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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****      Quarterly Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the Quarter Ended June 30, 2010**

 

**or**

 

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

 

**For the transition period from                  to**

 

**CommissionFile Number 000-09273**

 

**MOCON, INC.**

(Exact name 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 Mendelssohn Avenue North, Minneapolis, Minnesota55428**

(Address of principal executive offices) (Zip code)

 

**(763) 493-6370**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  YES x NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  YES o NO o

 

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

 

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

 

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

 

5,199,295Common Shares were outstanding as of July 31, 2010.

 

 

 

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MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended June 30, 2010

 
| ** **                         | **Page   Number**                                                                                 |
|------------------------------------|--------------------------------------------------------------------------------------------------------|
| PART I. FINANCIAL INFORMATION |                                                                                                   |
|                               |                                                                                                   |
| Item 1.                            | Financial  Statements                                                                                  |   |
|                               | Consolidated Balance Sheets (Unaudited) 

June 30, 2010 and December 31, 2009                | 1 |
|                               |                                                                                                   |   |
|                               | Consolidated Statements of Income (Unaudited) 

Three and six months ended June 30, 2010 and 2009 | 2 |
|                               |                                                                                                   |   |
|                               | Consolidated Statements of Cash Flows (Unaudited) 

Six months ended June 30, 2010 and 2009       | 3 |
|                               |                                                                                                   |   |
|                               | Notes to Consolidated Financial Statements (Unaudited)                                                 | 4-11 |
|                               |                                                                                                   |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations            | 12-21 |
|                               |                                                                                                   |   |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                            | 21-22 |
|                               |                                                                                                   |   |
| Item 4T.                           | Controls and  Procedures                                                                               | 22 |
|                               |                                                                                                   |
| PART II.  OTHER INFORMATION   |                                                                                                   |
|                               |                                                                                                   |
| Item 1A.                           | Risk Factors                                                                                           | 23 |
|                               |                                                                                                   |   |
| Item 2.                            | Unregistered  Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity  Securities   | 23 |
|                               |                                                                                                   |   |
| Item  6.                           | Exhibits                                                                                               | 23 |
|                               |                                                                                                   |
| Signatures                         | 24                                                                                                     |
|                               |                                                                                                   |
| Exhibit Index                 | 25                                                                                                     |

 

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

* *

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

 

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PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MOCON, INC.AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 
| ** **                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2010**          | ** ** | **2009**              | ** ** |
|                                                                                                                                              |       |              |       |                  |       |
| ASSETS                                                                                                                                            |       |              |       |                  |       |
| Current  assets:                                                                                                                                  |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                                                        |       | $                 | 8,401,422  |                  | $          | 9,393,127 |   |
| Marketable  securities, current                                                                                                                   |       | 2,218,784         |       | 4,371,119             |       |
| Trade  accounts receivable, less allowance for doubtful accounts of $199,389 in 2010  and $162,315 in 2009                                        |       | 4,394,472         |       | 4,589,998             |       |
| Other  receivables                                                                                                                                |       | 108,117           |       | 92,738                |       |
| Inventories                                                                                                                                       |       | 4,087,835         |       | 4,265,470             |       |
| Prepaid  income taxes                                                                                                                             |       | —            |       | 223,648               |       |
| Prepaid  expenses                                                                                                                                 |       | 546,350           |       | 357,911               |       |
| Deferred  income taxes                                                                                                                            |       | 411,549           |       | 411,549               |       |
| Total  current assets                                                                                                                             |       | 20,168,529        |       | 23,705,560            |       |
|                                                                                                                                              |       |              |       |                  |       |
| Marketable  securities, noncurrent                                                                                                                |       | 502,392           |       | 567,163               |       |
| Property,  plant and equipment, net of accumulated depreciation of $4,061,914 in 2010  and $4,601,480 in 2009                                     |       | 2,746,813         |       | 1,655,187             |       |
| Goodwill                                                                                                                                          |       | 3,017,819         |       | 3,300,088             |       |
| Investment  in affiliated company                                                                                                                 |       | 3,052,000         |       | —                |       |
| Technology  rights and other intangibles, net                                                                                                     |       | 743,310           |       | 738,035               |       |
| Deferred  income taxes                                                                                                                            |       | 400,083           |       | 280,548               |       |
| Other  assets                                                                                                                                     |       | 82,188            |       | 80,427                |       |
|                                                                                                                                              |       |              |       |                  |       |
| TOTAL  ASSETS                                                                                                                                     |       | $                 | 30,713,134 |                  | $          | 30,327,008 |   |
|                                                                                                                                              |       |              |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                        |       |              |       |                  |       |
| Current  liabilities:                                                                                                                             |       |              |       |                  |       |
| Accounts  payable                                                                                                                                 |       | $                 | 2,173,916  |                  | $          | 1,343,739 |   |
| Compensation  and related expenses                                                                                                                |       | 1,531,592         |       | 1,479,398             |       |
| Other  accrued expenses                                                                                                                           |       | 159,494           |       | 163,640               |       |
| Accrued  product warranties                                                                                                                       |       | 187,652           |       | 209,710               |       |
| Dividends  payable                                                                                                                                |       | 493,933           |       | 465,302               |       |
| Deferred  revenue                                                                                                                                 |       | 416,449           |       | 426,277               |       |
| Total  current liabilities                                                                                                                        |       | 4,963,036         |       | 4,088,066             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Obligations  to former employees                                                                                                                  |       | 46,114            |       | 54,141                |       |
| Accrued  income taxes                                                                                                                             |       | 202,418           |       | 202,418               |       |
| Total  noncurrent liabilities                                                                                                                     |       | 248,532           |       | 256,559               |       |
|                                                                                                                                              |       |              |       |                  |       |
| Total  liabilities                                                                                                                                |       | 5,211,568         |       | 4,344,625             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                       |       |              |       |                  |       |
| Capital  stock — undesignated. Authorized 3,000,000 shares                                                                                   |       | —            |       | —                |       |
| Common  stock — $0.10 par value. Authorized 22,000,000 shares; issued and outstanding  5,199,295 shares in 2010 and 5,170,018 shares in 2009 |       | 519,930           |       | 517,002               |       |
| Additional  paid-in capital                                                                                                                       |       | 410,624           |       | 114,021               |       |
| Retained  earnings                                                                                                                                |       | 25,715,133        |       | 24,690,293            |       |
| Accumulated  other comprehensive (loss) income                                                                                                    |       | (1,144,121        | )          | 661,067               |       |
| Total  stockholders’ equity                                                                                                                  |       | 25,501,566        |       | 25,982,383            |       |
|                                                                                                                                              |       |              |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                  |       | $                 | 30,713,134 |                  | $          | 30,327,008 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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MOCON, INC.AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF INCOME

(Unaudited)

 
| ** **                                    | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                                    | ** ** | **2010**                | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Sales:                                        |       |                    |       |                  |       |   |   |   |   |
| Products                                      |       | $                       | 6,740,834  |                  | $          | 5,914,436 |   | $ | 13,198,035 |   | $ | 11,757,231 |   |
| Consulting  services                          |       | 610,437                 |       | 506,900               |       | 1,246,559 |   | 835,864 |   |
| Total  sales                                  |       | 7,351,271               |       | 6,421,336             |       | 14,444,594 |   | 12,593,095 |   |
|                                          |       |                    |       |                  |       |   |   |   |   |
| Cost  of sales:                               |       |                    |       |                  |       |   |   |   |   |
| Products                                      |       | 2,527,703               |       | 2,532,935             |       | 4,955,882 |   | 4,888,399 |   |
| Consulting  services                          |       | 329,276                 |       | 261,712               |       | 668,256 |   | 486,745 |   |
| Total  cost of sales                          |       | 2,856,979               |       | 2,794,647             |       | 5,624,138 |   | 5,375,144 |   |
|                                          |       |                    |       |                  |       |   |   |   |   |
| Gross  profit                                 |       | 4,494,292               |       | 3,626,689             |       | 8,820,456 |   | 7,217,951 |   |
|                                          |       |                    |       |                  |       |   |   |   |   |
| Selling,  general and administrative expenses |       | 2,700,585               |       | 2,491,411             |       | 5,434,148 |   | 5,072,463 |   |
|                                          |       |                    |       |                  |       |   |   |   |   |
| Research  and development expenses            |       | 522,778                 |       | 462,031               |       | 1,070,526 |   | 969,631 |   |
|                                          |       |                    |       |                  |       |   |   |   |   |
| Operating  income                             |       | 1,270,929               |       | 673,247               |       | 2,315,782 |   | 1,175,857 |   |
|                                          |       |                    |       |                  |       |   |   |   |   |
| Other  income, net                            |       | 289,349                 |       | 119,272               |       | 559,217 |   | 228,579 |   |
|                                          |       |                    |       |                  |       |   |   |   |   |
| Income  before income taxes                   |       | 1,560,278               |       | 792,519               |       | 2,874,999 |   | 1,404,436 |   |
|                                          |       |                    |       |                  |       |   |   |   |   |
| Income  taxes                                 |       | 468,507                 |       | 277,000               |       | 861,107 |   | 490,000 |   |
|                                          |       |                    |       |                  |       |   |   |   |   |
| Net  income                                   |       | $                       | 1,091,771  |                  | $          | 515,519 |   | $ | 2,013,892 |   | $ | 914,436 |   |
|                                          |       |                    |       |                  |       |   |   |   |   |
| Net  income per common share:                 |       |                    |       |                  |       |   |   |   |   |
| Basic                                         |       | $                       | 0.21       |                  | $          | 0.09 |   | $ | 0.39 |   | $ | 0.16 |   |
| Diluted                                       |       | $                       | 0.20       |                  | $          | 0.09 |   | $ | 0.38 |   | $ | 0.16 |   |
|                                          |       |                    |       |                  |       |   |   |   |   |
| Weighted  average common shares outstanding:  |       |                    |       |                  |       |   |   |   |   |
| Basic                                         |       | 5,197,012               |       | 5,560,102             |       | 5,189,122 |   | 5,575,990 |   |
| Diluted                                       |       | 5,376,398               |       | 5,637,853             |       | 5,345,158 |   | 5,643,239 |   |

 

See accompanying notes to consolidated financial statements.

 

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MOCON, INC.AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                         | ** ** | **Six  Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **June 30,**     | ** ** |
| ** **                                                                         | ** ** | **2010**              | ** ** | **2009** | ** ** |
| Cash  flows from operating activities:                                             |       |                  |       |   |   |
| Net  income                                                                        |       | $                     | 2,013,892  |   | $ | 914,436 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                  |       |   |   |
| Stock-based  compensation expense                                                  |       | 131,846               |       | 115,731 |   |
| Loss  on disposition of long-term assets                                           |       | 3,009                 |       | 6,000 |   |
| Depreciation  and amortization                                                     |       | 255,370               |       | 299,798 |   |
| Deferred  income taxes                                                             |       | (119,535              | )          | — |   |
| Excess  tax benefit from employee stock plans                                      |       | (4,377                | )          | (25 | ) |
| Changes  in operating assets and liabilities:                                      |       |                  |       |   |   |
| Trade  accounts receivable                                                         |       | 12,942                |       | 99,804 |   |
| Other  receivables                                                                 |       | (15,379               | )          | 60,544 |   |
| Inventories                                                                        |       | 96,532                |       | 155,500 |   |
| Prepaid  income taxes                                                              |       | 205,711               |       | (275,458 | ) |
| Prepaid  expenses                                                                  |       | (193,936              | )          | (27,545 | ) |
| Accounts  payable                                                                  |       | 213,015               |       | (481,947 | ) |
| Compensation  and related expenses                                                 |       | 89,081                |       | (502,428 | ) |
| Other  accrued expenses                                                            |       | (7,210                | )          | (74,554 | ) |
| Accrued  product warranties                                                        |       | (13,983               | )          | (26,192 | ) |
| Accrued  income taxes                                                              |       | 12,003                |       | (4,634 | ) |
| Deferred  revenue                                                                  |       | (9,828                | )          | 47,692 |   |
| Net  cash provided by operating activities                                         |       | 2,669,153             |       | 306,722 |   |
|                                                                               |       |                  |       |   |   |
| Cash  flows from investing activities:                                             |       |                  |       |   |   |
| Purchases  of marketable securities                                                |       | (497,015              | )          | (979,101 | ) |
| Proceeds  from maturities of marketable securities                                 |       | 2,714,121             |       | 2,595,900 |   |
| Purchases  of property, plant and equipment                                        |       | (596,987              | )          | (183,385 | ) |
| Proceeds  from sale of property and equipment                                      |       | 7,605                 |       | 1,522 |   |
| Cash  paid for patent and trademark registrations                                  |       | (47,919               | )          | (73,463 | ) |
| Other                                                                              |       | (1,761                | )          | (1,761 | ) |
| Cash  paid for investment in affiliated companies                                  |       | (3,633,909            | )          | — |   |
| Net  cash (used in) provided by investing activities                               |       | (2,055,865            | )          | 1,359,712 |   |
|                                                                               |       |                  |       |   |   |
| Cash  flows from financing activities:                                             |       |                  |       |   |   |
| Net  proceeds from line of credit                                                  |       | —                |       | 400,000 |   |
| Proceeds  from the exercise of stock options                                       |       | 163,308               |       | 7,685 |   |
| Purchases  and retirement of common stock                                          |       | —                |       | (1,589,851 | ) |
| Excess  tax benefit from employee stock plans                                      |       | 4,377                 |       | 25 |   |
| Dividends  paid                                                                    |       | (960,421              | )          | (1,006,381 | ) |
| Net  cash used in financing activities                                             |       | (792,736              | )          | (2,188,522 | ) |
|                                                                               |       |                  |       |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                      |       | (812,257              | )          | (31,181 | ) |
|                                                                               |       |                  |       |   |   |
| Net  decrease in cash and cash equivalents                                         |       | (991,705              | )          | (553,269 | ) |
|                                                                               |       |                  |       |   |   |
| Cash  and cash equivalents:                                                        |       |                  |       |   |   |
| Beginning  of period                                                               |       | 9,393,127             |       | 4,553,479 |   |
| End  of period                                                                     |       | $                     | 8,401,422  |   | $ | 4,000,210 |   |
|                                                                               |       |                  |       |   |   |
| Supplemental  disclosures of cash flow information:                                |       |                  |       |   |   |
| Cash  paid during the period for income taxes                                      |       | $                     | 762,930    |   | $ | 730,621 |   |
|                                                                               |       |                  |       |   |   |
| Supplemental  schedule of noncash investing and financing activities:              |       |                  |       |   |   |
| Amortization  of cumulative unrealized gain on marketable securities               |       | $                     | —     |   | $ | (2,527 | ) |
| Dividends  accrued                                                                 |       | $                     | 493,933    |   | $ | 487,093 |   |
| Purchases  of fixed assets and intangibles in accounts payable                     |       | $                     | 749,997    |   | $ | 22,244 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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MOCON, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited)

 

Note1 — Consolidated Financial Statements

 

Theconsolidated balance sheet as of June 30, 2010, the consolidatedstatements of income for the three- and six-month periods ended June 30,2010 and 2009, and the consolidated statements of cash flows for the six-monthperiods ended June 30, 2010 and 2009 have been prepared in accordance withaccounting principles generally accepted in the United States of America.  These interim unaudited consolidatedfinancial statements reflect all adjustments which are, in the opinion ofmanagement, necessary to fairly present the financial position, results ofoperations and cash flows at June 30, 2010, and for all periodspresented.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted.

 

Theresults of operations for the three- and six-month periods ended June 30,2010 are not necessarily indicative of operating results for the fullyear.  It is suggested that theseconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and notes included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2009, previously filed with theSecurities and Exchange Commission.

 

Weoperate in a single industry segment: the developing, manufacturing, andmarketing of measurement, analytical, monitoring and consulting products forcustomers in the barrier packaging, food, pharmaceutical, consumer products,industrial hygiene, air quality monitoring, oil and gas exploration and otherindustries throughout the world.

 

*Principles of Consolidation*

 

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

 

*Foreign Currency Translation*

 

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

 

*Use of Estimates*

 

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

 

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*FairValue of Financial Instruments*

 

Thecarrying value of cash equivalents, accounts receivable, accounts payable andshort-term debt approximates fair value due to the short maturity of those instruments.  See marketable securities fair valuedisclosures at Note 5 and fair value disclosures of derivative instruments atNote 12.

 

*Recently Adopted Accounting Pronouncements*

 

In November 2008, the FASB issued EmergingIssues Task Force (EITF) No. 08-6, *Equity-MethodAccounting Considerations*, now codified in ASC Topic 323.  EITF 08-6 concludes that the cost basis of anew equity-method investment would be determined using a cost-accumulationmodel, which would continue the practice of including transaction costs in thecost of investment and would exclude the value of contingentconsideration.  It also requires that ashare issuance by an investee shall be accounted for by the investor as if theinvestor had sold a proportionate share of its investment, with any resultinggain or loss recognized in earnings. EITF 08-6 was effective for us January 1, 2010, and its adoptiondid not have a material impact on our consolidated financial statements.

 

In September 2009, the FASB ratified itsguidance on two revenue recognition standards which were to become effectivefor us beginning January 1, 2011. With earlier adoption permitted, we elected to adopt this guidance inthe first quarter 2010.  Under EITF 08-1,*Multiple-Deliverable Revenue Arrangements*,now codified in ASC Topic 605, when vendor specific objective evidence or thirdparty evidence for deliverables in an arrangement cannot be determined, a bestestimate of the selling price is required to separate deliverables and allocatearrangement consideration using the relative selling price method.  Under EITF 09-3, *Certain Revenue Arrangements That Include Software Elements*,now codified in ASC Topic 985, tangible products that have software componentsthat are essential to the functionality of the tangible product will no longerbe within the scope of the software revenue recognition guidance, andsoftware-enabled products will now be subject to the new guidance for multipledeliverable arrangements discussed above. The adoption of this guidance did not have a material impact on ourconsolidated financial statements.

 

InJanuary 2010, the FASB updated the disclosure requirements for fair valuemeasurements, codified in ASC Topic 820, *Fair Value Measurementsand Disclosures*.  The updatedguidance requires companies to disclose separately the investments thattransfer in and out of Levels 1 and 2 and the reasons for those transfers.Additionally, in the reconciliation for fair value measurement usingsignificant unobservable inputs (Level 3), companies should present separatelyinformation about purchases, sales, issuances and settlements.  We adopted the updated guidance on January 1,2010, except for the disclosures about purchases, sales, issuances andsettlements in the Level 3 reconciliation, which are effective for fiscal yearsbeginning after December 15, 2010. We will adopt the remaining guidance on January 1, 2011.  The adoption of the required guidance did nothave an impact on our consolidated financial statements.  We do not expect that the adoption of theremaining guidance will have an impact on our consolidated financialstatements.

 

Note2 — Inventories

 

Inventoriesconsist of the following:

 
| ** **        | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished products |       | $                       | 674,926    |                        | $          | 939,385 |   |
| Work-in-process   |       | 1,696,407               |       | 1,404,012                   |       |
| Raw materials     |       | 1,716,502               |       | 1,922,073                   |       |
|              |       | $                       | 4,087,835  |                        | $          | 4,265,470 |   |

 

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Note3 — Net Income Per Common Share

 

Basicnet income per common share is computed by dividing net income by the weightedaverage number of shares of common stock outstanding during the period.  Diluted net income per common share iscomputed using the treasury stock method to compute the weighted average commonstock outstanding assuming the conversion of potential dilutive common shares.

 

Thefollowing table presents a reconciliation of the denominators used in thecomputation of net income per common share — basic, and net income per commonshare — diluted, for the three- and six-month periods ended June 30, 2010and 2009:

 
| ** **                                                              | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                              | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Weighted shares of common stock outstanding —  basic               |       | 5,197,012                                   |       | 5,560,102                                 |       | 5,189,122 |   | 5,575,990 |   |
| Weighted shares of common stock assumed upon  exercise of stock options |       | 179,386                                     |       | 77,751                                    |       | 156,036 |   | 67,249 |   |
| Weighted shares of common stock outstanding —  diluted             |       | 5,376,398                                   |       | 5,637,853                                 |       | 5,345,158 |   | 5,643,239 |   |

 

Forthe three- and six-month periods ended June 30, 2010, there were 131,663and 221,963, respectively, stock options outstanding that were excluded fromthe above computation because they were anti-dilutive.

 

Note4 — Goodwill and Intangible Assets

 

Asof June 30, 2010 and December 31, 2009, goodwill amounted to$3,017,819 and $3,300,088, respectively. The decrease was primarily due to foreign currency translation relatingto the acquisition of Paul Lippke Handels-GmbH. Other identifiable intangible assets (all of which are being amortizedexcept projects in process) are as follows:

 
| ** **                 | ** ** | **As of June 30, 2010** | ** ** |
|----------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **Cost**                     | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                    |       | $                            | 1,053,056  |   | $ | (427,314 | ) | $ | 625,742 |   | 10 to 17 years |   |
| Trademarks and trade names |       | 485,891                      |       | (408,323 | ) | 77,568 |   | 5 to 17 years |   |
| Other intangibles          |       | 778,596                      |       | (738,596 | ) | 40,000 |   | 3 years |   |
|                       |       | $                            | 2,317,543  |   | $ | (1,574,233 | ) | $ | 743,310 |   |   |   |

 
| ** **                 | ** ** | **As of December 31, 2009** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **Cost**                         | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                    |       | $                                | 1,008,032  |   | $ | (402,392 | ) | $ | 605,640 |   | 10 to 17 years |   |
| Trademarks and trade names |       | 477,486                          |       | (398,424 | ) | 79,062 |   | 5 to 17 years |   |
| Other intangibles          |       | 778,596                          |       | (725,263 | ) | 53,333 |   | 3 years |   |
|                       |       | $                                | 2,264,114  |   | $ | (1,526,079 | ) | $ | 738,035 |   |   |   |

 

Totalamortization expense for the three-month periods ended June 30, 2010 and2009 was $24,312 and $21,198, respectively, and $48,154 and $41,697 for thesix-month periods ended June 30, 2010 and 2009.  Projects in process are not amortized untilthe patent or trademark is granted by the regulatory agency.  Estimated amortization expense for theremainder of 2010 and each of the four succeeding 

 

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fiscalyears and thereafter based on the intangible assets as of June 30, 2010 isas follows:

 
| ** **          | ** ** | **Estimated  Expense** | ** ** |
|---------------------|------------|------------------------|------------|
| 2010                |       | $                      | 42,380     |   |
| 2011                |       | $                      | 77,550     |   |
| 2012                |       | $                      | 45,125     |   |
| 2013                |       | $                      | 40,432     |   |
| 2014                |       | $                      | 29,883     |   |
| 2015 and thereafter |       | $                      | 218,436    |   |

 

Note5 — Marketable Securities

 

Marketablesecurities at June 30, 2010 consist of municipal bonds and certificates ofdeposits, and are classified as held-to-maturity.  Held-to-maturity securities are recorded atamortized cost, adjusted for the amortization or accretion of premiums ordiscounts.  A decline in the market valueof any held-to-maturity security below the amortized cost basis that is deemedother than temporary is charged to income, resulting in the establishment of anew cost basis for the security.  Therewas no impairment during the first six months of 2010, therefore, no adjustmentto the amortized cost basis was made. Currently, all of our marketable securities mature within two years.

 

Theamortized cost and fair value for held-to-maturity securities by major securitytype at June 30, 2010 and December 31, 2009 were as follows:

 
| ** **              | ** ** | **June 30, 2010** | ** ** |
|-------------------------|------------|------------------------|------------|
| ** **              | ** ** | **Amortized   Cost**   | ** ** | **Gross  Unrealized   Holding   Gains** | ** ** | **Gross   Unrealized   Holding   Losses** | ** ** | **Fair Value** | ** ** |
| Certificates of deposit |       | $                      | 734,000    |   | $ | — |   | $ | — |   | $ | 734,000 |   |
| Municipal bonds         |       | 1,987,176              |       | 9,605 |   | — |   | 1,996,781 |   |
|                    |       | $                      | 2,721,176  |   | $ | 9,605 |   | $ | — |   | $ | 2,730,781 |   |

 
| ** **              | ** ** | **December 31, 2009** | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **Amortized   Cost**       | ** ** | **Gross   Unrealized   Holding   Gains** | ** ** | **Gross  Unrealized   Holding   Losses** | ** ** | **Fair Value** | ** ** |
| Certificates of deposit |       | $                          | 2,387,988  |   | $ | 12 |   | $ | — |   | $ | 2,388,000 |   |
| Municipal bonds         |       | 2,550,294                  |       | 36,031 |   | (1,408 | ) | 2,584,917 |   |
|                    |       | $                          | 4,938,282  |   | $ | 36,043 |   | $ | (1,408 | ) | $ | 4,972,917 |   |

 

Note6 — Comprehensive Income

 

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

 

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| ** **                                                           | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                           | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income                                                           |       | $                                           | 1,091,771  |                                      | $          | 515,519 |   | $ | 2,013,892 |   | $ | 914,436 |   |
| Foreign currency translation adjustment                              |       | (1,043,809                                  | )          | 429,313                                   |       | (1,805,188 | ) | (9,998 | ) |
| Amortization of cumulative unrealized gain on  marketable securities |       | —                                      |       | —                                    |       | — |   | (2,527 | ) |
| Comprehensive income                                                 |       | $                                           | 47,962     |                                      | $          | 944,832 |   | $ | 208,704 |   | $ | 901,911 |   |

 

Note7 — Investment in Affiliated Company

 

InJanuary 2010, we acquired a minority equity ownership interest in LuxcelBiosciences Limited (Luxcel) based in Cork, Ireland.  The investment of approximately $3,625,000(€2,500,000), which was made through our newly-formed subsidiary, MOCONNetherlands Holding B.V., amounted to a 16.9% equity interest in Luxcel.  In addition, we acquired warrants to purchasean additional 375,000 shares at €2.24 per share at any time within three yearsfrom the date of the initial investment.

 

Luxcelhas developed phosphorescence-based sensors that enable rapid, high-throughputscreening and detection of bacterial contamination of food samples and non-invasiveanalysis of atmospheres in food, beverage and pharmaceutical packaging.  They also are innovators in an emerginghigh-throughput screening technique for measuring drug toxicity and metabolismin drug discovery for pharmaceutical research. The investment in Luxcel is carried on our balance sheet at the originalpurchase price, adjusted for currency fluctuations.  We believe that it is not feasible to readilydetermine the fair value of this investment as there is no established marketfor the securities.

 

Aspart of our relationship with Luxcel, we purchase sensors which accompany ourinstruments for sale to an end user and are required to pay a royalty to Luxcelon the sale of such instruments.

 

Note8 — Warranty

 

Weprovide a warranty for most of our products. Warranties are for periods ranging from ninety days to one year, andcover parts and labor for non-maintenance repairs, at our location.  Operator abuse, improper use, alteration,damage resulting from accident, or failure to follow manufacturer’s directionsare excluded from warranty coverage.

 

Warrantyexpense is accrued at the time of sale based on historical claimsexperience.  Warranty reserves are alsoaccrued for special rework campaigns for known major product modifications.  We also offer extended warranty servicecontracts for select products when the factory warranty period expires.

 

Warrantyprovisions and claims for the six-month periods ended June 30, 2010 and2009 were as follows:

 
| ** **          | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| Beginning balance   |       | $                                   | 209,710    |   | $ | 229,087 |   |
| Warranty provisions |       | 101,505                             |       | 83,732 |   |
| Warranty claims     |       | (123,563                            | )          | (110,125 | ) |
| Ending balance      |       | $                                   | 187,652    |   | $ | 202,694 |   |

 

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Note9 — Income Taxes

 

MOCON, Inc.or one of our subsidiaries files income tax returns in the U.S. federaljurisdiction, several state jurisdictions, China, Germany and theNetherlands.  With limited exceptions, weare no longer subject to income tax examinations by taxing authorities fortaxable years before 2006.

 

Asof December 31, 2009, the liability for gross unrecognized tax benefitswas $175,000, which included potential benefits of $127,000 that, if recognized,would affect the effective tax rate. During the six months ended June 30, 2010, there were nosignificant changes to the total gross unrecognized tax benefits that wouldhave a material effect on results of operations.  We recognize potential interest and penaltiesrelated to income tax positions, if any, as a component of provision for incometaxes on the consolidated statements of income. It is expected that the amount of unrecognized tax benefits for positionswhich we have identified will not change significantly in the next twelvemonths.

 

Note 10 — Stock-Based Compensation

 

As of June 30, 2010, we have reserved 142,487 shares ofcommon stock for options and other stock-based incentive awards that are stillavailable for grant under our 2006 stock incentive plan, and 894,350 shares foroptions that have been granted under either the 2006 stock incentive plan orthe 1998 stock option plan but have not yet been exercised.  We issue new shares of common stock uponexercise of stock options.  There wereno options granted in the first six months of 2010.

 

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

 
| ** **                                           | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Total cost of stock-based compensation               |       | $                                           | 65,686     |                                      | $          | 57,414 |   | $ | 131,846 |   | $ | 115,731 |   |
| Amount of income tax benefit recognized in  earnings |       | (3,865                                      | )          | (2,992                                    | )          | (7,344 | ) | (5,649 | ) |
| Amount charged against net income                    |       | $                                           | 61,821     |                                      | $          | 54,422 |   | $ | 124,502 |   | $ | 110,082 |   |

 

Thefair value of each option grant is estimated on the date of grant using theBlack-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 historical experience.  The dividend yield is calculated based uponthe dividend payments made during the prior four quarters as a percent of theaverage stock price for that period.

 

Asummary of the option activity for the first six months of 2010 is as follows:

 

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| ** **                            | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Exercise   Price per   Share** | ** ** | **Weighted********Average   Remaining   Contractual   Term** | ** ** | **Aggregate  Intrinsic   Value** | ** ** |
|---------------------------------------|------------|------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------|------------|
| Outstanding at December 31, 2009 |       | 937,250                |       | $                                                     | 8.84       |                                                         | 4.2        |                                  | $          | 881,656 |   |
| Options granted                       |       | —                 |       | —                                                |       | —                                                       |       |                                  |       |
| Options cancelled/expired             |       | (3,800                 | )          | $                                                     | 8.56       |                                                         | —     |                                  |       |   |
| Options exercised                     |       | (39,100                | )          | $                                                     | 6.55       |                                                         | —     |                                  |       |   |
| Outstanding at June 30, 2010     |       | 894,350                |       | $                                                     | 8.94       |                                                         | 3.8        |                                  | $          | 1,806,472 |   |
|                                  |       |                   |       |                                                  |       |                                                         |       |                                  |       |
| Exercisable at June 30, 2010     |       | 753,738                |       | $                                                     | 8.82       |                                                         | 3.4        |                                  | $          | 1,619,243 |   |

 

Thetotal intrinsic value of options exercised was $20,938 and $985 during thethree-month periods ended June 30, 2010 and 2009, respectively, and $136,713and $985 during the first six months of 2010 and 2009, respectively.

 

Asummary of the status of our unvested option shares as of June 30, 2010 isas follows:

 
| ** **                         | ** ** | **Number of   Shares** | ** ** | **Weighted********Average  Grant Date   Fair Value** | ** ** |
|------------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|
| Unvested at December 31, 2009 |       | 162,312                |       | $                                                    | 2.50       |   |
| Options granted                    |       | —                 |       | —                                               |       |
| Options cancelled                  |       | (1,200                 | )          | $                                                    | 2.45       |   |
| Options vested                     |       | (20,500                | )          | $                                                    | 2.72       |   |
| Unvested at June 30, 2010     |       | 140,612                |       | $                                                    | 2.47       |   |

 

Asof June 30, 2010, there was $271,884 of total unrecognized compensationcost related to unvested stock-based compensation granted under our plans.  That cost is expected to be recognized over aweighted-average period of 1.4 years. The total fair value of option shares vested during the three-monthperiods ended June 30, 2010 and 2009 was $27,880 and $20,100,respectively, and $55,760 and $40,200 during the six-month periods ended June 30,2010 and 2009, respectively.

 

Note 11 — Derivatives

 

Wehave entered into a foreign currency forward exchange contract, principally tohedge an intercompany loan denominated in euros.  This contract does not qualify for hedgeaccounting under the Derivatives and Hedging Topic of the Codification.  As a result, gains or losses related tomark-to-market adjustments on foreign currency forward exchange contracts arerecognized as other income or expense in the income statement during the periodin which the instrument is outstanding. The fair value of the foreign currency forward exchange contractrepresents the amount we would receive or pay to terminate the contract at thereporting date and is recorded in other current assets or liabilities dependingon whether the net amount is a gain or a loss. We do not utilize derivative instruments for trading or otherspeculative purposes.

 

AtJune 30, 2010, we had one outstanding foreign currency forward exchangecontract with a notional amount totaling approximately $3,089,000.  This contract matures in January 2011which coincides with the expected settlement of the intercompany loan.  As of June 30, 2010 the fair value ofthis contract resulted in a net loss position of $25,500, and was recorded inother income and other current liabilities. There were no outstanding foreign currency contracts as of December 31,2009.  While the currency contract doesnot qualify for hedge accounting, we believe it is effective in economicallyhedging the currency exposure on the intercompany loan to which it relates.

 

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Note 12 — Fair Value Measurements

 

Ahierarchy for inputs used in measuring fair value is in place thatdistinguishes market data between observable independent market inputs andunobservable market assumptions by the reporting entity.  The hierarchy is intended to maximize the useof observable inputs and minimize the use of unobservable inputs by requiringthat the most observable inputs be used when available.  Level 1 provides the most reliable measure offair value, while Level 3 generally requires significant managementjudgment.  The three levels are definedas follows:

 
| Level 1 — |   | Inputs are unadjusted quoted prices in active  markets for identical assets and liabilities.                                                                                                                                                                                               |
|----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |   |                                                                                                                                                                                                                                                                                       |
| Level 2 — |   | Observable inputs other than quoted prices for  the asset or liability, either directly or indirectly. These include quoted  prices for similar assets or liabilities in active markets and quoted prices  for identical or similar assets or liabilities in markets that are not  active. |
|           |   |                                                                                                                                                                                                                                                                                       |
| Level 3 — |   | Unobservable inputs that reflect the reporting  entity’s own assumptions.                                                                                                                                                                                                             |

 

Our population of financial assets and liabilitiessubject to fair value measurement at June 30, 2010 are as follows:

 
| ** **                                  | ** ** | **Fair Value** | ** ** | **Level 2** | ** ** |
|---------------------------------------------|------------|----------------|------------|-------------|------------|
| Liabilities:                                |       |           |       |        |       |
| Foreign currency forward exchange contracts |       | $              | 25,500     |        | $          | 25,500 |   |
|                                             |            |                |            |             |            |  |  |

 

Foreigncurrency forward exchange contracts are carried at fair value based onsignificant other observable market inputs, in this case, quoted foreigncurrency exchange rates.  Such valuationrepresents the amount we would receive or pay to terminate the forward exchangecontract at the reporting date.

 

Note 13 — Commitments and Contingencies

 

InMarch 2010, we signed a 15-year lease for a property which replaced ourformer Minneapolis headquarters and operations center.  The new lease commenced on June 1, 2010,and requires future minimum lease payments starting at $367,000 per year,increasing to $520,000 in the final year.

 

InMay 2010, we executed a standby letter of credit agreement in the amountof $25,000 which serves as a performance bank guarantee covering potentialwarranty claims for orders from one of our foreign customers.  This letter of credit will expire in November 2011.

 

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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 the caption“Forward-Looking Statements.”  Thefollowing discussion of the results of operations and financial condition ofMOCON should be read in conjunction with our consolidated financial statementsand the related notes thereto included elsewhere in this report.

 

***Overview***

 

*Description of Business*

 

MOCON, Inc.designs, manufactures, markets and services products, and provides consultingservices, primarily in the measurement and analytical instrument and servicesmarkets.  Our products includeinstruments that detect, measure and monitor gases and chemical compounds.

 

Wehave three primary operating locations in the United States — Minnesota,Colorado and Texas — and foreign facilities in Germany and China.  In addition, we recently made a minorityequity investment in an Irish company. We use a combination of a direct sales force and independent salesrepresentatives to market our products and services in the United States,Canada, Germany and China, and use a network of independent salesrepresentatives to market and service our products and services in otherforeign countries.  In recent years, overhalf of our revenues have come from international customers.

 

Ourcurrent plans for growth include continued strong funding for research anddevelopment (approximately 6% to 8% of our revenue) to foster new productdevelopment, together with strategic acquisitions where appropriate.  Our products are used by customers in manydifferent markets.  A significant focusof our product development and marketing efforts in 2009 and 2010 has been inthe food and beverage markets.  Ourtarget customers in this market are primarily interested in three things:developing successful new consumer products, maintaining high quality in theirproducts and ensuring the shelf life and safety of their products.  Our newest products help address theincreased consumer emphasis on health and safety.

 

*Market Strategy*

 

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

 

Wehave recently developed and introduced our OpTechTM-O2 Platinum oxygen analyzer whichincorporates sensor technology developed by Luxcel Biosciences Limited.  This instrument is able to measure the oxygenconcentration in a food, beverage, pharmaceutical or medical device packagewithout piercing the package.  This newtechnology, which went into production in the third quarter of 2009, enablesmanufacturers in these industries to track and trace their products duringmanufacture and distribution, and follow changes in oxygen levels as theyoccur.  Applications include looking forpoor heat seals or leaks, excessive package permeation, poor gas flushing andmicrobial growth.  All of these issuesaffect product acceptance, product quality and product safety.  We believe the addressable market forproducts in these industries that have the functionality of our OpTech-O2 Platinum oxygen analyzer could be as high asan aggregate of $75 million over the next ten years.

 

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Inthe cases of both the BevAlert and the OpTech products, MOCON is targeting theworldwide increase in concern for consumer safety in the food and beveragemarkets.  Our strategy is to continue toposition ourselves as a leader in the consumer and industrial safetymarketplace by offering unique products and services into large and growingmarkets.

 

***Results of Operations***

 

Thefollowing table sets forth the relationship between various components of ourresults of operations, stated as a percent of sales, for the three- andsix-month periods ended June 30, 2010 and 2009:

 
| ** **                                   | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                   | ** ** | **2010**                               | ** ** | **2009**                             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Sales                                        |       | 100.0                                  |       | 100.0                                |       | 100.0 |   | 100.0 |   |
| Cost of sales                                |       | 38.9                                   |       | 43.5                                 |       | 39.0 |   | 42.7 |   |
| Gross profit                                 |       | 61.1                                   |       | 56.5                                 |       | 61.0 |   | 57.3 |   |
| Selling, general and administrative expenses |       | 36.7                                   |       | 38.8                                 |       | 37.6 |   | 40.3 |   |
| Research and development expenses            |       | 7.1                                    |       | 7.2                                  |       | 7.4 |   | 7.7 |   |
| Operating income                             |       | 17.3                                   |       | 10.5                                 |       | 16.0 |   | 9.3 |   |
| Other income, net                            |       | 3.9                                    |       | 1.8                                  |       | 3.9 |   | 1.9 |   |
| Income before income taxes                   |       | 21.2                                   |       | 12.3                                 |       | 19.9 |   | 11.2 |   |
| Income taxes                                 |       | 6.4                                    |       | 4.3                                  |       | 6.0 |   | 3.9 |   |
| Net income                                   |       | 14.8                                   |       | 8.0                                  |       | 13.9 |   | 7.3 |   |

 

*Comparison of Financial Results for the Three- andSix-Month Periods Ended June 30, 2010 and 2009*

 

*Sales*

 

Salesfor the three-month period ended June 30, 2010 were $7,351,000, up 14%compared to $6,421,000 for the same period in 2009.  We experienced increases in sales in most ofour major product groups as the global economic conditions that had negativelyaffected the prior year’s results showed signs of improvement.  Sales to foreign customers increased 22% overthe prior year second quarter primarily due to a strong showing in Asia.  Domestic and foreign sales accounted for 40%and 60%, respectively, of our consolidated second quarter sales in 2010, and43% and 57% of our consolidated sales, respectively, for the same period in2009.

 

Salesfor the six-month period ended June 30, 2010 were $14,445,000, up 15%compared to $12,593,000 for the same period in 2009.  Sales increased in all four major productgroups with permeation instruments and gas analyzer equipment showing thelargest improvement. On a geographical basis, sales increased 8% and 20% in ourdomestic and foreign markets, respectively. Domestic and foreign sales accounted for 42% and 58%, respectively, ofour consolidated sales for the first six months of 2010, and 45% and 55% forthe same period in 2009.

 

Thefollowing table summarizes total sales by product line for the three- andsix-month periods ended June 30, 2010 and 2009:

 

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| ** **                           | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Permeation products and services     |       | $                                           | 4,074,539  |                                      | $          | 3,619,027 |   | $ | 8,194,051 |   | $ | 7,211,652 |   |
| Gas analyzers, sensors and detectors |       | 1,442,712                                   |       | 1,018,239                                 |       | 2,768,346 |   | 2,263,511 |   |
| Packaging products and services      |       | 1,256,825                                   |       | 1,281,644                                 |       | 2,317,467 |   | 2,315,528 |   |
| Other instruments and services       |       | 577,195                                     |       | 502,426                                   |       | 1,164,730 |   | 802,404 |   |
|                                 |       | $                                           | 7,351,271  |                                      | $          | 6,421,336 |   | $ | 14,444,594 |   | $ | 12,593,095 |   |

 

Thefollowing table sets forth the relationship between various components ofdomestic and foreign sales for the three- and six-month periods ended June 30,2010 and 2009:

 
| ** **          | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|---------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Domestic sales      |       | $                                           | 2,909,715  |                                      | $          | 2,773,904 |   | $ | 6,118,634 |   | $ | 5,663,336 |   |
| Foreign sales:      |       |                                        |       |                                      |       |   |   |   |   |
| Europe              |       | 1,711,057                                   |       | 1,769,388                                 |       | 3,552,180 |   | 3,363,147 |   |
| Asia                |       | 2,324,328                                   |       | 1,371,598                                 |       | 3,709,679 |   | 2,543,181 |   |
| Other               |       | 406,171                                     |       | 506,446                                   |       | 1,064,101 |   | 1,023,431 |   |
| Total foreign sales |       | 4,441,556                                   |       | 3,647,432                                 |       | 8,325,960 |   | 6,929,759 |   |
|                |       | $                                           | 7,351,271  |                                      | $          | 6,421,336 |   | $ | 14,444,594 |   | $ | 12,593,095 |   |

 

***Permeation Products and Services*** — Sales of ourpermeation products and services increased 13% for the second quarter ended June 30,2010 compared to the same period in the prior year, and accounted for 55% and56% of our consolidated second quarter sales in 2010 and 2009,respectively.  The improvement ineconomic conditions in our foreign markets that we saw in the first quarter2010 continued in the current quarter. International sales of permeation products and services increased 29%for the second quarter 2010 compared to the same period in 2009, and accountedfor 78% of the sales in this product group. This increase was partially offsetby a 23% decrease in domestic sales.

 

Salesof our permeation products and services, which accounted for 57% of ourconsolidated sales during the first six months in both 2010 and 2009, increased14% during the first six months of 2010 compared to the same period in2009.  International sales of permeationproducts and services accounted for 74% of sales in this product group andincreased 28% over last year.  Domesticsales of this product group decreased 15% in the first six months of 2010compared to the same period last year.

 

***Gas Analyzers, Sensors and Detectors*****— Sales of ourgas analyzers, sensors and detector products and services, which accounted for20% and 16% of our consolidated second quarter sales in 2010 and 2009,respectively, increased 42% during the second quarter 2010 compared to the sameperiod in 2009.  Within this group, salesof our piD-TECH sensors and OEM detectors accounted for the majority of theincrease.  Historically, orders forsensors and detectors have typically been large and infrequent in nature.  Sales of gas chromatographs were also higherdue to increased shipments of the BevAlert product and instruments used inmultipoint environmental monitoring applications.

 

Salesof our gas analyzers, sensors and detector products and services, whichaccounted for 19% and 18% of our consolidated sales during the first six monthsin 2010 and 2009, respectively, increased 22% during the first six months of2010 compared to the same period in 2009. This increase is primarily due to sales of gas chromatographs to the oiland gas exploration, industrial hygiene and environmental 

 

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monitoringmarkets.

 

***Packaging Products and Services*****— Sales of ourpackaging products and services, which accounted for 17% and 20% of ourconsolidated second quarter sales in 2010 and 2009, respectively, decreased 2%during the second quarter 2010 compared to the same period in 2009.  This group consists of headspace analyzersand leak detection instruments.  Domesticsales of these products increased 8% in the second quarter 2010 as compared tothe prior period, while foreign shipments decreased 12%.

 

Salesof our packaging products and services, which accounted for 16% and 19% of ourconsolidated sales during the first six months in 2010 and 2009, respectively,were consistent during the first six months of both 2010 and 2009.  Domestic sales of these products increased11% in the first six months of 2010 compared to the prior period, while foreignshipments decreased 13%.

 

***Other Instruments and Services*****— Sales in ourother instruments and services category, which accounted for 8% ourconsolidated second quarter sales in both 2010 and 2009, increased 15% in thesecond quarter 2010, compared to the same period in 2009.  This increase was primarily the result ofincreased demand for our gas chromatography analyzer products and services, andmore specialty projects performed by our analytical testing and consultinggroups, partially offset by a decline in sales of non-MOCON products by ourGerman subsidiary.

 

Salesin our other instruments and services category, which accounted for 8% and 6%of our consolidated sales during the first six months in 2010 and 2009,respectively, increased 45% during the first six months of 2010, compared tothe same period in 2009.  This increasewas due primarily to increased demand for our gas chromatography analyzerproducts and services, and more specialty projects performed by our analyticaltesting and consulting groups.

 

*Gross Profit*

 

Thegross profit margins for our product sales were 62.5% and 57.2% for the three-monthperiods ended June 30, 2010 and 2009, respectively.  This improvement was the result of afavorable sales mix and manufacturing efficiencies realized through higherproduction volumes.  The gross profitmargins for our consulting services were 46.1% and 48.4%, respectively, for thethree-month periods ended June 30, 2010 and 2009.  This decrease was due to the varying marginsbetween consulting service projects.

 

Forthe six months ended June 30, 2010 and 2009, the gross profit margins forour products were 62.4% and 58.4%, respectively.  This improvement was the result of afavorable sales mix and manufacturing efficiencies realized through higherproduction volumes.  For the six monthsended June 30, 2010 and 2009, the gross profit margins for our consultingservices were 46.4% and 41.8%, respectively. This increase was primarily due to the increase in sales in the firstsix months of 2010 which allowed for higher absorption of fixed costs in thisarea.

 

*Selling, General and Administrative Expenses*

 

Selling,general and administrative (SG&A) expenses were $2,701,000 in thethree-month period ended June 30, 2010, compared to $2,491,000 in the sameperiod of 2009.  The increase wasprimarily related to costs associated with moving our Minneapolis headquartersand operations center, and increased wages, benefits and incentive bonuscompensation.

 

SG&Aexpenses were $5,434,000 in the six-month period ended June 30, 2010,compared to $5,072,000 in the same period of 2009.  As a percentage, SG&A expenses were 37.6%and 40.3% of consolidated sales in the first six months of 2010 and 2009,respectively, due to the higher sales level in 2010.  The 2010 dollar increase was primarilyrelated to costs associated with moving our Minneapolis headquarters and operationscenter, increases in wages, benefits, incentive bonus compensation, and 

 

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higherprofessional fees related to the Luxcel investment as compared to the sameperiod in the prior year.

 

*Research and Development Expenses*

 

Researchand development (R&D) expenses were $523,000, or 7.1% of sales in thesecond quarter 2010, compared to $462,000, or 7.2% of sales, in the same periodof 2009.  The increase in spending in thecurrent quarter is primarily related to the development of products for the newfood safety market.  R&D expenses were$1,071,000, or 7.4% of sales in the first six months of 2010, compared to$970,000, or 7.7% of sales, in the same period of 2009.  The increase in spending in the first sixmonths of 2010 is primarily related to projects that had been delayed in theprior year due to the slowdown in the economy, as well as new productdevelopment for food safety.  Asignificant portion of R&D expenditures in 2010 are expected to be devotedto the food safety market.

 

Ourintent is to continue to spend between 6% and 8% of consolidated sales onR&D.

 

*Other Income*

 

Otherincome for the three- and six-month periods ended June 30, 2010 and 2009was as follows:

 
| ** **                     | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest income                |       | $                                           | 22,910     |                                      | $          | 103,154 |   | $ | 52,653 |   | $ | 220,916 |   |
| Foreign currency exchange gain |       | 262,959                                     |       | 12,611                                    |       | 501,492 |   | 4,593 |   |
| Other                          |       | 3,480                                       |       | 3,507                                     |       | 5,072 |   | 3,070 |   |
|                           |       | $                                           | 289,349    |                                      | $          | 119,272 |   | $ | 559,217 |   | $ | 228,579 |   |

 

Interestincome decreased for both the second quarter and six months ended June 30,2010, compared to the same periods in 2009, due to lower average yields on loweraverage interest bearing investments. The foreign currency gains in the second quarter and six months ended June 30,2010 were primarily the result of adjusting a euro-based intercompany loanobligation to market value at June 30, 2010.

 

*Income Tax Expense*

 

Ourprovision for income taxes was 30.0% of income before income taxes for thesecond quarter ended June 30, 2010, as well as for the six months thenended.  The provisions for the comparableperiods in the prior year were 35.0% and 34.9%, respectively.  The decrease in the effective tax rate forboth the second quarter and year to date 2010 was primarily due to the creationof foreign tax credits generated by the repatriation of funds from our Germansubsidiary and the increase in the allowable deduction for domestic productionactivity for federal income tax purposes.

 

Basedon current projected annual operating results and current income tax rates, weexpect the effective tax rate for the remainder of 2010 to be in the range of29% to 32%.  This rate fluctuates overtime based on the income tax rates in the various jurisdictions in which weoperate, and also the level of profits in those jurisdictions.

 

*Net Income*

 

Netincome was $1,092,000 in the second quarter 2010, compared to $516,000 in the secondquarter 2009.  Diluted net income pershare was $0.20 and $0.09 in the second quarters of 2010 and 2009,respectively.  For the six months ended June 30,2010, net income was $2,014,000, or $0.38 per diluted share, compared to netincome of $914,000, or $0.16 per diluted share in the prior year.

 

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*Liquidity and Capital Resources*

 

Wehave historically financed our operations, capital equipment and other cashrequirements through our cash flows generated from operations.  Total cash, cash equivalents and marketablesecurities decreased $3,208,000 during the first six months of 2010 to$11,123,000 as of June 30, 2010, compared to $14,331,000 at December 31,2009.  The primary reason for thisdecrease was due to the investment of approximately $3,625,000 (€2,500,000) toacquire a minority equity ownership interest in Luxcel Biosciences Limited inIreland.  Our working capital as of June 30,2010 decreased $4,412,000 to $15,205,000, as compared to $19,617,000 at December 31,2009.  We invest our excess cash inmarketable securities consisting primarily of municipal bonds, certificates ofdeposits and U.S. treasury obligations. We believe that a combination of our existing cash, cash equivalents andmarketable securities, and an expected continuation of cash flow fromoperations, will continue to be adequate to fund our operations and workingcapital, capital expenditures, dividend payments and any authorized stockrepurchases for at least the next twelve months.  We currently do not have any committed linesof credit or other credit facilities.

 

Oneof our strategic objectives is, as market and business conditions warrant, toconsider acquisitions of businesses, products or technologies.  In this regard, in January 2010, we madea minority equity investment of €2,500,000 in Luxcel Biosciences Limited, anIrish company, to help us establish a stronger presence in the food safetymarket.  If we consummate one or moreadditional acquisition opportunities, the cost of which exceeds our existingcash resources, we may need to fund such activities with a portion of our cashbalances and debt and/or equity financing. If we need to raise additional capital, an equity-based or equity-linkedfinancing may be used which could be dilutive to existing shareholders.  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.

 

*Cash Flow*

 

CashFlow from Operating Activities

 

Ourprimary source of funds is cash provided by operating activities which totaled$2,669,000 and $307,000 in the first six months of 2010 and 2009,respectively.  The key components of thecash provided by operating activities in 2010 were the income for the period,an increase in accounts payable and decreases in inventories and prepaid incometaxes, partially offset by an increase in prepaid expenses.  The increase in accounts payable is primarilydue to unpaid vendor invoices associated with the recent move of ourMinneapolis headquarters.

 

CashFlow from Investing Activities

 

Cash(used in) provided by investing activities totaled ($2,056,000) and $1,360,000in the first six months of 2010 and 2009, respectively.  The primary reason for cash used in investingactivities in 2010 was the investment of approximately $3,625,000 (€2,500,000)to acquire a minority equity ownership interest in Luxcel Biosciences Limitedin Ireland and capital expenditures of approximately $597,000, the majority ofwhich relates to our move to new offices in Minnesota.  This was offset somewhat by the net proceedsfrom maturities of marketable securities of $2,217,000.

 

CashFlow from Financing Activities

 

Cashused in financing activities totaled $793,000 and $2,189,000 in the first sixmonths of 2010 and 2009, respectively. During the first six months of 2010 and 2009, we made dividend paymentsto our shareholders of $960,000 and $1,006,000, respectively. Partially offsetting the impact of the dividend payments in 2010 werethe proceeds from the exercise of stock options in the amount of $163,000.

 

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Wecurrently are not authorized by our Board of Directors to make repurchases ofour common stock.

 

***Contractual Obligations***

 

Werefer you to our Annual Report on Form 10-K for the year ended December 31,2009 for a summary of our contractual obligations.  In addition, in March 2010, we signed a15-year lease for a property which replaced our former Minneapolis headquartersand operations center.  The new leasecommenced on June 1, 2010, and requires future minimum lease paymentsstarting at $367,000 per year, subject to annual increases.  In May 2010, we entered into a foreigncurrency forward exchange contract to act as a hedge against fluctuations in aeuro-denominated intercompany note.  Thiscontract has a notional amount totaling approximately $3,089,000, bears anexchange rate of 1.2358 U.S. dollars per euro and matures in January 2011.

 

***Off-Balance Sheet Arrangements***

 

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

 

***Recently Issued Accounting Pronouncements***

 

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

 

InJanuary 2010, the FASB updated the disclosure requirements for fair valuemeasurements.  The updated guidancerequires companies to disclose separately the investments that transfer in andout of Levels 1 and 2 and the reasons for those transfers. Additionally, in thereconciliation for fair value measurement using significant unobservable inputs(Level 3), companies should present separately information about purchases,sales, issuances and settlements.  Weadopted the updated guidance on January 1, 2010, except for the disclosuresabout purchases, sales, issuances and settlements in the Level 3reconciliation, which are effective for fiscal years beginning after December 15,2010.  We will adopt the remainingguidance on January 1, 2011.  Theadoption of the required guidance did not have an impact on our consolidatedfinancial statements.  We do not expectthat the adoption of the remaining guidance will have an impact on ourconsolidated financial statements.

 

***Critical Accounting Policies***

 

Oursignificant accounting policies are described in Note 1 to our consolidatedfinancial statements.  This Management’sDiscussion and Analysis of Financial Condition and Results of Operations isbased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of theseconsolidated financial statements requires management to make estimates andjudgments that affect the reported amount of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities.  The Securities and Exchange Commission hasdefined a company’s most critical accounting policies as those that are mostimportant to the portrayal of its financial condition and results ofoperations, and which require the company to make its most difficult andsubjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, we have identified the following criticalaccounting policies.  Although we believethat our estimates and assumptions are reasonable, they are based uponinformation available when they are made. Actual results may differ significantly from these estimates underdifferent assumptions or conditions.

 

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*Revenue recognition* — We recognize revenue whenit is realized or realizable and earned. We consider 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 collectability isreasonably assured.  Our terms are F.O.B.shipping point with no right of return, except in rare cases, and customeracceptance of our products is not required. The revenue recognition policy does not differ among the various productlines, the marketing venues, or various geographic destinations.  We do not have distributors who stock ourequipment.  We do not offer rebates,price protection, or other similar incentives, and discounts when offered arerecorded as a reduction in revenue.  Werecord revenue net of sales tax charged to the customer.

 

Revenuefor preventive maintenance agreements is recognized on a per visit basis andextended warranties on a straight-line basis over the life of the contracts.

 

Ouraccounting treatment for recognizing revenue from shipments with multipleelement arrangements was changed in the first quarter 2010, as we adopted ASCTopic 605.  This guidance provides thatthe overall arrangement fee will be allocated to each element (both deliveredand undelivered items) based on their relative selling prices, as demonstratedby vendor-specific objective evidence (VSOE) or third-party evidence(TPE).  Where VSOE or TPE is notavailable, revenue will be allocated using an estimated selling price.  This change did not have a material impact onour consolidated financial statements.

 

*Allowance for doubtful accounts and sales returns* — Ourallowance for doubtful accounts and sales returns is for accounts receivablebalances that are estimated to be uncollectible as well as anticipated salesreturns.  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 are notpredictive of future results or if economic conditions worsened for our customers.  In the event we determine that a smaller orlarger allowance for doubtful accounts is appropriate, we would record a creditor charge to selling, general and administrative expense in the period that wemade such a determination.  As of June 30,2010, we had $199,000 reserved against our accounts receivable for doubtfulaccounts and sales returns.

 

*Accrual for excess and obsolete inventories*—**We perform a quarterly analysis toidentify excess and obsolete inventory. We record a charge to cost of sales for amounts identified.  Our analysis includes inventory levels, thenature of the components and their inherent risk of obsolescence and theon-hand quantities relative to the sales history of that component.  We believe that our financial results couldbe materially different if historical trends are not predictive of futureresults or if demand for our products decreased because of economic orcompetitive conditions or otherwise.  Asof June 30, 2010, we had $343,000 accrued for excess and obsoleteinventories.

 

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

 

*Accrued product warranties*—**Our products are generally covered by a warranty, withwarranty periods ranging from ninety days to one year from the date ofsale.  Estimated warranty costs areaccrued in the same period in which the related revenue is recognized, based onanticipated parts and 

 

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laborcosts, utilizing historical experience. Additional warranty reserves are also accrued for major rework campaigns.  We periodically assess the adequacy of ourwarranty reserves based on changes in these factors and record any necessaryadjustments if actual claim experience indicates that adjustments arenecessary.  Although we believe thelikelihood to be relatively low, warranty claims experience could be materiallydifferent from actual results due to manufacturing changes that could impactproduct quality, a change in our warranty policy in response to industrytrends, as yet unrecognized defects in products sold, or other factors.  As of June 30, 2010, we had $188,000accrued for future estimated warranty claims.

 

*Income taxes*—**In the preparation of our consolidated financialstatements, management is required to estimate income taxes in each of thejurisdictions in which we operate.  Thisprocess involves estimating actual current tax exposures together withassessing temporary differences resulting from differing treatment of items fortax and accounting purposes.  Thesedifferences result in deferred tax assets and liabilities, which are includedin our Consolidated Balance Sheets.

 

Managementreviews the deferred tax assets for recoverability on a quarterly basis andassesses the need for valuation allowances. These deferred tax assets are evaluated by considering historical levelsof income, estimates of future taxable income streams and the impact of taxplanning strategies.  A valuationallowance is recorded to reduce deferred tax assets when it is determined thatit is more likely than not that we would not be able to realize all or part ofour deferred tax assets.  At June 30,2010 and December 31, 2009, we provided a valuation allowance in theapproximate amount of $320,000 against our net deferred tax assets, relatedprimarily to the capital loss carryforward.

 

***Forward-Looking Statements***

 

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

 

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

 

·                  Increases in prices for raw materials;

·                  Risks inherent in operating internationallyand selling and shipping our products and purchasing our products andcomponents internationally;

·                  Fluctuations in foreign currency exchangerates and interest rates;

·                  Failure to develop new products andtechnologies, delays in new product introduction and lack of market acceptanceof new products;

 

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·                  Failure to effect strategic acquisitions andintegrate effectively newly acquired operations;

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

·                  The effects of the global economic downturnand continuing decreases in capital spending by our customers that may occur asa result;

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

·                  Disruption in our ability to manufacture ourproducts or the ability of our key suppliers to provide us products orcomponents or raw materials for products resulting in our inability to supplymarket demand for our products;

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

·                  Highly competitive nature of the markets inwhich we sell our products and the introduction of competing products;

·                  Loss of customers;

·                  Failure to retain senior management orreplace lost senior management;

·                  Employee slowdowns, strikes or similaractions;

·                  Reliance on our management informationsystems for inventory management, distribution, accounting and other functions;

·                  Effects of any pending or threatenedlitigation;

·                  Failure to comply with applicable laws andregulations and adverse changes in applicable laws or regulations;

·                  Changes in generally accepted accountingprinciples; or

·                  Conditions and changes in general economicand 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, 2009 under theheading “Part I — Item 1A.  RiskFactors” on pages 9 through 14 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 webelieve that the expectations reflected in our forward-looking statements arereasonable, we do not know whether our expectations will prove correct.  The expectations reflected in ourforward-looking statements can be affected by inaccurate assumptions we mightmake or by known or unknown risks and uncertainties, including those describedabove.  The risks and uncertainties describedabove are not exclusive and further information concerning us and our business,including factors that potentially could materially affect our financialresults or condition, may emerge from time to time.  We assume no obligation to update forward-lookingstatements to reflect actual results or changes in factors or assumptionsaffecting such forward-looking statements. We advise you, however, to consult any further disclosures we make onrelated subjects in our quarterly reports on Form 10-Q and current reportson Form 8-K we file with or furnish to the Securities and ExchangeCommission.

 

Item 3.                                     Quantitativeand Qualitative Disclosures About Market Risk

 

*Equity Price and Interest Rate Risk*

 

Allof our marketable securities, some of which are insured by the FDIC, are atfixed interest rates and mature within two years; therefore, we believe thatthe market risk arising from the holding of these 

 

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financialinstruments is minimal.

 

*Foreign Currency Risk*

 

Historically,in excess of 50% of our consolidated sales have been to internationaldestinations.  Since we invoice most ofthese customers in U.S. dollars, we do not have significant exposure to foreigncurrency transaction risk relating to trade accounts receivable.  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 and yuan currency results of operations are translated to U.S.dollars.  These fluctuations are recordedin our consolidated balance sheet as an adjustment to accumulated othercomprehensive income or loss.  Wehistorically have not experienced any material foreign currency transactiongains or losses, however, we realized a foreign currency transaction gain forthe first six months of 2010 relating to the valuation of a euro-denominatedintercompany loan which originated in the first quarter 2010.  To mitigate the effect of any currencyfluctuations in the future, we have purchased a foreign currency forwardcontract which acts as a hedge against potential gains or losses.  Our investment in foreign subsidiariestranslated into U.S. dollars is not hedged. Any changes in foreign currency exchange rates would be reflected as aforeign currency translation adjustment, a component of accumulated othercomprehensive income in stockholders’ equity, and would not impact our netincome.

 

Item 4T.          Controlsand Procedures

 

*Evaluation of Disclosure Controls and Procedures*

 

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

 

*Changes in Internal Control Over Financial Reporting*

 

Therewas no change in our internal control over financial reporting that occurredduring our quarter ended June 30, 2010 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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PART II.     OTHERINFORMATION

 

Item 1A.         RiskFactors

 

We are affected by risks specific to us as well as factors that affectall businesses operating in a global market. The significant factors known to us that could materially adverselyaffect our business, financial condition or operating results are described inour annual report on Form 10-K for the fiscal year ended December 31,2009 under the heading “Part I — Item 1A. Risk Factors.”  There has been no material change in thoserisk factors.

 

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

 

*Unregistered Sales of Equity Securities*

 

We did not sell any equity securities of MOCON, Inc. during the secondquarter ended June 30, 2010 that were not registered under the SecuritiesAct of 1933.

 

*Issuer Repurchases of Equity Securities*

 

We did not repurchase any equity securities of MOCON, Inc. duringthe second quarter ended June 30, 2010.

 

Item 6.            Exhibits

 

Thefollowing exhibits 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-Oxley  Act of 2002 |
|             |       |                                                                                                      |
| 32.2             |       | Certification  of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly authorized.

 

 
|                        | MOCON, INC.                              |
|-----------------------------|-----------------------------------------------|
|                        |                                          |
|                        |                                          |
| Date:  August 13, 2010 | /s/  Robert L. Demorest                       |
|                        | Robert  L. Demorest                           |
|                        | Chairman,  President and Chief                |
|                        | Executive  Officer                            |
|                        | (Principal  Executive Officer)                |
|                        |                                          |
|                        |                                          |
| Date:  August 13, 2010 | /s/  Darrell B. Lee                           |
|                        | Darrell  B. Lee                               |
|                        | Vice  President, Treasurer and Chief          |
|                        | Financial  Officer                            |
|                        | (Principal  Financial and Accounting Officer) |

 

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MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED JUNE 30, 2010

 

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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