Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

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

#### ** **

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

##### ** **

**(MarkOne)**

 

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

** **

**For theQuarter Ended March 31, 2010**

** **

**or**

 

**o****        ****Transition Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**For thetransition period from                 to                 **

 

**Commission File Number 000-09273**

** **

**MOCON, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

(Addressof 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                       |   | Smaller reporting company x |
| (do not check if a smaller reporting company) |   |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). YES o NOx

 

5,193,695Common Shares were outstanding as of April 30, 2010.

 

 

 

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MOCON, INC. AND SUBSIDIARIES

 

INDEXTO FORM 10-Q

For the Quarter Ended March 31, 2010

 
| ** **                               | ** **                                                                                           | **Page  Number** |
|------------------------------------------|------------------------------------------------------------------------------------------------------|------------------|
| PART I.  FINANCIAL INFORMATION |                                                                                                 |
|                                     |                                                                                                 |             |
| Item 1.                                  | Financial Statements                                                                                 |             |
|                                     | Consolidated  Balance Sheets (Unaudited)   March 31, 2010 and December 31, 2009            | 1                |
|                                     |                                                                                                 |             |
|                                     | Consolidated  Statements of Income (Unaudited)   Three months ended March 31, 2010 and 2009     | 2                |
|                                     |                                                                                                 |             |
|                                     | Consolidated  Statements of Cash Flows (Unaudited)   Three months ended March 31, 2010 and 2009 | 3                |
|                                     |                                                                                                 |             |
|                                     | Notes to Consolidated Financial Statements (Unaudited)                                               | 4-10             |
|                                     |                                                                                                 |             |
| Item 2.                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations          | 11-19            |
|                                     |                                                                                                 |             |
| Item 3.                                  | Quantitative  and Qualitative Disclosures About Market Risk                                          | 19-20            |
|                                     |                                                                                                 |             |
| Item 4T.                                 | Controls  and Procedures                                                                             | 20               |
|                                     |                                                                                                 |             |
| PART II.  OTHER INFORMATION    |                                                                                                 |
|                                     |                                                                                                 |             |
| Item 1A.                                 | Risk Factors                                                                                         | 20               |
|                                     |                                                                                                 |             |
| Item 2.                                  | Unregistered  Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity  Securities | 21               |
|                                     |                                                                                                 |             |
| Item  6.                                 | Exhibits                                                                                             | 21               |
|                                     |                                                                                                 |             |
| Signatures                               | 22                                                                                                   |
|                                     |                                                                                                 |
| Exhibit Index                       | 23                                                                                                   |

 

*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 namesreferred to in this report are the property of their respective owners.*

 

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PART I. FINANCIAL INFORMATION

 

Item 1.  FinancialStatements

 

MOCON,INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 
| ** **                                                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2010**           | ** ** | **2009**              | ** ** |
|                                                                                                                                              |       |               |       |                  |       |
| ASSETS                                                                                                                                            |       |               |       |                  |       |
| Current  assets:                                                                                                                                  |       |               |       |                  |       |
| Cash  and cash equivalents                                                                                                                        |       | $                  | 8,401,964  |                  | $          | 9,393,127 |   |
| Marketable  securities, current                                                                                                                   |       | 2,655,559          |       | 4,371,119             |       |
| Trade  accounts receivable, less allowance for doubtful accounts of $171,207 in 2010  and $162,315 in 2009                                        |       | 4,091,346          |       | 4,589,998             |       |
| Other  receivables                                                                                                                                |       | 103,462            |       | 92,738                |       |
| Inventories                                                                                                                                       |       | 4,127,241          |       | 4,265,470             |       |
| Prepaid  income taxes                                                                                                                             |       | 115,341            |       | 223,648               |       |
| Prepaid  expenses                                                                                                                                 |       | 555,239            |       | 357,911               |       |
| Deferred  income taxes                                                                                                                            |       | 411,549            |       | 411,549               |       |
| Total  current assets                                                                                                                             |       | 20,461,701         |       | 23,705,560            |       |
|                                                                                                                                              |       |               |       |                  |       |
| Marketable  securities, noncurrent                                                                                                                |       | 323,615            |       | 567,163               |       |
| Property,  plant and equipment, net of accumulated depreciation of $4,675,987 in 2010  and $4,601,480 in 2009                                     |       | 1,661,797          |       | 1,655,187             |       |
| Goodwill                                                                                                                                          |       | 3,180,434          |       | 3,300,088             |       |
| Investment  in affiliated company                                                                                                                 |       | 3,396,042          |       | —                |       |
| Technology  rights and other intangibles, net                                                                                                     |       | 745,431            |       | 738,035               |       |
| Deferred  income taxes                                                                                                                            |       | 331,599            |       | 280,548               |       |
| Other  assets                                                                                                                                     |       | 81,307             |       | 80,427                |       |
|                                                                                                                                              |       |               |       |                  |       |
| TOTAL  ASSETS                                                                                                                                     |       | $                  | 30,181,926 |                  | $          | 30,327,008 |   |
|                                                                                                                                              |       |               |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                        |       |               |       |                  |       |
| Current  liabilities:                                                                                                                             |       |               |       |                  |       |
| Accounts  payable                                                                                                                                 |       | $                  | 1,410,529  |                  | $          | 1,343,739 |   |
| Compensation  and related expenses                                                                                                                |       | 1,298,985          |       | 1,479,398             |       |
| Other  accrued expenses                                                                                                                           |       | 142,650            |       | 163,640               |       |
| Accrued  product warranties                                                                                                                       |       | 194,097            |       | 209,710               |       |
| Dividends  payable                                                                                                                                |       | 493,662            |       | 465,302               |       |
| Deferred  revenue                                                                                                                                 |       | 568,486            |       | 426,277               |       |
| Total  current liabilities                                                                                                                        |       | 4,108,409          |       | 4,088,066             |       |
|                                                                                                                                              |       |               |       |                  |       |
| Obligations  to former employees                                                                                                                  |       | 50,825             |       | 54,141                |       |
| Accrued  income taxes                                                                                                                             |       | 202,418            |       | 202,418               |       |
| Total  noncurrent liabilities                                                                                                                     |       | 253,243            |       | 256,559               |       |
|                                                                                                                                              |       |               |       |                  |       |
| Total  liabilities                                                                                                                                |       | 4,361,652          |       | 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  5,192,445 shares in 2010 and 5,170,018 shares in 2009 |       | 519,245            |       | 517,002               |       |
| Additional  paid-in capital                                                                                                                       |       | 284,045            |       | 114,021               |       |
| Retained  earnings                                                                                                                                |       | 25,117,296         |       | 24,690,293            |       |
| Accumulated  other comprehensive (loss) income                                                                                                    |       | (100,312           | )          | 661,067               |       |
| Total  stockholders’ equity                                                                                                                  |       | 25,820,274         |       | 25,982,383            |       |
|                                                                                                                                              |       |               |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                  |       | $                  | 30,181,926 |                  | $          | 30,327,008 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OFINCOME

(Unaudited)

 
| ** **                                    | ** ** | **Three  Months Ended** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **March 31,**      | ** ** |
| ** **                                    | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Sales:                                        |       |                    |       |   |   |
| Products                                      |       | $                       | 6,457,201  |   | $ | 5,842,795 |   |
| Consulting  services                          |       | 636,122                 |       | 328,964 |   |
| Total  sales                                  |       | 7,093,323               |       | 6,171,759 |   |
|                                          |       |                    |       |   |   |
| Cost  of sales:                               |       |                    |       |   |   |
| Products                                      |       | 2,428,179               |       | 2,355,464 |   |
| Consulting  services                          |       | 338,980                 |       | 225,033 |   |
| Total  cost of sales                          |       | 2,767,159               |       | 2,580,497 |   |
|                                          |       |                    |       |   |   |
| Gross  profit                                 |       | 4,326,164               |       | 3,591,262 |   |
|                                          |       |                    |       |   |   |
| Selling,  general and administrative expenses |       | 2,733,563               |       | 2,581,052 |   |
|                                          |       |                    |       |   |   |
| Research  and development expenses            |       | 547,748                 |       | 507,600 |   |
|                                          |       |                    |       |   |   |
| Operating  income                             |       | 1,044,853               |       | 502,610 |   |
|                                          |       |                    |       |   |   |
| Other  income                                 |       | 269,868                 |       | 109,307 |   |
|                                          |       |                    |       |   |   |
| Income  before income taxes                   |       | 1,314,721               |       | 611,917 |   |
|                                          |       |                    |       |   |   |
| Income  taxes                                 |       | 392,600                 |       | 213,000 |   |
|                                          |       |                    |       |   |   |
| Net  income                                   |       | $                       | 922,121    |   | $ | 398,917 |   |
|                                          |       |                    |       |   |   |
| Net  income per common share:                 |       |                    |       |   |   |
| Basic                                         |       | $                       | 0.18       |   | $ | 0.07 |   |
| Diluted                                       |       | $                       | 0.17       |   | $ | 0.07 |   |
|                                          |       |                    |       |   |   |
| Weighted  average common shares outstanding:  |       |                    |       |   |   |
| Basic                                         |       | 5,181,232               |       | 5,591,877 |   |
| Diluted                                       |       | 5,323,721               |       | 5,650,078 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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MOCON,INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                         | ** ** | **Three  Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**      | ** ** |
| ** **                                                                         | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Cash  flows from operating activities:                                             |       |                    |       |   |   |
| Net  income                                                                        |       | $                       | 922,121    |   | $ | 398,917 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                    |       |   |   |
| Stock-based  compensation expense                                                  |       | 66,160                  |       | 58,317 |   |
| Loss  on disposition of long-term assets                                           |       | 1,500                   |       | 3,000 |   |
| Depreciation  and amortization                                                     |       | 128,123                 |       | 156,198 |   |
| Deferred  income taxes                                                             |       | (51,051                 | )          | — |   |
| Excess  tax benefit from employee stock plans                                      |       | (2,102                  | )          | — |   |
| Changes  in operating assets and liabilities:                                      |       |                    |       |   |   |
| Trade  accounts receivable                                                         |       | 389,645                 |       | 391,035 |   |
| Other  receivables                                                                 |       | (12,024                 | )          | 4,467 |   |
| Inventories                                                                        |       | 101,458                 |       | (85,782 | ) |
| Prepaid  income taxes                                                              |       | 99,620                  |       | (16,401 | ) |
| Prepaid  expenses                                                                  |       | (200,016                | )          | (155,738 | ) |
| Accounts  payable                                                                  |       | 93,534                  |       | (174,451 | ) |
| Compensation  and related expenses                                                 |       | (163,046                | )          | (557,743 | ) |
| Other  accrued expenses                                                            |       | (19,201                 | )          | (51,822 | ) |
| Accrued  product warranties                                                        |       | (12,277                 | )          | (5,239 | ) |
| Accrued  income taxes                                                              |       | 2,102                   |       | (4,465 | ) |
| Deferred  revenue                                                                  |       | 142,209                 |       | 71,994 |   |
| Net  cash provided by operating activities                                         |       | 1,486,755               |       | 32,287 |   |
|                                                                               |       |                    |       |   |   |
| Cash  flows from investing activities:                                             |       |                    |       |   |   |
| Purchases  of marketable securities                                                |       | —                  |       | (637,025 | ) |
| Proceeds  from maturities of marketable securities                                 |       | 1,959,108               |       | 1,878,530 |   |
| Purchases  of property, plant and equipment                                        |       | (93,570                 | )          | (147,721 | ) |
| Cash  paid for patent and trademark registrations                                  |       | (14,470                 | )          | (22,944 | ) |
| Other                                                                              |       | (880                    | )          | (881 | ) |
| Cash  paid for investment in affiliated company                                    |       | (3,660,638              | )          | — |   |
| Net  cash (used in) provided by investing activities                               |       | (1,810,450              | )          | 1,069,959 |   |
|                                                                               |       |                    |       |   |   |
| Cash  flows from financing activities:                                             |       |                    |       |   |   |
| Proceeds  from the exercise of stock options                                       |       | 104,005                 |       | — |   |
| Purchases  and retirement of common stock                                          |       | —                  |       | (18,736 | ) |
| Excess  tax benefit from employee stock plans                                      |       | 2,102                   |       | — |   |
| Dividends  paid                                                                    |       | (466,758                | )          | (503,308 | ) |
| Net  cash used in financing activities                                             |       | (360,651                | )          | (522,044 | ) |
|                                                                               |       |                    |       |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                      |       | (306,817                | )          | (249,891 | ) |
|                                                                               |       |                    |       |   |   |
| Net  (decrease) increase in cash and cash equivalents                              |       | (991,163                | )          | 330,311 |   |
|                                                                               |       |                    |       |   |   |
| Cash  and cash equivalents:                                                        |       |                    |       |   |   |
| Beginning  of period                                                               |       | 9,393,127               |       | 4,553,479 |   |
| End  of period                                                                     |       | $                       | 8,401,964  |   | $ | 4,883,790 |   |
|                                                                               |       |                    |       |   |   |
| Supplemental  disclosures of cash flow information:                                |       |                    |       |   |   |
| Cash  paid during the period for income taxes                                      |       | $                       | 341,929    |   | $ | 219,011 |   |
|                                                                               |       |                    |       |   |   |
| Supplemental  schedule of noncash investing and financing activities:              |       |                    |       |   |   |
| Amortization  of cumulative unrealized gain on marketable securities               |       | $                       | —     |   | $ | (2,527 | ) |
| Noncash  exercise of stock options                                                 |       | $                       | 92,813     |   | $ | — |   |
| Dividends  accrued                                                                 |       | $                       | 493,662    |   | $ | 503,072 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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MOCON, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note1 — Consolidated Financial Statements

 

Theconsolidated balance sheet as of March 31, 2010, and the consolidatedstatements of income and cash flows for the three-month periods ended March 31,2010 and 2009 have been prepared in accordance with accounting principlesgenerally 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 March 31, 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-month period ended March 31, 2010 arenot necessarily indicative of operating results for the full year.  It is suggested that these consolidatedfinancial statements be read in conjunction with the consolidated financialstatements and notes included in our Annual Report on Form 10-K for thefiscal year ended December 31, 2009, previously filed with the Securitiesand 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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*SubsequentEvents*

* *

Wehave evaluated the period subsequent to March 31, 2010, and concludedthere were no events or transactions occurring during this period that requiredrecognition or additional disclosure in the consolidated financial statements.

 

*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 thoseinstruments.

 

*Recently Adopted Accounting Pronouncements*

* *

In November 2008, the FASB issued Emerging IssuesTask 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.

 

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Note 2 — Inventories

 

Inventories consist of the following:

 
| ** **         | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------|------------|--------------------------|------------|-----------------------------|------------|
| Finished  products |       | $                        | 717,164    |                        | $          | 939,385 |   |
| Work-in-process    |       | 1,654,526                |       | 1,404,012                   |       |
| Raw  materials     |       | 1,755,551                |       | 1,922,073                   |       |
|               |       | $                        | 4,127,241  |                        | $          | 4,265,470 |   |

 

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-month periods endedMarch 31, 2010 and 2009:

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                              | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| Weighted shares of common  stock outstanding — basic               |       | 5,181,232                                        |       | 5,591,877 |   |
| Weighted shares of common  stock assumed upon exercise of stock options |       | 142,489                                          |       | 58,201 |   |
| Weighted shares of common  stock outstanding — diluted             |       | 5,323,721                                        |       | 5,650,078 |   |

 

Forthe three-month period ended March 31, 2010, there were 222,763 stockoptions outstanding that were excluded from the above computation because theywere anti-dilutive.

 

Note4 — Goodwill and Intangible Assets

 

Asof March 31, 2010 and December 31, 2009, goodwill amounted to$3,180,434 and $3,300,088, respectively. The decrease was due to foreign currency translation relating to theacquisition of Paul Lippke Handels-GmbH. Other identifiable intangible assets (all of which are being amortizedexcept projects in process) are as follows:

 
| ** **                 | ** ** | **As of  March 31, 2010** | ** ** |
|----------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **Cost**                       | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                    |       | $                              | 1,034,066  |   | $ | (414,642 | ) | $ | 619,424 |   | 10 to 17 years |   |
| Trademarks and trade names |       | 482,690                        |       | (403,350 | ) | 79,340 |   | 5 to 17 years |   |
| Other intangibles          |       | 778,596                        |       | (731,929 | ) | 46,667 |   | 3 years |   |
|                       |       | $                              | 2,295,352  |   | $ | (1,549,921 | ) | $ | 745,431 |   |   |   |

 

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| ** **                  | ** ** | **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 March 31, 2010 and2009 was $23,842 and $20,499, respectively. Projects in process are not amortized until the patent or trademark isgranted by the regulatory agency. Estimated amortization expense for the remainder of 2010 and each of thefour succeeding fiscal years and thereafter based on the intangible assets asof March 31, 2010 is as follows:

 
| ** **           | ** ** | **Estimated  Expense** | ** ** |
|----------------------|------------|------------------------|------------|
| 2010                 |       | $                      | 65,567     |   |
| 2011                 |       | $                      | 75,928     |   |
| 2012                 |       | $                      | 43,503     |   |
| 2013                 |       | $                      | 38,810     |   |
| 2014                 |       | $                      | 28,260     |   |
| 2015  and thereafter |       | $                      | 205,320    |   |

 

### Note 5 — Marketable Securities

###  

Marketable securities at March 31, 2010 consist of municipal bondsand certificates of deposits, 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 three months of 2010, therefore, noadjustment to the amortized cost basis was made.  Currently, all of our marketable securitiesmature within two years.

 

The amortized cost and fair value for held-to-maturity securities bymajor security type at March 31, 2010 were as follows:

 
| ** **               | ** ** | **March 31, 2010** | ** ** |
|--------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **Amortized  Cost**          | ** ** | **Gross  Unrealized  Holding  Gains** | ** ** | **Gross  Unrealized  Holding  Losses** | ** ** | **Fair Value** | ** ** |
| Certificates  of deposit |       | $                            | 1,149,000  |   | $ | — |   | $ | — |   | $ | 1,149,000 |   |
| Municipal  bonds         |       | 1,830,174                    |       | 16,271 |   | (444 | ) | 1,846,001 |   |
|                     |       | $                            | 2,979,174  |   | $ | 16,271 |   | $ | (444 | ) | $ | 2,995,001 |   |

 

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Note 6 — Comprehensive Income

 

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

 
| ** **                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                           | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Net income                                                           |       | $                                      | 922,121    |   | $ | 398,917 |   |
| Foreign currency  translation adjustment                             |       | (761,379                               | )          | (439,311 | ) |
| Amortization of cumulative  unrealized gain on marketable securities |       | —                                 |       | (2,527 | ) |
| Comprehensive income  (loss)                                         |       | $                                      | 160,742    |   | $ | (42,921 | ) |

 

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,non-invasive analysis of atmospheres in food, beverage and pharmaceuticalpackaging, and are innovators in an emerging high-throughput screeningtechnique for measuring drug toxicity and metabolism in drug discovery forpharmaceutical research.  The investmentin Luxcel is carried on our balance sheet at the original purchase price,adjusted for currency fluctuations.  Webelieve that it is not feasible to readily determine the fair value of thisinvestment as there is no established market for the securities.

 

Aspart of our relationship with Luxcel, we will purchase sensors which will accompanyour instruments for sale to an end user. We will also be required to pay a royalty to Luxcel on the sale of suchinstruments.

 

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.

 

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Warranty provisions and claims for thethree-month periods ended March 31, 2010 and 2009 were as follows:

 
| ** **          | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------|------------|----------------------------------------|------------|
| ** **          | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Beginning balance   |       | $                                      | 209,710    |   | $ | 229,087 |   |
| Warranty provisions |       | 38,645                                 |       | 56,010 |   |
| Warranty claims     |       | (54,258                                | )          | (64,894 | ) |
| Ending balance      |       | $                                      | 194,097    |   | $ | 220,203 |   |

 

Note9 — Income Taxes

 

MOCON, Inc.or one of our subsidiaries files income tax returns in the U.S. federaljurisdiction, several state jurisdictions, China and Germany.  With limited exceptions, we are no longersubject to income tax examinations by taxing authorities for taxable yearsbefore 2006.

 

Asof December 31, 2009, the liability for gross unrecognized tax benefitswas $175,000, which included potential benefits of $127,000 that, ifrecognized, would affect the effective tax rate.  During the three months ended March 31,2010, there were no significant changes to the total gross unrecognized taxbenefits that would have 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 forpositions which we have identified will not change significantly in the next twelvemonths.

 

Note 10 — Stock-Based Compensation

 

As of March 31, 2010, we have reserved 141,037 shares of common stock for optionsand other stock-based incentive awards that are still available for grant underour 2006 stock incentive plan, and 904,975 shares for options that have beengranted under either the 2006 stock incentive plan or the 1998 stock optionplan but have not yet been exercised.  Weissue new shares of common stock upon exercise of stock options.  There were no options granted in the firstthree months of 2010.

 

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

 
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Total  cost of stock-based compensation              |       | $                                      | 66,160     |   | $ | 58,317 |   |
| Amount  of income tax benefit recognized in earnings |       | (3,479                                 | )          | (2,657 | ) |
| Amount  charged against net income                   |       | $                                      | 62,681     |   | $ | 55,660 |   |

 

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 historicalexperience.  The dividend yield iscalculated based upon the dividend payments made during the prior four quartersas a percent of the average stock price for that period.

 

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A summary of the option activity for thefirst three months of 2010 is as follows:

 
| ** **                             | ** ** | **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             |       | (25                   | )          | $                                                 | 8.58       |                                                | —     |                            |       |   |
| Options  exercised                     |       | (32,250               | )          | $                                                 | 6.10       |                                                | —     |                            |       |   |
| Outstanding  at March 31,  2010   |       | 904,975               |       | $                                                 | 8.94       |                                                | 4.0        |                            | $          | 1,867,203 |   |
|                                   |       |                  |       |                                              |       |                                                |       |                            |       |
| Exercisable  at March 31, 2010    |       | 752,913               |       | $                                                 | 8.82       |                                                | 3.7        |                            | $          | 1,656,211 |   |

 

Thetotal intrinsic value of options exercised was $115,775 and $0 during thethree-month periods ended March 31, 2010 and 2009, respectively.

 

Asummary of the status of our unvested option shares as of March 31, 2010is as follows:

 
| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|
| Unvested  at December 31, 2009 |       | 162,312               |       | $                                             | 2.50       |   |
| Options  granted                    |       | —                |       | —                                        |       |
| Options  cancelled                  |       | —                |       | —                                        |       |
| Options  vested                     |       | (10,250               | )          | $                                             | 2.72       |   |
| Unvested  at March 31, 2010    |       | 152,062               |       | $                                             | 2.24       |   |

 

Asof March 31, 2010, there was $340,277 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 March 31, 2010 and 2009 was $27,880 and $20,100respectively.

 

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

 

ThisManagement’s Discussion and Analysis provides material historical andprospective disclosures intended to enable investors and other users to assessour financial condition and results of operations.  Statements that are not historical areforward-looking and involve risks and uncertainties discussed 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 consulting services, primarily in the measurement and analyticalinstrument and services markets.  Ourproducts include instruments that detect, measure and monitor gases andchemical compounds.

 

We have three primary operating locations in the United States —Minnesota, Colorado and Texas — and foreign facilities in Germany andChina.  We use a combination of a directsales force and independent sales representatives to market our products andservices in the United States, Canada, Germany and China, and use a network ofindependent sales representatives to market and service our products andservices in other foreign countries.  Inrecent years, over half of our revenues have come from international customers.

 

Our current plans for growth include continued strong funding forresearch and development (approximately 6% to 8% of our revenue) to foster newproduct development, together with strategic acquisitions whereappropriate.  Our products are used bycustomers in many different markets.  Asignificant focus of our product development and marketing efforts in 2009 and2010 has been in the food and beverage markets. Our target customers in this market are primarily interested in threethings: developing successful new consumer products, maintaining high qualityin their products and ensuring the shelf life and safety of theirproducts.  Our newest products helpaddress the increased consumer emphasis on health and safety.

 

### *Market Strategy*

###  

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

 

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

 

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In the cases of both the BevAlert and the OpTech products, MOCON istargeting the worldwide increase in concern for consumer safety in the food andbeverage markets.  Our strategy is tocontinue to position ourselves as a leader in the consumer and industrialsafety marketplace by offering unique products and services into large andgrowing markets.

 

### ***Results of Operations***

### ** **

The following table sets forth the relationship between variouscomponents of our results of operations, stated as a percent of sales, for thethree-month periods ended March 31, 2010 and 2009:

 
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Sales                                         |       | 100.0                                  |       | 100.0 |   |
| Cost  of sales                                |       | 39.0                                   |       | 41.8 |   |
| Gross  profit                                 |       | 61.0                                   |       | 58.2 |   |
| Selling,  general and administrative expenses |       | 38.6                                   |       | 41.8 |   |
| Research  and development expenses            |       | 7.7                                    |       | 8.3 |   |
| Operating income                              |       | 14.7                                   |       | 8.1 |   |
| Other income                                  |       | 3.8                                    |       | 1.8 |   |
| Income before income taxes                    |       | 18.5                                   |       | 9.9 |   |
| Income taxes                                  |       | 5.5                                    |       | 3.4 |   |
| Net income                                    |       | 13.0                                   |       | 6.5 |   |

###  

### *Comparison of Financial Results for the Three-MonthPeriods Ended March 31, 2010 and 2009*

### * *

### *Sales*

###  

Sales for the three-month period ended March 31, 2010 were$7,093,000, up 15% compared to $6,172,000 for the sameperiod in 2009.  We experienced increasesin sales in all our major product groups as the global economic conditions thathad negatively affected the prior year’s results showed signs ofimprovement.  Domestic and foreign salesaccounted for 45% and 55%, respectively, of our consolidated first quartersales in 2010, and 47% and 53% of our consolidated sales, respectively, for thesame period in 2009.

 

Thefollowing table summarizes total sales by product line for the three-monthperiods ended March 31, 2010 and 2009:

 
| ** **                            | ** ** | **Three  Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| Permeation products and  services     |       | $                                       | 4,119,512  |   | $ | 3,592,625 |   |
| Gas analyzers, sensors and  detectors |       | 1,325,634                               |       | 1,245,272 |   |
| Packaging products and  services      |       | 1,060,642                               |       | 1,033,884 |   |
| Other instruments and  services       |       | 587,535                                 |       | 299,978 |   |
| Total sales                           |       | $                                       | 7,093,323  |   | $ | 6,171,759 |   |

 

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The following table sets forth the relationshipbetween various components of domestic and foreign sales for the three-monthperiods ended March 31, 2010 and 2009:

 
| ** **          | ** ** | **Three  Months Ended  March 31,** | ** ** |
|---------------------|------------|-----------------------------------------|------------|
| ** **          | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| Domestic sales      |       | $                                       | 3,208,919  |   | $ | 2,889,432 |   |
| Foreign sales:      |       |                                    |       |   |   |
| Europe              |       | 1,841,123                               |       | 1,593,759 |   |
| Asia                |       | 1,385,351                               |       | 1,171,583 |   |
| Other               |       | 657,930                                 |       | 516,985 |   |
| Total foreign sales |       | 3,884,404                               |       | 3,282,327 |   |
| Total sales         |       | $                                       | 7,093,323  |   | $ | 6,171,759 |   |

 

***Permeation Products and Services*** — Sales of our permeationproducts and services increased 15% for the first quarter ended March 31,2010 compared to the same period in the prior year, and accounted for 58% ourconsolidated first quarter sales in both years. The increase resulted from higher capital equipment expenditures in thefirst quarter 2010 after a very soft first quarter 2009.  International sales of permeation productsand services accounted for 71% of the total sales of this product group in thefirst quarter 2010, and increased 27% over the prior year.  This increase was partially offset by a 7%decrease in domestic sales.

 

***Gas Analyzers, Sensors and Detectors*****— Sales of ourgas analyzers, sensors and detector products, which accounted for 19% and 20%of our consolidated first quarter sales in 2010 and 2009, respectively,increased 6% during the first quarter 2010 compared to the same period in2009.  Within this group, sales of ourgas chromatographs increased 96% due primarily to stronger demand in the oiland gas exploration and industrial hygiene markets. This increase was partiallyoffset by a decrease in shipments of OEM sensors and detectors as well as totalhydrocarbon analyzers.

 

***Packaging Products and Services*****— Sales of ourpackaging products and services, which accounted for 15% and 17% of ourconsolidated first quarter sales in 2010 and 2009, respectively, increased 3%during the first quarter 2010 compared to the same period in 2009.  This group consists of headspace analyzersand leak detection instruments.  Domesticsales of these products increased 15% in 2010 compared to the prior period,while foreign shipments decreased 13%.

 

***Other Instruments and Services*****— Sales in ourother instruments and services category, which accounted for 8% and 5% of ourconsolidated first quarter sales in 2010 and 2009, respectively, increased 96%in the first quarter 2010, compared to the same period in 2009.  This increase was the result of morespecialty projects performed by our analytical testing and consulting groups,as well as an increase in sales of non-MOCON products by our German subsidiary.

 

### *Gross Profit*

###  

The gross profit margins for our product sales were 62.4% and 59.7% forthe three-month periods ended March 31, 2010 and 2009, respectively.  This improvement was the result of afavorable product mix and manufacturing efficiencies realized through higherproduction volumes.  The gross profitmargins for our consulting services were 46.7% and 31.6%, respectively, for thethree-month periods ended March 31, 2010 and 2009.  This increase was primarily due to theincreased volume of analytical testing and consulting performed in the currentperiod.

 

*Selling, General and Administrative Expenses*

 

Selling, general and administrative (SG&A) expenses were $2,734,000in the three-month period ended 

 

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March 31, 2010, compared to $2,581,000 in the same period of2009.  The increase was primarily relatedto costs associated with the minority equity investment in Luxcel BiosciencesLimited, higher incentive compensation, and increased travel and promotionexpenses.

 

### *Research and Development Expenses*

###  

Research and development (R&D) expenses were $548,000, or 7.7% ofsales in the first quarter 2010, compared to $508,000, or 8.3% of sales, in thesame period of 2009.  The increase inspending in the current period is primarily related to projects that hadtentatively been pushed out from the prior year due to the slowdown in theeconomy.  A significant portion ofR&D expenditures in 2010 are expected to be devoted to the food safetymarket.

 

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

 

### *Other Income*

###  

Otherincome for the three month periods ended March 31, 2010 and 2009 was asfollows:

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Interest  income                       |       | $                                      | 29,743     |   | $ | 117,762 |   |
| Foreign  currency exchange gain (loss) |       | 238,533                                |       | (8,018 | ) |
| Other                                  |       | 1,592                                  |       | (437 | ) |
|                                   |       | $                                      | 269,868    |   | $ | 109,307 |   |

 

Interest income decreased for the first quarter ended March 31,2010, compared to the same period in 2009, due to lower average yields on loweraverage interest bearing investments. The foreign currency gain in the first quarter 2010 was primarily theresult of adjusting a euro-based intercompany loan obligation to market valueat March 31, 2010.

 

### *Income Tax Expense*

###  

Our provision for income taxes was 29.9% of income before income taxesfor the first quarter ended March 31, 2010, compared to 34.8% of incomebefore income taxes for the same period in the prior year.  The decrease in the effective tax rate in thefirst quarter 2010 was primarily due to the creation of foreign tax creditsgenerated by the repatriation of funds from our German subsidiary and theincrease in the allowable deduction for domestic production activity forfederal income tax purposes.

 

### Based on current projected annual operating results and current incometax rates, we expect the effective tax rate for the remainder of 2010 to be inthe range of 29% to 34%.  This ratefluctuates over time based on the income tax rates in the various jurisdictionsin which we operate, and also the level of profits in those jurisdictions.

### * *

### *Net Income*

###  

Net income was $922,000 in the first quarter 2010, compared to $399,000in the first quarter 2009.  Diluted netincome per share was $0.17 and $0.07 in the first quarters of 2010 and 2009,respectively.

 

*Liquidity and Capital Resources*

 

We have historically financed our operations, capital equipment andother cash requirements through our 

 

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cash flows generated from operations. Total cash, cash equivalents and marketable securities decreased$2,950,000 during the first three months of 2010 to $11,381,000 as of March 31,2010, compared to $14,331,000 at December 31, 2009.  The primary reason for this decrease was dueto the investment of approximately $3,625,000 (€2,500,000) to acquire aminority equity ownership interest in Luxcel Biosciences Limited inIreland.  Our working capital as of March 31,2010 decreased $3,264,000 to $16,353,000, 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 lines ofcredit or other credit facilities, and it is uncertain whether such facilitiescould be obtained in sufficient amounts or on acceptable terms.

 

One of our strategic objectives is, as market and business conditionswarrant, to consider 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*

 

Cash Flow from Operating Activities

 

Our primary source of funds is cash provided by operating activitieswhich totaled $1,487,000 and $32,000 in the first three months of 2010 and2009, respectively.  The key componentsof the cash provided by operating activities in 2010 were the income for theperiod, decrease in accounts receivable, and increased deferred revenue,partially offset by a increase in prepaid expenses and a reduction in accruedcompensation and related expenses.  Thedecrease in accounts receivable is primarily due to improved collections fromcustomers and the decrease in accrued compensation and related expenses isprimarily due to the March 2010 payment of incentive bonuses related to2009.

 

### Cash Flow from Investing Activities

###  

Cash (used in) provided by investing activities totaled ($1,810,000)and $1,070,000 in the first three 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, offset somewhat by the proceeds from maturities of marketablesecurities of $1,959,000.  For theremainder of 2010, we expect to incur capital expenditures in the range of$1,100,000 to $1,400,000, the majority of which relates to our move to newoffices in Minnesota.

 

Cash Flow from Financing Activities

 

Cash used in financing activities totaled $361,000 and $522,000 in thefirst three months of 2010 and 2009, respectively.  During the first three months of 2010 and2009, we made dividend payments to our shareholders of $467,000 and $503,000,respectively.  Partially offsetting the impact of thedividend payment in 2010 were the proceeds from the exercise of stock optionsin the amount of $104,000.

 

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We currently are not authorized by our Board of Directors to make repurchasesof our common stock.

 

***Contractual Obligations***

** **

We refer you to our Annual Report on Form 10-K for the year ended December 31,2009 for a summary of our contractual obligations.  There has been no material change in thisinformation.

 

### ***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 material off-balancesheet 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 believe the adoption of this pronouncementwill not have a significant impact on our consolidated financial statements.

 

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 thedisclosures about 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 expect thatthe adoption of the remaining guidance will have an impact on our consolidatedfinancial statements.

 

***Critical Accounting Policies***

*** ***

Our significant accounting policies are described in Note 1 to ourconsolidated financial statements.  ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations is based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.  The preparationof these consolidated financial statements requires management to makeestimates and judgments that affect the reported amount of assets, liabilities,revenues and expenses, and related disclosure of contingent assets andliabilities.  The Securities and ExchangeCommission has defined a company’s most critical accounting policies as thosethat are most important to the portrayal of its financial condition and resultsof operations, and which require the company to make its most difficult andsubjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, we have identified the following criticalaccounting policies.  Although we believethat our estimates and assumptions are reasonable, they are based uponinformation available when they are made. Actual results may differ significantly from these estimates underdifferent assumptions or conditions.

 

*Revenuerecognition* — We recognize revenue when it is realized orrealizable and earned.  We considerrevenue realized or realizable when persuasive evidence of an arrangementexists, the product has been shipped or the services have been provided to thecustomer, title and risk of loss of products has passed to the customer, the salesprice is fixed or determinable, and collectability is reasonably assured.  Our terms are F.O.B. shipping point with noright of return, except in rare cases, and customer acceptance of our productsis not required.  The revenue recognitionpolicy does not differ among the various product lines, the marketing venues,or various geographic destinations.  Wedo not have 

 

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

 

Revenue for preventivemaintenance agreements is recognized on a per visit basis and extendedwarranties on a straight-line basis over the life of the contracts.

 

Our accounting treatment forrecognizing revenue from shipments with multiple element arrangements waschanged in the first quarter 2010, as we adopted ASC Topic 605.  This guidance provides that the overallarrangement fee will be allocated to each element (both delivered andundelivered items) based on their relative selling prices, as demonstrated byvendor-specific objective evidence (VSOE) or third-party evidence (TPE).  Where VSOE or TPE is not available, revenuewill 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* — Our allowancefor doubtful accounts and sales returns is for accounts receivable balancesthat 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 ourcustomers.  In the event we determinethat a smaller or larger allowance for doubtful accounts is appropriate, wewould record a credit or charge to selling, general and administrative expensein the period that we made such a determination.  As of March 31,2010 and 2009, we had $171,000 and $162,000, respectively, reserved against ouraccounts receivable for doubtful accounts and sales returns.

 

*Accrual for excess and obsolete inventories*—**We perform an analysis to identify excessand obsolete inventory.  We record acharge to cost of sales for amounts identified. Our analysis includes inventory levels, the nature of the components andtheir inherent risk of obsolescence and the on-hand quantities relative to thesales history of that component.  Webelieve that our financial results could be materially different if historicaltrends are not predictive of future results or if demand for our productsdecreased because of economic or competitive conditions or otherwise.  As of March 31,2010 and 2009, we had $333,000 and $304,000, respectively, accrued for excessand obsolete inventories.

 

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

 

*Accrued product warranties*—**Our products are generally covered by 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 labor costs, utilizing historical experience.  Additional warranty reserves are also accruedfor major rework campaigns.  Weperiodically assess the adequacy of our warranty reserves based on changes inthese factors and record any necessary adjustments if actual claim experienceindicates that adjustments are necessary. Although we believe the likelihood to be relatively low, warranty claimsexperience could be materially different from actual results due to manufacturingchanges that could impact product quality, a change in our warranty policy inresponse to industry trends, as yet unrecognized defects in products sold, orother factors.  As of March 31, 2010and 2009, we had $194,000 and $220,000, respectively, accrued for futureestimated warranty claims.

 

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*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.

 

Management reviews the deferred tax assets for recoverability on aquarterly basis and assesses the need for valuation allowances.  These deferred tax assets are evaluated byconsidering historical levels of income, estimates of future taxable incomestreams and the impact of tax planning strategies.  A valuation allowance is recorded to reducedeferred tax assets when it is determined that it is more likely than not thatwe would not be able to realize all or part of our deferred tax assets.  At March 31, 2010 and December 31,2009, we provided a valuation allowance in the approximate amount of $320,000against our net deferred tax assets, related primarily to the capital losscarryforward.

 

### ***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 internationally andselling and shipping our products and purchasing our products and componentsinternationally;

·      Fluctuations in foreign currency exchange rates andinterest rates;

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

·      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 downturn andcontinuing decreases in capital spending by our customers that may occur as aresult;

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

 

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·      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 distributors and salesassociates to market and sell our products;

·      Highly competitive nature of the markets in which wesell our products and the introduction of competing products;

·      Loss of customers;

·      Failure to retain senior management or replace lostsenior management;

·      Employee slowdowns, strikes or similar actions;

·      Reliance on our management information systems forinventory management, distribution, accounting and other functions;

·      Effects of any pending or threatened litigation;

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

·      Changes in generally accepted accounting principles;or

·      Conditions and changes in general economic andbusiness 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 financial instruments isminimal.

 

### *Foreign Currency Risk*

###  

Historically,in excess of 50% of our consolidated sales have been to international destinations.  Since we invoice most of these customers inU.S. dollars, we do not have significant exposure to foreign currencytransaction risk.  We invoice a smallamount to our international customers in their local 

 

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currencywhich exposes us to some transaction gain or loss when converting theirpayments into U.S. dollars.  We also paya small number of our international suppliers in their local currency whichexposes us to transaction gain or loss. However, these have not resulted in material amounts in the past.  Our foreign operations expose us to foreigncurrency exchange risk when the euro and yuan currency results of operationsare translated to U.S. dollars.  While wehistorically have not experienced any material foreign currency translationgains or losses, we realized a foreign currency transaction gain relating tothe valuation of a euro-denominated intercompany loan which originated in thefirst quarter 2010.  In the future, wemay engage in hedging activity to minimize this risk.  Our net investment in foreign subsidiary translatedinto U.S. dollars is not hedged.  Anychanges in foreign currency exchange rates would be reflected as a foreigncurrency translation adjustment, a component of accumulated other comprehensiveincome in stockholders’ equity, and would not impact our net income.

 

Item 4T.          Controls and 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 March 31, 2010 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

PART II.     OTHER INFORMATION

 

Item 1A.         Risk Factors

 

We are affected by risks specific to us as well asfactors that affect all businesses operating in a global market.  The significant factors known to us thatcould materially adversely affect our business, financial condition oroperating results are described in our annual report on Form 10-K for thefiscal year ended December 31, 2009 under the heading “Part I — Item1A. Risk Factors.”  There has been nomaterial change in those risk factors.

 

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

 

*Unregistered Sales ofEquity Securities*

 

We did not sell any equity securities of MOCON, Inc.during the first quarter ended March 31,2010 that were not registered under the Securities Act of 1933.

 

*Issuer Repurchases ofEquity Securities*

 

We did not repurchase any equity securities of MOCON, Inc.during the first quarter ended March 31, 2010.

 

Item 6.            Exhibits

 

The following exhibits arebeing filed or furnished with this quarterly report on Form 10-Q:

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

 

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SIGNATURES

 

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: May 17, 2010 | /s/ Robert L. Demorest                       |
|                    | Robert L. Demorest                           |
|                    | Chairman, President and Chief                |
|                    | Executive Officer                            |
|                    | (Principal Executive Officer)                |
|                    |                                         |
|                    |                                         |
| Date: May 17, 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 MARCH 31, 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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