Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

#### ** **

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

##### ** **

**(Mark One)**

 

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

** **

**For theQuarter Ended March 31, 2009**

** **

**or**

 

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

** **

**For thetransition period from                 to                 **

 

**CommissionFile Number 000-09273**

** **

**MOCON, INC.**

(Exactname of registrant as specified in its charter)

 

| **Minnesota**                                        | ** ** | **41-0903312**      |
|------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                      |       | (I.R.S. employer    |
| incorporation or organization)                       |       | identification no.) |
|                                                 |       |                |
| **7500 Boone Avenue North,  Minneapolis, Minnesota** | ** ** | **55428**           |
| (Address of principal executive offices)             |       | (Zip code)          |

 

**(763) 493-6370**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  YES x  NO o

 

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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “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) |   |                             |

 

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

 

5,589,694 Common Shares were outstanding as of April 30, 2009.

 

 

 

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MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended March 31,2009

 
| ** **                                           | **Page  Number**                                                                                     |
|------------------------------------------------------|------------------------------------------------------------------------------------------------------|
| PART I.   FINANCIAL  INFORMATION |                                                                                                 |
|                                                 |                                                                                                 |
| Item 1.                                              | Financial Statements                                                                                 |   |
|                                                 | Consolidated Balance Sheets (Unaudited)  March 31, 2009 and December 31, 2008              | 1 |
|                                                 |                                                                                                 |   |
|                                                 | Consolidated Statements of Income (Unaudited)  Three months ended March 31, 2009 and 2008       | 2 |
|                                                 |                                                                                                 |   |
|                                                 | Consolidated Statements of Cash Flows (Unaudited)  Three months ended March 31, 2009 and 2008   | 3 |
|                                                 |                                                                                                 |   |
|                                                 | Notes to Consolidated Financial Statements (Unaudited)                                               | 4-10 |
|                                                 |                                                                                                 |   |
| Item 2.                                              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations          | 10-18 |
|                                                 |                                                                                                 |   |
| Item 3.                                              | Quantitative  and Qualitative Disclosures About Market Risk                                          | 18 |
|                                                 |                                                                                                 |   |
| Item 4T.                                             | Controls and  Procedures                                                                             | 19 |
|                                                 |                                                                                                 |
|                                                 |                                                                                                 |
| PART II.  OTHER  INFORMATION          |                                                                                                 |
|                                                 |                                                                                                 |
| Item 1A.                                             | Risk Factors                                                                                         | 19 |
|                                                 |                                                                                                 |   |
| Item 2.                                              | Unregistered  Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity  Securities | 19-20 |
|                                                 |                                                                                                 |   |
| Item 6.                                              | Exhibits                                                                                             | 20 |
|                                                 |                                                                                                 |
| Signatures                                           | 21                                                                                                   |
|                                                 |                                                                                                 |
| Exhibit Index                                   | 22                                                                                                   |

 

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

* *

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

 

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Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MOCON, INC. ANDSUBSIDIARIES

 

CONSOLIDATEDBALANCE SHEETS

(Unaudited)

 
| ** **                                                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2009**           | ** ** | **2008**              | ** ** |
|                                                                                                                                              |       |               |       |                  |       |
| ASSETS                                                                                                                                            |       |               |       |                  |       |
| Current assets:                                                                                                                                   |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                         |       | $                  | 4,883,790  |                  | $          | 4,553,479 |   |
| Marketable securities, current                                                                                                                    |       | 7,245,679          |       | 7,087,373             |       |
| Trade accounts receivable, less allowance  for doubtful accounts of $141,686 in 2009 and $137,182 in 2008                                         |       | 3,830,330          |       | 4,514,359             |       |
| Other receivables                                                                                                                                 |       | 250,971            |       | 255,923               |       |
| Inventories                                                                                                                                       |       | 4,775,979          |       | 4,731,859             |       |
| Prepaid income taxes                                                                                                                              |       | 467,297            |       | 465,641               |       |
| Prepaid expenses                                                                                                                                  |       | 537,064            |       | 385,264               |       |
| Deferred income taxes                                                                                                                             |       | 362,773            |       | 362,773               |       |
| Total current assets                                                                                                                              |       | 22,353,883         |       | 22,356,671            |       |
|                                                                                                                                              |       |               |       |                  |       |
| Marketable securities, noncurrent                                                                                                                 |       | 3,065,726          |       | 4,468,064             |       |
| Property, plant and equipment, net of  accumulated depreciation of $4,367,239 in 2009 and $4,274,454 in 2008                                      |       | 1,838,561          |       | 1,826,269             |       |
|                                                                                                                                              |       |               |       |                  |       |
| Other assets:                                                                                                                                     |       |               |       |                  |       |
| Goodwill                                                                                                                                          |       | 3,146,773          |       | 3,267,926             |       |
| Technology rights and other intangibles,  net                                                                                                     |       | 665,908            |       | 659,298               |       |
| Deferred income taxes                                                                                                                             |       | 298,094            |       | 298,094               |       |
| Other                                                                                                                                             |       | 77,786             |       | 76,905                |       |
| Total other assets                                                                                                                                |       | 4,188,561          |       | 4,302,223             |       |
|                                                                                                                                              |       |               |       |                  |       |
| TOTAL ASSETS                                                                                                                                      |       | $                  | 31,446,731 |                  | $          | 32,953,227 |   |
|                                                                                                                                              |       |               |       |                  |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                         |       |               |       |                  |       |
| Current liabilities:                                                                                                                              |       |               |       |                  |       |
| Accounts payable                                                                                                                                  |       | $                  | 1,247,526  |                  | $          | 1,676,448 |   |
| Accrued compensation and vacation                                                                                                                 |       | 924,306            |       | 1,498,428             |       |
| Other accrued expenses                                                                                                                            |       | 254,415            |       | 310,828               |       |
| Accrued product warranties                                                                                                                        |       | 220,203            |       | 229,087               |       |
| Dividends payable                                                                                                                                 |       | 503,072            |       | 503,308               |       |
| Deferred revenue                                                                                                                                  |       | 317,787            |       | 245,793               |       |
| Total current liabilities                                                                                                                         |       | 3,467,309          |       | 4,463,892             |       |
|                                                                                                                                              |       |               |       |                  |       |
| Noncurrent liabilities:                                                                                                                           |       |               |       |                  |       |
| Obligations to former employees                                                                                                                   |       | 52,021             |       | 55,522                |       |
| Accrued income taxes                                                                                                                              |       | 215,820            |       | 215,820               |       |
| Total noncurrent liabilities                                                                                                                      |       | 267,841            |       | 271,342               |       |
|                                                                                                                                              |       |               |       |                  |       |
| Total liabilities                                                                                                                                 |       | 3,735,150          |       | 4,735,234             |       |
|                                                                                                                                              |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                        |       |               |       |                  |       |
| Capital stock — undesignated. Authorized  3,000,000 shares                                                                                   |       | —             |       | —                |       |
| Common stock — $0.10 par value. Authorized  22,000,000 shares; issued and outstanding 5,589,694 shares in 2009 and  5,592,314 shares in 2008 |       | 558,969            |       | 559,231               |       |
| Capital in excess of par value                                                                                                                    |       | 2,908,512          |       | 2,868,669             |       |
| Retained earnings                                                                                                                                 |       | 24,164,111         |       | 24,268,266            |       |
| Accumulated other comprehensive income                                                                                                            |       | 79,989             |       | 521,827               |       |
| Total stockholders’ equity                                                                                                                   |       | 27,711,581         |       | 28,217,993            |       |
|                                                                                                                                              |       |               |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                   |       | $                  | 31,446,731 |                  | $          | 32,953,227 |   |

 

See accompanying notes to consolidated financialstatements.

 

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MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF INCOME

(Unaudited)

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **March 31,**               | ** ** |
| ** **                                    | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Sales:                                        |       |                             |       |   |   |
| Products                                      |       | $                                | 5,842,795  |   | $ | 7,102,453 |   |
| Consulting services                           |       | 328,964                          |       | 359,981 |   |
| Total sales                                   |       | 6,171,759                        |       | 7,462,434 |   |
|                                          |       |                             |       |   |   |
| Cost of sales:                                |       |                             |       |   |   |
| Products                                      |       | 2,355,464                        |       | 2,919,612 |   |
| Consulting services                           |       | 225,033                          |       | 234,303 |   |
| Total cost of sales                           |       | 2,580,497                        |       | 3,153,915 |   |
|                                          |       |                             |       |   |   |
| Gross profit                                  |       | 3,591,262                        |       | 4,308,519 |   |
|                                          |       |                             |       |   |   |
| Selling, general and administrative  expenses |       | 2,581,052                        |       | 2,582,634 |   |
|                                          |       |                             |       |   |   |
| Research and development expenses             |       | 507,600                          |       | 543,951 |   |
|                                          |       |                             |       |   |   |
| Operating income                              |       | 502,610                          |       | 1,181,934 |   |
|                                          |       |                             |       |   |   |
| Other income                                  |       | 109,307                          |       | 131,693 |   |
|                                          |       |                             |       |   |   |
| Income before income taxes                    |       | 611,917                          |       | 1,313,627 |   |
|                                          |       |                             |       |   |   |
| Income taxes                                  |       | 213,000                          |       | 428,000 |   |
|                                          |       |                             |       |   |   |
| Net income                                    |       | $                                | 398,917    |   | $ | 885,627 |   |
|                                          |       |                             |       |   |   |
| Net income per common share:                  |       |                             |       |   |   |
| Basic                                         |       | $                                | 0.07       |   | $ | 0.16 |   |
| Diluted                                       |       | $                                | 0.07       |   | $ | 0.16 |   |
|                                          |       |                             |       |   |   |
| Weighted average common shares outstanding:   |       |                             |       |   |   |
| Basic                                         |       | 5,591,877                        |       | 5,532,432 |   |
| Diluted                                       |       | 5,650,078                        |       | 5,668,573 |   |

 

See accompanying notes toconsolidated financial statements.

 

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MOCON, INC. ANDSUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**               | ** ** |
| ** **                                                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Cash flows from operating activities:                                              |       |                             |       |   |   |
| Net income                                                                         |       | $                                | 398,917    |   | $ | 885,627 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                             |       |   |   |
| Stock-based compensation expense                                                   |       | 58,317                           |       | 77,639 |   |
| Loss on disposition of long-term assets                                            |       | 3,000                            |       | 13,500 |   |
| Depreciation and amortization                                                      |       | 156,198                          |       | 137,045 |   |
| Deferred income taxes                                                              |       | —                           |       | (8,549 | ) |
| Excess tax benefit from employee stock  plans                                      |       | —                           |       | (5,667 | ) |
| Changes in operating assets and liabilities:                                       |       |                             |       |   |   |
| Trade accounts receivable                                                          |       | 391,035                          |       | (285,839 | ) |
| Other receivables                                                                  |       | 4,467                            |       | (19,624 | ) |
| Inventories                                                                        |       | (85,782                          | )          | (39,532 | ) |
| Prepaid income taxes                                                               |       | (16,401                          | )          | — |   |
| Prepaid expenses                                                                   |       | (155,738                         | )          | (115,569 | ) |
| Accounts payable                                                                   |       | (174,451                         | )          | 470,389 |   |
| Accrued compensation and vacation                                                  |       | (557,743                         | )          | (244,034 | ) |
| Other accrued expenses                                                             |       | (51,822                          | )          | (30,593 | ) |
| Accrued product warranties                                                         |       | (5,239                           | )          | (740 | ) |
| Accrued income taxes                                                               |       | (4,465                           | )          | 17,285 |   |
| Deferred revenue                                                                   |       | 71,994                           |       | — |   |
| Net cash provided by operating activities                                          |       | 32,287                           |       | 851,338 |   |
|                                                                               |       |                             |       |   |   |
| Cash flows from investing activities:                                              |       |                             |       |   |   |
| Purchases of marketable securities                                                 |       | (637,025                         | )          | (2,136,836 | ) |
| Proceeds from maturities of marketable  securities                                 |       | 1,878,530                        |       | 1,701,475 |   |
| Purchases of property, plant and equipment                                         |       | (147,721                         | )          | (82,325 | ) |
| Purchases of patents and trademarks                                                |       | (22,944                          | )          | (39,019 | ) |
| Other                                                                              |       | (881                             | )          | (905 | ) |
| Net cash provided by (used in) investing  activities                               |       | 1,069,959                        |       | (557,610 | ) |
|                                                                               |       |                             |       |   |   |
| Cash flows from financing activities:                                              |       |                             |       |   |   |
| Proceeds from the exercise of stock options                                        |       | —                           |       | 106,295 |   |
| Purchases and retirement of common stock                                           |       | (18,736                          | )          | — |   |
| Excess tax benefit from employee stock  plans                                      |       | —                           |       | 5,667 |   |
| Dividends paid                                                                     |       | (503,308                         | )          | (442,372 | ) |
| Net cash used in financing activities                                              |       | (522,044                         | )          | (330,410 | ) |
|                                                                               |       |                             |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                      |       | (249,891                         | )          | 274,742 |   |
|                                                                               |       |                             |       |   |   |
| Net increase in cash and cash equivalents                                          |       | 330,311                          |       | 238,060 |   |
|                                                                               |       |                             |       |   |   |
| Cash and cash equivalents:                                                         |       |                             |       |   |   |
| Beginning of period                                                                |       | 4,553,479                        |       | 5,207,105 |   |
| End of period                                                                      |       | $                                | 4,883,790  |   | $ | 5,445,165 |   |
|                                                                               |       |                             |       |   |   |
| Supplemental disclosures of cash flow  information:                                |       |                             |       |   |   |
| Cash paid during the period for income  taxes                                      |       | $                                | 219,011    |   | $ | 196,891 |   |
|                                                                               |       |                             |       |   |   |
| Supplemental schedule of noncash investing  and financing activities:              |       |                             |       |   |   |
| Amortization of cumulative unrealized gain  on marketable securities               |       | $                                | (2,527     | ) | $ | — |   |
| Dividends accrued                                                                  |       | $                                | 503,072    |   | $ | 443,296 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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MOCON, INC. AND SUBSIDIARIES

 

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 — Consolidated Financial Statements

 

The consolidated balance sheet as of March 31, 2009, and theconsolidated statements of income and cash flows for the three-month periodsended March 31, 2009 and 2008 have been prepared by us, withoutaudit.  However, all adjustments(consisting solely of normal recurring adjustments) which are, in the opinionof management, necessary to present fairly the financial position, results ofoperations and cash flows at March 31, 2009, and for all periodspresented, have been made.  The resultsof operations for the three-month period ended March 31, 2009 are notnecessarily indicative of operating results for the full year.

 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted.  It is suggested that theseconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and notes included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008, previously filed with theSecurities and Exchange Commission.

 

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

 

*Principles of Consolidation*

 

The consolidated financial statements include the accounts of MOCON, Inc.and its subsidiaries after elimination of inter-company transactions andaccounts.

 

*Foreign Currency Translation*

* *

The financial statements for operations outside the United States aremaintained in their local currency.  Allassets and liabilities of our foreign subsidiaries are translated to UnitedStates dollars at period-end exchange rates, while revenue and expense accountsare translated at the average exchange rates during the period transactionsoccurred.  Translation adjustments arisingfrom the use of differing exchange rates are included in accumulated othercomprehensive income or loss in stockholders’ equity.  Gains and losses on foreign currencytransactions are included in other income or loss.

 

*Use of Estimates*

 

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

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*Recently Issued AccountingPronouncements*

* *

In February 2008, the FASB amended SFAS 157 by FSP FinancialAccounting Standard (FAS) 157-2, *EffectiveDate of FASB Statement No. 157* (FSP FAS 157-2).  FSP FAS 157-2 deferred the effective date ofSFAS 157 for all nonfinancial assets and liabilities that are not remeasured atfair value on a recurring basis to fiscal years beginning after February 15,2008.  We adopted the required provisionsof SFAS 157 effective in the first quarter of fiscal 2008.  In the first quarter 2009, we adopted theremaining provisions of SFAS 157. Although we believe the adoption of FSP FAS 157-2 may impact the waythat we determine the fair value of goodwill, indefinite-lived intangibleassets, and other long-lived assets, we do not expect it to have a materialimpact on our results of operations or financial condition.

 

In October 2008, the FASB issued FSP No. FAS 157-3, *Determining the Fair Value of a Financial Asset Whenthe Market for That Asset Is Not Active*, which clarifies theapplication of SFAS 157 in an inactive market and illustrates how an entitywould determine fair value when the market for a financial asset is notactive.  The Staff Position is effectiveimmediately and applies to prior periods for which financial statements havenot been issued, including interim or annual periods ending on or before September 28,2008.  The implementation of FAS 157-3did not have an effect on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), *Business Combinations*(SFAS 141(R)).  SFAS 141(R) retainsthe fundamental requirements of the original pronouncement requiring that thepurchase method be used for all business combinations.  SFAS 141(R) defines the acquirer as theentity that obtains control of one or more businesses in the businesscombination, establishes the acquisition date as the date that the acquirerachieves control and requires the acquirer to recognize the assets acquired,liabilities assumed and any noncontrolling interest at their fair values as ofthe acquisition date.  SFAS 141(R) alsorequires that acquisition-related costs be recognized separately from theacquisition.  We will be required toapply the guidance of SFAS 141(R) to any business combinations completedon or after January 1, 2009.

 

In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and HedgingActivities* (SFAS 161), an amendment of SFAS No. 133.  SFAS 161 establishes, among other things, thedisclosure requirements for derivative instruments and for hedgingactivities.  The intent is to provideusers of financial statements with an enhanced understanding of a) how and whyan entity uses derivative instruments, b) how derivative instruments andrelated hedged items are accounted for under SFAS 133 and its relatedinterpretations, and c) how derivative instruments and related hedged itemsaffect an entity’s financial position, financial performance, and cashflows.  To meet those objectives, theStatement requires qualitative disclosures about objectives and strategies forusing derivatives, quantitative disclosures about fair value amounts of andgains and losses on derivative instruments, and disclosures aboutcredit-risk-related contingent features in derivative agreements.  SFAS 161 is effective for us beginning in2009.  We currently have no derivativeinstruments or hedging activities but will assess the impact of SFAS 161 if andwhen we engage in these types of transactions.

 

In April 2008, the FASB issued FSP No. FAS 142-3, *Determination of the Useful Life of Intangible Assets*.  FSP FAS 142-3 amends the factors that shouldbe considered in developing renewal or extension assumptions used to determinethe useful life of a recognized intangible asset under SFAS No. 142, *Goodwill and Other Intangible Assets*.  FSP FAS 142-3 was effective for us beginning January 1,2009.  The implementation of FSP FAS142-3 did not have an effect on our consolidated financial statements.

 

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Note 2 — Inventories

 

Inventories consist of the following:

 
| ** **         | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------|------------|--------------------------|------------|-----------------------------|------------|
| Finished  products |       | $                        | 857,801    |                        | $          | 829,861 |   |
| Work-in-process    |       | 1,576,853                |       | 1,633,577                   |       |
| Raw  materials     |       | 2,341,325                |       | 2,268,421                   |       |
|               |       | $                        | 4,775,979  |                        | $          | 4,731,859 |   |

 

Note 3 — Net Income Per Common Share

 

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

 

The following table presents a reconciliation of the denominators usedin the computation of net income per common share — basic, and net income percommon share — diluted, for the three-month periods ended March 31, 2009and 2008:

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                              | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Weighted  shares of common stock outstanding — basic               |       | 5,591,877                                        |       | 5,532,432 |   |
| Weighted  shares of common stock assumed upon exercise of stock options |       | 58,201                                           |       | 136,141 |   |
| Weighted  shares of common stock outstanding — diluted             |       | 5,650,078                                        |       | 5,668,573 |   |

 

For the three-month period ended March 31, 2009, there were484,574 stock options outstanding that were excluded from the above computationbecause they were anti-dilutive.

 

Note 4 — Goodwill and Intangible Assets

 

As of March 31, 2009 and December 31, 2008, goodwill amountedto $3,146,773 and $3,267,926, 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, 2009** | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | **Cost**                                     | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                                            | 884,265    |   | $ | (375,484 | ) | $ | 508,781 |   | 10 to 17  years |   |
| Trademarks  and trade names |       | 469,023                                      |       | (385,229 | ) | 83,794 |   | 5 to 17  years |   |
| Other  intangibles          |       | 778,596                                      |       | (705,263 | ) | 73,333 |   | 3 years |   |
|                        |       | $                                            | 2,131,884  |   | $ | (1,465,976 | ) | $ | 665,908 |   |   |   |

 

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

 

Total amortization expense for the three-month periods ended March 31,2009 and 2008 was $20,499 and $28,058, respectively.  Projects in process are not amortized untilthe patent or trademark is granted by the regulatory agency.  Estimated amortization expense for theremainder of 2009 and each of the four succeeding fiscal years and thereafterbased on the intangible assets as of March 31, 2009 is as follows:

 
| ** **          | ** ** | **Estimated  Expense** | ** ** |
|---------------------|------------|------------------------|------------|
| 2009                |       | $                      | 61,904     |   |
| 2010                |       | $                      | 74,876     |   |
| 2011                |       | $                      | 61,103     |   |
| 2012                |       | $                      | 28,493     |   |
| 2013                |       | $                      | 23,730     |   |
| 2014 and thereafter |       | $                      | 102,069    |   |

 

Note 5 — Marketable Securities

 

As of January 1, 2008, the classification of our marketable debtsecurities was changed from available-for-sale to held-to-maturity.  This change was made due to our currentintent and ability to hold these securities until maturity or the call date asthe case may be.  Currently, all of ourmarketable securities mature within two and one-half years.  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 2009, therefore noadjustment to the amortized cost basis was made.  Under the prior method, these securities wererecorded at fair value and the unrealized holding gains and losses wereexcluded from income and reported as a separate component of stockholders’equity until realized.  For the debtsecurities that were outstanding at December 31, 2007, there wasapproximately $25,000 of unrealized gain that was recorded in stockholders’equity, which was amortized over the remaining life of the securities.  This unrealized gain was fully amortized at March 31,2009.

 

Note 6 — Comprehensive Income

 

Other comprehensive income pertains to foreign currency translationadjustments that are not included in net income but rather are recordeddirectly in stockholders’ equity.

 
| ** **                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                           | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Net  income                                                          |       | $                                                | 398,917    |   | $ | 885,627 |   |
| Foreign  currency translation adjustment                             |       | (439,311                                         | )          | 331,693 |   |
| Amortization  of cumulative unrealized gain on marketable securities |       | (2,527                                           | )          | — |   |
| Comprehensive (loss) income                                          |       | $                                                | (42,921    | ) | $ | 1,217,320 |   |

 

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Note 7 — Warranty

 

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

 

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

 

Warranty provisions and claims for the three-month periods ended March 31,2009 and 2008 were as follows:

 
| ** **           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------|------------|--------------------------------------------------|------------|
| ** **           | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Beginning  balance   |       | $                                                | 229,087    |   | $ | 201,373 |   |
| Warranty  provisions |       | 56,010                                           |       | 72,964 |   |
| Warranty  claims     |       | (64,894                                          | )          | (71,027 | ) |
| Ending balance       |       | $                                                | 220,203    |   | $ | 203,310 |   |

 

Note 8 — Income Taxes

 

MOCON, Inc. or one of our subsidiaries files income tax returns inthe U.S. federal jurisdiction, several state jurisdictions, China andGermany.  With limited exceptions, we areno longer subject to income tax examinations by taxing authorities for taxableyears before 2005.

 

In August 2008, the Internal Revenue Service completed itsexamination of MOCON’s 2006 Federal tax return. This resulted in an assessment of an additional $37,000 in tax andinterest, which had no impact on our effective tax rate.

 

As of December 31, 2008, the liability for gross unrecognized taxbenefits was $168,000, which included potential benefits of $121,000 that, ifrecognized, would affect the effective tax rate.  During the three months ended March 31,2009, there were no significant changes to the total gross unrecognized taxbenefits.  It is expected that the amountof unrecognized tax benefits for positions which we have identified will notchange significantly in the next twelve months.

 

Note 9 — Stock-Based Compensation

 

As of March 31, 2009, we have reserved 232,000 shares of commonstock for options and other stock-based incentive awards that are stillavailable for grant under our 2006 stock incentive plan, and 848,562 shares foroptions that have been granted under either the 2006 stock incentive plan orthe 1998 stock option plan but have not yet been exercised.  We issue new shares of common stock uponexercise of stock options.  There were nooptions granted in the first quarter of 2009.

 

Amounts recognized in the consolidated financial statements related tostock-based compensation are as follows:

 

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| ** **                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Total  cost of stock-based compensation                     |       | $                                                | 58,317     |   | $ | 77,639 |   |
| Amount  capitalized in inventory and property and equipment |       | —                                           |       | — |   |
| Amounts  charged against income before income taxes         |       | 58,317                                           |       | 77,639 |   |
| Amount  of income tax benefit recognized in earnings        |       | (2,657                                           | )          | (12,552 | ) |
| Amount charged against net income                           |       | $                                                | 55,660     |   | $ | 65,087 |   |

 

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

 

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

 
| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price per  Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding  at December 31, 2008 |       | 848,562                    |       | $                                                      | 8.81       |                                                | 4.9        |                            | $          | 567,879 |   |
| Options  granted                       |       | —                     |       | —                                                 |       | —                                              |       |                            |       |
| Options  cancelled                     |       | —                     |       | —                                                 |       | —                                              |       |                            |       |
| Options  expired                       |       | —                     |       | —                                                 |       | —                                              |       |                            |       |
| Options  exercised                     |       | —                     |       | —                                                 |       | —                                              |       |                            |       |
| Outstanding  at March 31, 2009    |       | 848,562                    |       | $                                                      | 8.81       |                                                | 4.6        |                            | $          | 533,300 |   |
|                                   |       |                       |       |                                                   |       |                                                |       |                            |       |
| Exercisable  at March 31, 2009    |       | 693,468                    |       | $                                                      | 8.60       |                                                | 4.3        |                            | $          | 533,300 |   |

 

There were no stock options exercised during the three-month periodended March 31, 2009.  The totalintrinsic value of options exercised during the three-month period ended March 31,2008 was $37,235.

 

A summary of the status of our unvested option shares as of March 31,2009 is as follows:

 
| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| Unvested  at December 31, 2008 |       | 163,469                    |       | $                                                       | 2.47       |   |
| Options  granted                    |       | —                     |       | —                                                  |       |
| Options  cancelled                  |       | —                     |       | —                                                  |       |
| Options  vested                     |       | (8,375                     | )          | $                                                       | 2.40       |   |
| Unvested at March 31, 2009     |       | 155,094                    |       | $                                                       | 2.47       |   |

 

As of March 31, 2009, there was $383,672 of total unrecognizedcompensation cost related to unvested stock-based compensation granted underour plans.  That cost is expected to berecognized over a

 

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weighted-average period of 1.4 years. The total fair value of option shares vested during the three-monthperiods ended March 31, 2009 and 2008 was $20,100 and $26,884,respectively.

 

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

 

This Management’s Discussion and Analysis provides material historicaland prospective disclosures intended to enable investors and other users toassess our financial condition and results of operations.  Statements that are not historical areforward-looking and involve risks and uncertainties discussed below under thecaption “Forward-Looking Statements.” The following discussion of the results of operations and financialcondition of MOCON should be read in conjunction with our consolidatedfinancial statements and the related notes thereto included elsewhere in thisreport.

 

***Overview***

** **

MOCON, Inc. designs, manufactures, markets and services productsand provides consulting services primarily in the measurement and analyticalinstrument and services markets.  Ourproducts include instruments that detect, measure and monitor gases andchemical compounds.  We continually seekgrowth opportunities through technological and product improvement, byacquiring and developing new products, and by acquiring new companies.

 

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

 

Historically, a significant portion of our revenues have come frominternational customers.  In this regard,we acquired our subsidiary in Germany in 2004 to solidify our presence andopportunities in Europe.  Similarly, weopened our office in Shanghai, China in 2007 to better serve our Asiancustomers.

 

Our current plans for growth include continued funding for research anddevelopment to foster new product development together with strategicacquisitions where appropriate.

 

***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, 2009 and 2008:

 
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Sales                                         |       | 100.0                                            |       | 100.0 |   |
| Cost  of sales                                |       | 41.8                                             |       | 42.3 |   |
| Gross  profit                                 |       | 58.2                                             |       | 57.7 |   |
| Selling,  general and administrative expenses |       | 41.8                                             |       | 34.6 |   |
| Research  and development expenses            |       | 8.3                                              |       | 7.3 |   |
| Operating  income                             |       | 8.1                                              |       | 15.8 |   |
| Other  income                                 |       | 1.8                                              |       | 1.8 |   |
| Income  before income taxes                   |       | 9.9                                              |       | 17.6 |   |
| Income  taxes                                 |       | 3.4                                              |       | 5.7 |   |
| Net  income                                   |       | 6.5                                              |       | 11.9 |   |

 

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### *Comparison of Financial Resultsfor the Three-Month Periods Ended March 31, 2009 and 2008*

### * *

### *Sales*

###  

Sales for the three-month period ended March 31,2009 were $6,172,000, down 17% compared to $7,462,000for the same period in 2008.  The effectsof the global economic recession contributed to a decrease in sales across allmajor product lines and market regions. On a geographical basis, sales decreased 17% in both our domestic andforeign markets.  Domestic and foreignsales accounted for 47% and 53%, respectively, of our consolidated firstquarter sales in both 2009 and 2008.

 

The following table summarizes total sales by product line for thethree-month periods ended March 31, 2009 and 2008:

 
| ** **                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Permeation  products and services                         |       | $                                                | 3,592,625  |   | $ | 3,934,053 |   |
| Gas,  headspace, and other analyzer products and services |       | 2,365,996                                        |       | 3,029,078 |   |
| Other  instruments and services                           |       | 213,138                                          |       | 499,303 |   |
| Total  sales                                              |       | $                                                | 6,171,759  |   | $ | 7,462,434 |   |

 

The following table sets forth the relationshipbetween various components of domestic and foreign sales for the three-monthperiods ended March 31, 2009 and 2008:

 
| ** **           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------|------------|--------------------------------------------------|------------|
| ** **           | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Domestic  sales      |       | $                                                | 2,889,432  |   | $ | 3,492,931 |   |
| Foreign  sales:      |       |                                             |       |   |   |
| Europe               |       | 1,593,759                                        |       | 1,982,901 |   |
| Asia                 |       | 1,171,583                                        |       | 1,433,195 |   |
| Other                |       | 516,985                                          |       | 553,407 |   |
| Total  foreign sales |       | 3,282,327                                        |       | 3,969,503 |   |
| Total  sales         |       | $                                                | 6,171,759  |   | $ | 7,462,434 |   |

 

***Permeation Products and Services*** —Sales of our permeation products and services, which accounted forapproximately 58% and 53% of our consolidated first quarter sales in 2009 and2008, respectively, decreased 9% during the first quarter 2009 compared to thesame period in 2008.  This decrease,which was primarily in our foreign markets, was due primarily to decreaseddemand for our core permeation instruments, as orders for capital equipmenthave weakened.

 

***Gas, Headspace, and Other Analyzer Products andServices*****— Sales of ourgas, headspace, and other analyzer products and services, which accounted for38% and 40% of our consolidated first quarter sales in 2009 and 2008,respectively, decreased 22% during the first quarter 2009 compared to the sameperiod in 2008.  Within this group, salesof our gas analyzer products through our Baseline subsidiary decreased 17% dueprimarily to reduced demand for the gas chromatograph and total hydrocarbonanalyzer instruments, partially offset by an increase in sales of sensors,detectors and spares.

 

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Sales of our packaging products, which includesheadspace analyzers and leak detection equipment, were consistent as apercentage of consolidated first quarter sales in 2009 and 2008.

 

***Other Instruments and Services*****— Sales in our other instruments and servicescategory, which accounted for 4% and 7% of our consolidated first quarter salesin 2009 and 2008, respectively, decreased 57% in the first quarter 2009,compared to the same period in 2008. This decrease was due primarily to a reduction in contract manufacturingof sample preparation products, reduced sales of non-MOCON products by ourGerman subsidiary and decreased demand for our gas chromatography analyzerproducts and consulting services.

 

### *Gross Profit*

###  

The gross profit margins for our product sales were59.7% and 58.9% for the three-month periods ended March 31, 2009 and 2008,respectively.  This increase wasprimarily due to the mix of products shipped and cost reductions associatedwith our OEM sensor product line.

 

The gross profit margins for our consulting serviceswere 31.6% and 34.9%, respectively, for the three-month periods ended March 31,2009 and 2008.  This decrease wasprimarily due to slightly decreased sales over which the fixed costs wereapplied.

 

*Selling, General andAdministrative Expenses*

 

Selling, general and administrative (SG&A)expenses were $2,581,000 in the three-month period ended March 31, 2009,consistent with $2,583,000 in the same period of 2008.  As a percentage, SG&A expenses were 41.8%and 34.6% of consolidated sales in the first quarters of 2009 and 2008,respectively, due to the lower sales level in 2009.  Decreases in incentive compensation and stockoption expense were offset by increased professional fees and trade showexpense in the first quarter 2009 compared to the same period in the prioryear.

 

### *Research and Development Expenses*

###  

Research and development (R&D) expenses were$508,000, or 8.3% of sales in the first quarter 2009, compared to $544,000, or7.3% of sales, in the same period of 2008. Although this current level of expense was higher than our historicalrange of 6% to 8% of sales, and it may continue to be in subsequent quarters,it is lower in terms of absolute dollars spent on R&D than what we hadprojected to spend.

 

### *Other Income*

###  

Other income for the first quarter ended March 31,2009 of $109,000 consisted of interest income of $118,000, partially offset bya loss of $9,000 on foreign currency exchange and other insignificantexpenses.  Other income for the firstquarter ended March 31, 2008 of $132,000 consisted of interest income of$139,000, partially offset by a loss of $7,000 on foreign currency exchange andother insignificant expenses.  Interestincome decreased for the first quarter ended March 31, 2009, compared tothe same period in 2008, due to lower average yields on slightly higher averageinterest bearing investments.

 

### *Income Tax Expense*

###  

Our provision for income taxes was 34.8% of incomebefore income taxes for the first quarter ended March 31, 2009, comparedto 32.6% of income before income taxes for the first quarter ended March 31,2008.  This increase in the effective taxrate in the first quarter 2009 was primarily due to the impact of stockcompensation expense, the mix of foreign earnings, and the lower incomebase.  Based on current projected annualoperating results and current income tax rates, we expect the effective taxrate for the 

 

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remainder of 2009 to be in the range of 31% to36%.  This rate fluctuates over timebased on the income tax rates in the various jurisdictions in which we operate,and also the level of profits in those jurisdictions.

 

### *Net Income*

###  

Net income was $399,000 in the first quarter 2009,compared to $886,000 in the first quarter 2008. Diluted net income per share was $0.07 and $0.16 in the first quartersof 2009 and 2008, respectively.

 

*Liquidity and Capital Resources*

 

We have historically financed our operations,capital expenditures and other liquidity needs through our cash flows generatedfrom operations.  Total cash, cashequivalents and marketable securities decreased $914,000 during the first threemonths of 2009 to $15,195,000 as of March 31, 2009, compared to$16,109,000 at December 31, 2008. Our working capital as of March 31, 2009 increased $994,000 to$18,887,000, as compared to $17,893,000 at December 31, 2008.  This increase was primarily due to loweraccrued compensation and accounts payable balances and marketable securitymaturities, offset somewhat by a decrease in accounts receivable.  Our investment in marketable securitiesconsists primarily of municipal bonds, certificates of deposits and U.S.treasury obligations.  We do notcurrently have any funds invested in auction rate certificates.  We believe that a combination of our existingcash, cash equivalents and marketable securities, plus an expected continuationof cash flow from operations, will continue to be adequate to fund ouroperations, capital expenditures, dividend payments and authorized stockrepurchases for at least the next twelve months.  Purchases of property and equipment wererelatively constant between the two periods mentioned above, and we had nomaterial commitments for capital expenditures as of March 31, 2009.

 

One of our strategic objectives is, as market andbusiness conditions warrant, to consider acquisitions of businesses, productsor technologies.  We may need to fundsuch activities, should they arise, with a combination of cash on hand and debtand/or equity financing, although no assurance can be given that such debtand/or equity financing will be available at reasonable terms or at all.  We currently do not have any committed linesof credit or other credit facilities available for use.  If we raise additional funds by issuing debt,we may be subject to restrictive covenants that could limit our operationalflexibility and higher interest expense could dilute earnings per share.  Any plan to raise additional capital mayinvolve an equity-based or equity-linked financing, which may be dilutive toexisting shareholders.

 

*Cash Flow*

 

Cash Flow from Operating Activities

 

Our primary source of funds is cash provided byoperating activities which totaled $32,000 and $851,000 in the first threemonths of 2009 and 2008, respectively. The key components of the cash provided by operating activities in 2009were the net income and decreased accounts receivable, primarily offset bydecreases in accounts payable and accrued compensation and vacation.  The decrease in accounts receivable isprimarily due to the decrease in sales; the decrease in accrued compensationand vacation is primarily due to the March 2009 payment of incentivebonuses related to 2008.

 

### Cash Flow from Investing Activities

###  

Cash provided by (used in) investing activitiestotaled $1,070,000 and ($558,000) in the first three months of 2009 and 2008,respectively.  The primary reasons forcash provided by investing activities in 2009 were net proceeds from maturitiesof marketable securities of $1,242,000, offset somewhat by purchases ofproperty and equipment.  We presently donot believe that any significant property, plant and equipment expenditures arerequired to accommodate our current level of operations.

 

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Cash Flow from Financing Activities

 

Cash used in financing activities totaled $522,000and $330,000 in the first three months of 2009 and 2008, respectively.  During the first three months of 2009 and2008, we made dividend payments to our shareholders of $503,000 and $442,000,respectively.  Partially offsetting the impact of thedividend payment in 2008 were the proceeds from the exercise of stock optionsin the amount of $106,000.

 

Our Board of Directors has authorized, dependingupon market conditions and other factors, the repurchase of up to a total of$2,000,000 of our common stock.  As of March 31,2009, we had repurchased an aggregate of 51,532 shares of MOCON common stockunder the program at a total cumulative cost of $441,000, leaving $1,559,000remaining in this authorization at that date. During the first three months of 2009 we repurchased 2,620 shares at atotal cost of $19,000.

 

***ContractualObligations***

** **

We refer you to our Annual Report on Form 10-Kfor the year ended December 31, 2008 for a summary of our contractualobligations.  There has been no materialchange in this information.

 

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

### ** **

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

 

***Recently Issued AccountingPronouncements***

*** ***

InFebruary 2008, the FASB amended SFAS 157 by FSP Financial AccountingStandard (FAS) 157-2, *Effective Date of FASBStatement No. 157* (FSP FAS 157-2).  FSP FAS 157-2 deferred the effective date ofSFAS 157 for all nonfinancial assets and liabilities that are not remeasured atfair value on a recurring basis to fiscal years beginning after February 15,2008.  We adopted the required provisionsof SFAS 157 effective in the first quarter of fiscal 2008.  In the first quarter 2009, we adopted the remainingprovisions of SFAS 157.  Although webelieve the adoption of FSP FAS 157-2 may impact the way that we determine thefair value of goodwill, indefinite-lived intangible assets, and otherlong-lived assets, we do not expect it to have a material impact on our resultsof operations or financial condition.

 

InOctober 2008, the FASB issued FSP No. FAS 157-3, *Determiningthe Fair Value of a Financial Asset When the Market for That Asset Is NotActive*, which clarifies the application of SFAS 157 in an inactivemarket and illustrates how an entity would determine fair value when the marketfor a financial asset is not active.  TheStaff Position is effective immediately and applies to prior periods for whichfinancial statements have not been issued, including interim or annual periodsending on or before September 28, 2008. The implementation of FAS 157-3 did not have an effect on ourconsolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), *Business Combinations* (SFAS 141(R)).  SFAS 141(R) retains the fundamentalrequirements of the original pronouncement requiring that the purchase methodbe used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains controlof one or more businesses in the business combination, establishes theacquisition date as the date that the acquirer achieves control and requiresthe acquirer to recognize the assets acquired, liabilities assumed and anynoncontrolling interest at their fair values as of the acquisition date.  SFAS 141(R) also requires thatacquisition-related costs be recognized separately from the acquisition.  We will be required to apply the guidance ofSFAS 141(R) to any business combinations completed on or after January 1,2009.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (SFAS 161), anamendment of SFAS No. 133.  SFAS 161establishes, among other things, the 

 

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disclosurerequirements for derivative instruments and for hedging activities.  The intent is to provide users of financialstatements with an enhanced understanding of a) how and why an entity usesderivative instruments, b) how derivative instruments and related hedged itemsare accounted for under SFAS 133 and its related interpretations, and c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows.  To meet those objectives, the Statementrequires qualitative disclosures about objectives and strategies for usingderivatives, quantitative disclosures about fair value amounts of and gains andlosses on derivative instruments, and disclosures about credit-risk-relatedcontingent features in derivative agreements. SFAS 161 is effective for us beginning in 2009.  We currently have no derivative instrumentsor hedging activities but will assess the impact of SFAS 161 if and when weengage in these types of transactions.

 

InApril 2008, the FASB issued FSP No. FAS 142-3, *Determinationof the Useful Life of Intangible Assets*.  FSP FAS 142-3 amends the factors that shouldbe considered in developing renewal or extension assumptions used to determinethe useful life of a recognized intangible asset under SFAS No. 142, *Goodwill and Other Intangible Assets*.  FSP FAS 142-3 was effective for us beginning January 1,2009.  The implementation of FSP FAS142-3 did not have an effect on our consolidated financial statements.

 

***CriticalAccounting Policies***

*** ***

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

 

*Revenuerecognition* — We recognize revenue when it is realized orrealizable and earned.  In accordancewith the Securities and Exchange Commission Staff Accounting Bulletin 104 (SAB104), *Revenue Recognition,*weconsider revenue realized or realizable when persuasive evidence of anarrangement exists, the product has been shipped or the services have beenprovided to the customer, title and risk of loss of products has passed to thecustomer, the sales price is fixed or determinable, and collectibility isreasonably assured.  Our terms are F.O.B.shipping point with no right of return, and customer acceptance of our productsis not required.  The revenue recognitionpolicy does not differ among the various product lines, the marketing venues,or various geographic destinations.  Wedo not have distributors who stock our equipment.  We do not offer rebates, price protection, orother similar incentives, and discounts when offered are recorded as areduction in revenue.

 

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

 

Emerging Issues Task Force(EITF) Issue 00-21, *Revenue Arrangements withMultiple Deliverables*, provides revenue recognition guidance forarrangements with multiple deliverables, and the criteria to determine if itemsin a multiple deliverable agreement should be accounted for separately.  If products or services are sold on astandalone basis, revenue is recognized as the products or services aredelivered.  

 

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When products or servicesare sold as part of a multiple element arrangement, we allocate revenue on arelative fair value basis.

 

*Allowance for doubtful accounts and sales returns* —Our allowance for doubtful accounts and sales returns is for accountsreceivable balances that are estimated to be uncollectible as well as anticipatedsales returns.  The reserve is based on anumber of factors, including:  (1) ananalysis of customer accounts and (2) our historical experience withaccounts receivable write-offs and sales returns.  The analysis includes the age of thereceivable, the financial condition of a customer or industry and generaleconomic conditions.  We believe ourfinancial results could be materially different if historical trends do notreflect actual results or if economic conditions worsened for ourcustomers.  In the event we determinedthat a smaller or larger allowance for doubtful accounts is appropriate, wewould record a credit or charge to selling, general and administrative expensein the period that we made such a determination.  As of March 31,2009, we had $141,686 reserved against our accounts receivable for doubtfulaccounts and sales returns.

 

*Accrual for excess and obsolete inventories*—**We perform an analysis to identify excessand obsolete inventory.  We record acharge to cost of sales for amounts identified. Our analysis includes inventory levels, the nature of the finishedproduct and its inherent risk of obsolescence and the on-hand quantitiesrelative to the sales history of that finished product.  We believe that our financial results couldbe materially different if historical trends do not reflect actual results orif demand for our products decreased because of economic or competitiveconditions or otherwise.  As of March 31, 2009,we had $303,976 accrued for excess and obsolete inventories.

 

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

 

*Accrued product warranties*—**Our products are generally covered by awarranty, with warranty periods ranging from ninety days to one year from thedate of sale.  Estimated warranty costsare accrued in the same period in which the related revenue is recognized,based on anticipated parts and labor costs, utilizing historicalexperience.  Additional warranty reservesare also accrued for major rework campaigns. We periodically assess the adequacy of our warranty reserves based onchanges in these factors and record any necessary adjustments if actual claimexperience indicates that adjustments are necessary.  Although we believe the likelihood to berelatively low, warranty claims experience could be materially different fromactual results due to manufacturing changes that could impact product quality,a change in our warranty policy in response to industry trends, as yetunrecognized defects in products sold, or other factors.  As of March 31,2009, we had $220,203 accrued for future estimated warranty claims.

 

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

 

Management reviews the deferred tax assets forrecoverability on a quarterly basis and assesses the need for valuationallowances.  These deferred tax assetsare evaluated by considering historical levels of income, estimates of futuretaxable income streams and the impact of tax planning strategies.  A valuation allowance is recorded to reducedeferred tax assets when it is determined that it is more likely 

 

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than not that we would not be able to realize all orpart of our deferred tax assets.  At March 31, 2009and December 31, 2008, we provided a valuation allowance in theapproximate amount of $370,000 and $364,000, respectively, against our netdeferred tax assets, related primarily to the long-term capital losscarryforward.

 

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

### ** **

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

 

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

 

·      Increases in prices for raw materials;

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

·      Fluctuations in foreign currency exchangerates and interest rates;

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

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

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

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

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

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

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

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

·      Loss of customers;

·      Failure to retain senior management orreplace lost senior management;

·      Employee slowdowns, strikes or similaractions;

·      Reliance on our management informationsystems for inventory management, distribution, 

 

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accounting and other functions;

·      Effects of any pending or threatenedlitigation;

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

·      Changes in generally accepted accountingprinciples; or

·      Conditions and changes in general economicand business conditions.

 

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

 

Wewish to caution readers not to place undue reliance on any forward-lookingstatement that speaks only as of the date made and to recognize thatforward-looking statements are predictions of future results, which may notoccur as anticipated.  Actual resultscould differ materially from those anticipated in the forward-lookingstatements and from historical results, due to the risks and uncertaintiesdescribed above, as well as others that we may consider immaterial or do notanticipate at this time. Although we believe that the expectations reflected inour forward-looking statements are reasonable, we do not know whether ourexpectations will prove correct.  Theexpectations reflected in our forward-looking statements can be affected byinaccurate assumptions we might make or by known or unknown risks anduncertainties, including those described above. The risks and uncertainties described above are not exclusive andfurther information concerning us and our business, including factors thatpotentially could materially affect our financial results or condition, mayemerge from time to time.  We assume noobligation to update forward-looking statements to reflect actual results orchanges in factors or assumptions affecting such forward-lookingstatements.  We advise you, however, toconsult any further disclosures we make on related subjects in our quarterly reportson Form 10-Q and current reports on Form 8-K we file with or furnishto the Securities and Exchange Commission.

 

Item 3.               Quantitative andQualitative Disclosures About Market Risk

 

*Equity Price and Interest RateRisk*

 

Allof our marketable securities, the majority of which are insured by the FDIC,are at fixed interest rates and mature within two and one-half years;therefore, we believe that the market risk arising from the holding of thesefinancial instruments is minimal.

 

### *Foreign Currency Risk*

###  

Historically,in excess of 50% of our consolidated sales have been to internationaldestinations.  Since we invoice most ofthese customers in U.S. dollars, we do not have significant exposure to foreigncurrency transaction risk.  We invoice asmall amount to our international customers in their local currency whichexposes us to some transaction gain or loss when converting their payments intoU.S. dollars.  We also pay a small numberof our international suppliers in their local currency which exposes us totransaction gain or loss.  However, thesehave 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 translationlosses, we may engage in hedging activity in the future to minimize thisrisk.  Our net investment in foreignsubsidiary translated into U.S. dollars is not hedged.  Any changes in foreign currency exchangerates would be reflected as a foreign currency translation adjustment, acomponent of accumulated other comprehensive income in stockholders’ equity,and would not impact our net income.

 

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Item 4T.            Controls andProcedures

 

*Evaluation of Disclosure Controlsand Procedures*

 

Wemaintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) that are designed to ensure that information required to bedisclosed by us in the reports we file or submit under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized, and reported, withinthe 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 ExecutiveOfficer, and Chief Financial Officer, particularly during the period when ourperiodic reports are being prepared.

 

*Changes in Internal Control OverFinancial Reporting*

 

Therewas no change in our internal control over financial reporting that occurredduring our quarter ended March 31,2009 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

PART II.       OTHERINFORMATION

 

Item 1A.            Risk Factors

 

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

 

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

 

*UnregisteredSales of Equity Securities*

 

We did not sell any equitysecurities of MOCON, Inc. during the first quarter ended March 31, 2009that were not registered under the Securities Act of 1933.

 

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*IssuerRepurchases of Equity Securities*

 

The following table showsour stock repurchase activity during the first quarter ended March 31,2009:

 
| **Period**                                            | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Paid Per  Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Maximum  Amount of  Authorization  Remaining  Under the  Plan** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| January 1,  2009 through January 31, 2009   |       | —                                       |       | —                                   |       | —                                                                                                               |       | —                                                                      |       |
| February 1,  2009 through February 28, 2009 |       | —                                       |       | —                                   |       | —                                                                                                               |       | —                                                                      |       |
| March 1,  2009 through March 31, 2009       |       | 2,620                                        | (1)        | $                                        | 7.15       |                                                                                                                 | 2,620      |                                                                        | $          | 1,559,000 |   |
|                                                       |            |                                              |            |                                          |            |                                                                                                                      |            |                                                                             |            |  |  |

 

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(1)   On November 9, 2005, our Board ofDirectors authorized the repurchase of up to a total of $2,000,000 of ourcommon stock.  This program has noexpiration date, but may be suspended or discontinued at any time by our Boardof Directors.  We purchased 2,620 sharesduring the period indicated above under this program which, when combined withrepurchases made in prior periods, leaves $1,559,000 remaining in thisauthorization as of March 31, 2009.

 

Except as set forth in thetable above, we did not purchase any shares of our common stock or other equitysecurities registered pursuant to Section 12 of the Securities ExchangeAct of 1934, as amended, during the first quarter ended March 31, 2009.

 

Item 6.               Exhibits

 

The followingexhibits are being filed or furnished with this quarterly report on Form 10-Q:

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

 

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SIGNATURES

 

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

 

 
|                    | MOCON, INC.                                            |
|-------------------------|--------------------------------------------------------|
|                    |                                                   |
|                    |                                                   |
| Date: May 14, 2009 | /s/ Robert L. Demorest                                 |
|                    | Robert L. Demorest                                     |
|                    | Chairman, President and Chief Executive Officer        |
|                    | (Principal Executive Officer)                          |
|                    |                                                   |
|                    |                                                   |
| Date: May 14, 2009 | /s/ Darrell B. Lee                                     |
|                    | Darrell B. Lee                                         |
|                    | Vice President, Treasurer and Chief Financial  Officer |
|                    | (Principal Financial and Accounting Officer)           |

 

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MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED MARCH 31,2009

 

EXHIBIT INDEX

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

 

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