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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the Quarter Ended March 31, 2012

 

or

 

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

 

For the transition period from          to           

 

Commission File Number 000-09273

 

MOCON, INC.

(Exact name of registrant as specified in its charter)

 

Minnesota

 

41-0903312

(State or other jurisdiction of

 

(I.R.S. employer

incorporation or organization)

 

identification no.)

 

7500 Mendelssohn Avenue North, Minneapolis, 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 all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o
(do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

As of April 30, 2012, the Company had 5,473,298 common shares issued and outstanding.

 

 

 



Table of Contents

 

MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended March 31, 2012

 

 

 

Page
Number

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2012 and December 31, 2011

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income (Unaudited)
Three months ended March 31, 2012 and 2011

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three months ended March 31, 2012 and 2011

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 2012 and 2011

 

4

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

5-11

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

12-19

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

19-20

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

20

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

21

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

21

 

 

 

 

 

Item 6.

 

Exhibits

 

22

 

 

 

 

 

Signatures

 

23

 

 

 

Exhibit Index

 

24

 

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

 

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

 



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MOCON, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

15,982,890

 

$

8,425,846

 

Marketable securities, current

 

5,714,241

 

4,304,912

 

Trade accounts receivable, less allowance for doubtful accounts of $157,764 in 2012 and $150,921 in 2011

 

4,862,082

 

4,675,464

 

Other receivables

 

104,900

 

101,951

 

Inventories

 

4,608,666

 

4,479,929

 

Prepaid income taxes

 

87,472

 

9,239

 

Prepaid expenses, other

 

774,948

 

511,299

 

Deferred income taxes

 

821,028

 

848,597

 

Total current assets

 

32,956,227

 

23,357,237

 

 

 

 

 

 

 

Marketable securities, noncurrent

 

3,281,284

 

5,799,417

 

Property, plant and equipment, net of accumulated depreciation of $4,307,661 in 2012 and $4,147,129 in 2011

 

3,691,983

 

3,174,748

 

Goodwill

 

3,172,493

 

3,119,246

 

Investment in affiliated company

 

3,334,500

 

3,237,250

 

Technology rights and other intangibles, net

 

998,274

 

909,536

 

Deferred income taxes

 

16,718

 

20,360

 

Other assets

 

87,543

 

86,717

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

47,539,022

 

$

39,704,511

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of term note payable

 

$

875,004

 

$

 

Revolving line of credit

 

4,000,000

 

 

Accounts payable

 

2,254,929

 

1,812,779

 

Compensation and related expenses

 

1,582,752

 

2,313,553

 

Other accrued expenses

 

416,296

 

406,378

 

Accrued product warranties

 

180,325

 

205,506

 

Dividends payable

 

574,654

 

543,881

 

Deferred revenue

 

492,653

 

857,906

 

Total current liabilities

 

10,376,613

 

6,140,003

 

 

 

 

 

 

 

Term note payable

 

2,624,996

 

 

Obligations to former employees

 

48,155

 

46,751

 

Accrued income taxes

 

294,790

 

277,978

 

 

 

 

 

 

 

Total liabilities

 

13,344,554

 

6,464,732

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Capital stock — undesignated. Authorized 3,000,000 shares; none issued and outstanding in 2012 and 2011

 

 

 

Common stock — $0.10 par value. Authorized 22,000,000 shares; issued and outstanding 5,472,898 shares in 2012 and 5,438,810 shares in 2011

 

547,290

 

543,881

 

Additional paid-in capital

 

3,193,810

 

2,762,524

 

Retained earnings

 

30,769,150

 

30,523,405

 

Accumulated other comprehensive loss

 

(315,782

)

(590,031

)

Total stockholders’ equity

 

34,194,468

 

33,239,779

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

47,539,022

 

$

39,704,511

 

 

See accompanying notes to consolidated financial statements.

 

1



Table of Contents

 

MOCON, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Sales:

 

 

 

 

 

Products

 

$

8,516,337

 

$

8,190,590

 

Consulting services

 

666,994

 

884,033

 

Total sales

 

9,183,331

 

9,074,623

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

Products

 

2,994,877

 

2,846,373

 

Consulting services

 

379,370

 

412,936

 

Total cost of sales

 

3,374,247

 

3,259,309

 

 

 

 

 

 

 

Gross profit

 

5,809,084

 

5,815,314

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

3,777,673

 

3,205,148

 

 

 

 

 

 

 

Research and development expenses

 

733,539

 

557,356

 

 

 

 

 

 

 

Operating income

 

1,297,872

 

2,052,810

 

 

 

 

 

 

 

Other income, net

 

17,508

 

12,670

 

 

 

 

 

 

 

Income before income taxes

 

1,315,380

 

2,065,480

 

 

 

 

 

 

 

Income taxes

 

494,707

 

748,172

 

 

 

 

 

 

 

Net income

 

$

820,673

 

$

1,317,308

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

Basic

 

$

0.15

 

$

0.25

 

Diluted

 

$

0.14

 

$

0.24

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

5,450,173

 

5,268,301

 

Diluted

 

5,691,783

 

5,484,689

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.105

 

$

0.10

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

MOCON, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

820,673

 

$

1,317,308

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Cumulative translation adjustment

 

274,249

 

489,572

 

 

 

 

 

 

 

Comprehensive income

 

$

1,094,922

 

$

1,806,880

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

MOCON, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

820,673

 

$

1,317,308

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Stock-based compensation expense

 

123,537

 

97,660

 

(Gain) loss on disposition of long-term assets

 

(37,440

)

500

 

Depreciation and amortization

 

166,400

 

141,995

 

Deferred income taxes

 

31,211

 

17,645

 

Excess tax benefit from employee stock plans

 

(43,945

)

(24,302

)

Changes in operating assets and liabilities:

 

 

 

 

 

Trade accounts receivable

 

(284,097

)

738,910

 

Other receivables

 

(2,389

)

162,541

 

Inventories

 

(109,598

)

(396,703

)

Prepaid income taxes

 

(78,233

)

426,161

 

Prepaid expenses and other

 

(262,032

)

(283,387

)

Accounts payable

 

547,874

 

486,914

 

Compensation and related expenses

 

(739,583

)

(482,243

)

Other accrued expenses

 

5,266

 

16,507

 

Accrued product warranties

 

(26,894

)

(817

)

Accrued income taxes

 

54,737

 

160,830

 

Deferred revenue

 

(367,190

)

(24,654

)

Net cash (used in) provided by operating activities

 

(201,703

)

2,354,865

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of marketable securities

 

(365,000

)

(2,236,690

)

Proceeds from maturities of marketable securities

 

1,473,804

 

266,530

 

Purchases of property, plant and equipment

 

(617,238

)

(216,034

)

Proceeds from sale of property and equipment

 

82,266

 

 

Cash paid for patents and other intangible assets

 

(190,819

)

(27,105

)

Other

 

(826

)

(881

)

Net cash provided by (used in) investing activities

 

382,187

 

(2,214,180

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from revolving line of credit

 

4,000,000

 

 

Proceeds from term note payable

 

3,500,000

 

 

Proceeds from the exercise of stock options

 

267,213

 

78,348

 

Excess tax benefit from employee stock plans

 

43,945

 

24,302

 

Dividends paid

 

(544,156

)

(500,345

)

Net cash provided by (used in) financing activities

 

7,267,002

 

(397,695

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

109,558

 

124,424

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

7,557,044

 

(132,586

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

8,425,846

 

6,955,248

 

End of period

 

$

15,982,890

 

$

6,822,662

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for income taxes

 

$

486,992

 

$

143,534

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Dividends accrued

 

$

574,654

 

$

528,162

 

Purchases of fixed assets and intangibles in accounts payable

 

$

156,383

 

$

26,617

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

MOCON, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MARCH 31, 2012

(Unaudited)

 

Note 1 — Condensed Consolidated Financial Statements

 

The condensed consolidated balance sheet as of March 31, 2012, the condensed consolidated statements of income for the three-month periods ended March 31, 2012 and 2011, the condensed consolidated statements of comprehensive income for the three-month periods ended March 31, 2012 and 2011, and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2012 and 2011 have been prepared in accordance with accounting principles generally accepted in the United States of America.  These interim unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows at March 31, 2012, and for all periods presented.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.

 

The results of operations for the three-month period ended March 31, 2012 are not necessarily indicative of operating results for the full year.  It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, previously filed with the Securities and Exchange Commission.

 

MOCON Inc. (the Company) is involved with the developing, manufacturing and marketing of measurement, analytical, monitoring and consulting products for customers in the barrier packaging, food, pharmaceutical, consumer products, industrial hygiene, air quality monitoring, oil and gas exploration and other industries throughout the world.  The Company reports its operating segments in accordance with accounting standards codified in ASC 280, Segment Reporting, with three operating segments (Lab Instruments, Field Instruments and Food Safety Products) that have been aggregated into one reporting segment for financial reporting purposes.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of MOCON, Inc. and its wholly-owned subsidiaries (collectively the “Company”). All material intercompany balances and transactions have been eliminated in consolidation.

 

Fair Value of Financial Instruments

 

The carrying amount for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the immediate or short-term maturity of these financial instruments.  The fair value of investments in marketable securities is based on quoted market prices and summarized in Note 5.  See Note 7 for fair value disclosure of the investment in Luxcel.  The fair value of the Company’s term note payable and revolving line of credit at March 31, 2012 approximates the carrying value due to the proximity of the date at which the Company executed the agreements and period end.

 

5



Table of Contents

 

Recently Adopted Accounting Pronouncements

 

On January 1, 2012, the Company adopted the FASB issued guidance on the presentation of comprehensive income, which requires entities to present reclassification adjustments included in other comprehensive income on the face of the financial statements and allows entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Adoption of this guidance did not have a material effect on our consolidated financial statements.

 

In September 2011, the FASB issued updated accounting guidance on the periodic testing of goodwill for impairment.  This guidance allows entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If the entity concludes the fair value is higher than the carrying value, then no further testing is necessary.  However, if impairment is likely, the first step, which is to calculate the fair value of the reporting unit, is necessary.  Additionally, the entity is required to then perform step two in measuring the impairment loss for the period.  For public companies, this guidance is effective for fiscal years (and interim periods within those years) beginning after December 15, 2011, with earlier adoption permitted.  The Company adopted this guidance on January 1, 2012 and it did not have a material effect on our consolidated financial statements.

 

Note 2 — Inventories

 

Inventories consist of the following:

 

 

 

March 31,
2012

 

December 31,
2011

 

Finished products

 

$

922,818

 

$

804,049

 

Work-in-process

 

1,600,349

 

1,652,708

 

Raw materials

 

2,085,499

 

2,023,172

 

 

 

$

4,608,666

 

$

4,479,929

 

 

Note 3 — Net Income Per Common Share

 

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

 

The following table presents a reconciliation of the denominators used in the computation of net income per common share — basic, and net income per common share — diluted, for the three-month periods ended March 31, 2012 and 2011:

 

6



Table of Contents

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Weighted shares of common stock outstanding — basic

 

5,450,173

 

5,268,301

 

Weighted shares of common stock assumed upon exercise of stock options

 

241,610

 

216,388

 

Weighted shares of common stock outstanding — diluted

 

5,691,783

 

5,484,689

 

 

Outstanding stock options totaling 123,200 at March 31, 2011, have been excluded from the net income per common share calculations because the effect on net income per common share would be anti-dilutive.  There were no anti-dilutive shares at March 31, 2012.

 

Note 4 — Goodwill and Intangible Assets

 

As of March 31, 2012 and December 31, 2011, goodwill amounted to $3,172,493 and $3,119,246, respectively.  The increase was due to foreign currency translation.  Other intangible assets (all of which are being amortized except projects in process) are as follows:

 

 

 

As of March 31, 2012

 

 

 

Cost

 

Accumulated
Amortization

 

Net

 

Estimated
Useful Lives

 

Patents

 

$

1,335,650

 

$

(457,095

)

$

878,555

 

10 to 17 years

 

Trademarks and trade names

 

516,985

 

(449,041

)

67,944

 

5 to 17 years

 

Other intangibles

 

131,775

 

(80,000

)

51,775

 

4 years

 

 

 

$

1,984,410

 

$

(986,136

)

$

998,274

 

 

 

 

 

 

As of December 31, 2011

 

 

 

Cost

 

Accumulated
Amortization

 

Net

 

Estimated
Useful Lives

 

Patents

 

$

1,283,761

 

$

(447,158

)

$

836,603

 

10 to 17 years

 

Trademarks and trade names

 

516,069

 

(443,136

)

72,933

 

5 to 17 years

 

Other intangibles

 

80,000

 

(80,000

)

 

 

 

 

$

1,879,830

 

$

(970,294

)

$

909,536

 

 

 

 

Total amortization expense for the three-month periods ended March 31, 2012 and 2011 was $15,842 and $20,535, respectively.  Projects in process are not amortized until the patent or trademark is granted by the regulatory agency or the asset is ready for use.  Estimated amortization expense for the remainder of 2012 and each of the four succeeding fiscal years and thereafter based on the intangible assets as of March 31, 2012 is as follows:

 

 

 

Estimated
Expense

 

2012

 

$

46,798

 

2013

 

$

58,626

 

2014

 

$

48,202

 

2015

 

$

43,550

 

2016

 

$

35,468

 

2017 and thereafter

 

$

224,937

 

 

7



Table of Contents

 

Note 5 — Marketable Securities

 

Marketable securities at March 31, 2012 consisted of municipal bonds and certificates of deposits, and are classified as held-to-maturity due to our ability and intent to hold these securities until maturity or the call date as the case may be.  Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.  A decline in the market value of any held-to-maturity security below the amortized cost basis that is deemed other than temporary is charged to income, resulting in the establishment of a new cost basis for the security.  There was no other than temporary impairment during the first three months of 2012; therefore, no adjustment to the amortized cost basis was made.  Currently, all of the Company’s marketable securities mature within two years.

 

The amortized cost and fair value for held-to-maturity securities by major security type at March 31, 2012 and December 31, 2011 were as follows:

 

 

 

March 31, 2012

 

 

 

Amortized
Cost

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair Value

 

Certificates of deposit

 

$

4,942,985

 

$

18,274

 

$

 

$

4,961,259

 

Municipal bonds

 

4,052,540

 

16,025

 

(526

)

4,068,039

 

 

 

$

8,995,525

 

$

34,299

 

$

(526

)

$

9,029,298

 

 

 

 

December 31, 2011

 

 

 

Amortized
Cost

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair Value

 

Certificates of deposit

 

$

5,192,983

 

$

14,741

 

$

(1,605

)

$

5,206,119

 

Municipal bonds

 

4,911,346

 

11,762

 

(1,907

)

4,921,201

 

 

 

$

10,104,329

 

$

26,503

 

$

(3,512

)

$

10,127,320

 

 

Note 6 — Accumulated Other Comprehensive Income (Loss)

 

Adjustments to accumulated other comprehensive income (loss) consist of the following:

 

 

 

Three Months Ended
March 31
,

 

 

 

2012

 

2011

 

Beginning balance

 

$

(590,031

)

$

(261,096

)

Cumulative translation adjustment

 

274,249

 

489,572

 

Ending balance

 

$

(315,782

)

$

228,476

 

 

Note 7 - Investment in Affiliated Company

 

In January 2010, the Company acquired a minority equity ownership interest in Luxcel Biosciences Limited (Luxcel) based in Cork, Ireland.  The investment in Luxcel is carried on the condensed consolidated balance sheet at the original purchase price, adjusted for currency fluctuations.  The Company believes that it is not feasible to readily determine the fair value of this investment.  Information related to future cash flows of Luxcel is not readily available as the entity is a start-up research and development company and future cash flows are highly dependent on their ability to obtain additional

 

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funding, gain acceptance of their products in the marketplace, and obtain regulatory approvals.

 

Note 8 — Warranty

 

The Company provides a warranty for most of its products.  Warranties are for periods ranging from ninety 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 follow manufacturer’s directions are excluded from warranty coverage.

 

Warranty expense is accrued at the time of sale based on historical claims experience.  Warranty reserves are also accrued for special rework campaigns for known major product modifications.  The Company also offers extended warranty service contracts for select products when the factory warranty period expires.

 

Warranty provisions and claims for the three-month periods ended March 31, 2012 and 2011 were as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Beginning balance

 

$

205,506

 

$

217,819

 

Warranty provisions

 

35,826

 

72,057

 

Warranty claims

 

(61,007

)

(69,529

)

Ending balance

 

$

180,325

 

$

220,347

 

 

Note 9 — Bank Financing

 

In connection with the acquisition as more fully described in Note 12, on March 28, 2012, the Company entered into a Credit Agreement (the Agreement) with Wells Fargo Bank, National Association (the Bank).  The Agreement provided for a secured term note payable of $3,500,000 and a revolving line of credit of $5,000,000. As of March 31, 2012, the Company had $4,000,000 outstanding on the revolving line of credit.

 

The term note is due in monthly principal installments of $72,917 through March 28, 2016.  Interest is due monthly and is charged at a fixed rate of 3.46% through maturity.  The revolving line of credit accrues interest monthly at 1.75% over the one-month LIBOR rate, which totaled 1.99% at March 31, 2012, through the earlier of payment in full or March 28, 2016.

 

The term note and revolving line of credit are secured by all of the assets of the Company except for the shares of PBI-Dansensor A/S (Dansensor).  The Company is subject to various positive and negative covenants in the Agreement, including maintaining certain financial ratios and limits on incurring additional indebtedness, making capital and lease expenditures and making share repurchases.

 

The future minimum principal payments of the term note payable for the remainder of fiscal 2012 and for each fiscal year thereafter is as follows:

 

2012

 

$

656,253

 

2013

 

875,004

 

2014

 

875,004

 

2015

 

875,004

 

2016

 

218,735

 

Total

 

$

3,500,000

 

 

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Note 10 — Income Taxes

 

As of March 31, 2012 and December 31, 2011, the liability for gross unrecognized tax benefits was $261,000 and $244,000, respectively.  Changes in gross unrecognized tax benefits during the three months ended March 31, 2012 consisted of an increase of $17,000 for tax positions taken in the current year. It is expected that the amount of unrecognized tax benefits for positions which the Company has identified will not materially change in the next twelve months.

 

Note 11 — Stock-Based Compensation

 

As of March 31, 2012, the Company has reserved 392,350 shares of common stock for options and other stock-based incentive awards that are still available for grant under our 2006 stock incentive plan, and 791,462 shares for options that have been granted under either the 2006 stock incentive plan or the 1998 stock option plan but have not yet been exercised.  The Company issues new shares of common stock upon exercise of stock options.  There were no options granted in the first three months of 2012.

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Total cost of stock-based compensation

 

$

123,537

 

$

97,660

 

Amount of income tax benefit recognized in earnings

 

(32,416

)

(15,331

)

Amount charged against net income

 

$

91,121

 

$

82,329

 

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model (Black-Scholes).  The Company uses historical data to estimate the expected price volatility, expected option life and expected forfeiture rate.  The Company bases its estimate of expected volatility for awards granted on daily historical trading data of its common stock for a period equivalent to the expected term of the award.

 

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.  The Company estimates the expected term consistent with historical exercise and cancellation activity of its previous share-based grants with a seven year contractual term.  Forfeitures are based on historical experience.  The dividend yield is calculated based upon the dividend payments made during the prior four quarters as a percent of the average stock price for that period.

 

A summary of the option activity for the first three months of 2012 is as follows:

 

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Number of
Shares

 

Weighted
Average
Exercise
Price per
Share

 

Weighted
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2011

 

829,786

 

$

11.05

 

4.1

 

$

4,108,291

 

Options granted

 

 

 

 

 

 

Options cancelled/expired

 

(450

)

$

14.99

 

 

 

 

Options exercised

 

(37,874

)

$

10.27

 

 

 

 

Outstanding at March 31, 2012

 

791,462

 

$

11.08

 

3.9

 

$

4,096,724

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2012

 

601,317

 

$

10.10

 

3.1

 

$

3,705,729

 

 

The total intrinsic value of options exercised was $275,770 and $133,688 during the three-month periods ended March 31, 2012 and 2011, respectively.

 

A summary of the status of our unvested option shares as of March 31, 2012 is as follows:

 

 

 

Number of
Shares

 

Weighted
Average
Grant Date
Fair Value

 

Unvested at December 31, 2011

 

204,225

 

$

4.00

 

Options granted

 

 

 

Options cancelled

 

(450

)

$

4.05

 

Options vested

 

(13,630

)

$

4.82

 

Unvested at March 31, 2012

 

190,145

 

$

3.64

 

 

As of March 31, 2012, there was $691,406 of total unrecognized compensation cost related to unvested stock-based compensation granted under our plans.  That cost is expected to be recognized over a weighted-average period of 1.6 years.  The total fair value of option shares vested during the three-month periods ended March 31, 2012 and 2011 was $65,697 and $53,819, respectively.

 

Note 12 — Subsequent Event

 

On April 2, 2012, the Company completed the acquisition of all the issued and outstanding shares of Dansensor pursuant to a Share Purchase Agreement (SPA) that the Company entered into with PBI-Holding A/S (Dansensor Holding) on March 9, 2012.  Dansensor is a manufacturer of specialized instrumentation for Modified Atmosphere Packaging (MAP) of foods, beverages, pharmaceuticals, and other perishable items.  Under the terms of the acquisition agreement, the Company paid an aggregate amount of approximately $20 million, of which $14 million was paid in cash at closing.  In addition, the Company entered into a loan agreement with Dansensor Holding to finance the remainder of the purchase price.  This seller financing is payable over a term of four years, with interest at 3.46% per annum, and is secured by shares of Dansensor.  Additionally, the Company entered into a revolving line of credit and a term note payable with its Bank, which are more fully described in Note 9.

 

The Company incurred approximately $425,000 in acquisition related costs over the course of working on the acquisition.  Approximately $390,000 of these costs are recorded as selling, general and administrative expenses in the condensed consolidated statements of income as of March 31, 2012.

 

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

 

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations.  Statements that are not historical are forward-looking and involve risks and uncertainties discussed below under the caption “Forward-Looking Statements.”  The following discussion of the results of operations and financial condition of MOCON should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this report.  The following discussion does not reflect our acquisition of Dansensor, which was completed after the period covered by this report, except to the extent that the activities associated with the acquisition had an impact during the quarter ended March 31, 2012.

 

Overview

 

Description of Business

 

MOCON, Inc. designs, manufactures, markets and services products and provides consulting and testing services primarily in the measurement and analytical instrument and services markets.  Our products include instruments that detect, measure and monitor gases and chemical compounds.  We continually seek growth opportunities through technological and product improvement, by developing new products, and by acquiring new companies, new product lines, or rights to technologies.

 

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

 

Historically, a significant portion of our sales has come from international customers.  In recognition of the importance of our international customers, we maintain a physical presence in Europe through our wholly-owned subsidiary located in Neuwied, Germany, and in Asia through a sales and service office and laboratory in Shanghai, China.

 

Our ongoing plans for growth include continued substantial funding for research and development to drive new product development, together with strategic acquisitions where appropriate.

 

Our purchase of Dansensor of Ringsted, Denmark is directly in line with our stated strategy.  This manufacturer of specialized instruments and control systems for the Modified Atmosphere Packaging (MAP) market world-wide is an excellent fit for our products, services, and distribution channels.  We continue, with this acquisition, to grow our offerings to food, beverage, pharmaceutical, health care and other companies who are concerned about the quality, safety and extended shelf-life of their packaged products for consumers.

 

Products

 

Our permeation products consist of instruments and services that measure the rate at which various gases and vapors permeate through a variety of materials.  This is our original business, and still contributes the largest portion of our consolidated revenues.  These products perform measurements under precise temperature, pressure and relative humidity conditions.  The principal market for these products consists of manufacturers of packaging materials and the users of such materials such as companies in the food, beverage, pharmaceutical and consumer product industries.  We invest a significant portion of our R&D dollars each year on new product development in this area, which has resulted in continuous growth and market leadership.  For example, our AQUATRAN® ultra-high sensitivity, trace moisture permeation analyzer has been increasingly accepted as the standard test

 

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instrument of choice in the flat panel, solar cell and electronics industries, and is used by customers to extend the life and quality of these devices.

 

For permeation customers who do not desire to purchase our instrumentation, we offer a range of consulting and testing services.  This part of our business is also growing and we are expanding the model beyond the borders of North America.  Today, we have MOCON-owned laboratories in the United States, Germany and China, and collaborative laboratories in India, Canada, Ireland, Switzerland and the United Kingdom.  We plan to have additional collaborative laboratories in other countries in the near future.

 

The instruments in our package testing products group are used to measure leaks and to analyze the gaseous headspace of sealed packages, as applied in the food, beverage, pharmaceutical, medical device and other industries.  We have recently developed and introduced our OpTech®-O2 Platinum oxygen analyzer which incorporates proprietary sensor technology developed by Luxcel Biosciences Limited (Luxcel).  This instrument is able to measure the oxygen concentration in food, beverage, pharmaceutical or medical device packages without piercing the package.  This new technology enables manufacturers in these industries to track and trace their products during the manufacturing and distribution phase, and to follow changes in oxygen levels as they occur.  This is an important test for determining shelf-life, safety and quality.

 

The acquisition of Dansensor has broadened our product offerings in the MAP marketplace, with new on and off-line head space analyzers, gas mixers and control systems, and a variety of trace gas leak detectors which will dovetail nicely with our existing package testing instruments.

 

We also manufacture advanced gas analysis and monitoring instrumentation used in applications such as oil and gas exploration, process gas analysis, industrial hygiene and safety, environmental air monitoring and homeland security.  The two principal instruments in this group are gas chromatographs and total hydrocarbon analyzers.  These instruments are typically installed in fixed locations at the monitoring sites and generally perform their functions of detecting and measuring various hydrocarbons continually or at regular intervals.  Our new BevAlert® system tests the purity of carbon dioxide used to carbonate soft drinks, beer and mineral waters around the world.  As manufacturers of these consumer beverages expand their businesses and operations, especially into developing countries, they are increasingly investing in better instrumentation to ensure that the final product is free of contaminants.  Our BevAlert system is well suited to addressing the concerns of beverage manufacturers, and we believe this is a growth opportunity for us, as our sales of the BevAlert system have been increasing over the past two years.  We also manufacture and sell gas sensors and detectors which are sold to original equipment manufacturers (OEMs) of mobile monitoring equipment.

 

Our newest product offering is focused on the food safety market.  With the sensor technologies and expertise we acquired with our investment in Luxcel, coupled with our core instrumentation capabilities, we developed our GreenLight® food safety product line.  This breakthrough technology permits, for the first time, determination of the presence or absence of aerobic bacteria in food products or ingredients in as little as one to six hours.  This is a dramatic improvement over the 48 to 72 hour tests currently being used by the food industry.  There are three models of the GreenLight product line currently available.

 

Results of Operations

 

The following table sets forth the relationship between various components of our results of operations, stated as a percent of sales, for the three-month periods ended March 31, 2012 and 2011:

 

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Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Sales

 

100.0

 

100.0

 

Cost of sales

 

36.8

 

35.9

 

Gross profit

 

63.2

 

64.1

 

Selling, general and administrative expenses

 

41.1

 

35.3

 

Research and development expenses

 

8.0

 

6.1

 

Operating income

 

14.1

 

22.7

 

Other income, net

 

0.2

 

0.1

 

Income before income taxes

 

14.3

 

22.8

 

Income taxes

 

5.4

 

8.2

 

Net income

 

8.9

 

14.6

 

 

Comparison of Financial Results for the Three-Month Periods Ended March 31, 2012 and 2011

 

Sales

 

Sales for the three-month period ended March 31, 2012 were $9,183,000, up 1% compared to $9,075,000 for the same period in 2011.  We experienced double digit growth in our gas analysis, sensors and detectors product line as well as in the package testing products group. Sales of permeation instruments and services were down slightly in the current period yet still accounted for 57% of total consolidated sales.  Sales to foreign customers increased 8% in the current period compared to last year while domestic shipments declined 8%.  Domestic and foreign sales accounted for 39% and 61%, respectively, of our consolidated first quarter sales in 2012, and 43% and 57% of our consolidated sales, respectively, for the same period in 2011.  The increased sales to our foreign customers were primarily in China, Japan, Poland and Mexico.

 

The following table summarizes total sales by product line group for the three-month periods ended March 31, 2012 and 2011:

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Permeation testing products and services

 

$

5,211,782

 

$

5,606,031

 

Gas analyzers, sensors and detectors

 

1,943,942

 

1,520,644

 

Package testing products and services

 

1,542,474

 

1,233,080

 

Other products and services

 

485,133

 

714,868

 

Total sales

 

$

9,183,331

 

$

9,074,623

 

 

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The following table sets forth the relationship between various components of domestic and foreign sales for the three-month periods ended March 31, 2012 and 2011:

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Domestic sales

 

$

3,571,950

 

$

3,864,087

 

Foreign sales:

 

 

 

 

 

Europe

 

2,274,515

 

2,213,285

 

Asia

 

2,391,099

 

2,092,889

 

Other

 

945,767

 

904,362

 

Total foreign sales

 

5,611,381

 

5,210,536

 

Total sales

 

$

9,183,331

 

$

9,074,623

 

 

Permeation Testing Products and Services — Sales of our permeation testing products and services decreased 7% for the first quarter ended March 31, 2012 compared to the same period in the prior year, and accounted for 57% and 62% of our consolidated first quarter sales in 2012 and 2011, respectively.  Foreign sales comprised 75% of the shipments of this product group in the first quarter 2012, and were up 7% over last year.  Domestic sales decreased 34% in the current quarter compared to an unusually strong first quarter in the prior year.  We believe the high concentration of sales in foreign markets is partially related to the emphasis being placed on sustainable packaging materials as these countries become increasingly sensitive to environmental impact issues.

 

Gas Analyzers, Sensors and Detectors — Sales of our gas analyzers, sensors and detector products and services, which accounted for 21% and 17% of our consolidated first quarter sales in 2012 and 2011, respectively, increased 28% during the first quarter 2012 compared to the same period in 2011.  Foreign sales comprised 50% of the shipments of this product group in the first quarter 2012, and were up 9% over last year.  Within this group, sales of sensors to OEM customers, as well as sales of instruments used for environmental monitoring and oil and gas exploration, accounted for the majority of the increase.

 

Package Testing Products and Services — Sales of our package testing products and services, which accounted for 17% and 13% of our consolidated first quarter sales in 2012 and 2011, respectively, increased 25% during the first quarter 2012 compared to the same period in 2011.  This group consists of headspace analyzers and leak detection instruments, both of which contributed to the growth in the first quarter 2012, primarily in the domestic market.

 

Other Products and Services — Sales in our other products and services category, which accounted for 5% and 8% our consolidated first quarter sales in 2012 and 2011, respectively, decreased 32% in the first quarter 2012, compared to the same period in 2011.  This decrease was primarily the result of lower sales of non-MOCON products sold by our German subsidiary.

 

Gross Profit

 

The overall gross profit margin was 63% for the first quarter ended March 31, 2012 compared to 64% in the same period in 2011.  The slight decrease in the current year is due to slightly lower shipments of higher margin permeation instruments and lower consulting services performed which does not allow for full absorption of fixed costs.

 

The overall gross profit margin varies from quarter to quarter depending on product mix and other factors.  However, our margins for the first quarter 2012 are within our historical and expected range.

 

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Selling, General and Administrative Expenses

 

Selling, general and administrative (SG&A) expenses were $3,778,000, or 41% of consolidated sales, in the three-month period ended March 31, 2012, compared to $3,205,000, or 35% of consolidated sales, in the same period of 2011.  The increase in the current quarter was primarily related to professional fees incurred in connection with the acquisition of Dansensor which closed on April 2, 2012.  There was approximately $390,000 recognized as expense in the first quarter 2012.

 

Research and Development Expenses

 

Research and development expenses were $734,000, or 8% of consolidated sales in the first quarter 2012, compared to $557,000, or 6% of consolidated sales, in the same period of 2011.  The current period expense is higher than the previous year due to costs incurred in connection with the development of the next generation hardware and software for our permeation instrument product line.  Also, the prior year expense of $557,000 had been reduced by $87,000 which had been received from Luxcel for certain collaborative research efforts.

 

Other Income

 

Other income for the three-month periods ended March 31, 2012 and 2011 was as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Interest income

 

$

31,119

 

$

21,095

 

Foreign currency exchange loss

 

(11,088

)

(8,563

)

Other

 

(2,523

)

138

 

 

 

$

17,508

 

$

12,670

 

 

Income Tax Expense

 

Our provision for income taxes was 37.6% and 36.2% of income before income taxes for the first quarters ended March 31, 2012 and 2011, respectively.  The higher rate in the first quarter 2012 was due primarily to the non-deductibility of certain expenses amounting to approximately $253,000 incurred in relation to the acquisition of Dansensor.  In addition, the current year provision does not include a projected research credit as Congress has not yet extended the credit for 2012.

 

Based on current projected annual operating results and current income tax rates, we expect the effective tax rate for the remainder of 2012 to decline from the rate in first quarter.  This rate fluctuates over time based 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 $821,000 in the first quarter 2012, compared to $1,317,000 in the first quarter 2011.  Diluted net income per share was $0.14 and $0.24 in the first quarters of 2012 and 2011, respectively.

 

Liquidity and Capital Resources

 

Total cash, cash equivalents and marketable securities increased $6,448,000 during the first three months of 2012 to $24,978,000 as of March 31, 2012, compared to $18,530,000 at December 31, 2011.  The increase was primarily due to the proceeds from Bank borrowings totaling $7.5 million which we borrowed on March 28, 2012 to finance a portion of the $20 million purchase price of Dansensor.

 

 

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The $7.5 million Bank borrowings consisted of a $3.5 million secured term note payable and a $5 million secured revolving line of credit.  At March 31, 2012, we had $4 million outstanding on the revolving line of credit.  The four-year term note is payable in monthly principal installments of $72,917 plus interest at 3.46% per annum.  The revolving line of credit accrues interest at 1.75% over the one-month LIBOR rate.  The term note and the revolving line of credit are due on March 28, 2016, and we are subject to certain financial and affirmative covenants.

 

Our working capital as of March 31, 2012 was $22,580,000, an increase of $5,363,000 compared to $17,217,000 at December 31, 2011.  This increase is primarily related to the borrowing of the $7.5 million mentioned above, partially offset by $4.9 million shown in current liabilities payable to the Bank.

 

One of our strategic objectives is, as market and business conditions warrant, to consider acquisitions of, or investments in, businesses, products and/or technologies.  In this regard, on April 2, 2012, we acquired all of the issued and outstanding shares of Dansensor.  If we wish to pursue one or more additional acquisition opportunities, this may require the consent of the Bank under the credit agreement we have executed, and we may need to fund such activities with a portion of our cash balances and debt or equity financing.  If we need to raise additional capital, an equity-based or equity-linked financing may be used which could be dilutive to existing shareholders.  If we raise additional funds by issuing debt, we may be subject to additional restrictive covenants that could limit our operational flexibility and higher interest expense could dilute earnings per share.

 

We invest a large portion of our available cash in highly liquid marketable securities consisting primarily of certificates of deposits, municipal bonds, and money market funds.  Our investment policy is to manage these assets to preserve principal, maintain adequate liquidity at all times, and maximize returns subject to investment guidelines we maintain.

 

We believe that a combination of our existing cash, cash equivalents and marketable securities, funds available under the revolving credit facility, and an expected continuation of cash flow from operations, will continue to be adequate to fund our operations and working capital, capital expenditures, required payments on indebtedness and dividend payments.

 

 

Cash Flow

 

Cash Flow from Operating Activities

 

Historically, our primary source of funds has been cash provided by operating activities. In the first quarter 2012, cash used in operations totaled $202,000 due primarily to lower net income, a substantial reduction of compensation related accruals, and an increase in trade accounts receivable and prepaid expenses that existed at December 31, 2011.  Cash generated from operations in the first quarter 2011 totaled $2.4 million.

 

Cash Flow from Investing Activities

 

Cash generated from investing activities totaled $382,000 in the first quarter 2012 due primarily to the net proceeds from marketable securities, partially offset by cash paid for patents and other intangibles and fixed assets.

 

Cash Flow from Financing Activities

 

Cash generated from financing activities totaled $7.3 million in the first quarter 2012 due primarily to the net proceeds of $7.5 million from bank borrowings and proceeds from the exercise of stock options of $267,000.  Partially offsetting the above sources of cash were dividend payments in the amount of $544,000.

 

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Table of Contents

 

Although we have repurchased shares of our common stock in the past, we currently are not authorized by our Board of Directors to make repurchases of our common stock and we are prohibited from doing so under the credit agreement with the Bank unless we get the Bank’s approval.

 

Contractual Obligations

 

We refer you to our Annual Report on Form 10-K for the year ended December 31, 2011 for a summary of our contractual obligations related to operating leases and purchase obligations.  In addition, we now have the following obligation with the Bank (in thousands):

 

 

 

Payments Due By Period

 

 

 

Total

 

Less than 1
year

 

1-3 years

 

4-5 years

 

After 5
years

 

Term note payable

 

$

3,738

 

$

980

 

$

1,869

 

$

889

 

 

 

We are also obligated to the Bank under a $5,000,000 secured revolving line of credit, of which $4,000,000 was outstanding at March 31, 2012, and is due by March 28, 2016.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC, that have or are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.  As a result, we are not materially exposed to financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.

 

Recently Issued Accounting Guidance

 

Offsetting Assets and Liabilities Disclosures

 

In December 2011, the FASB issued updated accounting guidance on disclosures about offsetting assets and liabilities.  This update adds certain additional disclosure requirements about financial instruments and derivative instruments that are subject to netting arrangements.  The new disclosures are required for interim and annual reporting periods beginning on or after January 1, 2013.  We do not expect this guidance to have a material impact on our consolidated financial statements.

 

Critical Accounting Policies

 

Our most critical accounting policies, which are those that require significant judgment, include policies related to revenue recognition, allowance for doubtful accounts, accrual for excess and obsolete inventories, recoverability of long-lived assets, accrued product warranties and income taxes. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.  Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed consolidated financial statements in accordance with generally accepted accounting principles. There have been no changes in the policies for our accounting estimates for the quarter ended March 31, 2012.

 

Forward-Looking Statements

 

This report contains forward-looking statements that involve future events, our future performance and our future operations and actions.  In some cases you can identify forward-looking statements by the use of words such as “may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,”

 

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“estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties.  These forward-looking statements may be contained in the notes to our consolidated financial statements and elsewhere in this report, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Some of the factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements are described below.

 

·                  Failure to effectively integrate the operations of Dansensor with ours;

·                  Ability to meet our debt obligations in a timely manner;

·                  The impact of complying with our bank covenants;

·                  Failure to successfully upgrade our ERP system without interruption;

·                  Increases in prices for raw materials;

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

·                  Fluctuations in foreign currency exchange rates and interest rates;

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

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

·                  Disruption in our ability to manufacture our products or the ability of our key suppliers to provide us products or components or raw materials for products resulting in our inability to supply market demand for our products;

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

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

·                  Loss of customers;

·                  Failure to retain senior management or replace lost senior management;

·                  Employee slowdowns, strikes or similar actions;

·                  Impairment of our investment in Luxcel due to adverse operating results as compared to plan;

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

·                  Effects of any potential litigation;

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

·                  Our ability to manage cash requirements;

·                  Changes in generally accepted accounting principles; or

·                  Conditions and changes in general economic and business conditions.

 

Item 3.                                             Quantitative and Qualitative Disclosures About Market Risk

 

Equity Price and Interest Rate Risk

 

All of our marketable securities, some of which are insured by the FDIC, are at fixed interest rates and mature within two years; therefore, we believe that the market risk arising from the holding of these financial instruments is minimal.

 

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Foreign Currency Risk

 

Historically, in excess of 50% of our consolidated sales have been to international destinations, and we expect this to increase in the future as a result of the acquisition of Dansensor.  Since we invoice most of these customers in U.S. dollars, we do not have significant exposure to foreign currency transaction risk.  We invoice a small amount to our international customers in their local currency which exposes us to some transaction gain or loss when converting their payments into U.S. dollars.  We also pay a small number of our international suppliers in their local currency which exposes us to transaction gain or loss.  However, these have not resulted in material amounts in the past.

 

Our foreign operations expose us to foreign currency exchange risk when the euro and yuan currency results of operations are translated to U.S. dollars.  We historically have not experienced any material foreign currency translation gains or losses.  We may enter into foreign currency hedge contracts from time to time to mitigate the effect of currency fluctuations.

 

Our investments in foreign subsidiaries translated into U.S. dollars are not hedged.  Any changes in foreign currency exchange rates would be reflected as a foreign currency translation adjustment, a component of accumulated other comprehensive income in stockholders’ equity, and would not impact our net income.

 

Item 4.                                 Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered in this Quarterly Report on Form 10-Q.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of such period, to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that material information relating to our Company and our consolidated subsidiaries is made known to management, including our Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during our quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.             OTHER INFORMATION

 

Item 1A.                        Risk Factors

 

We are affected by risks specific to us as well as factors that affect all businesses operating in a global market.  The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended December 31, 2011 under the heading “Part I — Item 1A. Risk Factors.”  There has been no material change in those risk factors.

 

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

 

Unregistered Sales of Equity Securities

 

We did not sell any equity securities of MOCON, Inc. during the three-month period ended March 31, 2012 that were not registered under the Securities Act of 1933.

 

Issuer Repurchases of Equity Securities

 

Other than the withholding of 6,284 shares of our common stock in connection with the cashless net exercise of stock options to pay the exercise price of such options, we did not repurchase any equity securities of MOCON, Inc. during the first quarter ended March 31, 2012.

 

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Item 6.                                 Exhibits

 

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

 

Exhibit
No.

 

Description

10.1

 

Share Purchase Agreement dated March 9, 2012, by and between MOCON, Inc. and PBI Holding A/S (Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on March 12, 2012 (File No. 000-09273))

 

 

 

10.2

 

Credit Agreement dated as of March 28, 2012 by and between MOCON, Inc. and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 3, 2012 (File No. 000-09273))

 

 

 

10.3

 

Security Agreement: Equipment dated as of March 28, 2012 executed by MOCON, Inc. in favor of Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on April 3, 2012 (File No. 000-09273))

 

 

 

10.4

 

Continuing Security Agreement: Rights to Payment and Inventory dated as of March 28, 2012 executed by MOCON, Inc. in favor of Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on April 3, 2012 (File No. 000-09273))

 

 

 

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)

 

 

 

101

 

The following materials from MOCON, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Condensed Consolidated Balance Sheets, (ii) the unaudited Condensed Consolidated Statements of Income, (iii) the unaudited Condensed Consolidated Statements of Comprehensive Income, (iv) the unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.* (furnished herewith)

 


*         Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under Section 11 or 12 of the Securities Act of 1933, as amended, or otherwise subject to the liability of those sections, except as shall be expressly set forth by specific reference in such filings.

 

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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 the undersigned hereunto duly authorized.

 

 

 

MOCON, INC.

 

 

 

 

Date: May 10, 2012

/s/ Robert L. Demorest

 

Robert L. Demorest

 

Chairman, President and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

Date: May 10, 2012

/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, 2012

 

EXHIBIT INDEX

 

Exhibit
No.

 

Description

 

Method of
Filing

10.1

 

Share Purchase Agreement dated March 9, 2012, by and between MOCON, Inc. and PBI Holding A/S

 

Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on March 12, 2012 (File No. 000-09273)

 

 

 

 

 

10.2

 

Credit Agreement dated as of March 28, 2012 by and between MOCON, Inc. and Wells Fargo Bank, National Association

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 3, 2012 (File No. 000-09273)

 

 

 

 

 

10.3

 

Security Agreement: Equipment dated as of March 28, 2012 executed by MOCON, Inc. in favor of Wells Fargo Bank, National Association

 

Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on April 3, 2012 (File No. 000-09273)

 

 

 

 

 

10.4

 

Continuing Security Agreement: Rights to Payment and Inventory dated as of March 28, 2012 executed by MOCON, Inc. in favor of Wells Fargo Bank, National Association

 

Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on April 3, 2012 (File No. 000-09273)

 

 

 

 

 

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

 

 

 

 

 

101

 

The following materials from MOCON, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Condensed Consolidated Balance Sheets, (ii) the unaudited Condensed Consolidated Statements of Income, (iii) the unaudited Condensed Consolidated Statements of Comprehensive Income, (iv) the unaudited Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements.*

 

Furnished herewith

 


*         Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under Section 11 or 12 of the Securities Act of 1933, as amended, or otherwise subject to the liability of those sections, except as shall be expressly set forth by specific reference in such filings.

 

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