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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the Quarter Ended June 30, 2015

 

or

 

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 ☒ NO ☐

 

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 ☒ NO ☐

 

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 ☐ Accelerated filer ☒ Non-accelerated filer (do not check if a smaller reporting company) ☐ Smaller reporting company ☐

 

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

 

YES ☐ NO ☒

 

 

As of August 4, 2015 we had 5,752,574 common shares issued and outstanding.

 

 
 

 

 

MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended June 30, 2015

 

 

 

Page

Number

PART I.   FINANCIAL INFORMATION

 
   

Item 1.    Financial Statements

 

Condensed Consolidated Balance Sheets June 30, 2015 (Unaudited) and December 31, 2014

1

   

Condensed Consolidated Statements of Income (Unaudited) Three and six-months ended June 30, 2015 and 2014

 2 

   
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three and six -months ended June 30, 2015 and 2014 3
   

Condensed Consolidated Statements of Cash Flows (Unaudited) Six -months ended June 30, 2015 and 2014

4

   

Notes to Condensed Consolidated Financial Statements (Unaudited)

5-12

   

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

13-22

   

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

22-23

   

Item 4.     Controls and Procedures

23

   
   

PART II.  OTHER INFORMATION

 
   

Item 1.     Legal Proceedings

24

   

Item 1A.  Risk Factors

24

   

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

24

   

Item 3.     Defaults Upon Senior Securities

24

   

Item 4.     Mine Safety Disclosures

24

   

Item 5.     Other Information

24

   

Item 6.     Exhibits

25

   

Signatures

26

   

Exhibit Index

27

 

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.

 

 
 

 

  

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MOCON, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(expressed in thousands, except share amounts)

 

   

June 30,

         
   

2015

   

December 31,

 
   

(Unaudited)

   

2014

 
                 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 6,019     $ 6,332  

Trade accounts receivable, less allowance for doubtful accounts of $155 in 2015 and $181 in 2014

    8,801       9,877  

Other receivables

    132       148  

Inventories

    9,205       8,705  

Prepaid income taxes

    335       771  

Prepaid expenses, other

    756       902  

Deferred income taxes

    715       766  

Other current assets

    316       -  

Total current assets

    26,279       27,501  
                 

Property, plant and equipment, net of accumulated depreciation of $8,135 in 2015 and $7,874 in 2014

    5,742       5,562  

Goodwill

    7,543       8,147  

Intangible assets, net

    9,635       10,831  

Other assets

    187       194  

Deferred income taxes

    287       274  

TOTAL ASSETS

  $ 49,673     $ 52,509  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities:

               

Current maturities of notes payable

  $ 736     $ 983  

Revolving lines of credit

    3,905       3,300  

Accounts payable

    3,562       4,402  

Accrued compensation and related expenses

    2,973       4,120  

Other accrued expenses

    1,272       731  

Accrued product warranties

    293       285  

Dividends payable

    633       631  

Deferred revenue

    1,255       997  

Total current liabilities

    14,629       15,449  
                 

Notes payable

    14       307  

Obligations to former employees

    61       67  

Deferred income taxes

    1,569       1,856  

Accrued income taxes

    363       357  

Total noncurrent liabilities

    2,007       2,587  

Total liabilities

    16,636       18,036  
                 

Shareholders' equity:

               

Capital stock – undesignated. Authorized 3,000,000 shares; none issued and outstanding in 2015 and 2014

    -       -  

Common stock – $0.10 par value. Authorized 22,000,000 shares; issued and outstanding 5,752,574 shares in 2015 and 5,732,505 shares in 2014

    575       573  

Additional paid-in capital

    6,894       6,427  

Retained earnings

    30,553       30,265  

Accumulated other comprehensive loss

    (4,985 )     (2,792 )

Total shareholders' equity

    33,037       34,473  
                 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 49,673     $ 52,509  
                 

 

See accompanying notes to condensed consolidated financial statements.

 

 
1

 

 

MOCON, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited - expressed in thousands, except per share amounts)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Revenue:

                               

Products

  $ 12,032     $ 12,432     $ 24,201     $ 24,273  

Services

    2,338       2,437       4,842       5,238  

Consulting

    679       705       1,366       1,376  

Total revenue

    15,049       15,574       30,409       30,887  
                                 

Cost of revenue:

                               

Products

    5,497       5,228       10,783       10,670  

Services

    1,016       1,116       2,064       2,141  

Consulting

    511       508       1,058       965  

Total cost of revenue

    7,024       6,852       13,905       13,776  
                                 

Gross profit

    8,025       8,722       16,504       17,111  
                                 

Selling, general and administrative expenses

    5,835       5,947       12,106       12,090  
                                 

Research and development expenses

    1,126       989       2,195       2,114  
                                 

Operating income

    1,064       1,786       2,203       2,907  
                                 

Other income (expense), net

    (113 )     (93 )     138       (150 )
                                 

Income before income taxes

    951       1,693       2,341       2,757  
                                 

Income tax expense

    305       527       787       861  
                                 

Net income

  $ 646     $ 1,166     $ 1,554     $ 1,896  
                                 

Net income per common share:

                               

Basic

  $ 0.11     $ 0.21     $ 0.27     $ 0.34  

Diluted

  $ 0.11     $ 0.20     $ 0.27     $ 0.33  
                                 

Weighted average common shares outstanding:

                               

Basic

    5,750       5,655       5,746       5,648  

Diluted

    5,846       5,775       5,840       5,770  
                                 

Cash dividends declared per common share

  $ 0.11     $ 0.11     $ 0.22     $ 0.22  

 

 

 
2

 

 

MOCON, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited - expressed in thousands)

 

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Net income

  $ 646     $ 1,166     $ 1,554     $ 1,896  
                                 

Other comprehensive income (loss):

                               

Cumulative translation adjustment

    520       (206 )     (2,193 )     (254 )
                                 

Comprehensive income (loss)

  $ 1,166     $ 960     $ (639 )   $ 1,642  
 
3

 

 

MOCON, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - expressed in thousands)

 

   

Six Months Ended

 
   

June 30,

 
   

2015

   

2014

 

Cash flows from operating activities:

               

Net income

  $ 1,554     $ 1,896  

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

               

Share-based compensation expense

    322       284  

Change in fair value of derivative instrument

    (3 )     93  

Gain on disposition of long-term assets

    (16 )     (17 )

Depreciation and amortization

    1,220       1,268  

Deferred income taxes

    (106 )     (143 )

Excess tax benefit from employee stock plans

    (2 )     (5 )

Changes in operating assets and liabilities:

               

Trade accounts receivable, net

    511       1,792  

Other receivables

    7       (200 )

Inventories

    (650 )     (1,084 )

Prepaid income taxes

    432       (27 )

Prepaid expenses, other

    (180 )     62  

Accounts payable

    (888 )     (686 )

Accrued compensation and related expenses

    (962 )     (226 )

Other accrued expenses

    293       (4 )

Accrued product warranties

    20       (104 )

Accrued income taxes

    294       171  

Deferred revenue

    281       822  

Net cash provided by operating activities

    2,127       3,892  
                 

Cash flows from investing activities:

               

Proceeds from maturities of marketable securities

    -       205  

Purchases of property, plant and equipment

    (861 )     (832 )

Proceeds from sale of property and equipment

    54       56  

Cash paid for patents and other intangible assets

    (124 )     (144 )

Other

    (2 )     (1 )

Net cash used in investing activities

    (933 )     (716 )
                 

Cash flows from financing activities:

               

Proceeds from the revolving lines of credit

    11,730       12,886  

Payments on the revolving lines of credit

    (11,125 )     (12,299 )

Payments on notes payable and seller financed note payable

    (538 )     (1,349 )

Proceeds from the exercise of stock options

    149       179  

Excess tax benefit from employee stock plans

    2       5  

Dividends paid

    (1,264 )     (1,242 )

Net cash used in financing activities

    (1,046 )     (1,820 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (461 )     (35 )
                 

Net (decrease) increase in cash and cash equivalents

    (313 )     1,321  
                 

Cash and cash equivalents:

               

Beginning of period

    6,332       4,133  

End of period

  $ 6,019     $ 5,454  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for income taxes

  $ 229     $ 800  

Cash paid during the period for interest

  $ 67     $ 113  
                 

Supplemental schedule of noncash investing and financing activities:

               

Dividends accrued

  $ 633     $ 623  

Purchases of prepaid expenses, fixed assets and intangibles in accounts payable

  $ 123     $ 239  

Transfers of inventory to fixed assets

  $ 28     $ -  

 

See accompanying notes to condensed consolidated financial statements.

 

 
4

 

 

MOCON, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2015

 

(Unaudited)

 

Note 1 – Condensed Consolidated Financial Statements

 

The condensed consolidated balance sheet as of June 30, 2015, the condensed consolidated statements of income and comprehensive income (loss), for the three and six-months ended June 30, 2015 and 2014 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 June 30, 2015, 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 and six-month periods ended June 30, 2015 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, 2014, previously filed with the Securities and Exchange Commission.

 

MOCON Inc. and its subsidiaries, develops, manufacturers and markets measurement, analytical, monitoring and consulting services for customers in the barrier packaging, food, pharmaceutical, consumer products, industrial hygiene, environmental, air quality monitoring, oil and gas exploration and other industries throughout the world.

 

We report our operating segments as Permeation Products and Services (“Permeation”), Package Testing Products and Services (“Package Testing”), and Industrial Analyzers Products and Services and Other (“Industrial Analyzers and Other”) for financial reporting purposes.

 

Principles of Consolidation

 

The consolidated financial statements include our accounts and our wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

 

Note 2 – Inventories

 

Inventories consist of the following (expressed in thousands):

 

   

June 30,

   

December 31,

 
   

2015

   

2014

 
                 

Finished products

  $ 1,368     $ 1,628  

Work-in-process

    3,260       2,574  

Raw materials

    4,577       4,503  
    $ 9,205     $ 8,705  

 

 
5

 

 

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 and six-months ended June 30, 2015 and 2014. (expressed in thousands):

 

     

Three Months Ended June 30,

   

Six Months Ended June 30,

 
     

2015

   

2014

   

2015

   

2014

 
                                   
Weighted shares of common stock outstanding - basic     5,750       5,655       5,746       5,648  

Dilutive impact of share-based awards

    96       120       94       122  
Weighted shares of common stock outstanding - diluted     5,846       5,775       5,840       5,770  

 

 

 

Outstanding stock options totaling 201,950 for the three-months ended June 30, 2015 and 246,250 for the six-months ended June 30, 2015 were excluded from the net income per common share calculation because the shares would be anti-dilutive. Outstanding stock options totaling 116,550 for the three-month period ended June 30, 2014 and none for the six-months ended June 30, 2014 were excluded from the net income per common share calculation because the shares would be anti-dilutive.

 

Note 4 – Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill for the six-month period ended June 30, 2015 were as follows (expressed in thousands):

 

   

 

           

Industrial

         
   

Package

Testing

   

Permeation

   

Analyzers &

Other

   

Total

 
                                 

Balance as of December 31, 2014

  $ 5,508     $ 2,029     $ 610     $ 8,147  

Foreign currency translation

    (459 )     (145 )     -       (604 )

Balance as of June 30, 2015

  $ 5,049     $ 1,884     $ 610     $ 7,543  

 

 

We test goodwill for impairment annually at the reporting unit level using a fair value approach. We will perform our annual impairment test for goodwill in the fourth quarter.

  

 
6

 

 

Other intangible assets (all of which are being amortized except projects in process) are as follows (expressed in thousands):

 

   

As of June 30, 2015

 
           

Accumulated

         
   

Cost

   

Amortization

   

Net

 
                         

Patents

  $ 1,829     $ (436 )   $ 1,393  

Trademarks and trade names

    3,376       (682 )     2,694  

Developed technology

    6,230       (2,250 )     3,980  

Customer relationships

    729       (263 )     466  

Internally developed software

    1,085       (100 )     985  

Other intangibles

    255       (138 )     117  
    $ 13,504     $ (3,869 )   $ 9,635  

 

   

As of December 31, 2014

 
           

Accumulated

         
   

Cost

   

Amortization

   

Net

 
                         

Patents

  $ 1,719     $ (416 )   $ 1,303  

Trademarks and trade names

    3,676       (644 )     3,032  

Developed technology

    6,843       (2,091 )     4,752  

Customer relationships

    800       (245 )     555  

Internally developed software

    1,085       (46 )     1,039  

Other intangibles

    255       (105 )     150  
    $ 14,378     $ (3,547 )   $ 10,831  

 

 

 

Total amortization expense for the three-months ended June 30, 2015 and 2014 was $295,000 and $320,000, respectively, and $590,000 and $639,000, respectively, for the six-months ended June 30, 2015 and 2014. 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 2015 and each of the four succeeding fiscal years and thereafter based on the intangible assets as of June 30, 2015 is as follows (expressed in thousands):

 

2015

  $ 591  

2016

    1,164  

2017

    1,130  

2018

    1,099  

2019

    1,098  

2020 & Thereafter

    3,890  
    $ 8,972  

 

 
7

 

 

Note 5 – Accumulated Other Comprehensive Income (Loss)

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Beginning balance

  $ (5,505 )   $ 565     $ (2,792 )   $ 613  

Foreign currency translation adjustments

    520       (206 )     (2,193 )     (254 )

Amounts reclassified to earnings

    -       -       -       -  

Accumulated other comprehensive income (loss)

  $ (4,985 )   $ 359     $ (4,985 )   $ 359  

 

 

Note 6 – Warranty

 

We provide a warranty for most of our products. Warranties are for periods ranging from ninety days to one year, and cover parts and labor for non-maintenance repairs. 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. Generally, warranty reserves are also accrued for special rework campaigns for known major product modifications. We also offer extended warranty service contracts for select products when the factory warranty period expires.

 

Warranty provisions and claims for the three and six-months ended June 30, 2015 and 2014 were as follows (expressed in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Beginning balance

  $ 354     $ 322     $ 285     $ 336  

Warranty provisions

    16       (19 )     217       51  

Warranty claims

    (77 )     (72 )     (209 )     (156 )

Ending Balance

  $ 293     $ 231     $ 293     $ 231  

 

 
8

 

 

Note 7 – Debt

 

Notes payable consists of the following (expressed in thousands):

 

   

June 30, 2015

   

December 31, 2014

 
                 

Note payable to bank, with interest at 3.46%, payable in monthly principal installments of $73 plus interest through March 28, 2016, collateralized by our assets with the exception of the Dansensor A/S (a wholly owned subsidiary) stock.

  $ 729     $ 1,166  
                 

Seller financed note payable (Seller Note), which was paid off on April 2, 2015

    -       95  
                 

Capital leases

    21       29  

Total long-term notes payable

    750       1,290  

Less current portion of long-term notes payable

    736       983  

Total long-term notes payable

  $ 14     $ 307  

 

 

In the U.S., we have a $6.0 million secured revolving line of credit with a maturity date of March 28, 2016. Interest is charged monthly at one-month LIBOR (0.18 percent) plus 1.75 basis points which totaled 1.93 percent at June 30, 2015 and December 31, 2014. The line of credit is secured by our assets with the exception of the outstanding stock of Dansensor. We had $3.9 million and $3.3 million outstanding on the line of credit at June 30, 2015 and December 31, 2014. Additionally, Dansensor has a DKK 10 million (approximately $1.5 million) available line of credit of which no amounts were outstanding as of June 30, 2015 and December 31, 2014. Outstanding borrowings on the Denmark line of credit are charged interest at 4.35 percent per year.

 

We are subject to various financial and restrictive covenants in the bank Credit Agreement, including maintaining certain financial ratios and limits on incurring additional indebtedness, making capital and lease expenditures and making share repurchases. We are in compliance with our debt covenants at June 30, 2015 and expect to remain in compliance through the next twelve months.

 

As of June 30, 2015, the future minimum principal payments of the notes payable for the remainder of 2015 and each of the three succeeding fiscal years are as follows (expressed in thousands):

 

2015

  $ 517  

2016

    231  

2017

    2  
    $ 750  

 

 

 

Note 8 – Income Taxes

 

Our provision for income tax expense was 32.1 percent and 31.2 percent of income before income taxes for the second quarters ended June 30, 2015 and 2014, respectively. Our provision for income tax expense was 33.6 percent and 31.2 percent of income before income taxes for the first half ended June 30, 2015 and 2014, respectively. The rate in the second quarters and first halves of 2015 and 2014 was lower than the statutory rate due primarily to the effect of foreign operations where tax rates tend to be lower as well as the domestic manufacturing deduction. The increase in the effective tax rate for 2015 as compared to 2014 is due to the higher proportion of projected taxable income from domestic operations in 2015.

 

 
9

 

 

As of June 30, 2015 and December 31, 2014, the liability for gross unrecognized tax benefits was $363,000 and $357,000, respectively. Changes in gross unrecognized tax benefits during the six-months ended June 30, 2015 were for interest accrued during the first quarter. It is expected that the amount of unrecognized tax benefits for positions which we have identified will not materially change in the next twelve months.

 

Note 9 – Share-Based Compensation

 

Stock Option Plans

 

As of June 30, 2015, we have reserved 559,914 shares of common stock for options and other share-based incentive awards that are still available for grant under our 2006 and 2015 stock incentive plans, and 674,260 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. We issue new shares of common stock upon exercise of stock options.

 

Amounts recognized in the condensed consolidated financial statements related to share-based compensation are as follows (expressed in thousands):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Total cost of share-based compensation

  $ 161     $ 142     $ 322     $ 284  

Amount of income tax benefit recognized in earnings

    (21 )     (22 )     (42 )     (43 )

Amount charged against net income

  $ 140     $ 120     $ 280     $ 241  

 

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model (Black-Scholes). We use historical data to estimate the expected price volatility, expected option life and expected forfeiture rate. Our estimates are based on expected volatility for awards granted on daily historical trading data of our 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. We estimate 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.

 

 
10

 

 

A summary of the option activity for the first six months of 2015 is as follows (expressed in thousands, except share and per share amounts):

 

                     

Weighted

         
             

Weighted

   

Average

   

Aggregate

 
             

Average

   

Remaining

   

Intrinsic

 
             

Exercise

   

Contractual

   

Value

 
     

Shares

   

Price

   

Term

   

(in thousands)

 
                                   

Options outstanding, December 31, 2014

    722,675     $ 14.35       4.58     $ 2,555  
Granted     -       -       -       -  
Exercised     (42,815 )     12.69       -       -  
Cancelled or expired     (5,600 )     16.15       -       -  

Options outstanding, June 30, 2015

    674,260     $ 14.44       4.14     $ 1,230  

Options exercisable, June 30, 2015

    483,985     $ 13.60       3.47     $ 1,189  

 

 

The total intrinsic value of options exercised was $42,000 and $108,000 during the three-months ended June 30, 2015 and 2014, respectively, and $183,000 and $336,000 during the six-months ended June 30, 2015 and 2014, respectively.

 

A summary of the status of our unvested option shares as of June 30, 2015 is as follows:

 

             

Weighted

 
             

Average

 
             

Grant Date

 
     

Shares

   

Fair Value

 
                   

Unvested at December 31, 2014

    227,400     $ 4.35  
Options granted     -       -  
Options cancelled     (4,625 )   $ 4.14  
Options vested     (32,506 )   $ 5.41  

Unvested at June 30, 2015

    190,269     $ 4.13  

 

As of June 30, 2015, there was $640,000 of total unrecognized compensation cost related to unvested share-based compensation granted under our plans. That cost is expected to be recognized over a weighted-average period of 1.1 years. The total fair value of option shares vested during the three-months ended June 30, 2015 and 2014 was $88,000 and $77,000, respectively, and $176,000 and $154,000 during the six-months ended June 30, 2015 and 2014, respectively.

 

Employee Stock Purchase Plan

 

On May 27, 2015, our shareholders approved the 2015 Employee Stock Purchase Plan (“Purchase Plan”) whereby 50,000 shares of common stock will be available for future sale. The first offering period will begin January 1, 2016 and provides participants an option to purchase shares of our common stock at a price per share equal to 85 percent of the value of the share of common stock at the beginning or end of the offering period (whichever is less).

 

 

Note 10 – Business Segments

 

 

We have four operating segments, structured by differences in products and services, that are regularly reviewed by our chief operating decision maker to make decisions about allocating resources and assessing segment performance. The segment performance is evaluated at segment operating income which is defined as gross profit less selling, general and administrative expenses and research and development expenses. General corporate expenses, including costs associated with various support functions such as human resources, information technology, finance and accounting, and general and administrative costs, are allocated to the reportable segments primarily on the basis of segment gross margin. Our four operating segments have been aggregated into three reportable segments. We aggregated our Other Products and Services operating segment into the Industrial Analyzers Products and Services segment based on minimal business activity and materiality.

 

 
11

 

 

The Permeation segment includes instruments and services that measure the rate at which various gases and vapors permeate through a variety of materials. The Package Testing segment provides customers with the ability to assess package performance, shelf-life, package improvement, cost reduction, sustainability and product safety using Modified Atmosphere Packaging and other technologies. The Industrial Analyzers and Other segment includes advanced gas analysis and monitoring instrumentation used in applications such as oil and gas exploration, beverage and specialty gas analysis, industrial hygiene and safety, food safety, environmental air monitoring and homeland security.

 

The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Intersegment revenue for the three and six months ended June 30, 2015 and 2014 were insignificant.

 

Financial information by reportable segment for the three and six-months ended June 30, 2015 and 2014 is as follows (expressed in thousands):

 

   

Three Months Ended June 30, 2015

   

Six Months Ended June 30, 2015

 
   

Revenue

   

Operating Income (loss)

   

Revenue

   

Operating Income (loss)

 

Package Testing

  $ 6,473     $ 531     $ 13,229     $ 1,419  

Permeation

    5,966       1,071       12,068       1,749  

Industrial Analyzers and Other

    2,610       (538 )     5,112       (965 )

Total

  $ 15,049     $ 1,064     $ 30,409     $ 2,203  

 

 

   

Three Months Ended June 30, 2014

   

Six Months Ended June 30, 2014

 
   

Revenue

   

Operating Income

   

Revenue

   

Operating Income

 

Package Testing

  $ 7,354     $ 679     $ 13,979     $ 729  

Permeation

    5,044       661       10,892       1,675  

Industrial Analyzers and Other

    3,176       446       6,016       503  

Total

  $ 15,574     $ 1,786     $ 30,887     $ 2,907  
 
12

 

 

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.

 

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 are headquartered in Minnesota and have operating locations in Minnesota, Denmark, and Colorado. We have offices and laboratories in Texas, Germany, France, Italy, Spain 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, Europe and China, and we use a network of independent sales representatives and distributors to market and service our products and services in most other foreign countries.

 

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

 

Products and Services

 

Package Testing Products and Services

 

We manufacture and sell three primary products in this group: headspace analyzers, leak detection equipment and gas mixers. Our headspace analyzer products are used to analyze the amount and type of gas present in the headspace of flexible and rigid packages, as applied to gas flushing in modified or controlled atmosphere packaging. The principal market for these products consists of packagers of foods, beverages and pharmaceuticals. Our headspace analyzer products include the PAC CHECK®, CheckMateTM and CheckPointTM series of off-line headspace analyzers and the MAP Check 3™ series of on-line analyzers for continuous and intermittent monitoring of Modified Atmosphere Packaging (MAP) and other gas flushing operations.

 

Our leak detection products detect leaks in sterile medical trays, food pouches, blister packs and a wide range of other sealed packages. We currently manufacture three types of leak detection instruments. The first type is a non-destructive leak detector that senses small amounts of carbon dioxide escaping from a package or tray. The second type of instrument detects leaks and checks for seal integrity by applying and measuring pressure within a package. The third type pulls a vacuum on a package and looks for vacuum or gas flow changes. The principal markets for these products are packagers of sterile medical items, pharmaceuticals and food products. Our leak detection products include the LeakMatic IITM , LeakPointer IITM and Lippke 4000/4500 series of instruments.

 

Our gas mixers are used in the food production environment to assure that the package has been properly flushed with the correct mixture of gases. Our gas mixer products include the MAP Mix Provectus and MAP Mix 9001 on-line instruments.

 

 
13

 

 

Permeation Products and Services

 

Our permeation products consist of systems and services that measure the rate at which various gases and vapors transmit through a variety of materials. These products perform measurements under precise temperature, pressure and relative humidity conditions. The principal market for these products consists of manufacturers of packaging materials, including manufacturers of papers, plastic films, coatings and containers and the users of such packaging materials, such as companies in the food, beverage, pharmaceutical and consumer product industries. Other customers include manufacturers of flat panel displays, solar panels, electronics, and many other sophisticated materials.

 

We also provide certain laboratory testing services to companies that have a need for permeation data. These services consist primarily of testing film and package permeation for companies that:

 

 

wish to outsource their testing needs to us;

 

 

are interested in evaluating our instrumentation prior to purchase; or

 

 

have purchased our products but have a need for additional capacity.

 

Permeation instruments that we currently manufacture include OX-TRAN® systems for oxygen transmission rates, PERMATRAN-W® systems for water vapor transmission rates, and PERMATRAN-C® systems for carbon dioxide transmission rates. Our AQUATRAN® ultra-high sensitivity, trace moisture permeation analyzer has been increasingly accepted as the standard test instrument of choice in the flat panel, solar cell and electronics industries. Our systems are available in a wide range of options for our customers, including high or low throughput, price, sensitivity and ease of use. They are primarily marketed to research and development departments, as well as production and quality assurance groups. During the second quarter 2014, we began shipping the OX-TRAN 2/22 for oxygen transmission measurement. In the fourth quarter 2014, we began shipping the PERMATRAN-W 3/34. Both the OX-TRAN 2/22 and the PERMATRAN-W 3/34 are part of our new series of technologically-advanced permeation instruments.

 

Industrial Analyzers Products and Services and Other

 

We manufacture and distribute advanced gas analysis and monitoring instrumentation used in applications such as oil and gas exploration, process and beverage gas analysis, industrial hygiene, safety, environmental air monitoring and indoor air quality.

 

In this group, we manufacture and sell two types of gas analyzer instruments: gas chromatographs (GCs) and total hydrocarbon analyzers (THAs). These instruments are typically installed in fixed locations at the monitoring sites and perform their functions of detecting and measuring various gases continually or at regular intervals. We also make miniaturized gas sensors and detectors which are sold to original equipment manufacturers (OEMs) of mobile gas safety equipment.

 

Our industrial analyzers products, sensors and detectors are for use in industrial hygiene (detection of hazardous gases in the workplace), hydrocarbon gas analysis for oil and gas exploration, contaminant detection in the manufacture of specialty gases, and environmental monitoring (tracking the release, or the presence, of toxic substances). Our newest GC offering measures trace levels of contaminants in beverage grade carbon dioxide which is used to carbonate soft drinks, beer and water.

 

We market some of these products under the names PetroAlert®, piD-TECH®, and BevAlert®.

 

Microbial Detection Products

 

Our microbial detection products are designed to rapidly detect microbial growth in food and beverage samples. Using the total viable count (TVC) method, our GreenLight® series of instruments perform rapid and precise measurements to determine the presence or absence of aerobic bacteria in food products or ingredients. There are two models of the GreenLight product line currently available; the GreenLight 930 and the GreenLight 910.

 

 
14

 

 

Results of Operations

 

The following table sets forth the relationship between various components of our results of operations, stated as a percent of revenue, for the three and six-months ended June 30, 2015 and 2014:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Revenue

    100.0       100.0       100.0       100.0  

Cost of revenue

    46.7       44.0       45.7       44.6  

Gross profit

    53.3       56.0       54.3       55.4  

Selling, general and administrative expenses

    38.8       38.2       39.8       39.2  

Research and development expenses

    7.5       6.3       7.2       6.8  

Operating income

    7.0       11.5       7.3       9.4  

Other income (expense), net

    (0.7 )     (0.6 )     0.4       (0.5 )

Income before income taxes

    6.3       10.9       7.7       8.9  

Income tax expense

    2.0       3.4       2.6       2.8  

Net income

    4.3       7.5       5.1       6.1  

 

 

Comparison of Financial Results for the Three and Six-Months Ended June 30, 2015 and 2014

 

Revenue

 

Total revenue for the three-months ended June 30, 2015 was $15.0 million, which is slightly lower compared to $15.6 million reported in the same period in 2014. Total revenue for the six-months ended June 30, 2015 was $30.4 million, which is slightly lower compared to $30.9 million reported in the same period in 2014. Foreign currency translation had an unfavorable impact of $1.2 million and $2.6 million for the three-months and six-months ended June 30, 2015, respectively, compared to the prior year period. When taking the currency rate impact into account, revenue grew 5 percent and 7 percent for the three-months and six-months ended June 30, 2015, respectively, and met target for the quarter for each of our Permeation and Package Testing segments. This growth was offset by the negative impact to our Industrial Analyzers and Other segment.

 

Revenue to foreign customers for the three-months ended June 30, 2015 and 2014, respectively, amounted to 69 percent and 72 percent of total consolidated revenue, and were down 3 percent in the current period. Revenue to foreign customers for the six-months ended June 30, 2015 and 2014, respectively, amounted to 68 percent and 72 percent of total consolidated revenue, and were down 4 percent in the current period.

 

 
15

 

 

The following table summarizes total revenue by reporting segments for the three and six-months ended June 30, 2015 and 2014 (expressed in thousands):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
                         
   

2015

   

2014

   

2015

   

2014

 

Package Testing

  $ 6,473     $ 7,354     $ 13,229     $ 13,979  

Permeation

    5,966       5,044       12,068       10,892  

Industrial Analyzers and Other

    2,610       3,176       5,112       6,016  

Total Sales

  $ 15,049     $ 15,574     $ 30,409     $ 30,887  

 

 

The following table sets forth the relationship between various components of domestic and foreign revenue for the three and six-months ended June 30, 2015 and 2014 (expressed in thousands):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
                         
   

2015

   

2014

   

2015

   

2014

 

Domestic Revenue

  $ 4,720     $ 4,312     $ 9,731     $ 8,498  

Foreign Revenue:

                               

Europe

    5,221       6,692       11,490       12,995  

Asia

    3,882       3,751       6,961       7,375  

Other

    1,226       819       2,227       2,019  

Total Foreign Revenue

    10,329       11,262       20,678       22,389  

Total Revenue

  $ 15,049     $ 15,574     $ 30,409     $ 30,887  

  

Package Testing Products and Services – Revenue in our Package Testing segment decreased 12 percent for the three-months ended June 30, 2015, compared to the same period in the prior year, and accounted for 43 percent and 47 percent of our consolidated second quarter revenue in 2015 and 2014 , respectively. Package Testing segment revenue for the current period was negatively impacted by $1.1 million due to currency rate fluctuations as compared to the prior year period. The negative impact from the currency rate fluctuations was offset by an increase in revenue from headspace and mixer products as compared to the prior year period. Revenue from foreign destinations comprised 73 percent and 80 percent of total revenue in this segment for the three-months ended June 30, 2015 and 2014, respectively.

 

Revenue in our Package Testing segment decreased 5 percent for the six-months ended June 30, 2015, compared to the same period in the prior year, and accounted for 43 percent and 45 percent of our consolidated six-months revenue in 2015 and 2014, respectively. Package Testing segment revenue for the current six-month period was negatively impacted by $2.1 million due to currency rate fluctuations as compared to the prior year period. Excluding the impact of the currency rate fluctuations, the Package Testing segment revenue grew 10 percent as compared to the prior year. This growth is a result in increased revenue from headspace and mixer products. Revenue from foreign destinations comprised 73 percent and 79 percent of total revenue in this segment for the six-months ended June 30, 2015 and 2014, respectively.

 

Permeation Testing Products and Services – Revenue in our Permeation segment increased 18 percent for the three-months ended June 30, 2015 compared to the same period in the prior year, and accounted for 40 percent and 33 percent of our consolidated second quarter revenue in 2015 and 2014 , respectively. Permeation segment revenue for the current period was negatively impacted by $0.1 million due to currency rate fluctuations as compared to the prior year period. Consistent with the increase in the first quarter of 2015, the increase in the current period is largely attributable to increased demand in the domestic markets for the new generation of oxygen permeation instrumentation, which was introduced to the market during the last half of 2014. Foreign revenue comprised 69 percent and 71 percent of the shipments in this segment in the second quarter of 2015 and 2014, respectively.

 

 
16

 

  

Revenue in our Permeation segment increased 11 percent for the six-months ended June 30, 2015 compared to the same period in the prior year, and accounted for 40 percent and 35 percent of our consolidated six-months revenue in 2015 and 2014, respectively. Permeation segment revenue for the current period was negatively impacted by $0.5 million due to currency rate fluctuations as compared to the prior year period. As noted above, the year to date increase in revenue is largely attributable to an increase demand in the domestic markets for the new generation of oxygen permeation instrumentation. Foreign revenue comprised 71 percent of the shipments in this segment in the first half of 2015, compared to 71 percent from the same period in the prior year.

 

 

Industrial Analyzers Products and Services and Other – Revenue in our Industrial Analyzers and Other segment, which accounted for 17 percent and 20 percent of our consolidated second quarter revenue in 2015 and 2014, respectively, decreased 18 percent during the second quarter 2015 compared to the same period in 2014. Revenue in this segment is comprised mainly of instruments and services provided by our Baseline subsidiary. The decline in revenue for the three month period ended June 30, 2015 compared to the prior year period was primarily due to the declines in the oil and gas exploration markets. This decline is offset in part by increases in other markets including sales of environmental monitoring products into Taiwan and BevAlert systems into India and Pakistan. Revenue to foreign destinations comprised 56 percent and 58 percent of total revenue in this segment for the three-months ended June 30, 2015 and 2014, respectively.

 

Revenue in our Industrial Analyzers and Other segment, which accounted for 17 percent and 20 percent of our consolidated six-months revenue in 2015 and 2014, respectively, decreased 15 percent during the first half 2015 compared to the same period in 2014. The decline in revenue for the six-month period ended June 30, 2015 compared to the prior year period was primarily due to the declines in the oil and gas exploration markets. This decline was partially offset by an increase in revenue from the environmental monitoring and beverage safety markets, as described above, in addition to increased demand for our food safety products. Revenue to foreign destinations comprised 56 percent and 61 percent of total revenue in this segment for the six-months ended June 30, 2015 and 2014, respectively.

 

 

Gross Profit

 

For the three-months ended June 30, 2015 and 2014, the consolidated gross profit margins were 53 percent and 56 percent, respectively. The gross profit as a percentage of revenue for the Package Testing segment increased by three percentage points to 54 percent in the current quarter, compared to 51 percent in the prior year quarter, due to an increase in revenue volume from headspace and accessory products which have a higher level of gross profit. The gross profit as a percentage of revenue in the Permeation segment decreased to 57 percent from 62 percent as compared to the prior year quarter due to additional costs associated with the increased production of the next generation products and the foreign exchanged pricing impacts on instruments made in the U.S.A and sold in foreign currencies. The gross profit as a percentage of revenue for the Industrial Analyzers and Other segment for the current quarter declined by fifteen percentage points to 44 percent compared to 59 percent in the prior year quarter, due to primarily reduced production volume to absorb the semi-variable and fixed production related costs.

 

 

 
17

 

 

For the six-months ended June 30, 2015 and 2014, the consolidated gross profit margins were 54 percent and 55 percent, respectively. The gross profit as a percentage of revenue for the Package Testing segment increased by five percentage points to 54 percent in the current six-month period, compared to 49 percent in the prior year six-month period, due to an increase in revenue volume from headspace and accessory products which have a higher level of gross profit. The gross profit as a percentage of revenue in the Permeation decreased to 58 percent from 64 percent as compared to the prior year quarter due to foreign exchange pricing impacts on instruments made in the U.S.A. and sold in foreign currencies and additional production costs related to the next generation instruments. The gross profit as a percentage of revenue for the Industrial Analyzers and Other segment for the current six-month period declined by ten percentage points to 46 percent compared to 56 percent in the prior year six-month period, due to a decrease in volume to absorb semi-variable and fixed production related costs and an increase in our warranty reserve for a quality issue identified with sensor components in the latest release of gas chromatograph instruments.

 

We expect future gross profit percentages to fluctuate depending on the mix of product, service and consulting revenue and the impact of foreign currency fluctuations.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (SG&A) expenses were $5.8 million, or approximately 39 percent of consolidated revenue, in the three-months ended June 30, 2015, compared to $5.9 million, or approximately 38 percent of consolidated revenue, in the same period of 2014. The dollar decrease in the current quarter was primarily related a decline in foreign currency rates partially offset by increased personnel and professional fees related to our initiative to reduce the number of legal entities that we have.

 

SG&A expenses were $12.1 million, or approximately 40 percent of consolidated revenue, in the six-months ended June 30, 2015 and 2014. SG&A expenses for the six-months ended included an increase in domestic commissions due to an higher percentage of revenue to domestic destinations, additional personnel costs due to additional headcount and increased professional fees as described above. The increased SG&A costs were offset by a decline in the foreign currency rates as compared to the year ago period.

 

Research and Development Expenses

 

Research and development (R&D) expenses were $1.1 million, or 8 percent of consolidated revenue, in the second quarter 2015, compared to $989,000, or 6 percent of revenue, in the same period of 2014. R&D expenses were $2.2 million, or 7 percent of consolidated revenue, in the first half of 2015, compared to $2.1 million, or 7 percent of revenue, in the same period of 2014. The spending levels in all periods described above are within our planned level of spending which we project to be between 6 percent and 8 percent of revenue each year.

 

Other Income (Expense), net

 

Other income (expense), net for the three and six-months ended June 30, 2015 and was as follows (expressed in thousands):

 

     

Three Months Ended June 30,

   

Six Months Ended June 30,

 
     

2015

   

2014

   

2015

   

2014

 
                                   

Interest income

  $ -     $ 1     $ -     $ 3  

Interest expense

    (37 )     (47 )     (65 )     (104 )

Foreign currency exchange gain (loss)

    (76 )     (47 )     203       (49 )
Total other income (expense)   $ (113 )   $ (93 )   $ 138     $ (150 )

 

 
18

 

 

Income Tax Expense

 

Our provision for income tax expense was 32.1 percent and 31.2 percent of income before income taxes for the second quarters ended June 30, 2015 and 2014, respectively. Our provision for income tax expense was 33.6 percent and 31.2 percent of income before income taxes for the first half ended June 30, 2015 and 2014, respectively. The rates in the second quarter and first half of 2015 and 2014 were lower than the statutory rate due primarily to the effect of foreign operations where tax rates tend to be lower as well as the domestic manufacturing deduction. The increase in the effective tax rate for 2015 as compared to 2014 is due to the higher proportion of projected taxable income from domestic operations in 2015.

 

Based on current projected annual operating results, current income tax rates, and current legislation, we expect the effective tax rate for the remainder of 2015 to be consistent with our experience in the first six-months. It is possible, however, that legislation will be enacted allowing for the research and development credit. If legislation is passed re-enacting the research and development credit for 2015 our effective tax rate would be favorably impacted. The benefit of the research and development credit in 2014 reduced the effective tax rate by 4.3 percentage points. We would expect similar results for 2015. The overall effective tax rate may fluctuate over time based on the income tax rates in the various jurisdictions in which we operate, and also the level of pre-tax profits in those jurisdictions.

 

Net Income

 

Net income was approximately $646,000 in the second quarter 2015, compared to a net income of approximately $1.2 million in the second quarter 2014. Diluted net income per share was $0.11 and $0.20 in the second quarters of 2015 and 2014, respectively. Net income was approximately $1.6 million in the first half of 2015, compared to a net income of approximately $1.9 million in the first half 2014. Diluted net income per share was $0.27 and $0.33 in the first half of 2015 and 2014, respectively.

 

Liquidity and Capital Resources

 

Total cash and cash equivalents decreased $313,000 to $6.0 million during the six-months ended June 30, 2015, compared to $6.3 million at December 31, 2014. Included in the June 30, 2015 total was $5.8 million held outside of the United States. The year-to-date decrease in cash and cash equivalents was primarily due to cash provided from operations of approximately $2.1 million, offset by dividend payments of $1.3 million, and purchases of fixed assets totaling $861,000. Of the $6.0 million available, we had $3.9 million and $3.3 million, respectively, outstanding on the revolving lines of credit as of June 30, 2015 and December 31, 2014. The four-year term note is payable in monthly principal installments of $72,917 plus interest at 3.46 percent per annum. The seller note was paid in full on April 2, 2015 in one final installment of $85,000, including interest, at 3.46 percent. The U.S. revolving line of credit accrues interest at 1.75 percent over the one-month LIBOR rate, which totaled 1.93 percent at June 30, 2015. The term note and the revolving line of credit related to our U.S. borrowings are due on March 28, 2016, and we are subject to certain financial and restrictive covenants.

 

Our working capital decreased slightly to $11.7 million compared to $12.1 million as of June 30, 2015 and December 31, 2014. Our cash and cash equivalents balance was negatively impacted during the six-months ended June 30, 2015 by approximately $460,000 due to the currency rate fluctuations.

 

One of our strategic objectives is, as market and business conditions warrant, to consider acquisitions of, or investments in, businesses, products and/or technologies. 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.

 

 
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We may invest a 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.

 

A significant amount of our earnings are generated outside of the U.S.A and are indefinitely reinvested in non-U.S.A subsidiaries, resulting in the majority of our cash being held outside the U.S.A. which are available for use by our non-U.S.A. operations. If these funds were repatriated to the U.S.A or used for U.S.A. operations, the amounts would be subject to U.S.A. tax. Therefore, as we continue to accumulate earnings outside of the U.S.A, and use the cash generated from U.S.A operations as well as borrowings to meet our U.S.A. cash needs. Should we require more capital in the U.S.A. than is generated by our U.S.A. operations, we could elect to repatriate earnings from our non-U.S.A. subsidiaries, seek additional borrowing capacity or to raise additional capital in the U.S.A. These alternatives could result in higher effective income tax rates, additional interest expense or other dilution of our earnings.

 

Cash Flow

 

Cash Flow from Operating Activities

 

Our primary source of funds has historically been cash provided by operating activities. In the first six-months of 2015, cash provided by operations totaled approximately $2.1 million, due primarily to net income of $1.6 million, adjusted by non-cash depreciation and amortization of $1.2 million, and a decrease in accounts receivable of $511,000, an increase in deferred revenue of $281,000 which was offset by an increase in inventories of $650,000 and a decrease in accounts payable of $888,000.

 

In the first six months of 2014, cash provided by operations totaled approximately $3.9 million, due primarily to net income of $1.9 million, adjusted by non-cash depreciation and amortization of $1.3 million , an increase in deferred revenue of $822,000, and an decrease in trade accounts receivable of $1.8 million. These increases in cash from operating activities were partially offset by a decrease in accounts payable of $686,000, and in increase in inventories of $1.0 million.

 

Cash Flow from Investing Activities

 

Cash used in investing activities totaled approximately $933,000 in the first six-months of 2015 due primarily to the purchase of property, plant and equipment and intangible assets totaling $985,000.

 

Cash used in investing activities totaled approximately $716,000 in the first six months of 2014 due primarily to the purchase of property, plant and equipment and intangible assets of $975,000, partially offset by the receipt of proceeds from maturities of marketable securities of $205,000.

 

Cash Flow from Financing Activities

 

Cash used in financing activities in the first six-months of 2015 totaled approximately $1.1 million due primarily dividends paid of $1.3 million. These uses of cash were partially offset by the proceeds received from stock option exercises of $149,000 and to an increase of our notes payable of $67,000.

 

Cash used in financing activities in the first six months of 2014 totaled approximately $1.8 million due primarily to a reduction of our term notes payable of $1.3 million, and dividends paid of $1.2 million. These uses of cash were partially offset by the proceeds received from stock option exercises of $180,000 and net proceeds from our revolving line of credit of $587,000.

 

 
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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 are prohibited from doing so under the credit agreement with the Bank unless we obtain the Bank’s approval.

 

Contractual Obligations

 

We refer you to our Annual Report on Form 10-K for the year ended December 31, 2014 for a summary of our contractual obligations related to operating leases, purchase obligations and financing arrangements.

 

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

 

Revenue from Contracts with Customers

 

In May 2014, the Financial Accounting Standards Board issued new accounting requirements for the recognition of revenue from contracts with customers. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. We are currently evaluating the impact of this guidance on our results of operations and financial position.

 

Inventory – Simplifying the Measurement of Inventory

 

In July 2015, the Financial Accounting Standards Board issued new accounting guidance in an effort to simplify the measurement of inventory. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. We are currently evaluating the impact of this guidance on our results of operations and financial position.

 

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, goodwill 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, 2014. 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 June 30, 2015.

 

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,” “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.”

 

 
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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 maintain effective internal controls over financial reporting;

 

Failure to realize the expected results from the 2012 Dansensor acquisition;

 

Decline in overall economic or business conditions;

 

Failure to comply with our bank covenants;

 

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

 

Failure to attract and retain qualified managerial and technical personal;

 

The impact of technological changes that could render our products obsolete;

 

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;

 

The impact of the Euro value decline against the United States dollar;

 

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

 

Reliance on patents, domestic trademarks laws, trade secrets and contractual provisions;

 

Exposure to the fluctuation of our common stock market price;

 

Compliance with securities laws and regulations;

 

Increases in prices for raw materials;

 

Effects of introducing new products into the marketplace with minimal acceptance concurrently;

 

Declining oil prices adversely affecting our revenue in Industrial Analyzers and Other segment;

 

Effects of any potential litigation;

 

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

 

Changes in generally accepted accounting principles

 

Item 3.         Quantitative and Qualitative Disclosures About Market Risk

 

Foreign Currency Exchange Risk

 

Today, nearly 70 percent of our consolidated revenue is generated from international customers. In our U.S. operations, we invoice most of these customers in U.S, dollars, so we do not have significant exposure to foreign currency transaction risk. In our European based operations, we have some exposure to foreign currency fluctuations as we invoice our customers primarily in euros, Danish krone and U.S. dollars. From time to time we use foreign exchange hedging contracts to reduce our exposure in these transactions. We also pay a number of our employees, international suppliers and service providers in their local currency which exposes us to transaction gain or loss. These have not resulted in material amounts in the past. Our foreign operations expose us to foreign currency exchange risk when the Danish krone, euro and yuan currency results of operations are translated to U.S. dollars. Except for the current period, we historically have not experienced any material foreign currency translation gains or losses, however, we are exposed to foreign currency transaction gains or losses related to the valuation of our seller loan obligation denominated in Danish krone. During the six months ended June 30, 2015, we recognized a foreign translation gain of $203,000. Further, foreign currency translation had an unfavorable impact of $2.6 million on our revenue for the six-month period ended June 30, 2015 compared to the prior year period.   

 

 
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To mitigate the effect of any further currency fluctuations in our loan obligations for Dansensor, we purchased a foreign currency contract which acted as an economic hedge against any additional gains or losses. We experienced a net $11,000 foreign currency transactional loss during the six months ended June 30, 2015 primarily due to the weakening of European currencies affecting long lived assets on the consolidated balance sheet. Our balance sheet related translation loss is recorded in accumulated other comprehensive income (loss) on the consolidated balance sheet.

 

Our investments in foreign subsidiaries translated into U.S. dollars are not hedged. Any changes in foreign currency exchange rates are reflected as a foreign currency translation adjustment, a component of accumulated other comprehensive income (loss) in shareholders’ 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 (Exchange Act), 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 the evaluation, the Chief Executive Officer and the 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 June 30, 2015 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 1.         Legal Proceedings

 

None.

 

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, 2014 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 six-month period ended June 30, 2015 that were not registered under the Securities Act of 1933.

 

 

Issuer Repurchases of Equity Securities

 

Other than the withholding of 6,875 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 six-months ended June 30, 2015.

 

Item 3.         Defaults Upon Senior Securities

 

None.

 

Items 4.       Mine Safety Disclosures

 

None.

 

Item 5.         Other Information

 

None.

 

 
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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

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 June 30, 2015, 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 (Loss), (iv) the unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. (filed herewith)

     

 

 
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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: August 7, 2015

/s/ Robert L. Demorest

   
 

Robert L. Demorest

 
 

Chairman, President and Chief

 
 

Executive Officer

 
 

(Principal Executive Officer)

 
     
     

Date:  August 7, 2015

/s/ Elissa Lindsoe

   
 

Elissa Lindsoe

 
 

Chief Financial Officer, Vice President, Treasurer and Secretary 

 
 

(Principal Financial and Accounting Officer)

 

 

 
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MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED JUNE 30, 2015

 

 

EXHIBIT INDEX

 

Exhibit No.

 

Description

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 June 30, 2015, 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 (Loss), (iv) the unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.