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 September 30, 2016

 

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 October 31, 2016, we had 5,810,250 common shares issued and outstanding.

 

  

MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended September 30, 2016

 

		Page Number
PART I.       FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets September 30, 2016 (Unaudited) and December 31, 2015	1
	Condensed Consolidated Statements of Income (Unaudited) Three and nine-months ended September 30, 2016 and 2015	2
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three and nine-months ended September 30, 2016 and 2015	3
	Condensed Consolidated Statements of Cash Flows (Unaudited) Nine-months ended September 30, 2016 and 2015	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5-13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	25
PART II.       OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
Signatures		28
Exhibit Index		29

 

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)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

MOCON, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

 

  

See accompanying notes to condensed consolidated financial statements.

 

 

MOCON, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited - expressed in thousands)

 

  

See accompanying notes to condensed consolidated financial statements.

 

 

MOCON, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - expressed in thousands)

 

 

See accompanying notes to condensed consolidated financial statements.

 

  

MOCON, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2016

(Unaudited)

 

 

 

 

  

 

 

 

 

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 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.

 

Significant Transactions and Financial Trends

 

During 2015, we implemented a series of initiatives, including a reduction in workforce and simplification of business structures (“Realignment Plan”). In conjunction with our One MOCON initiative, the integrations of our European based businesses are near completion which has changed the leadership needs in our business as a whole from one that is operationally based toward another that is designed to fuel growth through our sales strategy. As a result during the nine months ended September 30, 2016, we continued to evaluate our business needs and therefore have incurred approximately $903,000 of realignment expenses. The 2016 realignment activities included the elimination two senior executive positions in our company which included our chief operating officer. 

In January 2016, we entered into an agreement, which was amended on May 18, 2016, to sell substantially all the assets of our odor and aroma business formerly known as Microanalytics (“Microanalytics”) which is located in Round Rock, Texas. The purchase and sale of the assets was finalized and closed on May 18, 2016. The Company received proceeds of $500,000 resulting in a realized gain of $352,000. The remaining $800,000 owed by VAC in accordance with the Agreement will be recognized on the cost recovery method upon receipt.

 

 

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®, CheckMate^TM and CheckPoint^TM series of off-line headspace analyzers and the MAP Check 3^TM 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 II^TM and LeakPointer II^TM series of instruments. We recently introduced a modular leak testing product named LeakProtego that is designed to detect micro leaks in packages.

 

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.

 

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.

 

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 analyzer 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 the Greenlight 930 model of instrument perform rapid and precise measurements to determine the presence or absence of aerobic bacteria in food products or ingredients.

 

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 nine-months ended September 30, 2016 and 2015:

  

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Revenue			100.0				100.0				100.0				100.0
Cost of revenue			42.7				44.6				43.8				45.4
Gross profit			57.3				55.4				56.2				54.6
Selling, general and administrative expenses			33.2				37.4				37.4				38.7
Research and development expenses			7.1				5.9				7.8				6.8
Realignment expense			1.0				1.3				1.9				0.7
Operating income			16.0				10.8				9.1				8.4
Other income (expense), net			(0.2	)			(0.3	)			0.5				0.2
Income before income taxes			15.8				10.5				9.6				8.6
Income tax expense			3.6				2.8				2.6				2.6
Net income			12.2				7.7				7.0				6.0

 

Comparison of Financial Results for the Three and Nine-months Ended September 30, 2016 to September 30, 2015

 

 

Revenue

 

Total revenue for the three-months ended September 30, 2016 was $16.1 million, which is 7 percent higher compared to $15.0 million reported in the same period in 2015. The revenue increase is due to an increase of 17 percent and 6 percent for the Package Testing and Permeation segments, respectively, offset by a decline of 16 percent for the quarter in the Industrial Analyzers and Other segment. Total revenue for the nine-months ended September 30, 2016 and September 30, 2015 was $46.4 million and $45.4 million, respectively.

 

Revenue to foreign customers for the three-months ended September 30, 2016 and 2015, respectively, amounted to 68 percent and 61 percent of total consolidated revenue. Revenue to foreign customers for the nine-months ended both September 30, 2016 and 2015, respectively, amounted to 66 percent of total consolidated revenue.

 

The following table summarizes total revenue by reporting segments for the three and nine-months ended September 30, 2016 and 2015 (expressed in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Package Testing		$	7,572			$	6,454			$	21,903			$	19,684
Permeation			6,343				6,012				17,110				18,080
Industrial Analyzers and Other			2,145				2,556				7,408				7,667
Total Sales		$	16,060			$	15,022			$	46,421			$	45,431

 

The following table sets forth the relationship between various components of domestic and foreign revenue for the three and nine-months ended September 30, 2016 and September 30, 2015 (expressed in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Domestic Revenue		$	5,150			$	5,814			$	15,630			$	15,505
Foreign Revenue:
Europe			6,914				5,650				19,318				17,163
Asia			3,230				2,853				9,500				9,815
Other			766				705				1,973				2,948
Total Foreign Revenue			10,910				9,208				30,791				29,926
Total Revenue		$	16,060			$	15,022			$	46,421			$	45,431

 

Package Testing Products and Services – Revenue in our Package Testing segment increased 17 percent for the three-months ended September 30, 2016, compared to the same period in the prior year, and accounted for 47 percent and 43 percent of our consolidated third quarter revenue in 2016 and 2015, respectively. The increase is due to an increase in demand for our leak and headspace analyzers, specifically the LeakMatic II and CheckMate3, products as compared to the prior year period. Revenue from foreign destinations comprised 72 percent and 74 percent of total revenue in this segment for the three-months ended September 30, 2016 and 2015, respectively. There are increasingly more two income households in Europe which is driving consumer trends toward convenience and sustainable food packaging. In the U.S., growth in modified atmosphere packaging technologies is being driven through overall market expansion as food production lines are upgraded.

  

 

Revenue in our Package Testing segment increased 11 percent for the nine-months ended September 30, 2016 compared to the same period in the prior year, and accounted for 47 percent and 43 percent of our consolidated nine-months revenue in 2016 and 2015, respectively. The increase is due to an increase in demand for our headspace and mixer products as compared to the prior year period. Revenue from foreign destinations comprised 74 percent of total revenue in this segment for each of the nine-months ended September 30, 2016 and September 30, 2015.

 

Permeation Testing Products and Services – Revenue in our Permeation segment increased 6 percent for the three-months ended September 30, 2016 compared to the same period in the prior year, and accounted for 39 percent of our consolidated third quarter revenue in 2016 and 2015. We recorded $123,000 less in odor and aroma consulting revenue during the three months ended September 30, 2016 as a result of the sale of the business formerly known as Microanalytics. The decrease of consulting revenue was offset by an increase of product shipments to foreign destinations. Foreign revenue comprised 74 percent and 59 percent of the shipments in this segment in the third quarter of 2016 and 2015, respectively.

 

Revenue in our Permeation segment decreased 5 percent for the nine-months ended September 30, 2016 compared to the same period in the prior year, and accounted for 37 percent and 40 percent of our consolidated nine-months revenue in 2016 and 2015, respectively. The decrease in the current period is largely attributable to decreased revenue in the domestic markets. Approximately $0.6 million of this decline is driven by the sales force disruption experienced in the first half of 2016 and $0.4 million is driven by the sale of the business formerly known as Microanalytics. Foreign revenue comprised 69 percent and 64 percent of the shipments in this segment for the nine-months ended September 30, 2016 and 2015, respectively.

 

Industrial Analyzers Products and Services and Other – Revenue in our Industrial Analyzers and Other segment, which accounted for 13 percent and 16 percent of our consolidated third quarter revenue in 2016 and 2015, decreased 16 percent during the third quarter 2016 when compared to the same period in 2015. Revenue in this segment is comprised mainly of instruments, sensors and services provided by our Industrial Analyzer products. Shipments of BevAlert systems vary from quarter-to-quarter which was the primary driver in the revenue decline for the third quarter of 2016. Revenue to foreign destinations comprised 35 percent and 33 percent of total revenue in this segment for the three-months ended September 30, 2016 and 2015, respectively.

 

Revenue in our Industrial Analyzers and Other segment, decreased 3 percent during the nine-months ended September 30, 2016 when compared to the same period in 2015. The growth experienced in the sensor and detector products during the first half of 2016 was offset by continued softness in the oil and gas exploration markets throughout the year. Revenue to foreign destinations comprised 39 percent and 49 percent of total revenue in this segment for the nine-months ended September 30, 2016 and 2015, respectively.

  

Gross Profit

 

For the three-months ended September 30, 2016 and 2015, the consolidated gross profit margins were 57 percent and 55 percent, respectively. The gross profit as a percentage of revenue for our Package Testing segment increased by four percentage points to 59 percent in the current quarter, compared to 55 percent in the prior year quarter, due to increased volumes and process improvement initiatives. The gross profit as a percentage of revenue in the Permeation segment increased to 61 percent from 59 percent as compared to the prior year quarter due to increased volume in our products and service which offset a decline in gross profit related to our consulting revenue. Gross profit as a percentage of revenue for the Industrial Analyzers and Other segment for the current quarter decreased by five percentage points to 42 percent compared to 47 percent in the prior year quarter, due to reduced volume.

 

 

For the nine-months ended September 30, 2016 and 2015, the consolidated gross profit margins were 56 percent and 55 percent, respectively. The gross profit as a percentage of revenue for our Package Testing segment increased by three percentage points to 57 percent in the current nine-month period, compared to 54 percent in the prior year nine-month period, due to increased volumes and organization changes as part of our process improvement initiatives. The gross profit as a percentage of revenue in the Permeation segment increased by one percentage point to 59 percent in the current nine-month period, compared to 58 percent in the prior year nine-month period, due to increased volumes. Gross profit as a percentage of revenue for the Industrial Analyzers and Other segment for the current nine-month period decreased to 45 percent compared to 47 percent compared to the prior year nine-month period due to reduced volume.

 

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 $5.3 million, or 33 percent of consolidated revenue, in the three-months ended September 30, 2016, compared to $5.6 million, or 37 percent of consolidated revenue, in the same period of 2015. SG&A expenses were $17.3 million, or 37 percent of consolidated revenue, in the nine-months ended September 30, 2016, compared to $17.6 million, or 39 percent of consolidated revenue, in the same period of 2015. Cost reductions from our recent realignment plans were partially offset by increased professional fees and new hires.

 

Research and Development Expenses

 

Research and development (R&D) expenses were $1.1 million, or 7 percent of consolidated revenue in the third quarter 2016, compared to $886,000, or 6 percent of revenue in the same period of 2015. R&D expenses were $3.6 million, or 8 percent of consolidated revenue in the nine-months ended, September 30, 2016, compared to $3.1 million, or 7 percent of revenue in the same period of 2015. The spending levels described above are within our planned level of spending which we project to be between 6 percent and 8 percent of revenue each year.

 

Realignment Expense

 

Realignment expense was $153,000 and $903,000 for the three and nine-months ended September 30, 2016. This is related to personnel changes initiated in 2016 including expenses for payments owed under the severance agreements for personnel.

 

In 2015, the realignment expenses for the three and nine-months ended was $190,000 and $318,000 related to simplifying our legal entity structure.

 

 

Other Income (Expense), net

 

Other income (expense), net for the three and nine-months ended September 30, 2016 and 2015 was as follows (expressed in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Interest expense		$	(8	)		$	(31	)		$	(49	)		$	(96	)
Foreign currency exchange gain (loss)			(23	)			(17	)			(60	)			186
Other			(7	)							(7	)
Gain on sale of business			-				-				352				-
Total other income (expense)		$	(38	)		$	(48	)		$	236			$	90

 

The gain on sale of business recognized in 2016 relates to the sale of our business formerly known as Microanalytics.

 

The nine months ended September 30, 2015 foreign currency exchange gain of $186,000 was primarily a result of the timing of payments made in foreign currencies during the first half of 2015 for payables incurred prior to the strengthening of the U.S. dollar.  During 2016, foreign currency exchange rates have not experienced significant fluctuations as compared to 2015.

 

Income Tax Expense

 

Our provision for income tax expense was 23 percent and 27 percent of income before income taxes for the three months ended September 30, 2016 and 2015, respectively. Our provision for income tax expense was 29 percent and 31 percent of income before income taxes for the nine-months ended September 30, 2016 and 2015, respectively. The rates in the third quarter and first nine months of 2016 and 2015 were lower than the statutory rate due primarily to the effect of foreign operations where tax rates tend to be lower, the domestic manufacturing deduction, the research credit, and the provision to return discrete items related to returns filed in the three month periods. The decrease in the effective tax rate for 2016 as compared to 2015 is primarily due to permanent enactment of the research and development credit whereas previously the related tax credit was not in the effective tax rate until enacted later in the year.

 

Based on current projected annual operating results, current income tax rates, and current legislation, we expect the effective tax rate for the remainder of 2016 to be consistent with our experience in the nine-months of 2016. 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 each of these jurisdictions.

 

Operating Income and Net Income

 

Operating income was $2.6 million in the third quarter 2016 compared to $1.6 million in the third quarter of 2015.  Operating income was $4.2 million in the nine months ended September 30, 2016 compared to $3.8 million for the comparable period 2015. The increase for the three and nine-months ended September 30, 2016 is primarily due to increased margin contribution, reduced SG&A offset in part by the realignment costs incurred as discussed above.

 

Net income was approximately $2 million in the third quarter 2016, compared to a net income of approximately $1.2 million in the third quarter 2015. Diluted net income per share was $0.34 and $0.20 in the three-months ended September 30, 2016 and September 30, 2015, respectively. Net income was approximately $3.2 million in the first three quarters of 2016, compared to a net income of approximately $2.7 million in the first three quarters of 2015. Diluted net income per share was $0.56 and $0.46 in the nine-months ended September 30, 2016 and September 30, 2015, respectively.

 

 

Liquidity and Capital Resources

 

Total cash and cash equivalents increased $1.5 million to $7.8 million during the nine-months ended September 30, 2016, compared to $6.3 million at December 31, 2015. Of the September 30, 2016 balance, $5.7 million was held outside of the United States. The year-to-date increase in cash and cash equivalents was primarily due to cash provided from operations of $6.0 million, effect of exchange rate changes of $146,000 offset by cash used in financing of $4.6 million.

 

Of the $10.0 million available, we had zero and $2.8 million, respectively, outstanding on the revolving lines of credit as of September 30, 2016 and December 31, 2015. The U.S. revolving line of credit accrues interest at 1.50 percent over the one-month LIBOR rate, which totaled 2.02 percent at September 30, 2016. Our borrowings related to our U.S. revolving line of credit are due on August 26, 2018, and we are subject to certain financial and restrictive covenants.

 

Our working capital, current assets minus current liabilities, increased by $100,000 to $15.5 million compared to $15.1 million as of September 30, 2016 and December 31, 2015, respectively. Our cash and cash equivalents balance was positively impacted during the nine-months ended September 30, 2016 by approximately $146,000 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.

 

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 is 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, we intend to 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 seek 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 nine-months of 2016, cash provided by operations totaled approximately $6.0 million, due primarily to net income of $3.2 million, adjusted by non-cash depreciation and amortization of $1.9 million, a decrease in inventory of $499,000, an increase in accrued income taxes and expenses of $1.0 million and an increase in deferred revenue of $326,000 which was offset by an increase in accounts receivable of $606,000, a gain on sale of business of $352,000, a decrease in accrued compensation of $328,000 due primarily to severance and annual bonus payments.

 

 

In the first nine-months of 2015, cash provided by operations totaled approximately $4.4 million, due primarily to net income of $2.7 million, adjusted by non-cash depreciation and amortization of $1.8 million, and a decrease in accounts receivable of $704,000, a decrease in inventory of $113,000 which was offset by a decrease in accrued compensation of $1.0 million and a decrease in accounts payable of $1.5 million. 

 

Cash Flow from Investing Activities

 

Cash used in investing activities totaled approximately $28,000 in the first nine-months of 2016 due primarily to proceeds from the sale of business of $500,000 and other investing activities of $109,000, offset by the purchase of property, plant and equipment and intangible assets totaling $637,000.

 

Cash used in investing activities totaled approximately $1.1 million in the first nine-months of 2015 due primarily to the purchase of property, plant and equipment and intangible assets totaling $1.1 million.

 

Cash Flow from Financing Activities

 

Cash used in financing activities in the first nine-months of 2016 totaled approximately $4.6 million due primarily to dividends paid of $1.9 million and the payments less proceeds for the line of credit of $2.8 million.

 

Cash used in financing activities in the first nine-months of 2015 totaled approximately $2.8 million due primarily to dividends paid of $1.9 million and payment on term debt of $692,000. These uses of cash were partially offset by the proceeds received from stock option exercises of $161,000.

 

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. Under the credit agreement with the Bank, we are able to purchase up to $2.0 million in shares of our common stock without the Bank’s approval.

 

Contractual Obligations

 

The following table summarizes our future contractual cash obligations as of September 30, 2016 (expressed in thousands):

 

		Payments Due By Period
		Total				Less than 1 year				1-3 years				4-5 years				After 5 years
Operating and capital leases			7,679				1,042				1,772				1,472				3,393
Purchase obligations			5,990				5,990				-				-				-
Realignment accrual			793				619				174				-				-
Total contractual cash obligations		$	14,462			$	7,651			$	1,946			$	1,472			$	3,393

 

The severance and other payments we expect to make in connection with our Realignment Plans implemented during 2015 and 2016, the payments expected are included in the contractual obligations table above.

 

 

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 (FASB) issued Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2017, 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 FASB issued ASU 2015-11, Inventory – Simplifying 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.

 

Leases

 

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. The new guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption of the update is permitted. We are currently evaluating the impact of this guidance on our results of operations and financial position.

 

Stock Compensation

 

In March 2016, The FASB issued ASU 2016-09, Compensation-Stock Compensation. ASU 2016-09 is an effort to reduce cost and complexity and improve the accounting for share-based payment awards issued to employees for public and private companies. The new guidance is effective for interim and annual periods beginning after December 15, 2016. Early adoption of the update is permitted. 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, 2015. 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 September 30, 2016.

 

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.”

 

 

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.

 

●

Decline in overall economic or business conditions;

 

●

Failure to comply with our bank covenants;

 

●

Failure to develop new products and applications, or acquire complementary businesses and productions;

 

●

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;

 

●

The impact of cash held outside the United States;

 

●

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

 

●

Fluctuations in foreign currency exchange rates and interest rates;

 

●

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;

 

●

Exposure to risks in evaluation of internal control;

 

●

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;

 

●

Unanticipated charges and unknown cost savings through a realignment plan.

 

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

 

Foreign Currency Exchange Risk

 

Today, nearly 66 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 domestic operations. 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 2015 period, we historically have not experienced any material foreign currency translation gains or losses. During the nine months ended September 30, 2016, we recognized a foreign currency exchange loss of $60,000.

 

 

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 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 September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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, 2015 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 nine-month period ended September 30, 2016 that were not registered under the Securities Act of 1933.

 

 

Issuer Repurchases of Equity Securities

 

We did not repurchase any equity securities of MOCON, Inc. during the nine-months ended September 30, 2016.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Items 4.

Mine Safety Disclosures

 

None.

 

Item 5.

Other Information

 

 

Item 6.

Exhibits

 

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

 

Exhibit No.		Description
10.1		First Amendment to MOCON, Inc. 2015 Employee Stock Purchase plan (filed herewith)
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 September 30, 2016, 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. (filed herewith)

 

  

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: November 4, 2016	/s/ Robert L. Demorest
	Robert L. Demorest
	Chairman, President and Chief
	Executive Officer
	(Principal Executive Officer)
Date:  November 4, 2016	/s/ Elissa Lindsoe
	Elissa Lindsoe
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

 

MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2016

 

EXHIBIT INDEX

 

Exhibit No.		Description
10.1		First Amendment to MOCON, Inc. 2015 Employee Stock Purchase plan (filed herewith)
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 September 30, 2016, 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.

 

 

-29-