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 March 31, 2017

 

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 ☐ Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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 May 3, 2017, we had 5,867,127 common shares issued and outstanding.

 

  

MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended March 31, 2017

 

		Page Number
PART I.      FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets March 31, 2017 (Unaudited) and December 31, 2016	1
	Condensed Consolidated Statements of Income (Loss) (Unaudited) Three-months ended  March 31, 2017 and  2016	2
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three-months ended  March 31, 2017 and  2016	3
	Condensed Consolidated Statements of Cash Flows (Unaudited) Three-months ended  March 31, 2017 and  2016	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5-11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II.     OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	23
Signatures		24
Exhibit Index		25

 

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.

 

 

MOCON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(expressed in thousands, except share amounts)

 

		March 31,
		2017				December 31,
		(Unaudited)				2016
Assets
Current assets:
Cash and cash equivalents		$	11,162			$	8,313
Trade accounts receivable, less allowance for doubtful accounts of $149 in 2017 and $180 in 2016			10,443				10,726
Other receivables			16				21
Inventories			7,515				6,728
Prepaid income taxes			769				498
Prepaid expenses, other			1,003				876
Total current assets			30,908				27,162
Property, plant, and equipment, net of accumulated depreciation of $9,078 in 2017 and $8,537 in 2016			5,394				5,457
Goodwill			7,337				7,180
Intangible assets, net			7,661				7,831
Other assets			118				118
Deferred income taxes			296				700
Total assets		$	51,714			$	48,448
Liabilities and Shareholders’ Equity
Current liabilities:
Current maturities of long-term notes payable		$	82			$	83
Accounts payable			4,906				2,905
Accrued compensation and related expenses			3,070				3,948
Other accrued expenses			1,019				947
Accrued product warranties			204				209
Accrued income taxes			1,680				999
Dividends payable			704				644
Deferred revenue			1,430				980
Total current liabilities			13,095				10,715
Line of credit			1,200				-
Notes payable			61				80
Deferred income taxes			1,026				1,068
Accrued income taxes			134				134
Total noncurrent liabilities			2,421				1,282
Total liabilities			15,516				11,997
Shareholders’ equity:
Capital stock – undesignated. Authorized 3,000,000 shares; none issued and outstanding in 2017 and December 31,			-				-
Common stock – $0.10 par value. Authorized 22,000,000 shares; issued and outstanding 5,867,127 shares in 2017 and 5,854,413 shares in 2016			585				585
Additional paid-in capital			8,982				8,617
Retained earnings			32,410				33,144
Accumulated other comprehensive loss			(5,779	)			(5,895	)
Total shareholders’ equity			36,198				36,451
Total liabilities and shareholders' equity		$	51,714			$	48,448

 

See accompanying notes to consolidated financial statements.

 

 

MOCON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Loss)

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

 

		Three Months Ended March 31,
		2017				2016
Revenue:
Products		$	12,345			$	11,384
Services			2,726				2,812
Consulting			425				534
Total revenue			15,496				14,730
Cost of revenue:
Products			5,272				4,970
Services			1,137				1,174
Consulting			423				482
Total cost of revenue			6,832				6,626
Gross profit			8,664				8,104
Selling, general and administrative expenses			6,488				6,138
Research and development expenses			1,358				1,203
Operating income			818				763
Other expense, net			(40	)			(35	)
Income before income taxes			778				728
Income taxes			805				240
Net income (loss)		$	(27	)		$	488
Net income (loss) per common share:
Basic		$	0.00			$	0.08
Diluted		$	0.00			$	0.08
Weighted average common shares outstanding:
Basic			5,856				5,797
Diluted			5,856				5,816
Cash Dividends declared per common share		$	0.12			$	0.11

 

See accompanying notes to consolidated financial statements.

 

 

MOCON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited - expressed in thousands)

 

		Three months Ended March 31,
		2017				2016
Net income (loss)		$	(27	)		$	488
Other comprehensive income:
Cumulative translation adjustment			116				897
Comprehensive income		$	89			$	1,385

 

See accompanying notes to consolidated financial statements.

 

 

MOCON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited - expressed in thousands)

 

		Three months ended March 31,
		2017				2016
Cash flows from operating activities:
Net income (loss)		$	(27	)		$	488
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Share-based compensation expense			205				186
Loss on disposition of long-term assets			5				18
Depreciation and amortization			668				689
Deferred income taxes			348				(171	)
Changes in operating assets and liabilities:
Trade accounts receivable			358				(1,233	)
Other receivables			5				174
Inventories			(690	)			165
Prepaid income taxes			(266	)			(345	)
Prepaid expenses			39				(222	)
Accounts payable			1,752				399
Accrued compensation and related expenses			(509	)			(966	)
Other accrued expenses			62				121
Accrued product warranties			(6	)			16
Accrued income taxes			665				276
Deferred revenue			447				498
Net cash provided by operating activities			3,056				93
Cash flows from investing activities:
Purchases of property, plant and equipment			(175	)			(137	)
Proceeds from sale of property and equipment			-				43
Purchases of patents and other intangible assets			(15	)			(8	)
Other			4				-
Net cash used in investing activities			(186	)			(102	)
Cash flows from financing activities:
Payments on notes payable and seller financed note payable			(20	)			(17	)
Proceeds from the line of credit			1,200				850
Payments on the line of credit			-				(793	)
Proceeds from the exercise of stock options			147				19
Proceeds from ESPP			12				-
Dividends paid			(644	)			(637	)
Net cash provided by (used in) financing activities			695				(578	)
Effect of exchange rate changes on cash and cash equivalents			(716	)			205
Net increase (decrease) in cash and cash equivalents			2,849				(382	)
Cash and cash equivalents:
Beginning of year			8,313				6,344
End of year		$	11,162			$	5,962
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes		$	119			$	205
Cash paid during the year for interest		$	-			$	26
Supplemental schedule of noncash investing and financing activities:
Dividends accrued		$	704			$	637
Purchases of prepaid expenses, fixed assets and intangibles in accounts payable		$	236			$	142
Transfer of inventory to fixed assets		$	30			$	32

 

See accompanying notes to consolidated financial statements.

 

 

MOCON, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED March 31, 2017

(Unaudited)

 

Note 1 – Condensed Consolidated Financial Statements

 

The condensed consolidated balance sheet as of March 31, 2017, the condensed consolidated statements of income and comprehensive income, for the three-months ended March 31, 2017 and 2016 have been prepared in accordance with accounting principles generally accepted in the United States of America. These interim unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows at March 31, 2017, 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. Certain amounts have been reclassified from the prior year presentation to conform to the current year presentation.

 

The results of operations for the three-months ended March 31, 2017 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, 2016, 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 Package Testing Products and Services (“Package Testing”), Permeation Products and Services (“Permeation”), 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):

 

		March 31,				December 31,
		2017				2016
Finished products		$	1,754			$	1,252
Work-in-process			2,061				1,991
Raw materials			3,700				3,485
Total Inventory		$	7,515			$	6,728

  

  

Note 3 – Net Income (loss) Per Common Share

 

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) 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 (loss) per common share – basic, and net income (loss) per common share – diluted, for the three-months ended March 31, 2017 and 2016 (expressed in thousands):

 

		Three Months Ended
		March 31,
		2017				2016
Weighted shares of common stock outstanding - basic			5,856				5,797
Dilutive impact of share-based awards			-				19
Weighted shares of common stock outstanding - diluted			5,856				5,816

  

Outstanding stock options totaling 797,294 and 666,235 for the three-months ended March 31, 2017 and 2016 respectively, were excluded from the net income (loss) 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 three-months ended March 31, 2017 were as follows (expressed in thousands):

 

										Industrial
		Package Testing				Permeation				Analyzers & Other				Total
Balance as of December 31, 2016		$	4,819			$	1,751			$	610			$	7,180
Foreign currency translation			70				87				-				157
Balance as of March 31, 2017		$	4,889			$	1,838			$	610			$	7,337

  

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 or earlier if impairment indicators are identified.

 

  

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

 

		As of March 31, 2017
						Accumulated
		Cost				Amortization				Net
Patents		$	2,050			$	(527	)		$	1,523
Trademarks and trade names			3,269				(936	)			2,333
Developed technology			6,017				(3,343	)			2,674
Customer relationships			704				(391	)			313
Internally developed software			1,085				(290	)			795
Other intangibles			214				(191	)			23
		$	13,339			$	(5,678	)		$	7,661

 

		As of December 31, 2016
						Accumulated
		Cost				Amortization				Net
Patents		$	2,021			$	(508	)		$	1,513
Trademarks and trade names			3,219				(886	)			2,333
Developed technology			5,923				(3,125	)			2,798
Customer relationships			693				(366	)			327
Internally developed software			1,085				(263	)			822
Other intangibles			214				(176	)			38
		$	13,155			$	(5,324	)		$	7,831

  

Total amortization expense for the three-months ended March 31, 2017 and 2016 was $285,100 and $299,000, respectively. Projects in process are not amortized until the patent or trademark is granted by the regulatory agency or the asset is ready for use.

 

Estimated amortization expense for the remainder of 2017 and each of the four succeeding fiscal years and thereafter based on the intangible assets as of March 31, 2017 is approximately $0.8 million, $1.1 million, $1.1 million, $1.1 million, $0.5 million, and $2.4 million respectively.

 

Note 5 – Warranty

 

We provide warranties 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, at our location. Operator abuse, improper use, alteration, damage resulting from accident, or failure to follow manufacturer’s directions are excluded from warranty coverage.

 

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

 

  

Warranty provisions and claims for the three-months ended March 31, 2017 and 2016 are as follows (expressed in thousands):

 

		Three Months Ended
		March 31,
		2017				2016
Beginning balance		$	209			$	223
Warranty provisions			132				144
Warranty claims			(137	)			(125	)
Ending Balance		$	204			$	242

 

 

Note 6 – Debt

 

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

 

		March 31, 2017				December 31, 2016
Capital leases		$	143			$	163
Less current portion of long-term notes payable			82				83
Total long-term notes payable		$	61			$	80

 

 

In the U.S., we have a $10.0 million secured line of credit with a maturity date of August 26, 2018. Interest is charged monthly at one-month LIBOR (0.79 percent) plus 1.50 basis points which totaled 2.29 percent and 1.94 percent at March 31, 2017 and 2016, respectively. The line of credit is secured by our assets with the exception of the number of MOCON Europe A/S shares of outstanding stock that exceeds 65 percent of the total shares outstanding. We had $1.2 million and $0 outstanding on the line of credit at March 31, 2017 and December 31, 2016, respectively.

 

Additionally, we have a DKK 5 million (approximately $0.7 million) available line of credit of which no amount was outstanding as of March 31, 2017 and December 31, 2016. Outstanding borrowings are charged interest at a fixed rate of 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, acquisitions, making capital and lease expenditures and making share repurchases.

 

As of March 31, 2017, the future minimum principal payments of the notes payable for the remainder of 2017 and each of the succeeding fiscal years to the maturity of the note are as follows (expressed in thousands):

 

Minimum principal Payments
2017		$	63
2018			59
2019			21
Total		$	143

  

  

Note 7 – Realignment Expenses

 

Amounts accrued and cash payments for the three months ended March 31, 2017 and 2016 were as follows (expressed in thousands):

 

		Three Months Ended
		March 31,
		2017				2016
Beginning Balance		$	547			$	620
Cash Payments			(288	)			(508	)
Ending Balance		$	259			$	112

 

 

Note 8 – Income Taxes

 

Our provision for income tax expense was 103 percent and 33 percent of income before income taxes for the three-months ended March 31, 2017 and March 31, 2016, respectively. The rate in the three-months ended March 31, 2017 was higher than the statutory rate due primarily to discrete events occurring in the quarter. These discrete events include transaction costs incurred during the quarter and additional reserves for uncertain tax positions accrued.

 

As of March 31, 2017 and December 31, 2016, the liability for gross unrecognized tax benefits was $403,000 and $126,000. The increase in the gross unrecognized tax benefits is a result of the recording of an estimated exposure for a ruling we received from the Danish taxing authority. The amount of unrecognized tax benefits is likely to change in the next twelve months as a result of examination conclusion. It is expected that the amount of the unrecognized tax benefits for all other positions we have identified will not materially change in the next twelve months, with the exception of lapsing statutes of limitation.

 

Note 9 – Share-Based Compensation

 

Employee Stock Purchase Plan

 

The Company’s Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase newly issued shares of the Company’s common stock at a discount through payroll deductions. The Purchase Plan consists of a 6-month offering period whereby employees can purchase shares at a price equal to 85 percent of the market value at either the beginning of the offering period or the end of the offering period, whichever price is lower. The 15 percent discount is expensed over the offering period as share-based compensation expense. A maximum of 50,000 common shares can be purchased through the ESPP. During the year ended December 31, 2016, 3,585 shares were purchased under the ESPP. As of the year ended December 31, 2016, the Company had 46,415 shares of common stock available for future purchases under the ESPP. The weighted average grant date fair value of the Company’s ESPP purchase right was $2.35 during the year ended December 31, 2016.

 

Stock Incentive Plans

 

As of March 31, 2017, we have reserved 165,800 shares of common stock for options and other share-based incentive awards that are still available for grant under our 2015 stock incentive plan, and 797,294 shares for options that have been granted under either our 2006 or 2015 stock incentive plans but have not yet been exercised. We issue new shares of common stock upon exercise of stock options.

 

  

Share-based compensation expense recognized in the consolidated financial statements are as follows (expressed in thousands):

 

		Three Months Ended
		March 31,
		2017				2016
Cost of share-based compensation - stock incentive plans		$	200			$	186
Cost of share-based compensation - ESPP			5				-
Amount charged against net income (loss)		$	205			$	186

 

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. 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 or ten year as applicable contractual term. Forfeitures are based on historical experience. The dividend yield is calculated based upon the dividend payments made during the prior four quarters as a percent of the average stock price for that period.

 

A summary of the option activity for the first three months of 2017 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, 2016			814,544			$	16.04				4.53			$	2,820
Granted			15,000				18.70				6.80				0
Exercised			(29,000	)			15.45				3.10				186
Cancelled or expired			(3,250	)			16.87				0.00				0
Options outstanding, March 31, 2017			797,294			$	16.11				4.37			$	4,619
Options exercisable, March 31, 2017			544,144			$	15.19				3.49			$	3,652

 

The total intrinsic value of options exercised was $186,000 and $7,000 during the three-months ended March 31, 2017 and 2016, respectively.

 

As of March 31, 2017, there was $803,000 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 1.4 years. The total fair value of option shares vested during the three-months ended March 31, 2017 and 2016 was $0 and $88,000, respectively.

  

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. Beginning in 2017, segment performance is evaluated at gross profit. We no longer allocate general corporate expenses to the reportable segments. 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.

 

  

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 Permeation segment includes instruments and services that measure the rate at which various gases and vapors permeate through a variety of materials. 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, 2016. Intersegment revenue for the three-months ended March 31, 2017 and 2016 were insignificant.

 

Financial information by reportable segment for the three-months ended March 31, 2017 and 2016 is as follows (expressed in thousands):

 

		Package Testing				Permeation				Industrial Analyzers and Other				Consolidated
Three Months Ended March 31, 2017
Revenue		$	7,436			$	5,583			$	2,477			$	15,496
Gross profit			4,382				3,219				1,063				8,664
Three Months Ended March 31, 2016
Revenue		$	7,002			$	5,283			$	2,445			$	14,730
Gross profit			4,031				2,995				1,078				8,104

 

 

Note 11 – Subsequent event

  

On April 16, 2017, we entered into an Agreement and Plan of Merger (“Merger Agreement”), with AMETEK, Inc. Under the terms of the Merger Agreement, at the effective time of the Merger, contemplated by the Merger Agreement, each share of MOCON’s common stock issued and outstanding at the time of the Merger, other than shares owned by AMETEK or any of its subsidiaries or shares for which dissenter’s rights are validly asserted and not withdrawn, will be automatically cancelled and converted into the right to receive $30.00 in cash, without interest, less any applicable taxes required to be withheld. At the effective time of the Merger, each outstanding stock option to purchase MOCON common stock will vest in full and will be cancelled and converted into the right to receive an amount in cash equal to (i) the number of shares subject to the option multiplied by (ii) the excess of $30.00 over the exercise price per share of such option, less any required tax withholding. The closing of the Merger is subject to customary closing conditions, including the approval of MOCON's shareholders and applicable regulatory approvals. The merger is expected to be completed in the late second quarter or early third quarter of calendar year 2017.

 

 

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 other 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.

 

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 instruments perform rapid and precise measurements to determine the presence or absence of aerobic bacteria in food products or ingredients. In addition to instruments, we sell vials and swab kits which provide a recurring revenue opportunity. Revenue from these products do not contribute to our total revenue at a meaningful level.

 

  

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-months ended March 31, 2017 and 2016:

 

		Three Months Ended
		March 31,
		2017				2016
Revenue			100.0				100.0
Cost of revenue			44.1				45.0
Gross profit			55.9				55.0
Selling, general and administrative expenses			41.9				41.7
Research and development expenses			8.7				8.2
Operating income			5.3				5.2
Other income (expense), net			(0.3	)			(0.2	)
Income before income taxes			5.0				4.9
Income tax expense			5.2				1.6
Net income (loss)			(0.2	)			3.3

  

Comparison of Financial Results for the three-months ended March 31, 2017 and 2016

 

Revenue

 

Total revenue for the three-months ended March 31, 2017 was $15.5 million, which is 5 percent higher compared to $14.7 million reported in the same period in 2016. The revenue increase is due to an increase of 6 percent, 6 percent, and 1 percent for the Package Testing, Permeation, and Industrial Analyzers and Other segments, respectively.

 

Revenue to foreign customers for the three-months ended March 31, 2017 and 2016, respectively, amounted to 66 percent and 68 percent of total consolidated revenue.

 

The following table summarizes total revenue by reporting segments for the three-months ended March 31, 2017 and 2016 (expressed in thousands):

 

		Three Months Ended
		March 31,
		2017				2016
Package Testing		$	7,436			$	7,002
Permeation			5,583				5,283
Industrial Analyzers and Other			2,477				2,445
Total Revenue		$	15,496			$	14,730

  

 

The following table sets forth the relationship between various components of domestic and foreign revenue for the three-months ended March 31, 2017 and 2016 (expressed in thousands):

 

		Three Months Ended
		March 31,
		2017				2016
Domestic Revenue		$	5,241			$	4,642
Foreign Revenue:
Europe			6,207				6,434
Asia			3,195				2,876
Other			853				778
Total Foreign Revenue			10,255				10,088
Total Revenue		$	15,496			$	14,730

  

Package Testing Products and Services – Revenue in our Package Testing segment increased 6 percent for the three-months ended March 31, 2017, compared to the same period in the prior year, and accounted for 48 percent of our consolidated first quarter revenue in both 2017 and 2016, respectively. Revenue from foreign destinations comprised 76 percent of total revenue in this segment for both of the three-months ended March 31, 2017 and 2016. The increase is primarily due to the continued growth in demand for our products in the US and Europe. The euro declined by three percent year over year which negatively impacted our Package Testing segment revenue growth by three percentage points.

 

Permeation Testing Products and Services – Revenue in our Permeation segment increased 6 percent for the three-months ended March 31, 2017 compared to the same period in the prior year, and accounted for 36 percent of our consolidated first quarter revenue in 2017 and 2016. Foreign revenue comprised 60 percent and 71 percent of the shipments in this segment in the first quarter of 2017 and 2016, respectively. Our Permeation segment growth is driven by an increase in instruments domestically. The year-over-year euro decline negatively impacted our Permeation segment growth rate by one percentage point.

 

Industrial Analyzers Products and Services and Other – Revenue in our Industrial Analyzers and Other segment accounted for 16 percent for both of our consolidated first quarter revenue in 2017 and 2016. Revenue in this segment increased one percent for the quarter ended March 31, 2017 compared to the year ago period and is comprised mainly of instruments, sensors and services provided by our Industrial Analyzer products. Revenue to foreign destinations comprised 49 percent and 40 percent of total revenue in this segment for the three-months ended March 31, 2017 and 2016, respectively. The increase in revenue was driven by growth in BevAlert instruments and sensors which was offset by a decrease in our microbial detection products.

 

Gross Profit

 

For the three-months ended March 31, 2017 and 2016, 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 1 percentage point to 59 percent in the current quarter, compared to 58 percent in the prior year quarter. The gross profit as a percentage of revenue in the Permeation segment increased to 58 percent from 57 percent as compared to the prior year quarter. Gross profit as a percentage of revenue for the Industrial Analyzers and Other segment for the current quarter decreased by one percentage points to 43 percent compared to 44 percent in the prior year quarter. The overall increase in gross profit as a percentage of revenue was driven by volume based efficiencies in our Permeation and Package Testing segments.

 

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 consistent at $6.5 million, or 42 percent of consolidated revenue, in the three-months ended March 31, 2017, compared to $6.1 million, or 42 percent of consolidated revenue, in the same period of 2016. We incurred approximately $0.3 million in expenses during the first quarter of 2017 related to the recently announced merger agreement with AMETEK.

 

Research and Development Expenses

 

Research and development (R&D) expenses were $1.4 million, or 9 percent of consolidated revenue in the first quarter 2017, compared to $1.2 million, or 8 percent of revenue in the same period of 2016. The spending levels described above are slightly higher than our target 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-months ended March 31, 2017 and 2016 was as follows (expressed in thousands):

 

		Three Months Ended
		March 31,
		2017				2016
Interest expense		$	-			$	(26	)
Foreign currency exchange loss			(37	)			(9	)
Other			(3	)			-
Total other expense		$	(40	)		$	(35	)

 

 

Income Tax Expense

 

Our provision for income tax expense was 103 percent and 33 percent of income before income taxes for the three-months ended March 31, 2017 and March 31, 2016, respectively. The rate in the three-months ended March 31, 2017 was higher than the statutory rate due primarily to discrete events occurring in the quarter. These discrete events include transaction costs incurred during the quarter and additional reserves for uncertain tax positions accrued. The effective tax rate before discrete items for the three-months ended March 31, 2017 and March 31, 2016 were 34 percent and 33 percent, respectively.

 

Based on current projected annual operating results, current income tax rates, and current legislation, we expect the effective tax rate for the remainder of 2017 to be consistent with our experience in the three-months of 2017, absent the discrete events that occurred. 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 $818,000 in the first quarter 2017 compared to $763,000 in first quarter of 2016.  The increase for the three-months ended March 31, 2017 is primarily due to increased sales and the resulting higher margins.

 

Net loss was approximately $0.03 million in the first quarter of 2017 and net income was approximatley $0.5 million in the first quarter of 2016. Diluted net income per share was $0.00 and, $0.08 in the three-months ended March 31, 2017 and 2016, respectively.

 

  

Liquidity and Capital Resources

 

Total cash and cash equivalents increased $2.9 million to $11.2 million during the three-months ended March 31, 2017, compared to $8.3 million at December 31, 2016. Of the March 31, 2017 balance, $10.1 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 $3.1 million, net cashed provided by financing activities of $0.7 million, offset by the effect of exchange rate changes of $0.7 million and cash used in investing of $0.2 million.

 

At March 31, 2017, we had $1.3 million in total debt compared to $0.2 million on December 31, 2016. Total debt on March 31, 2017 is comprised of capital leases for equipment of $0.1 million and an advance on the line of credit of $1.2 million.

 

Our working capital as of March 31, 2017 increased approximately $1.4 million to $17.8 million, compared to $16.4 million at December 31, 2016. This increase was primarily due to an increase in cash, inventory and prepaid expenses, and a decrease in accrued compensation, partially offset by a decrease in accounts receivable, and increases in accounts payable, accrued income taxes, and deferred revenue.

 

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 have historically been indefinitely reinvested in non-U.S.A. subsidiaries, resulting in the majority of our cash being held outside the U.S.A. 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. taxes with the related foreign tax credit, such that a net benefit is available from unremitted non-U.S.A. earnings. Therefore, we intend to remit and use the cash generated from non-U.S.A. operations as well as borrowings, if needed, to meet our U.S.A. cash needs. As the remittance is expected to occur within the foreseeable future, we have recorded an income tax benefit associated with this remittance. Further, we intend to accrue income taxes on unremitted earnings going forward to reflect the expectation of future remittances to the U.S.A., which may increase our effective tax rate upon utilization of existing foreign tax credits.

 

Cash Flow

 

Cash Flow from Operating Activities

 

Our primary source of funds has historically been cash provided by operating activities. In the first three months of 2017, cash provided by operations totaled approximately $3.1 million, due primarily to a net loss of $0.03 million, adjusted by non-cash depreciation and amortization of $0.7 million, an increase in deferred revenue of $0.5 million, an increase in accounts payable of $1.8 million, partially offset by an increase in inventory of $0.7 million and a decrease in accrued compensation of $0.5 million.

 

In the first three-months of 2016, cash provided by operations totaled approximately $0.1 million, due primarily to net income of $0.5 million, adjusted by non-cash depreciation and amortization of $0.7 million, and a decrease in inventory of $0.2 million and an increase in accounts payable of $0.4 million which was offset by an increase in accounts receivable of $1.2 million, a decrease in accrued compensation of $1.0 million due primarily to severance and annual bonus payments.  

 

Cash Flow from Investing Activities

 

Cash used in investing activities totaled approximately $0.2 million in the first three months of 2017 due primarily to the purchase of property, plant and equipment and intangible assets totaling $0.2 million.

 

  

Cash used in investing activities totaled approximately $0.1 million in the first three-months of 2016 due primarily to the purchase of property, plant and equipment and intangible assets totaling $0.1 million.

 

Cash Flow from Financing Activities

 

Cash provided by financing activities in the first three months of 2017 totaled $0.7 million due primarily to proceeds from the line of credit of $1.2 million offset by dividends paid of $0.6 million.

 

Cash used in financing activities in the first three-months of 2016 totaled approximately $0.6 million due primarily to dividends paid of $0.6 million.

 

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 terms of the Merger Agreement we are prohibited from repurchasing shares of our common stock without the consent of AMETEK.

 

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 FASB 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, 2017, and interim periods within those annual periods. The Company intends to adopt the new standard in the first quarterly period of fiscal 2018. We do not believe adoption of the new standard will have a material impact on our Consolidated Statements of Income, but expect expanded financial statement footnote disclosure. We are continuing to evaluate the impacts of the pending adoption, and have engaged a third party to assist management in assessing the impact. As such, our preliminary assessments are subject to change.

 

Inventory – Simplifying the Measurement of Inventory

 

In July 2015, the FASB issued new accounting guidance in effort to simplify the measurement of Inventory. We adopted the standard effective January 1, 2017. There were no material impacts to our results of operations and financial position.

 

Leases

 

In February 2016, the FASB issued new accounting guidance, which 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.

 

  

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, 2016. Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed consolidated financial statements in accordance with generally accepted accounting principles. There have been no changes in the policies for our accounting estimates for the quarter ended March 31, 2017.

 

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.

 

 

●

The impact of our pending merger with AMETEK, including uncertainties as to if or when the closing of the merger may occur; the effects of disruption from the announcement of the entry into the merger agreement including possibly making it more difficult to maintain relationships with our employees, customers and vendors; transaction costs and the restrictions on us contained in the merger agreement;

●

Decline in overall economic or business conditions;

●

Failure to comply with our bank covenants;

●

Failure to develop new products and applications.

●

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;

●

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. We have historically not experienced material foreign currency translation gains or losses. During the three-months ended March 31, 2017, we recognized a foreign currency exchange loss of $37,000.

 

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 March 31, 2017 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 under the heading “Part I – Item 1A. Risk Factors.” Other than as noted below, there have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2016.

 

 

We can provide no assurance that our proposed merger with AMETEK will be completed.

 

On April 16, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), with AMETEK Inc. (“AMETEK”) and AMETEK ATOM, Inc., a Minnesota corporation and a wholly owned subsidiary of AMETEK (“Merger Sub”), pursuant to which, among other things, Merger Sub will merge with and into MOCON, with MOCON surviving as a wholly owned subsidiary of AMETEK (the “Merger”). 

 

We can provide no assurance that the Merger will be completed, or completed in the timeframe or manner currently anticipated. There are a number of risks surrounding the Merger, including, among other things, the occurrence of any event, change, or other circumstances that could give rise to the termination of the Merger Agreement, including a termination under circumstances that would require us to pay a termination fee of $5.6 million. The closing of the Merger is subject to customary conditions, including without limitation, (i) the approval by the holders of a majority of the voting power of all shares of MOCON common stock entitled to vote on the Merger, (ii) waiting periods under the anti-trust laws of the United States and Germany expiring and (iii) the absence of any law or order enjoining or otherwise prohibiting or making illegal the Merger. Further, each party’s obligation to consummate the Merger is subject to certain other conditions, including (a) the accuracy of the other party’s representations and warranties (subject in some instances to materiality or “material adverse effect” qualifiers) and (b) the other party’s performance of its material obligations Merger Agreement. In addition, AMETEK’s obligations to consummate the Merger are subject to the absence of any event, circumstance, change, condition, occurrence or effect since the date of the Merger Agreement that, individually or in the aggregate with any other directly related event, circumstance, change, condition, occurrence or effect, (A) has had, or would reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of MOCON and its subsidiaries, taken as a whole, or (B) prevents or materially delays the ability of MOCON to consummate the Merger. There can be no assurance that approval of our shareholders will be obtained, that the other conditions to closing of the Merger will be satisfied or waived or that other events will not intervene to delay or result in the termination of the Merger. If the Merger is not completed, the price of our common stock may change to the extent that the current market price of our common stock may reflect an assumption that the Merger will be consummated.

 

Pending the closing of the Merger, the Merger Agreement restricts us from engaging in certain actions without AMETEK’s consent, which could prevent us from pursuing opportunities that may arise prior to the closing of the Merger. Any delay in completing the Merger or a failure to complete the Merger could have a negative impact on our business and our relationships with our customers, vendors and employees. In addition, if the Merger Agreement is terminated, depending on the circumstances giving rise to termination, we may be required to pay a termination fee of $5.6 million.

 

  

Our financial condition and results of operations could be adversely impacted as a result of the entry into the Merger Agreement.

 

Our entry into the Merger Agreement, including preparing to complete the Merger, may cause disruptions to our business or business relationships, which could have an adverse impact on our financial condition and results of operations. For example:

 

	●	the attention of our management may be directed to transaction-related considerations and may be diverted from the day-to-day operations of our business;
	●	our employees may experience uncertainty about their future roles with us, which might adversely affect our ability to retain and hire key personnel and other employees; and
	●	customers, vendors, and other parties with whom we maintain business relationships may seek alternative relationships with third parties or seek to alter their business relationships with us.

  

In addition, we have incurred, and will continue to incur, significant costs, expenses, and fees for professional services and other transaction costs in connection with the Merger Agreement and the Merger, and many of these fees and costs are payable by us regardless of whether or not the Merger is consummated.

  

 

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

 

Unregistered Sales of Equity Securities

 

We did not sell any equity securities of MOCON, Inc. during the three-months period ended March 31, 2017 that were not registered under the Securities Act of 1933.

 

 

Issuer Repurchases of Equity Securities

 

Other than the withholding of 16,286 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 shares of our common stock or other equity securities of MOCON registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the fourth quarter ended December 31, 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
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101		The following materials from MOCON, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, 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: May 10, 2017	/s/ Robert L. Demorest
	Robert L. Demorest
	Chairman, President and Chief
	Executive Officer
	(Principal Executive Officer)
Date: May 10, 2017	/s/ Elissa Lindsoe
	Elissa Lindsoe
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

  

 

MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED March 31, 2017

 

 

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 March 31, 2017, 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.

 

 

 

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