Item 1.
BUSINESS
MOCON, Inc. designs, manufactures, markets and services products, and provides consulting services, primarily in the test and measurement, analytical instrument and services markets. Our products include instruments that detect, measure and monitor gases and other chemical compounds which help our customers improve the quality of their products, as well as develop new products.
Our gas and vapor permeation instruments were first used in the food packaging industry, starting in the 1970s, to measure small amounts of moisture which can adversely affect dry cereals and other food packaging. Today our core business is involved in, the detection, measurement and analysis of vapors and gases, serves industries far beyond food packaging. Our products serve markets such as foods, beverages, pharmaceuticals and consumer products, oil and gas exploration and industrial and environmental safety.
Our principal business strategy is to employ our product development and technological capabilities, manufacturing processes and revenue and marketing skills where we can successfully penetrate the market and become a leader in the segment. Our management team continually emphasizes product innovation, product performance, quality improvements, cost reductions and other value-adding activities. We seek growth opportunities through technological and product improvement, by acquiring and developing new products, by acquiring companies or new product lines, or by purchasing the rights to existing technologies.
MOCON, Inc. was incorporated as a Minnesota corporation in February 1966 as Modern Controls, Inc., and was initially involved in the commercialization of technology developed for the measurement of water vapor permeating through food packaging materials. Today, the key drivers in the industries we serve are food and beverage product safety and quality, improving workplace safety, supplying testing equipment for oil and gas exploration, and analyzing the quality of air both indoors and outdoors as well as water.
Our current plans for growth include continued substantial funding for research and development to foster new product development and to pursue strategic acquisitions and investments where appropriate.
Our principal executive offices and worldwide headquarters are located at 7500 Mendelssohn Avenue North, Minneapolis, Minnesota 55428, USA, and our telephone number is (763) 493-6370. Our website address is www.mocon.com. The information contained on our website or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report.
We make available, free of charge on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. We also make available, free of charge and through our website, to any shareholder who requests, the charters of our Board committees and our Code of Ethics. Requests for copies can be directed to our Chief Financial Officer at the address and phone number above.
Products and Services
We develop, manufacture, market and service test and measurement, analytical and monitoring instruments and systems used to detect, measure and analyze gases and other chemical compounds, as well as provide related consulting services. Please see our consolidated financial statements beginning on page for financial information concerning our business, including our revenue, net income and net assets.
Package Testing Products and Services
We manufacture and sell three primary products in this group: headspace analyzers, leak detection equipment and gas mixers. Our headspace analyzer products are used to analyze the amount and type of gas present in the headspace of flexible and rigid packages, as applied to gas flushing in modified or controlled atmosphere packaging. The principal market for these products consists of packagers of foods, beverages and pharmaceuticals. Our headspace analyzer products include the PAC CHECK®, CheckMateTM and CheckPointTM series of off-line headspace analyzers and the MAP Check 3TM series of on-line analyzers for continuous and intermittent monitoring of Modified Atmosphere Packaging (MAP) and other gas flushing operations.
Our leak detection products detect leaks in sterile medical trays, food pouches, blister packs and a wide range of other sealed packages. We currently manufacture three types of leak detection instruments. The first type is a non-destructive leak detector that senses small amounts of carbon dioxide escaping from a package or tray. The second type of instrument detects leaks and checks for seal integrity by applying and measuring pressure within a package. The third type pulls a vacuum on a package and looks for vacuum or gas flow changes. The principal markets for these products are packagers of sterile medical items, pharmaceuticals and food products. Our leak detection products include the LeakMatic IITM and LeakPointer IITM series of instruments.
Our gas mixers are used in the food production environment to assure that the package has been properly flushed with the correct mixture of gases. Our gas mixer products include the MAP Mix Provectus and MAP Mix 9001 on-line instruments.
Our package testing products and services group accounted for 43 percent, 44 percent and 44 percent of our consolidated revenue in 2015, 2014 and 2013, respectively.
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:
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wish to outsource their testing needs to us;
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are interested in evaluating our instrumentation prior to purchase; or
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have purchased our products but have a need for additional capacity.
Our permeation products and services accounted for approximately 41 percent, 36 percent and 38 percent of our consolidated revenue in 2015, 2014 and 2013, respectively. 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 Analyzer Products and Services
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.
Revenue for our Industrial Analyzer business’ products accounted for approximately 16 percent, 20 percent and 18 percent of our consolidated revenue in each of the years 2015, 2014 and 2013. We market some of these products under the names PetroAlert®, piD-TECH®, and BevAlert®.
Microbial Detection Products
Our microbial detection products are designed to rapidly detect microbial growth in food and beverage samples. Using the total viable count (TVC) method, our GreenLight® series of instruments perform rapid and precise measurements to determine the presence or absence of aerobic bacteria in food products or ingredients. There are two models of the GreenLight product line currently available; the Greenlight 930 and the Greenlight 910. While revenue for these two models are increasing, for the year ended December 31, 2015, revenue from these products do not contribute to our total revenue at a meaningful level.
Competition
We have several competitors for all of our products and services in both foreign and domestic markets. The principal competitive factors for our products and services are:
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product quality and performance;
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product reliability;
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product support; and
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price.
We compete with a variety of companies in each market in which we sell our products. Some of our competitors have greater assets and resources than we do, and some are smaller than we are. To remain competitive, we must continue to invest in research and development, marketing, customer service and support, and manage our operating expenses. We believe that we have strategies in place to develop technological and other advantages that will give us a competitive advantage over our competitors. However, there can be no assurance that we will have sufficient resources to execute these strategies, or that our competitors will not develop new technologies or other advantages which would require us to reduce our prices, result in lost orders or otherwise adversely affect our financial results.
Manufacturing and Supplies
Our manufacturing capabilities include electro-mechanical assembly, testing, integration of components and systems, calibration and validation of systems. Certain components that we use in our products are currently purchased from single source suppliers. Although we maintain an inventory of these components, an interruption or delay in supply from one of these sources could result in delays in our production while we locate an alternative supplier, which in turn could result in a loss of sales and income.
Patents, Trademarks and Other Intellectual Property Rights
We believe that the protection afforded us by our patent rights is important to our business, and we will continue to seek patent protection for our technology and products. We require all of our employees and consultants to assign to us all inventions that are conceived and developed during their employment, except to the extent prohibited by applicable law. To protect our proprietary information, we have entered into confidentiality and non-compete agreements with those of our employees and consultants who have access to sensitive information. We hold both U.S. and international patents and have U.S. and international patents pending. We currently hold 47 active U.S. patents and 66 foreign patents which will expire during the period from 2016 through 2034, and have another 55 patents pending. We do not believe that the expiration of our patents on their scheduled expiration dates will have a material adverse effect on our business.
We own, have the right to use, or have applied for certain trademarks which protect and identify our products. Our trademarks and service marks include the following: MOCON®, APCHECK®, AQUATRACE®, AQUATRAN, AROMATRAN®, AROMATRAX®, BASELINE®, BEVALERT, CALCARD®, CAL-SMART®, CheckPoint, CMV-2, COULOX®, DANSENSOR®, FLO SMART®, GREENLIGHT, HERSCH®, IMPULSE®, ISM-3, LeakMatic, LeakPointer, LIPPKE®, LUXCEL, MAP Check 3, MAP Mix, MICROANALYTICS®, MULTICHECK®, OPTECH®, OX-TRAN, PAC CHECK, PAC GUARD®, PERMATRAN-C, PERMATRAN-W, PETROALERT, piD-TECH, QUICK START®, SKYE®, TRU SEAL® and VOC-TRAQ®. Our trademarks and service marks have a life of 5 to 20 years, and are subject to periodic maintenance which may be extended in accordance with applicable law.
Marketing and Customers; Distribution Methods
We market our products and services throughout the United States and in over 60 foreign markets. We use a direct sales force of approximately 35 employees and 100 independent sales representatives and distributors to market and sell our products and services to end users throughout the world. To our knowledge, none of our independent sales representatives sell a material amount of product manufactured by any of our competitors.
For information concerning our export sales by geographic area, see Note 14 of the notes to consolidated financial statements. We market products and services to research laboratories, production departments and quality control groups in the life science, medical, food, pharmaceutical, plastics, paper, electronics, oil and gas and other industries. We do not believe that the loss of any single customer would have a material adverse effect on our business or financial performance.
Backlog
As of December 31, 2015, our total backlog was $5.3 million for all of our products as compared to $7.6 million and $7.0 million, as of December 31, 2014 and 2013, respectively. We anticipate shipping substantially all of the December 31, 2015 backlog in 2016.
Research and Development
We are committed to an ongoing engineering program dedicated to innovating new products and improving the quality and performance of our existing products. Our engineering expenses are primarily incurred in connection with the improvement of existing products, cost reduction efforts, and the development of new products that may have additional applications or represent extensions of existing product lines. None of these costs are borne directly by our customers.
We incurred expenses of approximately $4.3 million, $4.2 million and $4.0 million during the fiscal years ended December 31, 2015, 2014 and 2013, respectively, for research and development (R&D) of our products. These amounts were 6 percent to 7 percent of our consolidated revenue for each of those three fiscal years. On an annual basis, we currently intend to spend 6 percent to 8 percent of our consolidated revenue on R&D in the future.
Working Capital Practices
We strive to maintain a level of inventory that is appropriate given our projected revenue. Our domestic and international payment terms vary, however, generally ranging between 30 and 90 days. International revenue is, in some cases, transacted pursuant to letters of credit.
Seasonality
Our business is not seasonal in nature.
Employees
As of December 31, 2015, we had approximately 256 full-time employees. Included in this total are approximately 25 scientists and engineers who research and develop potential new products. None of our employees are represented by a labor union, and we consider our employee relations to be satisfactory.
Executive Officers of the Registrant
Our executive officers, their ages and their offices held, as of March 4, 2016 are as follows:
There are no family relationships among any of our directors and executive officers. Information regarding the business experience of our executive officers is set forth below.
Mr. Robert L. Demorest has been our President, Chief Executive Officer, and Chairman of the Board since April 2000. Mr. Demorest is also a director of Marten Transport, Ltd., a publicly traded company located in Mondovi, Wisconsin, and is a member of its audit committee.
Mr. Donald N. DeMorett has been our Chief Operating Officer since January 2013. Prior to that time, Mr. DeMorett had been the President and Chief Executive Officer of GearGrid Corporation, a manufacturer of commercial storage systems, for more than five years.
Ms. Elissa Lindsoe has been our Chief Financial Officer since October 2014. Ms. Lindsoe was previously the CFO of Galil Medical Ltd., a private equity owned medical device manufacturing firm.
Forward-Looking Statements
This Annual Report on Form 10-K contains or incorporates by reference not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on our website or otherwise. All statements other than statements of historical facts included in this Annual Report on Form 10-K that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, results of operations, addressable market size estimates and business. We have identified some of these forward-looking statements with words like “believe,” “may,” “could,” “might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate” or “continue” and other words and terms of similar meaning. These forward-looking statements may be contained in the notes to our consolidated financial statements and elsewhere in this Annual Report on Form 10-K, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements involve risks and uncertainties. These uncertainties include factors that affect all businesses as well as matters specific to us. The following are some of the uncertainties and factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements: realizing the expected financial benefits from the acquisition of Dansensor and the Realignment Plan; general economic conditions; failing to comply with the terms of our credit agreement; restrictions in our credit agreement, growth in the markets we serve, successfully competing against competitors; the decline in the value of the Euro and the price of oil; factors impacting the stock market and share price; ability of the Company’s manufacturing facilities to meet customer demand; regulatory matters; timing and success of new product introductions; adequate protection of intellectual property rights; and currency and other economic risks inherent in selling products internationally.
For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition or operating results, refer to this Annual Report on Form 10-K under Part I, Item 1A, “Risk Factors.”
All forward-looking statements included in this Annual Report on Form 10-K are expressly qualified in their entirety by the foregoing cautionary statements. We wish to caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described in this Annual Report on Form 10-K under the heading “Item 1A.
ITEM 1A.
RISK FACTORS
The following are significant factors known to us that could have material adverse effects on our business, financial condition or operating results and should be considered carefully in connection with any evaluation of an investment in our common stock. Additionally, the following risk factors could cause our actual results to materially differ from those reflected in any forward-looking statements.
If economic conditions decline, this could adversely affect our business, operating results and financial condition.
Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about global economic conditions poses a risk as consumers and businesses postpone spending in response to tighter credit, unemployment, negative financial news and/or declines in income or asset values, which could have a material negative effect on demand for our products and services. Our customers include pharmaceutical, food, medical and chemical companies, laboratories, government agencies and public and private research institutions. The capital spending of these entities can have a significant effect on the demand for our products. Decreases in capital spending by any of these customer groups could have a material adverse effect on our revenue, business and results of operations.
Further, our customers’ and independent representatives’ ability to borrow money from their existing lenders or to obtain credit from other sources to purchase our products may be impaired. Although we maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments and such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same loss rates that we have in the past, especially given the current turmoil in the worldwide economy. A significant change in the liquidity or financial condition of our customers could cause unfavorable trends in our receivable collections and additional allowances may be required, which could adversely affect our operating results. If investors have concerns that our business, operating results and financial condition will be negatively impacted by a worldwide economic downturn, our share price could decrease.
If we violate the terms of our credit agreement and financial covenants, it could cause our lender to demand immediate repayment of our credit facilities.
We have a credit agreement with Wells Fargo Bank, our primary lender, with which we entered into a line of credit through August 26, 2018. Our credit agreement with Wells Fargo Bank includes various financial and restrictive covenants. Our current internal projections indicate that we will be in compliance with our financial and restrictive covenants for the next 12 months. However, unforeseen circumstances may develop which could result in us violating our loan covenants. If we violate the terms of our credit agreement, including our financial and restrictive covenants, Wells Fargo Bank could deem us to be in default and require us to immediately repay the entire outstanding balance of our credit facilities. If we do not have the funds available to repay the credit facilities or we cannot find another source of financing, we may fail to meet the terms of our agreement which could decrease the value of our common stock or have other material adverse consequences for us.
Some of the markets in which we operate have experienced minimal growth in recent years, and in the case of the oil and gas market has experienced declines, and our ability to increase our revenue will depend in part on our ability to develop new products, develop new applications for our existing products or acquire complementary businesses and product lines.
We have identified a number of strategies that we believe will allow us to grow our business and increase our revenue in markets experiencing minimal growth. This includes developing new products and technologies, entering new markets such as food safety, developing new applications for our technologies, acquiring complementary businesses and product lines, and strengthening our sales force. However, we can make no assurance that we will be able to successfully implement these strategies, or that these strategies will result in the growth of our business or an increase in our revenue. Acquisitions that we may find attractive may be subject to the consent of Wells Fargo Bank under the credit agreement we have executed with them.
If we fail to attract and retain qualified managerial and technical personnel, we may fail to remain competitive.
Our future success depends, in significant part, upon the continued service and performance of our senior management and other key personnel. We rely on knowledgeable, experienced and skilled technical personnel, particularly engineers, scientists and service personnel, to design, assemble, sell and service our products. The loss of the services of our management team, some of whom have significant experience in our industry, and other key personnel could impair our ability to effectively manage our company and to carry out our business plan. Our inability to attract or retain qualified personnel could have a significant negative effect and thereby materially harm our business.
We face risks of technological changes that may render our products obsolete.
The markets for our products and services are characterized by technological change and evolving industry standards. As a result of such changes and evolving standards, our products may become noncompetitive or obsolete and we may have to develop new products in order to maintain or increase our revenue. New product introductions that are responsive to these factors require significant planning, design, development and testing at the technological, product and manufacturing process levels, and we may not be able to timely develop new products. In addition, industry acceptance of new technologies that we may develop may be slow due to, among other things, existing regulations or standards written specifically for older technologies and general unfamiliarity of users with new technologies. As a result, any new products that we may develop may not generate any meaningful revenue or profits for us for a number of years, if at all.
A significant portion of our revenue is generated from foreign countries and selling in foreign countries entails a number of risks which could result in a decrease in our revenue or an increase in our operating expenses.
Revenue outside the United States accounted for approximately 66 percent of our revenue in 2015, 69 percent in 2014 and 67 percent in 2013, and we expect that foreign revenue will continue to account for a significant portion of our revenues in the future. Revenue to customers in foreign countries are subject to a number of risks including, among others:
● agreements may be difficult to enforce;
● receivables may be difficult to collect;
● certain regions may experience political unrest and conflict and economic instability;
● foreign customers may have longer payment cycles;
● the countries into which we sell may impose tariffs or adopt other restrictions on foreign trade;
● currency fluctuations could reduce reported profitability in future periods;
● fluctuations in exchange rates may affect product demand;
● legal and regulatory requirements may be difficult to monitor and comply with, especially if inconsistent with U.S. laws and regulations;
● customizing products for foreign countries and managing and staffing international operations may lead to increased costs; and
● protection of intellectual property in foreign countries may be more difficult to enforce.
If any of these risks were to materialize, our revenue into foreign countries could decline, or our operating costs could increase, which would adversely affect our financial results.
A portion of our revenue is derived from third party distributors and a disruption to our relationship with them could adversely impact our business. In addition, a portion of our international revenue is derived through third party distributors. As a result, we are dependent upon the financial health of our distributors. We also are dependent upon the compliance of our distributors with foreign laws and the U.S. Foreign Corrupt Practices Act, or the FCPA. If a distributor were to go out of business, it would take substantial time, cost and resources to find a suitable replacement.
We hold a majority of our cash outside the United States and we could incur costs and additional tax liability if we were to bring this cash into the United States.
A significant amount of our cash was generated from our activities outside of the United States and is being held outside of the United States. If these funds were repatriated to the United States or used for operations in the United States in 2016, the amount would be subject to taxation within the United States. Should we require more cash in the United States than is generated by our United States operations, we could elect to repatriate this cash and pay the associated taxes, seek additional borrowing capacity in the United States or seek to raise additional capital in the United States. These alternatives could result in higher effective income tax rates, additional interest expense or other negative impacts to our earnings.
The recent decline in the value of the Euro against the United States dollar has caused a decline in our reported revenue and earnings.
A substantial portion of our revenue outside the United States is generated in Europe. Some of our sales in Europe are denominated in U.S. dollars. For customers that are located in Europe to whom we sell products priced in U.S. dollars, the recent decline in the value of the Euro against the United States dollar will make our products more expensive to these customers which often use their native currency (Euros) to purchase U.S. dollars to pay for our products, and the additional Euros that it will take to pay for our products is an effective price increase to these customers. This could reduce the demand or increase pressure to reduce prices by these customers for our products.
We also have sales to customers located in Europe and elsewhere that are denominated in Euros. For purposes of preparing our consolidated financial statements, these amounts are converted into U.S. dollars and the decrease in the value of the Euro relative to the U.S. dollar means that we will receive less in U.S. dollars from the sales than before the decrease in the exchange rate, which has negatively impacted our operating results. Although some of our costs are denominated in Euros which are also converted into U.S. dollars for purposes of preparing our consolidated financial statements, the reduction in costs on an as converted basis has not offset the reduction in revenue on an as converted basis which has lowered our earnings.
In addition to the decline in the value of the Euro, other fluctuations in foreign currency exchange rates could result in declines in our reported revenue and earnings.
Because the functional currency of our foreign operations is the applicable local currency, we are exposed to foreign currency transaction risk arising from transactions in the normal course of business, such as revenue to third party customers and purchases from suppliers denominated in foreign currencies. From time to time, we have elected to engage in hedging activity to mitigate our risk in this area. At December 31, 2015, there were no forward contract hedge instruments in place in our foreign operations.
Some of our competitors have greater resources than we do, which may provide our competitors with an advantage in the development and marketing of new products.
We currently encounter, and expect to continue to encounter, competition in the sale of our products. We believe that the principal competitive factors affecting the market for our products include product quality and performance, price, reliability and customer service. Our competitors include large multinational corporations. Some of our competitors have substantially greater financial, marketing and other resources than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than we can. In addition, competition could increase if new companies enter the market or if existing competitors expand their product lines or intensify efforts within existing product lines. Our current products, products under development and our ability to discover new technologies may be insufficient to enable us to compete effectively with our competitors.
Our reliance upon patents, domestic trademark laws, trade secrets and contractual provisions to protect our proprietary rights may not be sufficient to protect our intellectual property from others who may sell similar products.
We hold patents relating to various aspects of our products and believe that proprietary technical know-how is critical to many of our products. Proprietary rights relating to our products are protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are maintained in confidence as trade secrets. We cannot be certain that we will be issued any patents from any pending or future patent applications owned by or licensed to us or that the claims allowed under any issued patents will be sufficiently broad enough to protect our technology. In the absence of patent protection, we may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and proprietary know-how. Our competitors may initiate litigation to challenge the validity of our patents, or they may use their resources to design comparable products that do not infringe our patents. We may incur substantial costs if our competitors initiate litigation to challenge the validity of our patents or if we initiate any proceedings to protect our proprietary rights. If the outcome of any such litigation is unfavorable to us, it could have a material adverse effect on our business and results of operations. There may also be pending or issued patents held by parties not affiliated with us that relate to our products or technologies and we may need to acquire licenses to any such patents to continue selling some or all of our products. If we are required to obtain any such license in order to be able to continue to sell some or all of our products, we may not be able to do so on terms that are favorable to us, if at all.
In addition, we rely on trade secrets and proprietary know-how that we seek to protect, in part, by confidentiality agreements with our collaborators, employees and consultants. These agreements may be breached and we may not have adequate remedies for any such breach. Even if these confidentiality agreements are not breached, our trade secrets may otherwise become known or be independently developed by competitors.
The market price of our common stock has fluctuated significantly in the past, and will likely continue to do so in the future, and any broad market fluctuations may materially adversely affect the market price of our common stock.
The market price of our common stock has been volatile in the past, with closing prices ranging from a high of $17.99 and a low of $13.03 during 2015. Several factors could cause the price to fluctuate substantially in the future. Some of these factors include:
● announcements of new products by us or our competitors;
● quarterly fluctuations in our financial results;
● merger and acquisition activity in our industry segment;
● customer contract awards;
● a change to the rates at which we have historically paid dividends, which could be impacted by our credit agreement with Wells Fargo Bank;
● changes in regulation; and
● general economic and political conditions in the various markets where our products are sold.
In addition, the share prices of instrumentation companies have experienced significant fluctuations that often have been unrelated to the operating performance of such companies. This market volatility may adversely affect the market price of our common stock.
Complying with securities laws and regulations is costly for us.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations promulgated by the SEC and Nasdaq, are creating particular challenges for smaller publicly-held companies like us. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
We are exposed to risks relating to its evaluation of its internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act.
Our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our assessment of its internal control over financial reporting have required and will continue to require the expenditure of significant financial and managerial resources. Although our management has concluded that our internal control over financial reporting was effective as of December 31, 2015 and our independent registered public accounting firm agreed, no assurance can be provided that our management or independent registered public accounting firm will reach a similar conclusion as of any later date. Our failure to maintain effective internal control over financial reporting may have an adverse effect on our stock price.
If we experience any increase in the cost of raw materials or supplies, we may experience a decrease in profit margins.
In the past, the overall cost of the materials that we purchase has not risen much more than the rate of inflation. We believe that the price of our products and the prices of our competitors’ products is a significant factor affecting our customers’ buying decisions and consequently, we may not be able to pass along any cost increases in raw materials and supplies in the form of price increases or sustain profit margins that we have achieved in prior years.
We have spent significant resources to develop new products, and the realized revenue from these products may be minimal for a time frame after each new product is being introduced to the marketplace.
In recent years we began to market new products including next generation of existing products such as the OX-TRAN 2/22 and the PERMATRAN-W 3/34. We believe that there are significant markets for our new products and while we believe these products are superior in many respects to similar products being sold by our competitors, each one is new to the marketplace and may not gain the market acceptance necessary to allow us to capitalize on what we believe will be an increasing demand in the industries for which products are utilized. While we have realized increasing revenue of products introduced in the marketplace historically, there can be no assurance that revenue of these products will continue. While we believe our recent new product offerings represent a dramatic improvement over existing technology being used in the respective applications, for some of them, we have not realized significant revenue to date.
If we are not able to successfully market new products, we will not recover the significant research and development and other expenses we have incurred to bring these products to market.
Declining oil prices have resulted in decreased revenue in our Industrial Analyzers and Other segment and may continue to put pressure on this business segment.
Increased oil and gas drilling activity in periods prior to 2015 had been a positive driver for our revenue of monitoring instruments. Worldwide oil prices have recently declined which has led to a decrease in drilling and other exploration activities, which has negatively affected demand for our gas analyzers, sensors and detectors. A further decrease in oil prices may also lead to our customers further decreasing capital spending in anticipation of decreased profitability which could also further negatively affect demand for these products. As a result of decreased spending in the oil and gas drilling markets, our Industrial Analyzers and Other segment experienced a decline in revenue in 2015 and in recent periods and if revenue in this segment continues to decline, our share price could decline.
We recently implemented a realignment plan (“Realignment Plan”), which may result in additional or unanticipated non-recurring charges, and we may not be able to achieve the cost savings expected from these realignment efforts.
Throughout 2015, we completed an initiative to reduce the number of legal entities by merging those entities into other legal entities we have. This initiative is intended to reduce the complexity and administrative burden and cost of maintaining those legal entities. Further, to improve our profitability, during the fourth quarter of 2015, we brought the Package Testing and Permeation segment sales and marketing functions under common leadership and decreased our U.S. headcount by 5 percent. These changes were also designed to strengthen our market presence and provide a cost-effective approach to achieving our objectives.
However, we may not be able to achieve the level of benefits that we expect to realize from these or any future realignment activities, within expected timeframes, or at all. Changes in the amount, timing and character of charges related to our current or future realignment activities and the failure to complete, or a substantial delay in completing, our current and any future realignment plan could have a material adverse effect on our financial results.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
Item 2.
Item 2.
PROPERTIES
We lease an aggregate of 113,175 square feet of office, engineering, laboratory and production space in Minnesota, Texas, Germany, Denmark, Spain, Italy, France and China. We believe that all of our facilities are generally adequate for their present operations and that suitable space is readily available if any of our leases are not extended.
In March 2011, we signed a 15-year lease for our Minneapolis headquarters and operations center. The lease commenced July 1, 2011 and is for a location consisting of approximately 60,000 square feet of space. This space is leased until October 2025. This location is our corporate headquarters from which a portion of all reporting segments conduct operations.
Dansensor A/S, based in Denmark, and operating subsidiaries located in Germany, France, Spain, and Italy lease an aggregate of approximately 39,000 square feet. These buildings are leased through various dates until December 2021. These properties are utilized for the operations of the Package Testing segment.
Our operations located in Neuwied, Germany occupy approximately 8,075 square feet. This space is leased until July 2018. This property is utilized for the operations of the Permeation segment.
The MOCON (Shanghai) Trading Co., Ltd. operations are located in Shanghai, China, and occupy approximately 1,000 square feet. This space is leased until December 2016. This property is utilized in the operations of the Permeation segment.
In addition to our leased facilities described above, we own approximately two acres of land and a building located near Boulder, Colorado that consists of approximately 9,300 square feet of office and production space for our Industrial Analyzers and Other segment.
Item 3.
Item 3.
LEGAL PROCEEDINGS
There are no material pending legal, governmental, administrative or other proceedings to which we are a party or of which any of our property is the subject.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
Item 5.
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED ShareHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Dividends
Our common stock is quoted on the Nasdaq Global Market System under the symbol MOCO. The following table sets forth, for the fiscal periods indicated, the high and low closing sales prices for our common stock as reported by the Nasdaq Global Market System. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The following table also sets forth, for the fiscal periods indicated, the amount of cash dividends declared on our common stock:
We have been consistently paying dividends since 1984. Cash dividends paid in 2015, 2014 and 2013 were approximately $2.5 million, $2.5 million and $2.4 million, respectively. Our Board of Directors monitors and evaluates our dividend practice quarterly, and the Board may elect at any time to increase, decrease or not pay a dividend on our common stock based upon our financial condition, results of operations, cash requirements and future prospects and other factors deemed relevant by the Board. Under the loan agreement we have with Wells Fargo Bank, we are required to maintain certain financial ratios. One of these ratios will be impacted by the amount of dividends we pay. If paying dividends at our historical rate were to cause us to be out of compliance with this ratio, or otherwise cause us to be in breach of our covenants under our loan agreement with Wells Fargo Bank, we may be required to reduce or eliminate dividends until such time as we are able to repay our loan, regain compliance with the financial ratios and other covenants in the loan agreement, or negotiate a waiver or amendment with Wells Fargo Bank.
For information concerning securities authorized for issuance under equity compensation plans, please see Part III - Item 12.
Holders
As of February 26, 2016, there were approximately 309 holders of record and 3,400 beneficial holders of our common stock.
Issuer Repurchases of Equity Securities
Other than the withholding of 56,601 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, 2015. We currently are not authorized by our Board of Directors to make repurchases of our common stock, and we are restricted from doing so under our credit agreement with Wells Fargo Bank.
Recent Sales of Unregistered Securities
During the fourth quarter and year ended December 31, 2015, we did not issue or sell any shares of our common stock or other equity securities of MOCON without registration under the Securities Act of 1933, as amended.
Stock Performance Graph
The following graph compares the cumulative shareholder return on MOCON’s common stock to the S&P 500 Index and a peer group consisting of five companies with a market capitalization similar to MOCON. The peer companies were selected from the scientific and technical instruments industry within the technology sector. The graph compares the performance for the last five fiscal years, assuming an investment of $100 on December 31, 2010, including the reinvestment of all dividends. The peer group consists of the following companies: CyberOptics Corporation, eMagin Corporation, Perceptron, Inc., Sypris Solutions, Inc. and Transcat, Inc. We chose these five companies because they operate in similar technology sectors that we do and have a market capitalization similar to ours.
Source: Research Data Group, Inc.
Item 6.
Item 6.
SELECTED FINANCIAL DATA
Item 7.
Item 7.
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 including those discussed under the heading “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K. For more information, see “Part I Item 1 Business - Forward-Looking Statements” of this Annual Report on Form 10-K. The following discussion of the results of the 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 Annual Report on Form 10-K.
Overview
MOCON, Inc. designs, manufactures, markets and services products and provides consulting and testing services primarily in the measurement and analytical instrument and services markets. Our products include instruments that detect, measure and monitor gases and chemical compounds. We continually seek growth opportunities through technological and product improvement, by developing new products, and by acquiring new companies, new product lines, or rights to technologies.
We are headquartered in Minnesota and have operating locations in Minnesota, Denmark, and Colorado. We have offices and laboratories in Texas, Germany, France, Italy, Spain and China. We use a mix of a direct sales force and independent sales representatives to market our products and services in the United States, Canada, Europe and China, and we use a network of independent sales representatives and distributors to market and service our products and services in most other foreign countries.
Our ongoing plans for growth include continued substantial funding for research and development to drive new product introductions, together with strategic acquisitions and investments where appropriate.
Significant Transactions and Financial Trends
Throughout these financial sections, you will read about significant transactions or events that materially contribute to, or reduce our earnings, and materially affect our financial results and financial position.
Our research and development costs were approximately 6 percent to 7 percent of our consolidated revenue in 2015, 2014 and 2013. On an annual basis, we intend to spend 6 percent to 8 percent of our revenue on research and development in the future.
During 2015, we implemented a series of initiatives, including a reduction in workforce and simplification of business structures (“Realignment Plan”). Substantially all Realignment Plan activities were completed by December 31, 2015. These actions are intended to increase operating efficiencies and provide additional resources to execute our long-term growth strategy.
In January 2016, we entered into an agreement to sell substantially all the assets of the business formerly known as Microanalytics which is located in Round Rock, Texas. The sale is expected to be finalized and closed during the first half of 2016. The assets of this business primarily consists of lab equipment used in the analytical chemistry services, formulation, product development and consulting services focused on the identification of odors and aromas. The revenue related to this business was $0.7 million, $0.9 million and $0.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. The gross profit contribution related to the Microanalytics business was $0.2 million, $0.4 million and $0.3 million for the years ended December 31, 2015, 2014 and 2013, respectively.
While these items are important in understanding and evaluating our financial results, certain trends, such as our international revenue accounting for a significant portion of our revenue, and other transactions or events such as those discussed later in this Management’s Discussion and Analysis, may also have a material impact on our financial results.
Critical Accounting Policies
Our significant accounting policies are described in Note 1 to our consolidated financial statements included in Item 8
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and Report of Independent Registered Public Accounting Firms are included beginning on page of this Annual Report on Form 10-K and are incorporated herein by reference.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share data)
Note:
The sum of the quarterly amounts above may not agree with annual amounts due to rounding.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
a)
Dismissal of Independent Registered Public Accounting Firm
On July 13, 2015, the Audit Committee of the Board of Directors of MOCON, Inc. (the “Audit Committee” and the “Company,” respectively) notified KPMG LLP (“KPMG”) that KPMG had been dismissed as the Company’s independent registered public accounting firm, effective immediately. The dismissal of KPMG was approved by the Audit Committee.
The audit reports of KPMG on the Company’s consolidated financial statements for the years ended December 31, 2014 and 2013 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended December 31, 2014 and 2013 and the subsequent interim periods through July 13, 2015, there were no disagreements (within the meaning of Item 304(a)(1)(iv) of Regulation S-K) between the Company and KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the matter in their report on the Company’s consolidated financial statements.
During the fiscal years ended December 31, 2014 and 2013 and the subsequent interim periods through July 13, 2015, there were no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K), except that for the Company’s fiscal year ended December 31, 2013 and the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014, the Company’s internal control over financial reporting was not effective due to the existence of a material weakness in the Company’s internal control over financial reporting. As disclosed in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the above referenced periods:
The Company did not design process level management review controls that operated at a sufficient level of precision, and did not maintain appropriate controls over reviewing development and change management processes for our general information technology control environment, relating to the recognition and measurement of sales, inventories and income taxes.
KPMG discussed this above matter with the Audit Committee.
The Company previously provided KPMG with a copy of the disclosure it is making herein in response to Item 304(a) of Regulation S-K and requested that KPMG furnish the Company with a copy of its letter addressed to the Securities and Exchange Commission (the “SEC”), pursuant to Item 304(a)(3) of Regulation S-K, stating whether or not KPMG agrees with the statements related to them made by the Company in this report. A copy of KPMG’s letter to the SEC dated July 13, 2015 is attached as Exhibit 16.1 to this report.
b)
Engagement of Independent Registered Public Accounting Firm
In July 13, 2015 the Audit Committee approved the appointment of RSM US LLP (“RSM”) as the Company’s independent registered public accounting firm, effective immediately. During the fiscal years ended December 31, 2014 and 2013 and any subsequent interim period through July 13, 2015, neither the Company, nor anyone on its behalf, consulted RSM regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, or (ii) any matter that was either the subject of disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions) or a “reportable event” (as defined in Item 304(a)(1)(v) of Regulation S-K)
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b)
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system is designed to provide reasonable assurance to our management, Board of Directors and shareholders regarding the reliability of financial reporting and the preparation and fair presentation of our consolidated financial statements for external reporting purposes.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In designing and operating a control system, one must consider the potential benefits of controls relative to their costs and the reality of limited resources available to allocate to control activities, particularly in smaller companies. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any control will meet its objectives under all potential future conditions. Because of such inherent limitations in any control system, there can be no absolute assurance that control issues, misstatements, and/or fraud will be prevented or detected.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2015 based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2015. In May of 2013, COSO adopted an updated framework, which we adopted in 2015.
RSM US LLP, an independent registered public accounting firm, has issued an auditors’ report on management’s assessment of our internal control over financial reporting as of December 31, 2015, which is included elsewhere in this Form 10-K.
(c)
Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies may deteriorate.
(d)
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
Item 10.
Item 10.
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under Item 10 of this Annual Report on Form 10-K is to be contained under the headings “Proposal One - Election of Directors - Information About Board Nominees,” “Proposal One - Election of Directors - Additional Information About Board Nominees,” “Corporate Governance - Information About our Board and its Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement to be filed with the SEC with respect to our next annual meeting of shareholders, which involves the election of directors and is incorporated herein by reference, or, if such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this report, such information will be filed as part of an amendment to this report not later than the end of the 120-day period.
The information concerning our executive officers is included in this Annual Report under Item 1, “Executive Officers” and is incorporated herein by reference.
During the fourth quarter 2015, we made no material changes to the procedures by which shareholders may recommend nominees to the board of directors, as described in our most recent proxy statement.
Our Code of Ethics applies to all of our officers, directors and employees, including our principal executive officer and principal financial officer, and meets the requirements of the rules and regulations of the Securities and Exchange Commission. We will disclose any amendments to, and any waivers from a provision of, our Code of Ethics on a Form 8-K filed with the Securities and Exchange Commission. We make available, free of charge and through our website, to any shareholder who requests, the charters of our board committees and our Code of Ethics. Our website is www.mocon.com.
To request a copy of the charters of our board committees or our Code of Ethics, write to us at:
MOCON, Inc.
7500 Mendelssohn Avenue North
Minneapolis, Minnesota 55428
Attention: Chief Financial Officer
Item 11.
Item 11.
EXECUTIVE COMPENSATION
The information required under Item 11 of this Annual Report on Form 10-K is to be contained under the headings “Director Compensation,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in our definitive proxy statement to be filed with the SEC with respect to our next annual meeting of shareholders, which involves the election of directors and is incorporated herein by reference, or, if such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this report, such information will be filed as part of an amendment to this report not later than the end of the 120-day period.
ITem 12.
ITem 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED shareHOLDER MATTERS
The information required under Item 12 of this Annual Report on Form 10-K is to be contained under the headings “Principal Shareholders and Beneficial Ownership of Management” in our definitive proxy statement to be filed with the SEC with respect to our next annual meeting of shareholders, which involves the election of directors and is incorporated herein by reference, or, if such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this report, such information will be filed as part of an amendment to this report not later than the end of the 120-day period.
The following table summarizes outstanding options under our equity compensation plans as of December 31, 2015. Our only equity compensation plans as of December 31, 2015 were the MOCON, Inc. 2015 Equity Incentive Plan, MOCON, Inc. 2006 Stock Incentive Plan, as amended, the MOCON, Inc. 1998 Stock Option Plan and the 2015 Employee Stock Purchase Plan. The MOCON, Inc. 2006 Stock Incentive Plan and MOCON, Inc. 1998 Stock Option Plan have terminated with respect to future grants. Options and other stock incentive awards to be granted in the future under the MOCON, Inc. 2015 Equity Incentive Plan are within the discretion of our Board of Directors and the Compensation Committee of our Board of Directors and therefore cannot be ascertained at this time.
Item 13.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required under Item 13 of this Annual Report on Form 10-K is to be contained under the heading “Related Party Relationships and Transactions” and “Corporate Governance - Director Independence” in our definitive proxy statement to be filed with the SEC with respect to our next annual meeting of shareholders, which involves the election of directors and is incorporated herein by reference, or, if such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this report, such information will be filed as part of an amendment to this report not later than the end of the 120-day period.
Item 14.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under Item 14 of this Annual Report on Form 10-K is to be contained under the headings “Proposal Five - Ratification of Selection of Independent Registered Public Accounting Firm” in our definitive proxy statement to be filed with the SEC with respect to our next annual meeting of shareholders, which involves the election of directors and is incorporated herein by reference, or, if such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this report, such information will be filed as part of an amendment to this report not later than the end of the 120-day period.
PART IV
Item 15.
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The following consolidated financial statements of MOCON, Inc. and its subsidiaries are included herein:
2. Financial Statement Schedule
The following financial statement schedule is included herein and should be read in conjunction with the consolidated financial statements referred to above:
3. Exhibits
The exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index.
A.
MOCON, Inc. 1998 Stock Option Plan, as amended, (incorporated by reference to our Definitive Proxy Statement on Form DEF-14A filed on April 9, 2002 (File No. 000-09273)).
B.
MOCON, Inc. 2006 Stock Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 1, 2011 (File No. 000-09273)).
C.
Form of Incentive Stock Option Agreement between MOCON, Inc. and its Executive Officers under the MOCON, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on May 23, 2006 (File No. 000-09273)).
D.
Form of Non-Statutory Stock Option Agreement between MOCON, Inc. and its Non-Employee Directors and Executive Officers under the MOCON, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on May 23, 2006 (File No. 000-09273)).
E.
MOCON, Inc. 2015 Equity Incentive Plan, as amended and restated (incorporated by reference to Exhibit 5.1 to Form S-8 filed on August 7, 2015 (File No. 333-206212)).
F.
MOCON, Inc. 2015 Stock Purchase Plan (incorporated by reference to Exhibit 5.1 to Form S-8 filed on August 7, 2015 (File No. 333-206211)).
G.
Form of Executive Severance Agreement (incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (File No. 000-09273)).
H.
MOCON, Inc. Incentive Pay Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on December 29, 2014 (File No. 000-09273)).
I.
Description of Non-Employee Director Retirement Plan (incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No. 000-09273)).
J.
Description of Non-Employee Director Compensation Arrangements (filed herewith).
K.
Description of Executive Officer Compensation Arrangements (filed herewith).
L.
Amendment to Executive Severance Agreement (filed herewith).
(b)
Exhibits
The exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index.
(c)
Financial Statement Schedule
See Item 15(a)(2) above for the financial statement schedule filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 4, 2016
MOCON, Inc.
By:/s/ Robert L. Demorest____________
Robert L. Demorest, Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
By:/s/ Elissa Lindsoe________________
Elissa Lindsoe, Chief Financial Officer,
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on March 4, 2016.
Signature and Title
/s/ Robert L. Demorest
Robert L. Demorest, Chairman of the Board, President and Chief Executive Officer
/s/ Donald N. DeMorett
Donald N. DeMorett, Director
/s/ Robert F. Gallagher
Robert F. Gallagher, Director
/s/ Bradley D. Goskowicz
Bradley D. Goskowicz, Director
/s/ Kathleen Iverson
Kathleen Iverson, Director
/s/ Daniel W. Mayer
Daniel W. Mayer, Director
/s/ Tom C. Thomas
Tom C. Thomas, Director
/s/ David J. Ward
David J. Ward, Director
/s/ Paul R. Zeller
Paul R. Zeller, Director
MOCON, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2015, 2014 and 2013
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
MOCON, Inc.:
We have audited MOCON, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. MOCON, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, MOCON, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of MOCON, Inc. and subsidiaries as of and for the year ended December 31, 2015, and our report dated March 4, 2016 expressed an unqualified opinion.
/s/ RSM US LLP
Minneapolis, Minnesota
March 4, 2016
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
MOCON, Inc.:
We have audited the accompanying consolidated balance sheet of MOCON, Inc. and subsidiaries as of December 31, 2015, and the related consolidated statements of income, comprehensive income (loss), shareholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule II. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MOCON, Inc. and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), MOCON, Inc.’s and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 4, 2016 expressed an unqualified opinion on the effectiveness of MOCON, Inc. and subsidiaries’ internal control over financial reporting.
/s/ RSM US LLP
Minneapolis, Minnesota
March 4, 2016
Report of Independent Registered Public Accounting Firm
The Board of Directors and shareholders
MOCON, Inc.:
We have audited the accompanying consolidated balance sheet of MOCON, Inc. and subsidiaries as of December 31, 2014, and the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2014. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MOCON, Inc. and subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Minneapolis, Minnesota
March 4, 2016
MOCON, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2015 and 2014
(expressed in thousands, except share amounts)
See accompanying notes to consolidated financial statements.
MOCON, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2015, 2014 and 2013
(expressed in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
MOCON, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2015, 2014 and 2013
(expressed in thousands)
See accompanying notes to consolidated financial statements.
MOCON, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
Years ended December 31, 2015, 2014 and 2013
(expressed in thousands, except share amounts)
See accompanying notes to consolidated financial statements.
MOCON, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2015, 2014 and 2013
(expressed in thousands)
See accompanying notes to consolidated financial statements.
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
(1)
Summary of Significant Accounting Policies
MOCON Inc. and its subsidiaries develops, manufacturers and markets measurement, analytical, monitoring and consulting products for customers in the barrier packaging, food, pharmaceutical, consumer products, industrial hygiene, air quality monitoring, oil and gas exploration and other industries throughout the world.
We report our operating segments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting. Our operating segments are Permeation Products and Services (“Permeation”), Package Testing Products and Services (“Package Testing”), and Industrial Analyzer Products and Services and Other (“Industrial Analyzers and Other”) for financial reporting purposes.
The following is a summary of the significant accounting policies used in the preparation of our consolidated financial statements.
(a)
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.
(b)
Foreign Currency Translation
The financial statements for operations outside the United States are maintained in their local currencies. All assets and liabilities of our foreign subsidiaries are translated to United States dollars at period-end exchange rates, while revenue and expense accounts are translated at the average exchange rates during the period transactions occurred. Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income (loss) in shareholders’ equity. Gains and losses on foreign currency transactions are included in other income (expense).
(c)
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of short-term investments which are readily convertible to cash.
(d)
Trade Accounts Receivable
Credit is granted to customers in the normal course of business. Receivables are recorded at original carrying value, which approximates fair value, less reserves for estimated uncollectible amounts and sales returns. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment. When facts and circumstances dictate, we may need to adjust our estimates and assumptions.
(e)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, and market represents the lower of replacement cost or estimated net realizable value. We record an estimate for excess and obsolete inventory which is based on historical usage and sales history.
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
(f)
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation and amortization are typically computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred and significant renewals and betterments are capitalized. The present value of capital lease obligations are classified as long-term debt and the related assets are included in property, plant and equipment. Amortization of equipment under capital leases is included in depreciation expense.
(g)
Goodwill and Other Intangible Assets
As of December 31, 2015 and 2014, we have recorded approximately $7.4 million and $8.1 million of goodwill, respectively. We test goodwill at least annually for impairment. We completed our annual impairment test of goodwill and concluded that no impairment existed as of December 31, 2015 and 2014.
Intangible assets consist of developed technology, customer relationships, patents, trademarks and other intangibles. Developed technology, patents, trademarks and other intangibles are carried at cost less accumulated amortization. Costs incurred in connection with applications for new patents are deferred until a final determination, with respect to the application, is made by appropriate regulatory agencies. Costs of patents abandoned are charged to income in the period of abandonment. Developed technologies and customer relationships are amortized over 10 years. Patent costs and trademarks are amortized over the lesser of 17 years or their estimated useful lives using the straight-line method. Tradenames are amortized over the lesser of 20 years or their estimated useful lives using the straight-line method. Other intangibles are amortized over 3 to 5 years.
(h)
Software Development Costs
We capitalize certain software development costs related to software that is essential to the hardware within certain instruments we sell. Capitalized software development costs consist primarily of purchased materials and services. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. Based on our product development process, technological feasibility is generally established once product and detailed program designs have been completed, uncertainties related to high-risk development issues have been resolved through coding and testing, and we have established that the necessary skills, hardware, and software technology are available for production of the product. Once a software product is available for general release to the public, capitalized development costs associated with that product will begin to be amortized to cost of revenue over the product’s estimated economic life, using the greater of straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated timing of product revenue recognition.
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
Our capitalized software development costs are included in intangible assets on the consolidated balance sheets and are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that are determined to be in excess of net realizable value will be expensed in the period such a determination is made. As of December 31, 2015 and 2014 approximately $1.1 million of software development costs are being amortized over 7 to 10 years. Amortization expense was approximately $108,000, $46,000 and $0 for the years ended December 31, 2015, 2014 and 2013, respectively.
The Company capitalizes direct costs of materials and services used in the development and purchase of internal-use software. Amounts capitalized are amortized on a straight-line basis over a period of five years and are reported as a component of property, plant and equipment on the consolidated balance sheets. Depreciation expense was approximately $221,000, $213,000 and $172,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
(i)
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
We review our long-lived assets and certain identifiable intangibles for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
During 2014 we identified an impairment indicator related to our investment in affiliated company, Luxcel Biosciences Limited (Luxcel) and concluded that the carrying value of Luxcel exceeded its fair value. The impairment was determined to be other-than-temporary. As a result, an impairment of $3.2 million, or 100 percent of the carrying value, was recognized within operating expenses of the consolidated statements of income in 2014. The investment in Luxcel has been reported in our unallocated-corporate reporting segment. Likewise, the impairment loss is allocated therein as well.
(j)
Warranty
We have a liability recorded for estimated warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting claim, new product introductions and other factors. In the event we determine that its current or future product repair and replacement costs exceed our estimates, an adjustment to these reserves would be charged to earnings in the period such determination is made.
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
(k)
Use of Estimates
The preparation of the consolidated financial statements, in accordance with generally accepted principles in the United States of America, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant items subject to such estimates and assumptions include the useful lives of property, valuation of plant and equipment, valuation of investment in affiliated company, goodwill and intangible assets, inventory reserves, allowance for doubtful accounts, uncertain tax positions and warranty reserves. Actual results could differ from those estimates.
(l)
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to offset deferred tax assets if, based on the available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized. Based on our prospective adoption of ASU 2015-17, as of December 31, 2015 deferred tax asset and liability is classified as non current.
In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Potential accrued interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.
(m)
Fair Value of Financial Instruments
Our financial instruments are recorded in the consolidated balance sheets. The carrying amount for cash and cash equivalents, accounts receivable, line of credit, accounts payable and accrued liabilities approximates fair value due to the immediate or short-term maturity of these financial instruments.
There are three levels within the fair value hierarchy that may be used to measure fair value:
Level 1: Values based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2: Values based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuation techniques for which all significant assumptions are observable in the market.
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
Level 3: Values generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
(n)
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable when persuasive evidence of an arrangement exists, the product has been shipped or the services have been provided to the customer, title and risk of loss of products has passed to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. The revenue recognition policy does not differ among the various product lines, the marketing venues, or various geographic destinations. We do not have distributors who stock our equipment. We do not offer rebates, price protection, or other similar incentives, and discounts when offered are recorded as a reduction in revenue.
Revenue for service arrangements such as maintenance, repair, technical support are recognized either as the service is provided or ratably over the defined contractual period for service maintenance as noted in the paragraph below. Revenue for preventive maintenance agreements is recognized on a per visit basis and extended warranties on a straight-line basis over the life of the contracts. Unearned revenue related to these contracts is recorded in current liabilities in the consolidated balance sheets.
We periodically have shipments of products to customers in which revenue is recognized under the accounting guidance related to multiple element arrangements. We allocate the overall arrangement fee to each element (both delivered and undelivered items) based on their relative selling price, as demonstrated by vendor - specific evidence (VSOE) or third -party evidence (TPE). Where VSOE or TPE is not available, revenue is allocated using an estimated selling price.
Shipping and handling fees billed to customers are reported within revenue in the consolidated statements of income, and the related costs are included in cost of revenue in the consolidated statements of income.
Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities with the collected taxes recorded as current liabilities in the consolidated balance sheets.
(o)
Advertising Costs
We incur advertising costs associated with trade shows, print advertising and brochures. Such costs are charged to expense as incurred. Advertising expense was approximately $646,000, $845,000 and $831,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
(p)
Research and Development Costs
Research and development costs associated with new products or enhancements are charged to expenses from operations as incurred.
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
(q)
Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the weighted average of common shares outstanding during the year. Diluted net income per share is computed by dividing net income by the weighted average of common and potential dilutive common shares outstanding during the year.
(r)
Share-Based Compensation
Share-based compensation expense is calculated and recognized primarily on a straight-line basis over the vesting periods of the related share-based reward. We generally provide for the vesting of stock options in equal annual installments over a four-year period commencing on the one-year anniversary of the date of grant, or over a one-year period with one-fourth of the underlying shares vesting at the end of each three-month period following the grant date.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model (Black-Scholes). We use historical data to estimate the expected price volatility, expected option life and expected forfeiture rate. We base our estimate of expected volatility for awards granted in 2015, 2014 and 2013 on daily historical trading data of its common stock for a period equivalent to the expected term of the award. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. We estimated the expected term consistent with historical exercise and cancellation activity of its previous share-based grants with a seven-year contractual term. Forfeitures were 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 share price for that period. See Note 9 for additional information on share-based compensation.
(2)
Inventories
The major components of inventories at December 31, 2015 and 2014 were as follows (expressed in thousands):
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
(3)
Property, Plant and Equipment
Property, plant and equipment at December 31, 2015 and 2014 consisted of the following (dollar amounts expressed in thousands):
Depreciation of property, plant and equipment was approximately $1.3 million, $1.3 million and $1.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.
(4)
Goodwill and Other Intangible Assets
Goodwill
As of December 31, 2015 and 2014, goodwill amounted to approximately $7.4 million and $8.1 million, respectively. We test goodwill for impairment annually at the reporting unit level using a fair value approach, in accordance with the provisions of ASC 350, Goodwill and Other. We completed our annual impairment tests during the fourth quarter 2015 and 2014 and determined there was no impairment.
The changes in the carrying amount of goodwill for the year ended December 31, 2015 is as follows (expressed in thousands):
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
Other Intangible Assets
Other intangible assets (all of which are being amortized except projects in process) are as follows (expressed in thousands):
Amortization expense was approximately $1.2 million, $1.3 million and $1.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Estimated amortization expense for the fiscal years ending December 31, 2016 to 2020, and 2021 and thereafter is approximately $1.2 million, $1.1 million, $1.1 million, $1.1 million, $1.1 million and $2.8 million, respectively.
(5)
Warranties
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.
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
Warranty provisions and claims for the years ended December 31, 2015, 2014 and 2013 were as follows (expressed in thousands):
(6)
Commitments and Contingencies
(a)
Leases
We lease our facilities and certain equipment pursuant to operating and capital leases. The facility leases expire at various times through October 2025 and require us to pay operating costs, including real estate taxes. Equipment under capital lease consists of service vehicles and a phone system, net of accumulated depreciation totaling approximately $195,000 and $58,000 for the years ended December 31, 2015 and 2014, respectively.
Rental expense for operating leases, including charges for operating costs, were approximately $1.1 million, $1.2 million and $1.1 million for years ended December 31, 2015, 2014 and 2013, respectively.
The following is a schedule of future minimum lease payments, excluding charges for operating costs, as of December 31, 2015 (expressed in thousands):
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
(b)
Severance Agreements
We have severance agreements with our three executive officers and two of our divisional executives which provides for the payment to the officer of a lump sum amount upon the occurrence of certain termination events.
On September 9, 2014, we entered into a Confidential Separation and Release Agreement (“Separation Agreement”) with Darrell B. Lee, the Chief Financial Officer at that time. In connection with the Separation Agreement, we recognized approximately $107,000 in expense during the year ended December 31, 2014 related to severance costs. As of December 31, 2014, approximately $72,000 is included in accrued compensation and related expenses on the consolidated balance sheets. This balance was paid in full in 2015.
(c)
Inventory Purchase Obligations
At December 31, 2015, we had approximately $6.7 million of purchase order commitments to our suppliers for delivery of inventory primarily during 2016.
(7)
Realignment Expenses
During 2015, we implemented a Realignment Plan in order to simplify our business structure by reducing the number of legal entities and by combining the sales and marketing teams of our Package Testing and Permeation segments under common leadership. The realignment expenses incurred in 2015 were $1.0 million. Substantially all Realignment Plan activities were complete by December 31, 2015. The realignment plan included:
●
The elimination of approximately 10 positions across all areas
●
Significant costs associated with legal and professional fees of $414,000
●
Significant separation costs of $635,000
These expenses are recognized in the consolidated income statements as Realignment expenses. As of December 31, 2015, approximately $483,000 is included in Accrued compensation and approximately $137,000 is included in Accounts payable and related expenses on the consolidated balance sheets and is expected to be paid by December 31, 2016.
(8)
Income Taxes
Income before income taxes was as follows (expressed in thousands):
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
The provision (benefit) for income taxes consists of the following (expressed in thousands):
The effective income tax rate varies from the federal statutory tax rate for the following reasons:
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
The tax effect of significant temporary differences representing deferred tax assets and liabilities at December 31, 2015 and 2014 were as follows (expressed in thousands):
As of December 31, 2015, we have determined that establishing a valuation allowance against certain deferred tax assets is required since it is more likely than not that they will not be realized through generating taxable income of a proper character. This includes approximately $1.1 million from an unrealized capital loss carryover related to the impairment of an investment in an affiliated company, and approximately $171,000 from the carryover of state R&D tax credits which will begin to expire in 2028. However, we believe that it is more likely than not that the remainder of our deferred tax assets at December 31, 2015 will be realized, primarily through generation of future taxable income and tax; this includes approximately $170,000 of foreign tax credit carryover, which begins to expire in 2020 if unutilized.
As of December 31, 2015, there was approximately $4.4 million of accumulated undistributed earnings remaining at the foreign subsidiaries. Management has deemed that the tax impact of undistributed earnings is impracticable to calculate. No deferred tax liability has been provided on the remaining foreign earnings. If they were remitted to the U.S., applicable U.S. Federal and foreign withholding taxes would be partially offset by available foreign tax credits. The Company plans to remit earnings in 2017 in a transaction giving rise to a U.S. tax benefit, as such no deferred taxes have been provided.
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (expressed in thousands):
All unrecognized tax benefits, if recognized, would affect the effective tax rate on income before income taxes. The difference between this amount and the corresponding amount of gross unrecognized tax benefits related primarily to the deferred federal benefit for state income tax related amounts.
We do not anticipate that the total amount of unrecognized tax benefits will change significantly in the next twelve months.
We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Total accrued interest and penalties amounted to approximately $13,000 and $55,000 on a gross basis at December 31, 2015 and 2014, respectively, and are excluded from the reconciliation of unrecognized tax benefits presented above. During 2015, $42,000 was released and recognized in income tax expense.
We file income tax returns in the U.S. federal jurisdiction, several state jurisdictions, China, France, Germany, Denmark, Italy, Luxembourg, Spain and the Netherlands. With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before 2011. In early 2013, the State of Minnesota completed its examination of the four years 2008 through 2011 which resulted in an immaterial adjustment.
(9)
Share-Based Compensation
As of December 31, 2015, we have reserved 360,989 shares of common stock for options and other share-based incentive awards that are still available for grant under our 2006 and 2015 stock incentive plans, and 797,378 shares for options that have been granted under either our 1998, 2006 or 2015 stock incentive plans but have not yet been exercised. We issue new shares of common stock upon exercise of stock options.
Under our share-based incentive plans, option exercise prices are 100 percent of the market value of the common stock at the date of grant, except if incentive options granted under the 1998, 2006 and 2015 plans were granted to persons owning more than 10 percent of our stock, in which case the option price would be 110 percent of the market value. Exercise periods are generally for seven years. The plans allow for the granting of nonqualified stock options. Upon the exercise of these nonqualified options, we may realize a compensation deduction allowable for income tax purposes. The after-tax effect of these tax deductions is included in the accompanying consolidated financial statements as an addition to additional paid-in capital.
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
Share-based compensation expense recognized in the consolidated financial statements for 2015, 2014 and 2013 was as shown below (expressed in thousands):
The following assumptions were used to estimate the fair value of options granted during 2015, 2014 and 2013 using the Black-Scholes model:
Information regarding our stock option plans for 2013, 2014 and 2015 is as follows:
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
The weighted average grant date fair value based on the Black-Scholes model for options granted in 2015, 2014 and 2013 was $3.40, $4.28 and $4.45, respectively. The total intrinsic value of options exercised was $585,000, $979,000 and $824,000 during the years ended December 31, 2015, 2014 and 2013, respectively. The aggregate intrinsic values are based upon the closing price of our common stock on the last day of the respective fiscal year.
A summary of the status of our unvested option shares as of December 31, 2015 is as follows:
As of December 31, 2015, there was $955,000 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 1.9 years. The total fair value of option shares vested during the years 2015, 2014 and 2013 was $630,000, $550,000 and $513,000, respectively.
Employee Stock Purchase Plan
On May 27, 2015, our shareholders approved the 2015 Employee Stock Purchase Plan (“Purchase Plan”) whereby 50,000 shares of common stock will be available for future sale. The first offering period will begin January 1, 2016 and provides participants an option to purchase shares of our common stock at a price per share equal to 85 percent of the value of the share of common stock at the beginning or end of the offering period (whichever is less).
(10)
Other Income (Expense), net
Other income (expense), net for 2015, 2014 and 2013 was as follows (expressed in thousands):
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
(11)
Net Income per Common Share
The following table presents a reconciliation of the denominators used in the computation of net income per common share - basic and net income per common share - diluted for the years ended December 31, 2015, 2014 and 2013 (expressed in thousands):
Outstanding stock options totaling 610,153, 147,100 and 251,150 options for years ended December 31, 2015, 2014 and 2013, respectively, were excluded from the net income per share calculation because the shares would be anti-dilutive.
(12)
Savings and Retirement Plan
We have a 401(k) Savings and Retirement Plan covering our U.S. employees and several defined contribution pension plans covering certain employees outside of the U.S. We provide matching contributions in accordance with the plans. Our contributions to these plans in 2015, 2014 and 2013 were approximately $925,000, $882,000 and $886,000, respectively.
(13)
Debt
Long-term notes payable consists of the following (expressed in thousands):
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
In the U.S., we have a $10.0 million secured line of credit which was amended on August 28, 2015 with a maturity date of August 26, 2018. As of December 31, 2015 the outstanding balance is classified as a noncurrent liability. The amendment increased the principal amount from $6.0 million to $10.0 million, modified the maturity date, decreased the interest rate from 1.75 basis plus one-month LIBOR to 1.50 basis plus one-month LIBOR and revised certain debt covenants. Interest is charged monthly at one-month LIBOR (0.24 percent) plus 1.50 basis points which totaled 1.74 percent and 2.00 percent at December 31, 2015 and 2014, respectively. The line of credit is secured by our assets with the exception of the number of Dansensor shares of outstanding stock that exceeds 65 percent of the total shares outstanding. We had $2.8 million and $3.3 million outstanding on the line of credit at December 31, 2015 and December 31, 2014. Additionally, Dansensor has a DKK 10 million (approximately $1.5 million) available line of credit of which no amount was outstanding as of December 31, 2015 and 2014. 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. We are in compliance with our debt covenants at December 31, 2015 and expect to remain in compliance through 2016.
As of December 31, 2015, the future minimum principal payments of the long-term notes payable for each fiscal year thereafter is as follows (expressed in thousands):
(14)
Business Segments
We have four operating segments, structured by differences in products and services, that are regularly reviewed by our chief operating decision maker to make decisions about allocating resources and assessing segment performance. The segment performance is evaluated at segment operating income which is defined as gross profit less selling, general and administrative expenses and research and development expenses. General corporate expenses, including costs associated with various support functions such as human resources, information technology, finance and accounting, and general and administrative costs, are allocated to the reportable segments primarily on the basis of segment gross margin. Our four operating segments have been aggregated into three reportable segments based on the authoritative guidance. 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.
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
The accounting policies of the reportable segments are the same as those described in Note 1. There were no significant intersegment revenue for the years ended December 31, 2015, 2014 and 2013.
Segment information for the years ended December 31, 2015, 2014 and 2013 are as follows (expressed in thousands):
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
Property, Plant and Equipment, net of accumulated depreciation, by geographic location as of December 31, 2015, 2014 and 2013 is as follows (expressed in thousands):
The following table summarizes total revenue, based upon the region to which revenue to external customers were made for fiscal years 2015, 2014 and 2013 (expressed in thousands).
Our products are marketed outside of North America through our offices in foreign locations and various independent representatives.
(15)
Subsequent Event
On January 14, 2016, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Volatile Analysis Corporation (“VAC”) pursuant to which the Company agreed to sell to VAC the assets exclusively used in its business of providing equipment and analytical chemistry services and related formulation, product development, and consulting services, primarily focused on identification of odors and aromas. This business was conducted from the Company’s Round Rock, Texas facility. The purchase and sale of the assets is expected to be finalized and closed during the first half of 2016, at an aggregate purchase price of $1.3 million. The pending sale of this business does not qualify for discontinued operations or available for sale treatment since it does not represent a strategic shift that had or will have a major effect on the Company’s operations and financial results.
MOCON, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2015
Exhibit
No.
Exhibit
Method of Filing
3.1
Restated Articles of Incorporation of MOCON, Inc.
Incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (File No. 000-09273)
3.2
Third Restated Bylaws of MOCON, Inc.
Incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (File No. 000-09273)
10.1
Office/Warehouse Lease, dated March 9, 2010, by and between MOCON, Inc. and Minnesota Industrial Properties Limited Partnership
Incorporated by reference to Exhibit 10.4 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (File No. 000-09273)
10.2
MOCON, Inc. 2006 Stock Incentive Plan
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 1, 2011 (File No. 000-09273)
10.3
Form of Incentive Stock Option Agreement between MOCON, Inc. and its Executive Officers under the MOCON, Inc. 2006 Stock Incentive Plan
Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on May 23, 2006 (File No. 000-09273)
10.4
Form of Non-Statutory Stock Option Agreement between MOCON, Inc. and its Non-Employee Directors and Executive Officers under the MOCON, Inc. 2006 Stock Incentive Plan
Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on May 23, 2006 (File No. 000-09273)
10.5
MOCON, Inc. 2015 Equity Incentive Plan
Incorporated by reference to Exhibit 5.1 to Form S-8 filed on August 7, 2015 (File No. 333-206212)
Exhibit No.
Exhibit
Method of Filing
10.6
MOCON, Inc. 2015 Employee Stock Purchase Plan
Incorporated by reference to Exhibit 5.1 to Form S-8 filed on August 7, 2015 (File No. 333-206211)
10.7
Form of Executive Severance Agreement
Incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (File No. 000-09273)
10.8
MOCON Inc. Incentive Pay Plan
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on December 29, 2014 (File No. 000-09273)
10.9
Description of Non-Employee Director Retirement Plan
Incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No. 000-09273)
10.10
Subscription and Shareholders Agreement dated December 21, 2009 among MOCON, Inc., Luxcel Biosciences, Enterprise Ireland, Glanbia Enterprise Fund, and certain other parties named therein
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed December 23, 2009 (File No. 000-09273)
10.11
Credit Agreement dated as of March 28, 2012 by and between MOCON, Inc. and Wells Fargo Bank, National Association.
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 3, 2012 (File No. 000-09273)
10.12
Security Agreement: Equipment dated as of March 28, 2012 executed by MOCON, Inc. in favor of Wells Fargo Bank, National Association.
Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on April 3, 2012 (File No. 000-09273)
10.13
Continuing Security Agreement: Rights to Payment and Inventory dated as of March 28, 2012 executed by MOCON, Inc. in favor of Wells Fargo Bank, National Association.
Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on April 3, 2012 (File No. 000-09273)
10.14
Amendment No. 2 to the Credit Agreement dated March 28, 2012, by and between MOCON, Inc., and Wells Fargo Bank, National Association.
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 3, 2014 (File No. 000-09273)
10.15
Amendment No. 3 to the Credit Agreement dated March 28, 2012, by and between MOCON, Inc., and Wells Fargo Bank, National Association.
10.1 to our Current Report on Form 8-K filed on January 14, 2015 (File No. 000-0973)
10.16
Amendment No. 4 to the Credit Agreement dated March 28, 2012, by and between MOCON, Inc., and Wells Fargo Bank, National Association.
10.1 to our Current Report on Form 8-K filed on August 26, 2015 (File No. 000-0973)
Exhibit No.
Exhibit
Method of Filing
10.17
Offer Letter between MOCON, Inc. and Don DeMorett
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 10, 2013 (File No. 000-09273)
10.18
Offer Letter between MOCON, Inc. and Elissa Lindsoe
Incorporated by reference to Exhibit10.2 to our Current Report on Form 8-K filed on September 10, 2014 (File No. 000-09273)
10.19
Description of Non-Employee Director Compensation Arrangements
Filed herewith
10.20
Description of Executive Officer Compensation Arrangements
Filed herewith
10.21
Amendment to Executive Severance Agreement
Filed herewith
21.1
Subsidiaries of MOCON, Inc.
Filed herewith
23.1
Consent of Independent Registered Public Accounting Firm
Filed herewith
23.2 Consent of Independent Registered Public Accounting Firm
Filed herewith
31.1
Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2
Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
Filed herewith
32.2
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
Filed herewith
101.INS
XBRL Instance Document
Filed herewith
101.SCH
XBRL Taxonomy Extension Schema Document
Filed herewith
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Filed herewith
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
1 Confidential treatment has been requested by the issuer with respect to designated portions contained within document. Such portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934, as amended.
Financial Statement Schedule:
II - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is inapplicable or the information is presented in our consolidated financial statements or related notes. (expressed in thousands):
S-1