SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2010
Commission File Number 0-19047
---------
FOOD TECHNOLOGY SERVICE, INC.
(Exact Name of Registrant as Specified in its charter)
FLORIDA 59-2618503
(State of Incorporation or Organization) (Employer Identification Number)
502 Prairie Mine Road, Mulberry, FL 33860
(Address of Principal Executive offices)(Zip code)
Registrant's telephone number, including area code (863) 425-0039
Indicate by check mark whether the Registrant: (1) has filed all by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definition of "accelerated filer", "large accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [ ]
Non-Accelerated Filer [ ] Smaller Reporting Company [ X ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.): Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
Class September 30, 2010
------- ----------------
Common Stock $.01 Par Value 2,756,458 shares
FOOD TECHNOLOGY SERVICE, INC.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - September 30, 2010 and
December 31, 2009 1 - 2
Statements of Operations - Three Months Ended
September 30, 2010 and 2009 3
Statements of Operations - Nine Months Ended
September 30, 2010 and 2009 4
Statements of Cash Flows - Nine Months Ended
September 30, 2010 and 2009 5
Notes to Financial Statements 6 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
Item 4T. Controls and Procedures 18-19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 19
SIGNATURES 20
i
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
FOOD TECHNOLOGY SERVICE, INC.
BALANCE SHEETS
September 30, December 31,
2010 2009
------------ ------------
(Unaudited) (Audited)
ASSETS
------
Current Assets:
Cash $ 1,526,300 $ 610,311
Accounts Receivable, Less Allowance
for Doubtful Accounts of $2,500 319,019 213,752
Prepaid Expenses 41,760 31,807
Deferred Tax Asset 413,700 186,000
------------ ------------
Total Current Assets 2,300,779 1,041,870
------------ ------------
Property, Plant and Equipment:
Buildings 3,282,029 3,282,029
Cobalt 4,486,283 4,404,543
Furniture and Equipment 1,975,353 1,923,743
Less: Accumulated Depreciation (6,277,401) (6,005,524)
------------ ------------
3,466,264 3,604,791
Land 171,654 171,654
------------ ------------
Total Property, Plant and Equipment 3,637,918 3,776,445
------------ ------------
Other Assets:
Deferred Tax Asset 1,070,600 1,128,000
Utility Deposits 5,000 5,000
Other 10,625 -
------------ ------------
Total Other Assets 1,086,225 1,133,000
------------ ------------
Total Assets $ 7,024,922 $ 5,951,315
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
1
FOOD TECHNOLOGY SERVICE, INC.
BALANCE SHEETS
September 30, December 31,
2010 2009
------------ ------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 85,831 $ 36,556
------------ ------------
Total Current Liabilities 85,831 36,556
------------ ------------
Stockholders' Equity:
Common Stock $.01 Par Value, Authorized
5,000,000 Shares, Issued 2,756,458 27,564 27,564
Paid-In Capital 12,216,233 12,186,827
Deficit (5,286,215) (6,281,141)
------------ ------------
6,957,582 5,933,250
Less, 5,154 Treasury Shares at Cost (18,491) (18,491)
------------ ------------
Total Stockholders' Equity 6,939,091 5,914,759
------------ ------------
Total Liabilities and Stockholders'
Equity $ 7,024,922 $ 5,951,315
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
FOOD TECHNOLOGY SERVICE, INC.
STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
2010 2009
------------ ------------
(Unaudited) (Unaudited)
Net Revenues $ 815,275 $ 547,685
------------ ------------
Costs and Operating Expenses
Processing Costs 141,032 154,878
Selling, General and Administrative 261,173 228,702
Depreciation and Amortization 94,333 97,686
------------ ------------
Total Costs and Operating Expenses 496,538 481,266
------------ ------------
Income from Operations 318,737 66,419
Interest Income 680 1,530
Interest Expense (6) (5,458)
------------ ------------
Income before Income Taxes 319,411 62,491
Income Tax Benefit - Deferred 360,400 281,000
------------ ------------
Net Income $ 679,811 $ 343,491
============ ============
Net Income Per Common Share
-Basic $ 0.247 $ 0.125
-Diluted $ 0.236 $ 0.121
Weighted Average Number of Common Shares
Used in Computation
-Basic 2,756,458 2,756,458
-Diluted 2,880,958 2,827,958
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
FOOD TECHNOLOGY SERVICE, INC.
STATEMENTS OF OPERATIONS
Nine Months Ended
September 30,
2010 2009
------------ ------------
(Unaudited) (Unaudited)
Net Revenues $ 2,238,329 $ 1,875,239
------------ ------------
Costs and Operating Expenses
Processing Costs 389,543 389,136
Selling, General and Administrative 750,905 763,846
Depreciation and Amortization 275,419 296,762
------------ ------------
Total Costs and Operating Expenses 1,415,867 1,449,744
------------ ------------
Income from Operations 822,462 425,495
Interest Income 2,170 3,729
Interest Expense (6) (18,935)
------------ ------------
Income before Income Taxes 824,626 410,289
Income Tax Benefit - Deferred 170,300 281,000
------------ ------------
Net Income $ 994,926 $ 691,289
============ ============
Net Income Per Common Share
-Basic $ 0.361 $ 0.251
-Diluted $ 0.345 $ 0.244
Weighted Average Number of Common Shares
Used in Computation
-Basic 2,756,458 2,756,458
-Diluted 2,880,958 2,827,958
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
FOOD TECHNOLOGY SERVICE, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2010 2009
------------ ------------
(unaudited) (unaudited)
Cash Flows from Operations:
Cash Received from Customers $ 2,133,062 $ 1,931,701
Interest Received 2,170 3,729
Interest Paid (6) (18,935)
Cash Paid for Operating Expenses (1,071,720) (1,081,259)
------------ ------------
Net Cash Provided/(Used) by Operations 1,063,506 835,236
Cash Flows from Investing Activities:
Letter of Credit Costs (14,167) -
Purchase of Equipment (51,610) (22,386)
Purchase of Cobalt (81,740) -
------------ ------------
Net Cash Provided/(Used) by Investing (147,517) (22,386)
Cash Flows from Financing Activities:
Repayment on Financing Agreement and
Debenture Payable - (181,064)
------------ ------------
Net Cash Provided/(Used) by Investing - (181,064)
Net Increase (Decrease) in Cash 915,989 631,786
Cash at Beginning of Period 610,311 216,978
------------ ------------
Cash at End of Period $ 1,526,300 $ 848,764
============ ============
Reconciliation of Net Income (Loss) to
Net Cash Provided/(Used) by Operations:
Net Income/(Loss) $ 994,926 $ 691,289
Adjustments to Reconcile
Net Income/(Loss) to Cash Provided or Used:
Amortization 3,542 4,330
Deferred Income Taxes (170,300) (281,000)
Depreciation 271,877 292,432
Non Cash Payments of Salaries 29,406 24,000
(Increase)/Decrease in Receivables (105,267) 56,462
(Increase)/Decrease in Prepaid Expenses (9,953) (8,754)
Increase/(Decrease) in Payables
and Accruals 49,275 56,477
------------ ------------
Net Cash Provided/(Used) by Operations $ 1,063,506 $ 835,236
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Note A - Basis of Presentation
The accompanying financial statements of Food Technology Service, Inc. (the
"Company," "we" or "our") have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and the instructions to
Form 10-Q and, therefore, do not include all information and footnotes normally
included in financial statements prepared in accordance with generally accepted
accounting principles. These interim financial statements should be read in
conjunction with the financial statements and notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2009.
In the opinion of management, these financial statements reflect all
adjustments, including normal recurring adjustments, necessary for a fair
presentation of the financial position as of September 30, 2010, and the
results of operations and cash flows for the interim periods presented.
Operating results for the nine-month period ended September 30, 2010, are not
necessarily indicative of the results that may be expected for the full year.
We have evaluated subsequent events for recognition or disclosure through the
date this Form 10-Q is filed with the Securities and Exchange Commission.
Note B - Summary of Significant Accounting Policies
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements follows:
1. Nature of Business
The Company was organized in December 1985 and is engaged in the business of
operating a gamma irradiation facility using Cobalt 60 for the sterilization
of medical, surgical, pharmaceutical and packaging materials. It also
disinfects fruits, vegetables, oysters and meat products to enhance safety or
eliminate insect pests.
2. Use of Estimates
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing the financial statements.
3. Revenue Recognition
The primary source of revenue is from treating products with Cobalt. Net
Revenue is the gross income from such processing less allowances, if any.
Revenues are recorded after the Company's performance obligation is completed
and product has been processed in accordance with the customer's specifications
and collection of the resulting receivable is probable. A provision is made
for doubtful accounts which historically have not been significant.
6
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Note B - Summary of Significant Accounting Policies (continued)
4. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Assets other than Cobalt have
been depreciated using the straight-line method over the following lives for
both financial statement and tax purposes:
Building 31.5 years
Furniture and Equipment 5-15 Years
The total cost basis of Cobalt has been depreciated using engineering
estimates from published tables under which one-half of the remaining value is
written off over 5.26 year periods.
Estimated useful lives are periodically reviewed and if warranted, changes
will be made resulting in acceleration of depreciation.
MDS Nordion is the Company's supplier of Cobalt 60 and has agreed to accept the
return of all Cobalt 60 that has reached the end of its useful life; therefore,
the Company has provided no environmental remediation liability for the
disposal of the Cobalt 60.
5. Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or
less are considered to be cash and cash equivalents.
6. Concentration of Credit Risk
The Company maintains its cash in three financial institutions. The Federal
Deposit Insurance Corporation insures up to $250,000 per legal entity per
financial institution until December 31, 2013. At September 30, 2010, the
uninsured cash balance was $921,760.
7. Net Income Per Share
Basic net income per share is computed using the weighted average number of
common shares outstanding. Diluted net income per share is computed by the
weighted average number of common shares outstanding, plus the effect of common
stock equivalents that are dilutive.
8. Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, prepaid expenses, deposits,
accounts payable, accrued liabilities approximate fair value.
7
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Note B - Summary of Significant Accounting Policies (continued)
9. Stock Option Plans
The Company has various stock option plans for employees and other individuals
providing services to or serving as Directors of the Company. (See Note E)
Compensation cost under the plans is recognized using the fair value
recognition provisions of FASB ASC 718. Such cost is recognized for shares
expected to vest on a straight-line basis over the requisite service period of
the award using the Black-Scholes option-pricing model.
10. Reclassification
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
Note C - Lines of Credit
The Company no longer uses MDS Nordion to guarantee a $600,000 letter of credit
required by the State of Florida as a condition of the Company's Radioactive
Materials License. In July, 2010, the Company obtained a irrevocable standby
letter of credit of $600,000 through Regions Bank to satisfy State of Florida
requirements. The letter of credit will be automatically extended for an
additional year unless the bank provides a 120 day written notice to the
Company. The letter of credit is collaterized by the Company's real property
and has an annual fee of $12,000.
The Company has a separate $400,000 line of credit with Regions Bank that is
available for the short term capital needs of the Company. The line of credit
is secured by the Company's real property and incurs interest at prime plus
1.35%. As of September 30, 2010, the Company has not used the line of credit.
Note D - Income Taxes and Available Tax Loss Carryforwards
As of September 30, 2010, the Company had income tax net operating loss ("NOL")
carryforward for federal income tax purposes of approximately $4,107,340. The
NOL will expire in various years ending through the year 2022.
The components of income tax benefits attributable to operations are
as follows:
8
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Note D - Income Taxes and Available Tax Loss Carryforwards (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
----------- ----------- ----------- -----------
Current
Federal $ - $ - $ - $ -
State - - - -
----------- ----------- ----------- -----------
$ - $ -
=========== =========== =========== ===========
Deferred-benefit
Federal $ (307,700) $ - $ (145,400) $ -
State (52,700) - (24,900) -
----------- ----------- ----------- -----------
$ (360,400) $ - $ (170,300) $ -
=========== =========== =========== ===========
Deferred income taxes reflect the net tax effects of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows:
As of September 30, 2010 As of December 31, 2009
Current Non-Current Current Non-Current
----------- ----------- ----------- -----------
Deferred tax assets
NOL carryforwards $ 413,700 $ 1,070,600 $ 186,000 $ 1,128,000
----------- ----------- ----------- -----------
Deferred tax asset $ 413,700 $ 1,070,600 $ 186,000 $ 1,128,000
=========== =========== =========== ===========
The change in the valuation allowance is as follows:
December 31, 2009 $ 542,000
September 30, 2010 61,400
-----------
Change in valuation allowance $ 480,600
===========
A valuation allowance has been established to eliminate the net deferred tax
benefit due to uncertainty as to whether the tax benefits would ever be
realized. During 2010, as a result of the continuing diversification and
growth in customer base, ongoing profits from operations and the Company's
revised estimate of future taxable income, it was concluded that it is more
likely than not that future taxable income will be sufficient to realize a
larger portion of the Company's deferred asset.
9
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Note D - Income Taxes and Available Tax Loss Carryforwards (continued)
The Company believes that its estimate of future operations is conservative
and reasonable, but inherently uncertain. Accordingly, if future operations
generate taxable income greater than the projections, further adjustments to
reduce the reserve are possible. Conversely, if the Company realizes
unforeseen material losses in the future and its future projections of
income decrease, the allowance could be increased resulting in a charge to
income.
Income taxes for the periods ended September 30, 2010 and 2009 differ from the
amounts computed by applying the effective income tax rates of 37.63% and
37.63%, respectively, to income before income taxes as a result of the
following:
Three Months Ended
September 30,
2010 2009
----------- -----------
Expected provision at US statutory rate $ 108,600 20,276
State income tax net of federal benefit 11,600 3,471
Change in estimates in available NOL
carry forwards (480,600) (304,747)
----------- -----------
Income tax benefit $ (360,400) $(281,000)
=========== ===========
Nine Months Ended
September 30,
2010 2009
----------- -----------
Expected provision at US statutory rate $ 280,400 133,122
State income tax net of federal benefit 29,900 22,788
Change in estimates in available NOL
carry forwards (480,600) (436,910)
----------- -----------
Income tax benefit $ (170,300) $ (281,000)
=========== ===========
The Company's tax years 2006 through 2009 remain open to examination by taxing
jurisdictions.
Note E - Stock Options
On February 9, 1999 the Board of Directors approved an option program for non-
employee Directors.
10
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Note E - Stock Options (continued)
The program was amended in 2001 and 2005 to provide for the annual granting to
each non-employee Director of five year options to purchase 1,500 shares of
common stock, exercisable at the end of one year at the market value of the
shares of common stock on the date of grant. Also, the Chairman of the Board is
awarded annually five year options to purchase an additional 2,500 shares.
Year Shares Per Share
---- ------ ---------
2006 10,000 $3.28
2007 10,000 $2.52
2008 11,500 $2.18
On June 23, 2000 the Stockholders approved the 2000 Incentive and
Non-Statutory Stock Option Plan (the "2000 Plan").
The 2000 Plan is administered by the Board of Directors who is authorized to
grant incentive stock options ("ISO's") to Officers and employees of the
Company and non-qualified options ("NQO's") for certain other individuals
providing services to or serving as Directors of the Company.
The maximum number of shares of the Company's Stock that may be issued under
the 2000 Plan is 500,000 shares. Options granted and outstanding under this
plan are as follows:
Year Shares
---- -------
2003 5,000
2006 2,500
2006 100,000
2007 20,000
2008 60,000
-------
187,500
=======
The ISO's are exercisable 20% of the authorized amount immediately and 20%
in each of the following four years. ISO's granted to an optionee terminate 30
to 90 days after termination of employment or other relationship, except that
ISO's terminate the earlier of the expiration date of the option, or 90 to 180
days in the event of death and 180 days to one year in the event of disability.
No further options are being issued under the 2000 Plan.
On May 14, 2009 the Stockholders approved the 2009 Incentive and Non-Statutory
Stock Option Plan (the "2009 Plan").
11
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Note E - Stock Options (continued)
The 2009 Plan is administered by the Board of Directors who is authorized to
grant incentive stock options ("ISO's") to Officers and employees of the Company
and non-qualified options ("NQO's") for certain other individuals providing
services to or serving as Directors of the Company.
The maximum number of shares of the Company's Stock that may be issued under
the 2009 Plan is 125,000 shares. Options granted and outstanding under this
plan are as follows:
Year Shares
---- -------
2009 11,500
2010 11,500
-------
23,000
=======
The aggregate fair market value (determined at the time an ISO is granted) of
the Common Stock with respect to which ISO's are exercisable for the first time
by any person during any calendar year under the Plans shall not exceed
$100,000.
The ISO's are exercisable 20% of the authorized amount immediately and 20% in
each of the following four years. ISO's granted to an optionee terminate 30 to
90 days after termination of employment or other relationship, except that ISO's
terminate the earlier of the expiration date of the option, or 90 to 180 days in
the event of death and 180 days to one year in the event of disability.
Changes that occurred in options outstanding are summarized below:
Three Months Ended
September 30,
2010 2009
---------------- ----------------
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ----- -------- -----
Outstanding at
beginning of period 232,750 $2.46 242,250 $2.53
Granted 11,500 $2.15 -- --
Exercised -- -- -- --
Expired/canceled (2,250) $3.56 -- --
-------- ----- ------- -----
12
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Note E - Stock Options (continued)
Outstanding at
end of period 242,000 $2.43 242,250 $2.53
Exercisable at
end of period 178,458 $2.67 141,917 $2.89
Nine Months Ended
September 30,
2010 2009
---------------- ----------------
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ----- -------- -----
Outstanding at
beginning of period 242,250 $2.53 232,250 $2.57
Granted 11,500 $2.15 11,500 $1.89
Exercised -- -- -- --
Expired/canceled (11,750) $4.11 (1,500) $4.96
-------- ----- ------- -----
Outstanding at
end of period 242,000 $2.43 242,250 $2.53
Exercisable at
end of period 178,458 $2.67 141,917 $2.89
As mentioned in Note B, effective January 1, 2006, the Company adopted the
fair value recognition provisions of FASB ASC 718. As a result, additional
compensation expense of $10,826 and $8,000 was recorded for the three months
ended September 30, 2010 and 2009, respectively. For the nine months ended
September 30, 2010 and 2009 additional compensation expenses recorded were
$29,406 and $24,000, respectively. An additional $47,036 could be recorded
over the remaining vesting period of 60 months. The Company used the
following assumptions in applying the Black-Scholes pricing method:
Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
-------- -------- -------- --------
Risk free interest rate 2.04% 1.98% 2.04% 1.98%
Expected Volatility 87% 81% 87% 81%
Expected Life 5 years 5 years 5 years 5 years
Dividend Yield 0% 0% 0% 0%
13
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Note F - Related Party Transactions
The Company's supplier of Cobalt, MDS Nordion owns approximately 18.19% of the
Company's outstanding common stock.
The Company has recently purchased the following Cobalt from MDS Nordion:
Year Curies Amount
---- ------- --------
2007 384,065 $799,523
2008 200,000 470,688
2010 105,727 81,740
Note G - Earnings Per Share
Earnings per share is calculated in accordance with ASC 260-10, "Earnings Per
Share". Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the years. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common shares were exercised or
converted into common shares. Common share equivalents are excluded from the
computation of diluted earnings per share if their effects would be anti-
dilutive.
ASC 260-10 requires the presentation of both Basic EPS and Diluted EPS on the
face of the Company's Statements of Operations.
The following table sets forth the computation of basic and diluted per share
information:
Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
---------- ---------- ---------- ----------
Numerator:
Net Income $ 679,811 $ 343,491 $ 994,926 $ 691,289
Denominator:
Weighted average common
shares outstanding 2,756,458 2,756,458 2,756,458 2,756,458
Dilutive effect of stock 124,500 71,500 124,500 71,500
options ---------- ---------- ---------- ----------
Weighted average common
shares outstanding,
assuming dilution 2,880,958 2,827,958 2,880,958 2,827,958
=========== =========== =========== ===========
14
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Note G - Earnings Per Share (continued)
Potential common shares from out of the money options were excluded from the
computation of diluted EPS because calculation of the associated potential
common shares have an anti-dilutive effect on EPS. The following table lists
options that were excluded from EPS.
Out of the money options excluded Three Nine
Months Ended Months Ended
September 30, September 30,
2010 2009 2010 2009
------ ------ ------ ------
Stock option with exercise price of $3.60 5,000 5,000 5,000 5,000
Stock option with exercise price of $4.56 - 2,500 - 2,500
Stock option with exercise price of $4.12 - 7,000 - 7,000
Stock option with exercise price of $3.56 - 2,250 - 2,250
Stock option with exercise price of $3.36 2,500 2,500 2,500 2,500
Stock option with exercise price of $3.28 10,000 10,000 10,000 10,000
Stock option with exercise price of $3.24 100,000 100,000 100,000 100,000
Stock option with exercise price of $2.52 - 10,000 - 10,000
Stock option with exercise price of $2.57 - 20,000 - 20,000
Stock option with exercise price of $2.18 - 11,500 - 11,500
------- ------- ------- -------
Total anti-dilutive options
excluded from EPS 117,500 170,750 161,250 170,750
======= ======= ======= =======
Note H - Concentration and Credit Risk
Although the Company continues to diversify its customer base, three customers
accounted for approximately 57% and 61% of revenues for the three months ended
September 30, 2010 and 2009, respectively. For the nine months ended September
30, 2010 and 2009 three customers accounted for approximately 60% and 63% of
revenues, respectively.
The Company's cash and accounts receivable are subject to potential credit
risk. Management continuously monitors the credit standing of the financial
institutions and customers with which the Company deals. A provision has been
made for doubtful accounts which historically have not been significant.
Note I - Recent Accounting Pronouncements
Adoption of New Accounting Standards
In May 2009, the FASB issued FASB ASC 855-10-05, "Subsequent Events", which
requires companies to evaluate events and transactions that occur after the
balance sheet date but before the date the financial statements are issued,
or available to be issued in the case of non-public entities. FASB ASC
15
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
Note I - Recent Accounting Pronouncements (continued)
855-10-05 requires entities to recognize in the financial statements the
effect of all events or transactions that provide additional evidence of
conditions that existed at the balance sheet date, including the estimates
inherent in the financial preparation process. Entities shall not recognize
the impact of enters or transactions that provide evidence about conditions
that did not exist at the balance sheet date but arose after that date. FASB
ASC 855-10-05, also requires entities to disclose the date through which
subsequent events have been evaluated. FASB ASC 855-10-05 is effective for
the interim and annual reporting periods ending after June 15, 2009. We
adopted the provisions of FASB ASC 855-10-05 for the year ended December 31,
2009, as required, the adoption did not have a material impact on our
financial statements.
In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162" ("The Codification"). The Codification
reorganized existing U.S. accounting and reporting standards issued by the FASB
and other related private sector standard setters into a single source of
authoritative accounting principles arranged by topic. The Codification
supersedes all existing U.S. accounting standards; all other accounting
literature not included in the Codification (other than Securities and Exchange
Commission guidance for publicly-traded companies) is considered non-
authoritative. The Codification was effective on a prospective basis for
interim and annual reporting periods ending after September 15, 2009. The
adoption of the Codification changed the Company's references to U.S. GAAP
accounting standards but did not impact the Company's financial statements.
Note J - Subsequent Events
In November, 2010, the Company paid MDS Nordion approximately $510,000 from
cash reserves to purchase Cobalt for delivery during the first quarter of
2011. This prepayment allows the Company to receive a discount on the price
of the Cobalt.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company had revenues of $815,275 during the third quarter of 2010 compared
to revenues of $547,685 for the same period in 2009. This is an increase of
approximately 49 percent due to new customers and growth of existing
customers. The Company had income before taxes during the third quarter of
2010 of $319,411 compared to income before taxes of $62,491 during the third
quarter of 2009. This is an increase of approximately 411 percent. For the
first three quarters of 2010, the Company had revenues of $2,238,329 and
income before taxes of $824,626. Revenues during the first three quarters of
2009 were $1,875,239 and the Company had income before taxes of $410,289.
Revenues increased by about 19.4 percent and income before taxes increased by
approximately 101 percent in the first three quarters of 2010 compared to the
same period in 2009.
Included in revenue for the first three quarters of 2009 is a settlement fee
of $85,229 relating to the termination of a warehouse lease with a former
customer. Without the settlement fee, revenue from operations for the first
three quarters of 2009 would have been $1,790,010.
The Company's statement of operations reflects non-cash deferred income tax
benefit for the three months ended September 30, 2010 in the amount of $360,400.
The Company periodically evaluates the value of tax-loss carry-forwards on its
financial statements. During the third quarter of 2009, the Company increased
the value of the deferred tax asset which increased net income by $281,000.
During the third quarter of 2010, based on increased profitability and
potential future profitability, the Company again increased the value of the
deferred tax asset which increased net income by $360,400. These adjustments
resulted in net income during the third quarter of 2010 of $679,811 versus
net income of $343,491 during the third quarter of 2009. Similarly, the
Company had net income of $994,926 during the first three quarters of 2010
verses $691,289 during the same period in 2009.
During the third quarter of 2010, processing costs as a percentage of sales
were 17.3 percent. This compares to 28.2 percent during the third quarter of
2009. These costs are relatively fixed and the decrease in the third quarter
of 2010 reflects the increased revenues. General administrative and
development costs as a percentage of sales during the third quarter of 2010
were 32 percent. This compares to 41.8 percent in the third quarter of 2009.
These costs are also relatively fixed and the decline in general,
administrative and development expenses, as a percentage of sales, is primarily
due to the increased sales.
During the first three quarters of 2010, processing costs as a percentage of
sales were 17.4 percent. This compares to 20.8 percent with the lease
settlement revenue and 21.7 percent without such revenue in the first three
quarters of 2009. Again, these costs are relatively fixed and the decrease
during the third quarter of 2010 is attributable to increased revenue.
General, administrative and development costs as a percentage of sales were
33.6 percent during the first three quarters of 2010. This compares to 40.7
percent during the first three quarters of 2009 with the lease settlement
revenue and 42.7 percent during the first three quarters of 2009 without such
revenue. This reflects the fixed nature of these costs and the increase in
revenue.
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The Company's cash on hand increased from $610,311 on December 31, 2009 to
$1,526,300 on September 30, 2010. Approximately $510,000 was used in November
2010 to purchase Cobalt for delivery during the first quarter of 2011.
Liquidity and Capital Resources
As of September 30, 2010, the Company has cash on hand of $1,526,300 and
accounts receivable of $319,019.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 4T. Controls and Procedures
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Securities
Exchange Act Rules 13a-15(f) and 15d-15(f). The Company's internal control
system was designed to provide reasonable assurance to the Company's
management and board of directors regarding the preparation and fair
presentation of published financial statements. All internal control
systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
As of the end of the period covered by this report, an evaluation was
performed on the effectiveness of the design and operation of our disclosure
controls and procedures by our Chief Executive Officer who also acts as the
Company's Chief Financial Officer. Based upon that evaluation, our Chief
Executive/Chief Financial Officer concluded that the design and operation of
our disclosure controls and procedures were effective as of the end of the
period covered by this report.
In accordance with Rule 13a-15 of the General Rules and Regulations
promulgated under the Securities Exchange Act of 1934 (the "Act"), the term
"disclosure controls and procedures" means controls and other procedures of an
issuer that are designed to ensure that information required to be disclosed
by the issuer in the reports that it files or submits under the Act is
recorded, processed, summarized and reported, within the time periods
specified in the Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
The Company's management assessed the effectiveness of the Company's internal
control over financial reporting as of September 30, 2010 by using the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") in Internal Control - Integrated Framework. Based on this
assessment, management believes that as of September 30, 2010, the Company's
internal controls over financial reporting is effective.
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There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that
materially affected, or are reasonably likely to materially affect the
Company's internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The company is not involved in any legal proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
Number Description
31 Certifications of Officers pursuant to Rule 13a-14(a)/15d-14(a)
32 Certifications of Officers pursuant to Section 1350, of the
Sarbanes - Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 2010 FOOD TECHNOLOGY SERVICE, INC.
/S/ Richard Hunter
---------------------------------
Richard Hunter, Ph.D., Chief Executive
Officer and Chief Financial Officer
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