Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2011

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, 2011
Common Stock $.01 Par Value		2,804,742 shares

 

 

 

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

TABLE OF CONTENTS

 

PART I:		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Balance Sheets - September 30, 2011 and December 31, 2010			2-3
		Statements of Operations - Three Months Ended September 30, 2011 and 2010			4
		Statements of Operations - Nine Months Ended September 30, 2011 and 2010			5
		Statements of Cash Flows - Nine Months Ended September 30, 2011 and 2010			6
		Notes to Financial Statements			7-16
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			20
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			20
Item 3.		Defaults upon Senior Securities			20
Item 4.		Submission of Matters to a Vote of Security Holders			20
Item 5.		Other Information			20
Item 6.		Exhibits			20
SIGNATURES					21

---

Table of Contents

PART I:

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

FOOD TECHNOLOGY SERVICE, INC.

BALANCE SHEETS

 

		September 30, 2011				December 31, 2010
		(Unaudited)				(Audited)
ASSETS
Current Assets:
Cash		$	1,697,546			$	1,294,540
Accounts Receivable, Less Allowance for Doubtful Accounts of $5,000 and $2,500			447,028				354,489
Other Receivable			7,428				—
Prepaid Expenses			56,086				24,856
Deferred Tax Asset			556,900				369,200
Total Current Assets			2,764,988				2,043,085
Property, Plant and Equipment:
Buildings			3,355,843				3,282,029
Cobalt			5,900,978				4,486,283
Furniture and Equipment			2,045,533				1,981,525
Land			171,654				171,654
Less: Accumulated Depreciation			(6,703,917	)			(6,366,316	)
Total Property, Plant and Equipment			4,770,091				3,555,175
Other Assets:
Deferred Tax Asset			414,100				987,300
Utility Deposits			5,000				5,000
Prepaid Cobalt			—				512,978
Loan Fees - net			10,306				14,955
Total Other Assets			429,406				1,520,233
Total Assets		$	7,964,485			$	7,118,493

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

 

2

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

BALANCE SHEETS

 

		September 30, 2011				December 31, 2010
		(Unaudited)				(Audited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable		$	28,676			$	9,783
Accrued Liabilities			104,787				16,273
Total Current Liabilities			133,463				26,056
Stockholders’ Equity:
Common Stock $.01 Par Value, Authorized 5,000,000 Shares, Issued 2,804,742 and 2,756,458, respectively			28,047				27,564
Paid-In Capital			12,265,148				12,227,059
Deficit			(4,443,682	)			(5,143,695	)
Less, 5,154 Treasury Shares at Cost			(18,491	)			(18,491	)
Total Stockholders’ Equity			7,831,022				7,092,437
Total Liabilities and Stockholders’ Equity		$	7,964,485			$	7,118,493

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

 

3

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

STATEMENTS OF OPERATIONS

 

		Three Months Ended September 30,
		2011				2010
		(Unaudited)				(Unaudited)
Net Revenues		$	1,011,650			$	815,275
Costs and Operating Expenses
Processing Costs			167,918				141,032
Selling, General and Administrative			294,703				261,173
Depreciation and Amortization			132,419				94,333
Interest Expense			—				6
Total Costs and Operating Expenses			595,040				496,544
Income from Operations			416,610				318,731
Interest Income			215				680
Income before Income Taxes			416,825				319,411
Income Tax (Expense) Benefit - Deferred			(157,200	)			360,400
Net Income		$	259,625			$	679,811
Net Income Per Common Share
-Basic		$	0.093			$	0.247
-Diluted		$	0.089			$	0.236
Weighted Average Number of Common Shares
Used in Computation
-Basic			2,787,182				2,756,458
-Diluted			2,926,682				2,880,958

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

 

4

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

STATEMENTS OF OPERATIONS

 

		Nine Months Ended September 30,
		2011				2010
		(Unaudited)				(Unaudited)
Net Revenues		$	2,782,249			$	2,238,329
Costs and Operating Expenses
Processing Costs			457,790				389,543
Selling, General and Administrative			885,018				750,905
Depreciation and Amortization			354,467				275,419
Interest Expense			253				6
Total Costs and Operating Expenses			1,697,528				1,415,873
Income from Operations			1,084,721				822,456
Interest Income			792				2,170
Income before Income Taxes			1,085,513				824,626
Income Tax (Expense) Benefit - Deferred			(385,500	)			170,300
Net Income		$	700,013			$	994,926
Net Income Per Common Share
-Basic		$	0.253			$	0.361
-Diluted		$	0.241			$	0.345
Weighted Average Number of Common Shares Used in Computation
-Basic			2,766,812				2,756,458
-Diluted			2,906,312				2,880,958

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

 

5

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

STATEMENTS OF CASH FLOWS

 

		Nine Months Ended September 30,
		2011				2010
		(Unaudited)				(Unaudited)
Cash Flows from Operations:
Cash Received from Customers		$	2,689,710			$	2,133,062
Interest Received			792				2,170
Interest Paid			(253	)			(6	)
Cash Paid for Operating Expenses			(1,235,486	)			(1,071,720	)
Net Cash Provided by Operations			1,454,763				1,063,506
Cash Flows from Investing Activities:
Letter of Credit Costs			(12,218	)			(14,167	)
Purchase of Cobalt, Delivery & Installation			(901,717	)			(81,740	)
Purchase of Equipment			(64,008	)			(51,610	)
Building Renovation			(73,814	)			—
Net Cash (Used) by Investing			(1,051,757	)			(147,517	)
Net Increase in Cash			403,006				915,989
Cash at Beginning of Period			1,294,540				610,311
Cash at End of Period		$	1,697,546			$	1,526,300
Reconciliation of Net Income to
Net Cash Provided by Operations:
Net Income		$	700,013			$	994,926
Adjustments to Reconcile Net Income/(Loss) to Cash Provided or Used:
Amortization			16,867				3,542
Deferred Income Taxes			385,500				(170,300	)
Depreciation			337,601				271,877
Non Cash Payments of Salaries			38,572				29,406
(Increase)/Decrease in Receivables			(92,539	)			(105,267	)
(Increase)/Decrease in Other Receivables			(7,428	)			—
(Increase)/Decrease in Prepaid Expenses			(31,230	)			(9,953	)
Increase/(Decrease) in Payables			18,893				3,090
Increase/(Decrease) in Accruals			88,514				46,185
Net Cash Provided/(Used) by Operations		$	1,454,763			$	1,063,506

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

 

6

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

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, 2010.

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, 2011, and the results of operations and cash flows for the interim periods presented. Operating results for the period ended September 30, 2011, 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 gamma radiation from Cobalt 60. 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.

 

7

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

 

4. Accounts Receivable and Allowances for Doubtful Accounts

Accounts receivable are customer obligations arising from the sale of services and are due under normal trade terms requiring payment within 30 days from the invoice date. Accounts over ninety days are monitored closely by Management and delinquencies are determined based on payment history, aging analysis and any specific known troubled assets. Receivables are charged off to the allowance for doubtful accounts once Management determines that they are uncollectable.

5. 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.

Nordion is the Company’s supplier of Cobalt 60. When we purchase Cobalt, Nordion agrees 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.

6. Cash and Cash Equivalents

All highly liquid investments with original maturities of three months or less are considered to be cash and cash equivalents.

7. 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 and all funds in noninterest-bearing transaction accounts until December 31, 2012. The Company had no uninsured cash balances at September 30, 2011 and December 31, 2010.

 

8

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

 

8. 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.

9. Fair Value of Financial Instruments

The carrying value of cash, accounts receivable, prepaid expenses, deposits, accounts payable and accrued liabilities approximate fair value.

10. 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 I - Stock Options) 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.

11. Advertising

The Company expenses all advertising costs when incurred. Advertising expense recognized for the second quarter ended September 30, 2011 and 2010 was $ 799 and $2,897, respectively. For the nine months ended September 30, 2011 and 2010, advertising expense recognized was $ 4,363 and $7,044, respectively.

Note C - Certificate of Deposit

As of January 2011 the certificate of deposit was not renewed.

Note D - Loan Fees

During the first quarter of 2011 renewal fees in the amount of $12,219 were incurred in connection with the Regions letter of credit (See Note F - Letter and Line of Credit) for a total of $34,973. These fees were amortized based on the life of the loans. Amortization expense of for the three months ended September 30, 2011 and 2010 was $3,261 and $3,542, respectively. For the nine months ended September 30, 2011 and 2010 amortization expense was $16,867 and $3,542, respectively.

 

9

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

 

Note E - Prepaid Cobalt

In November 2010 the Company paid $512,978 to Nordion (See Note J - Related Party) for the delivery of 200,000 curies of Cobalt in early 2011. The delivery was received and placed in service in January 2011.

Note F - Letter and Line of Credit

The Company no longer uses 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 an 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 $12,219.

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, 2011 the Company has not used the line of credit.

Note G - Income Taxes and Available Tax Loss Carryforwards

The components of income tax / (benefit) are as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
Current
Federal		$	—			$	—			$	—			$	—
State			—				—				—				—
			—				—				—				—
Deferred-benefit
Federal			134,200				(307,700	)			329,200				(145,400	)
State			23,000				(52,700	)			56,300				(24,900	)
			157,200				(360,400	)			385,500				(170,300	)
Total income tax expense /(benefit)		$	157,200			$	(360,400	)		$	385,500			$	(170,300	)

 

10

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

 

Income taxes for the three and nine months ended September 30, 2011 and 2010 differ from the amounts computed by applying the effective income tax rates of 37.63% to income before income taxes as a result of the following:

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Expected provision at US statutory rate		$	141,700			$	108,600			$	369,100			$	280,400
State income tax net of federal benefit			15,100				11,600				39,400				29,900
Nondeductible expenses			400				—				1,500				—
Change in estimates and available NOL carryforwards			—				—				1,000				—
Change in valuation allowance			—				(480,600	)			(25,500	)			(480,600	)
Income tax expense /(benefit)		$	157,200			$	(360,400	)		$	385,500			$	(170,300	)

The Company had income tax net operating loss (“NOL”) carryforwards for federal income tax purposes. The NOL will expire in various years ending through the year 2030.

The Company’s NOL carryforward is as follows:

 

		September 30,				December 31,
		2011				2010
NOL carryforward - Beginning of period			3,672,530				4,933,066
Less used			(1,228,933	)			(1,099,151	)
Less expired			—				(161,385	)
NOL carryfoward - End of period			2,443,597				3,672,530

The components of the Company’s deferred tax assets are as follows:

 

		September 30,				December 31,
		2011				2010
NOL carryforward		$	919,600			$	1,382,000
Accrued Salary			15,800				—
Stock Options			35,600				—
Less valuation allowance			—				(25,500	)
Deferred Benefit		$	971,000			$	1,356,500

The change in the valuation allowance is as follows:

 

December 31, 2010			(25,500	)
September 30, 2011			—
Change in valuation allowance			25,500

 

11

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

 

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.

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 2011, 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 all of the Company’s deferred asset.

The Company believes that its estimate of future operations is conservative and reasonable, but inherently uncertain. 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.

These amounts have been presented in the financial statements as follows:

 

		September 30,				December 31,
		2011				2010
Current		$	556,900			$	369,200
Non-Current			414,100				987,300
Net Deferred tax asset		$	971,000			$	1,356,500

The Company’s tax years 2008 through 2010 remain open to examination by taxing jurisdictions.

Note H - Accrued Liabilities

Effective January 1, 2011, the Board of Directors modified the President’s employment contract to include a resignation clause. This clause provides two weeks base pay for every full year worked for the company, if six month notice is received before the President leaves. As of September 30, 2011 an accrual of $42,000 is recorded in relation to the resignation clause.

Note I - Stock Options

On May 14, 2009 the Stockholders approved the 2009 Incentive and Non-Statutory Stock Option Plan (the “2009 Plan”).

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.

 

12

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

 

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
2011			10,000
			33,000

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.

A summary of the status of the Company’s stock options for the period from December 31, 2010 to September 30, 2011 is as follows:

 

		Number of Shares				Wtd. Avg. Exercise Price				Wtd. Avg. Remaining Contractual Life (Yrs)
Outstanding at December 31, 2010			242,000			$	2.43
Granted			10,000			$	4.85
Exercised			(48,284	)		$	3.24
Expired/forfeited			(64,216	)		$	3.25
Outstanding at September 30, 2011			139,500			$	1.95				4.27
Vested/exercisable at September 30, 2011			99,500			$	1.80				3.34

 

13

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

 

A summary of the status of the Company’s nonvested stock options for the period from December 31, 2010 to September 30, 2011 is as follows:

 

		Number of Shares				Wtd. Avg. Grant Date Fair Value
Nonvested at December 31			64,500			$	0.58
Granted			10,000			$	3.25
Vested			(34,500	)		$	1.62
Nonvested at September 30, 2011			40,000			$	0.37
Expired/Forfeited during the period			64,216			$	0.90

The Company estimated the fair value at the date of grant for the nine months ended September 30, 2011 using the Black Scholes option valuation model with the following assumptions:

 

Risk free interest rate		0.96% - 2.24%
Expected volatility		83.58% - 84.66%
Expected life		5 years
Dividend yield		0%

Option valuation models require the input of highly subjective assumptions including the expected option life. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

During the quarter ended September 30, 2011, 93,917 stock options were exercised under a cashless program resulting in the issuance of 48,284 shares.

The Company recognized $14,106 and $10,826 stock-based compensation expense for the three months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011 and 2010 the stock-based compensation expense recognized was $38,572 and $29,406, respectively.

As of September 30, 2011, there was $30,181 of unrecognized compensation costs related to non-vested stock options, which will be amortized to expense over future periods. The Company expects to recognize that cost over the weighted average vesting period 1.68 years.

Note J - Related Party Transactions

The Company’s supplier of Cobalt, Nordion (Canada) Inc., formerly MDS Nordion, owned approximately 16.8% of the Company’s outstanding common stock. By agreement entered into February 10, 2011, Nordion (Canada) Inc., formerly MDS Nordion, sold 463,317 shares of common stock to Fort Ashford Holdings, LLC for $3.60 per share. As of February 25, 2011, the closing date for the sale, Nordion (Canada) ceased to be a shareholder and no longer has any direct or indirect interest in the outstanding shares of common stock of the Company.

 

14

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

 

The Company has recently purchased the following Cobalt from Nordion:

 

Year		Curies		Amount
2010		105,757		$	81,740
2011		499,998		$	1,414,694

In November 2010, the Company paid Nordion approximately $510,000 to purchase Cobalt for delivery during the first quarter of 2011. This prepayment allowed the Company to receive a discount on the price of the Cobalt. The Cobalt was delivered as scheduled in January 2011.

Note K - Earnings Per Share

Earnings per share are calculated in accordance with ASC 260-10, “Earnings Per Share”. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the years. Diluted earnings per share reflect 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 September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
Numerator:
Net Income		$	259,625			$	679,811			$	700,013			$	994,926
Denominator:
Wtd. Avg. common shares outstanding			2,787,182				2,756,458				2,766,812				2,756,458
Dilutive effect of stock options			139,500				124,500				139,500				124,500
Wtd. Avg. common shares outstanding, assuming dilution			2,926,682				2,880,958				2,906,312				2,880,958

 

15

---

Table of Contents

FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

 

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 has an anti-dilutive effect on EPS. The following table lists options that were excluded from EPS.

Out of the money stock options excluded

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
Stock option with exercise price of $3.60			—				5,000				—				5,000
Stock option with exercise price of $3.36			—				2,500				—				2,500
Stock option with exercise price of $3.28			—				10,000				—				10,000
Stock option with exercise price of $3.24			—				100,000				—				100,000
			—				117,500				—				117,500

Note L - Concentration and Credit Risk

Although the Company continues to diversify its customer base, three customers accounted for approximately 66% and 57% of revenues for the three months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011 and 2010 the three customers accounted for approximately 66% and 60% 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.

The Company’s supplier of Cobalt 60 is Nordion (Canada) Inc. In the event it is unavailable from Nordion the Company can obtain Cobalt 60 from one other source.

Note M - Subsequent Events

We have evaluated subsequent events for recognition or disclosure in these financial statements through the date of issuance, and determined there are no material transactions to recognize or disclose.

 

16

---

Table of Contents

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company had record revenues of $1,011,650 during the third quarter of 2011 compared to revenues of $815,275 for the same period in 2010. This is an increase of approximately 24.1 percent. The Company had income before taxes during the third quarter of 2011 of $416,825 compared to income before taxes of $319,411 during the third quarter of 2010. This is an increase of approximately 30.5 percent. For the first three quarters of 2011, the Company had revenues of $2,782,249 and income before taxes of $1,085,513. Revenues during the first three quarters of 2010 were $2,238,329 and the Company had income before taxes of $824,626. Revenues increased by about 24.3 percent and income before taxes increased by approximately 31.6 percent in the first three quarters of 2011 compared to the same period in 2010.

The Company has periodically evaluated the value of tax-loss carry-forwards on its financial statements and resulting changes make comparisons of net income between reporting periods difficult. During the third quarter of 2010, based on increased profitability and potential future profitability, the Company decreased its valuation allowance against the deferred tax asset by $480,600 which resulted in an increase in net income of $360,400. The valuation allowance at the end of the third quarter of 2011 is zero. These adjustments resulted in net income during the third quarter of 2011 of $259,625 versus net income of $679,811 during the third quarter of 2010. Similarly, the Company had net income of $700,013 during the first three quarters of 2011 versus $994,926 during the same period in 2010.

During the third quarter of 2011, processing costs as a percentage of sales were 16.6 percent. This compares to 17.3 percent during the third quarter of 2010. These costs are relatively fixed and the decrease in the third quarter of 2011 reflects the increased revenues. General administrative and development costs as a percentage of sales during the third quarter of 2011 were 29.1 percent. This compares to 32 percent in the third quarter of 2010. 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 2011, processing costs as a percentage of sales were 16.5 percent. This compares to 17.4 percent in the first three quarters of 2010. Again, these costs are relatively fixed and the decrease during the third quarter of 2011 is attributable to increased revenue. General, administrative and development costs as a percentage of sales were 31.8 percent during the first three quarters of 2011. This compares to 33.6 percent during the first three quarters of 2010. This reflects the fixed nature of these costs and the increase in revenue.

The Company’s cash on hand increased from $1,294,540 on December 31, 2010 to $1,697,546 on September 30, 2011. Approximately $74,000 of cash was used during the third quarter of 2011 to renovate the Company’s administrative offices. This project will be completed in December 2011 at a cost of approximately $125,000.

 

17

---

Table of Contents

Liquidity and Capital Resources

As of September 30, 2011, the Company has cash on hand of $1,697,546 and accounts receivable of $447,028.

 

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, 2011 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, 2011, the Company’s internal controls over financial reporting is effective.

 

18

---

Table of Contents

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.

 

19

---

Table of Contents

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
101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document

 

20

---

Table of Contents

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: October 31, 2011		FOOD TECHNOLOGY SERVICE, INC.
		/S/ Richard Hunter
		Richard Hunter, Ph.D., Chief Executive Officer and Chief Financial Officer

 

21