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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from [            ] to [            ]

Commission File Number 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)

(863) 425-0039

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Exchange Act.    Yes  ¨     No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     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

There were 2,827,980 shares of the Registrant’s common stock, $.01 par value per share, issued and outstanding as of August 8, 2012.

 

 

 

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TABLE OF CONTENTS

 

				Page
PART I. FINANCIAL INFORMATION
Item 1		Financial Statements:
		Balance Sheets – As of June 30, 2012 and December 31, 2011			3
		Statements of Operations – For the Three Months Ended June 30, 2012 and 2011			5
		Statements of Operations – For the Six Months Ended June 30, 2012 and 2011			6
		Statements of Cash Flows – For the Six Months Ended June 30, 2012 and 2011			7
		Notes to Financial Statements			8
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3		Quantitative and Qualitative Disclosures About Market Risk			16
Item 4T		Controls and Procedures			16
PART II. OTHER INFORMATION
Item 1		Legal Proceedings			18
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			18
Item 3		Defaults Upon Senior Securities			18
Item 4		Submission of Matters to a Vote of Security Holders			18
Item 5		Other Information			18
Item 6		Exhibits			18
SIGNATURES					19

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

FOOD TECHNOLOGY SERVICE, INC.

BALANCE SHEETS

 

		As of June 30,				As of December 31,
		2012				2011
		(Unaudited)				(Audited)
ASSETS
Current Assets:
Cash		$	2,925,152			$	2,000,367
Accounts Receivable, Less Allowance for
Doubtful Accounts of $5,000			414,632				511,448
Prepaid Expenses			57,129				28,467
Deferred Tax Asset			504,300				651,000
Total Current Assets			3,901,213				3,191,282
Property, Plant and Equipment:
Buildings			3,488,668				3,443,723
Cobalt			5,900,977				5,900,977
Furniture and Equipment			2,096,487				2,076,481
Land			171,654				171,654
Less: Accumulated Depreciation			(7,080,574	)			(6,830,734	)
Total Property, Plant and Equipment			4,577,212				4,762,101
Other Assets:
Certificate of Deposit			150,055				—
Equipment Deposit			50,059				—
Deferred Tax Asset			48,000				185,400
Utility Deposits			5,000				5,000
Loan Fees – Net			10,735				7,046
Total Other Assets			263,849				197,446
Total Assets		$	8,742,274			$	8,150,829

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

 

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FOOD TECHNOLOGY SERVICE, INC.

BALANCE SHEETS

 

		As of June 30,				As of December 31,
		2012				2011
		(Unaudited)				(Audited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable		$	10,797			$	32,002
Accrued Liabilities			88,463				68,242
Total Current Liabilities			99,260				100,244
Stockholders’ Equity:
Common Stock $.01 Par Value, Authorized 5,000,000 Shares, Issued 2,827,042 and 2,805,172, respectively			28,269				28,051
Paid-In Capital			12,334,245				12,275,218
Deficit			(3,701,009	)			(4,234,193	)
Less, 5,154 Treasury Shares at Cost			(18,491	)			(18,491	)
Total Stockholders’ Equity			8,643,014				8,050,585
Total Liabilities and Stockholders’ Equity		$	8,742,274			$	8,150,829

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

 

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FOOD TECHNOLOGY SERVICE, INC.

STATEMENTS OF OPERATIONS

 

		Three Months Ended June 30,
		2012				2011
		(Unaudited)				(Unaudited)
Net Revenues		$	1,019,823			$	910,707
Costs and Operating Expenses
Processing Costs			165,729				156,052
Selling, General and Administrative			310,627				280,967
Depreciation and Amortization			127,055				109,941
Total Costs and Operating Expenses			603,411				546,960
Income from Operations			416,412				363,747
Interest Income			218				230
Income before Income Taxes			416,630				363,977
Income Tax (Expense) Benefit—Deferred			(157,300	)			(137,900	)
Net Income		$	259,330			$	226,077
Net Income Per Common Share
-Basic		$	0.092			$	0.082
-Diluted		$	0.088			$	0.075
Weighted Average Number of Common Shares
Used in Computation
-Basic			2,826,801				2,756,458
-Diluted			2,938,801				2,998,458

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

 

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FOOD TECHNOLOGY SERVICE, INC.

STATEMENTS OF OPERATIONS

 

		Six Months Ended June 30,
		2012				2011
		(Unaudited)				(Unaudited)
Net Revenues		$	2,070,439			$	1,770,599
Costs and Operating Expenses
Processing Costs			331,849				289,872
Selling, General and Administrative			624,277				590,568
Depreciation and Amortization			258,419				222,047
Total Costs and Operating Expenses			1,214,545				1,102,487
Income from Operations			855,894				668,112
Interest Income			390				576
Income before Income Taxes			856,284				668,688
Income Tax (Expense) Benefit—Deferred			(323,100	)			(228,300	)
Net Income		$	533,184			$	440,388
Net Income Per Common Share
-Basic		$	0.189			$	0.160
-Diluted		$	0.182			$	0.147
Weighted Average Number of Common Shares
Used in Computation
-Basic			2,815,327				2,756,458
-Diluted			2,927,327				2,998,458

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

 

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FOOD TECHNOLOGY SERVICE, INC.

STATEMENTS OF CASH FLOWS

 

		Six Months Ended June 30,
		2012				2011
		(Unaudited)				(Unaudited)
Cash Flows from Operations:
Cash Received from Customers		$	2,167,255			$	1,715,648
Interest Received			390				576
Interest Paid			(400	)			(253	)
Cash Paid for Operating Expenses			(1,055,484	)			(824,172	)
Net Cash Provided by Operations			1,111,761				891,799
Cash Flows from Investing Activities:
Purchase of Certificate of Deposit			(150,055	)			—
Letter of Credit Costs			(12,269	)			(12,218	)
Purchase of Cobalt, Delivery & Installation			—				(856,791	)
Purchase of Equipment			(20,007	)			(41,202	)
Warehouse Renovation			(44,945	)			—
Net Cash (Used) by Investing			(227,276	)			(910,211	)
Cash Flows from Financing Activities:
Excess Tax Benefit From Share Based Compensation			40,300				—
Net Increase in Cash			924,785				(18,412	)
Cash at Beginning of Period			2,000,367				1,294,540
Cash at End of Period		$	2,925,152			$	1,276,128
Reconciliation of Net Income to Net Cash Provided by Operations:
Net Income		$	533,184			$	440,388
Adjustments to Reconcile Net Income to Cash Provided or Used:
Amortization			8,580				13,605
Deferred Income Tax			323,100				228,300
Excess Tax Benefit From Share Based Compensation			(40,300	)			—
Depreciation			249,840				208,442
Share-Based Compensation			20,246				24,466
(Increase)/Decrease in Receivables			96,816				(54,951	)
(Increase)/Decrease in Prepaid Expenses			(28,662	)			(43,637	)
(Increase)/Decrease in Equipment Deposit			(50,059	)			—
Increase/(Decrease) in Payables			(21,205	)			9,822
Increase/(Decrease) in Accruals			20,221				65,364
Net Cash Provided by Operations		$	1,111,761			$	891,799
Non-cash Financing Transactions:
Fair Value of Common Stock Issued Pursuant to Exercised Stock Options		$	147,000				—
Prepaid Cobalt Placed in Service			—			$	512,978

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

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2012

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, 2011.

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 June 30, 2012, and the results of operations and cash flows for the interim periods presented. Operating results for the period ended June 30, 2012, 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 – Business Description and Summary of Significant Accounting Policies

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.

1. 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.

2. 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.

3. 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 uncollectible.

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			31.5-40 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.

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2012

 

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 Cobalt is purchased, Nordion agrees to accept the return of all Cobalt 60 that has reached the end of its useful life for a fee. The Company’s facility has the capacity to store the Cobalt 60 and there is no regulatory or industry requirement stating when the Cobalt needs to be returned. Management periodically reviews the value of the Cobalt 60 and has determined an environmental remediation liability is not necessary since the value of the Cobalt 60 exceeds the disposal costs.

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 and all funds in noninterest-bearing transaction accounts until December 31, 2012. The Company had no uninsured cash balances as of June 30, 2012 and December 31, 2011.

7. Earnings Per Share

Basic earnings per share are computed using the weighted average number of common shares outstanding. Diluted earnings per share are 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 and accrued liabilities approximate fair value.

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 H—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. FASB ASC 718 requires the benefits of tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash inflows rather than operating cash inflows. This amount is shown as excess tax benefit from share based compensation on the statements of cash flows. The excess tax benefits from the expired options are recorded in additional paid-in capital and any tax benefits from stock options expired unexercised are offset to the extent of any remaining balance.

10. Advertising

The Company expenses all advertising costs when incurred. Advertising expense recognized for the three months ended June 30, 2012 and 2011 were $1,345 and $1,435, respectively and for the six months ended June 30, 2012 and 2011 were $2,652 and $3,563, respectively.

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2012

 

11. Reclassification

Certain reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.

Note C—Certificate of Deposit

Certificate of deposit totaling $150,055 bears interest of .15% that compounds quarterly and matures on June 23, 2013 with penalties for early withdrawal. Any penalties for early withdrawal would not have a material effect on the financial statements.

Note D—Loan Fees

During the first quarter of 2012 renewal fees in the amount of $12,269 were incurred in connection with the Regions letter of credit (See Note E—Letter and Line of Credit). As of June 30, 2012 and December 31, 2011, total loan fees were $20,856 and $34,972, respectively. These fees were amortized based on the life of the loans and written off upon completion. Amortization expense of for the three months ended June 30, 2012 and 2011 were $3,272 and $6,803, respectively and for the six months ended June 30, 2012 and 2011 were $8,580 and $13,605, respectively

Note E—Letter and Line of Credit

The State of Florida requires as a condition of the Company’s Radioactive Materials License a $600,000 irrevocable standby letter of credit. On February 24, 2012, the Company renewed the $600,000 letter of credit with Regions Bank to satisfy the State of Florida requirements. The letter of credit expires on February 24, 2013, has an annual fee of $12,269 and is collateralized by the Company’s real estate and a $150,055 certificate of deposit.

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 estate and incurs interest at prime plus 1.35%. As of June 30, 2012, the Company has not used the line of credit.

Note F—Income Taxes and Available Tax Loss Carryforwards

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Current
Federal		$	—			$	—			$	—			$	—
State			—				—				—				—
			—				—				—				—
Deferred-Benefit
Federal			134,300				117,700				275,900				194,900
State			23,000				20,200				47,200				33,400
			157,300				137,900				323,100				228,300
Total Income Tax Expense /(Benefit)		$	157,300			$	137,900			$	323,100			$	228,300

Income taxes 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:

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Expected Provision At US Statutory Rate		$	141,700			$	123,800			$	291,200			$	227,400
State Income Tax Net Of Federal Benefit			15,100				13,200				31,100				24,300
Nondeductible Expenses			500				900				800				1,100
Change In Estimates And Available NOL Carryforwards			—				—				—				1,000
Change In Valuation Allowance			—				—				—				(25,500	)
Income Tax Expense / (Benefit)		$	157,300			$	137,900			$	323,100			$	228,300

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:

 

		June 30, 2012				December 31, 2011
NOL carryforward - Beginning of period		$	2,071,925			$	3,672,530
Less used			(731,618	)			(1,600,605	)
Less expired			—				—
NOL carryfoward - End of period		$	1,340,307			$	2,071,925

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

 

		June 30, 2012				December 31, 2011
NOL Carryforward		$	504,300			$	779,700
Accrued Liabilities			17,700				17,700
Stock Options			30,300				39,000
Net Deferred Tax Asset		$	552,300			$	836,400
Current Portion		$	504,300			$	651,000
Noncurrent Portion			48,000				185,400
Total Net Deferred Tax Asset		$	552,300			$	836,400

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. As of June 30, 2012, no further changes to the valuation allowance have been made.

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.

The Company’s tax years 2009 through 2011 remain open to examination by taxing jurisdictions.

Note G—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 a six month notice is received before the President leaves. As of June 30, 2012, an accrual of $47,000 is recorded in relation to the resignation clause.

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2012

 

Note H—Stock Options

On February 9, 1999, the Board of Directors approved an option program for non-employee Directors.

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. Options outstanding under this plan as of June 30, 2012 and 2011 are 8,500 and 21,500, respectively.

No further options are being issued under the 1999 Plan.

On June 23, 2000, the Stockholders approved the 2000 Incentive and Non-Statutory Stock Option Plan (the “2000 Plan”).

The 2000 Plan was administered by the Board of Directors who was 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 125,000 shares. Options outstanding under this plan as of June 30, 2012 and 2011 are none and 120,000, respectively.

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”).

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		Granted				Outstanding
Before 2011			23,000				18,500
2011			10,000				10,000
2012			10,000				10,000
			43,000				38,500

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.

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2012

 

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.

In 2003 and 2008 the company reached the maximum number of stock options allowed to be issued under the respective current stock option plan. The company therefore issued 65,000 stock options outside of aforementioned plans. Options outstanding outside a specific plan as of June 30, 2012 and 2011 are 65,000 and 65,000, respectively.

 

A summary of the status of the Company’s stock options is as follows:

 

		Number of Shares				Wtd. Avg. Exercise Price				Wtd. Avg. Remaining Contractual Life (Yrs)
Outstanding At December 31, 2011			139,500			$	1.95				4.02
Granted			10,000			$	6.26
Exercised			(34,500	)		$	2.45
Expired/Forfeited			(3,000	)		$	2.52
Outstanding At June 30, 2012			112,000			$	2.16				4.33
Vested/Exercisable At June 30, 2012			88,000			$	2.49				3.73

A summary of the status of the Company’s nonvested stock options is as follows:

 

		Number of Shares				Wtd. Avg. Grant Date Fair Value
Nonvested, At December 31, 2011			28,000			$	0.41
Granted			10,000			$	4.36
Vested			(14,000	)		$	3.45
Nonvested, At June 30, 2012			24,000			$	0.28
Expired/Forfeited During Period			3,000			$	1.16

The Company estimated the fair value at the date of grant using the Black Scholes option valuation model with the following assumptions:

 

		Six Months Ended June 30,
		2012				2011
Risk Free Interest Rate			.75-1.04	%			1.85-2.24	%
Expected Volatility			80.06-80.13	%			84.49-84.66	%
Expected Life			5 years				5 years
Dividend Yield			0	%			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.

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2012

 

For the three months ended June 30, 2012, 7,000 stock options were exercised under a cashless program resulting in the issuance of 4,381 shares and an excess tax benefit of $7,300. For the six months ended June 30, 2012, 34,500 stock options were exercised under a cashless program resulting in the issuance of 21,870 shares and an excess tax benefit of $40,300.

For the three months ended June 30, 2012, 3,000 unexercised expired stock options created a $1,200 tax benefit that has been charged against paid-in capital from excess tax benefits.

The Company recognized $10,304 and $14,222 stock-based compensation expense for the three months ended June 30, 2012 and 2011, respectively and $20,246 and $24,466 for the six months ended June 30, 2012 and 2011, respectively.

As of June 30, 2012, there was $43,447 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 1.50 years.

Note I—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.

The Company has recently purchased the following Cobalt from Nordion:

 

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

Note J—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 June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Numerator:
Net Income		$	259,330			$	226,077			$	533,184			$	440,388
Denominator:
Wtd. Avg. Common Shares Outstanding			2,826,801				2,756,458				2,815,327				2,756,458
Dilutive Effect Of Stock Options			112,000				242,000				112,000				242,000
Wtd. Avg. Common Shares Outstanding, Assuming Dilution			2,938,801				2,998,458				2,927,327				2,998,458

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2012

 

For the three months and six months ended June 30, 2012 and 2011 there were no out of the money options to exclude from the computation of diluted EPS.

Note K—Commitments and Contingencies

In March 2012, the Company entered into an agreement with Nordion for the replacement of the Programmable Logic Control (PLC) system at an estimated cost of $800,000. This is the last part of a multi-year project intended to maintain the facility in good and reliable condition. The PLC replacement will take place in two phases and is expected to be substantially completed by the end of 2012. As of June 30, 2012, the company has paid $50,059 toward the completion of this project.

In March 2012, the Company entered into an agreement with Nordion to purchase an additional 300,000 curies of Cobalt at a cost of approximately $840,000 plus installation in order to accommodate increasing demand and normal Cobalt loss of strength over time. Installation is expected during the third quarter of 2012.

Note L—Concentration and Credit Risk

Although the Company continues to diversify its customer base it does a significant amount of its total business with the following customers.

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Customer 1			31				42				31				44
Customer 2			29				19				31				16
Total			60	%			61	%			62	%			60	%

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.

 

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Item 2.

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

Food Technology Service, Inc. had revenues of $1,019,823 during the second quarter of 2012 compared to revenues of $910,707 for the same period in 2011. This is an increase of approximately 12 percent. The Company had income before taxes during the second quarter of 2012 of $416,630 compared to income before taxes of $363,977 during the second quarter of 2011. This is an increase of approximately 14.5 percent. For the first half of 2012, the Company had revenues of $2,070,439 and income before taxes of $856,284. Revenues during the first half of 2011 were $1,770,599 and the Company had income before taxes of $668,688. Revenues increased by about 16.9 percent and income before taxes increased by approximately 28 percent in the first half of 2012 compared to the same period in 2011.

The Company’s statement of operations reflects non-cash deferred income tax expense for the second quarter of 2012 in the amount of $157,300. This resulted in net income during the second quarter of 2012 of $259,330 versus net income of $226,077 during the same period in 2011, an increase of 14.7 percent. Similarly, the Company’s statement of operations reflects non-cash deferred income tax expense for the first half of 2012 in the amount of $323,100. This resulted in net income of $533,184 during the first half of 2012 versus $440,388 during the same period of 2011. This is an increase of approximately 21.1 percent.

Management attributes increased revenue to continued growth in demand for packaging sterilization.

During the second quarter of 2012, processing costs as a percentage of sales were 16.3 percent compared to 17.1 percent during the second quarter of 2011. These costs are relatively fixed and the slight decrease in 2012 reflects the increase in revenue. General, administrative and development costs as a percentage of sales during the second quarter of 2012 were 30.5 percent. This compares to 30.8 percent in the second quarter of 2011. These costs are also relatively fixed and the decline in general, administrative and development expenses, as a percentage of sales, is due to the increased revenue.

During the first half of 2012, processing costs as a percentage of sales were 16 percent compared to 16.4 percent in the first half of 2011. Again, these costs are relatively fixed and decreased due to increased revenue. General, administrative and development costs as a percentage of sales were 30.2 percent during the first half of 2012. This compares to 33.3 percent during the first half of 2011. As previously mentioned, these costs are relatively fixed and the decline in general, administrative and development expenses, as a percentage of sales, is primarily due to increased revenue.

 

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.

 

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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 June 30, 2012 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 June 30, 2012, the Company’s internal controls over financial reporting is effective.

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.

 

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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

 

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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: August 10, 2012

 

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