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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 September 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 2,830,297 shares of the Registrant’s common stock, $.01 par value per share, issued and outstanding as of October 25, 2012.

 

 

 

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TABLE OF CONTENTS

 

				Page
PART I. FINANCIAL INFORMATION
Item 1		Financial Statements:
		Balance Sheets – As of September 30, 2012 and December 31, 2011			3
		Statements of Operations – For the Three Months Ended September 30, 2012 and 2011			5
		Statements of Operations – For the Nine Months Ended September 30, 2012 and 2011			6
		Statements of Cash Flows – For the Nine Months Ended September 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

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

FOOD TECHNOLOGY SERVICE, INC.

BALANCE SHEETS

 

		As of September 30,				As of December 31,
		2012				2011
		(Unaudited)				(Audited)
ASSETS
Current Assets:
Cash		$	2,201,706			$	2,000,367
Certificate of Deposit, Restricted			150,112				—
Accounts Receivable, Less Allowance for Doubtful Accounts of $5,000			461,544				511,448
Prepaid Expenses			39,936				28,467
Deferred Tax Asset			377,100				651,000
Total Current Assets			3,230,398				3,191,282
Property, Plant and Equipment:
Buildings			3,488,668				3,443,723
Cobalt			6,799,382				5,900,977
Furniture and Equipment			2,096,487				2,076,481
Land			171,654				171,654
Less: Accumulated Depreciation			(7,230,634	)			(6,830,734	)
Total Property, Plant and Equipment			5,325,557				4,762,101
Other Assets:
Equipment Deposit			393,968				—
Deferred Tax Asset			51,700				185,400
Utility Deposits			5,000				5,000
Loan Fees – Net			7,463				7,046
Total Other Assets			458,131				197,446
Total Assets		$	9,014,086			$	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 September 30,				As of December 31,
		2012				2011
		(Unaudited)				(Audited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable		$	24,058			$	32,002
Accrued Liabilities			127,006				68,242
Total Current Liabilities			151,064				100,244
Stockholders’ Equity:
Common Stock $.01 Par Value, Authorized 5,000,000 Shares, Issued 2,827,980 and 2,805,172, respectively			28,279				28,051
Paid-In Capital			12,347,756				12,275,218
Deficit			(3,494,522	)			(4,234,193	)
Less, 5,154 Treasury Shares at Cost			(18,491	)			(18,491	)
Total Stockholders’ Equity			8,863,022				8,050,585
Total Liabilities and Stockholders’ Equity		$	9,014,086			$	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 September 30,
		2012				2011
		(Unaudited)				(Unaudited)
Net Revenues		$	925,654			$	1,011,650
Costs and Operating Expenses
Processing Costs			148,413				167,918
Selling, General and Administrative			292,442				294,703
Depreciation and Amortization			153,332				132,419
Total Costs and Operating Expenses			594,187				595,040
Income from Operations			331,467				416,610
Interest Income			220				215
Income before Income Taxes			331,687				416,825
Income Tax (Expense) Benefit - Deferred			(125,200	)			(157,200	)
Net Income		$	206,487			$	259,625
Net Income Per Common Share
-Basic		$	0.073			$	0.093
-Diluted		$	0.070			$	0.089
Weighted Average Number of Common Shares
Used in Computation
-Basic			2,827,042				2,787,182
-Diluted			2,937,542				2,926,682

 

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

 

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FOOD TECHNOLOGY SERVICE, INC.

STATEMENTS OF OPERATIONS

 

		Nine Months Ended September 30,
		2012				2011
		(Unaudited)				(Unaudited)
Net Revenues		$	2,996,094			$	2,782,249
Costs and Operating Expenses
Processing Costs			480,263				457,790
Selling, General and Administrative			916,719				885,271
Depreciation and Amortization			411,751				354,467
Total Costs and Operating Expenses			1,808,733				1,697,528
Income from Operations			1,187,361				1,084,721
Interest Income			610				792
Income before Income Taxes			1,187,971				1,085,513
Income Tax (Expense) Benefit - Deferred			(448,300	)			(385,500	)
Net Income		$	739,671			$	700,013
Net Income Per Common Share
-Basic		$	0.263			$	0.253
-Diluted		$	0.253			$	0.241
Weighted Average Number of Common Shares
Used in Computation
-Basic			2,817,790				2,766,812
-Diluted			2,928,290				2,906,312

 

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

 

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FOOD TECHNOLOGY SERVICE, INC.

STATEMENTS OF CASH FLOWS

 

		Nine Months Ended September 30,
		2012				2011
		(Unaudited)				(Unaudited)
Cash Flows from Operations:
Cash Received from Customers		$	3,045,998			$	2,689,710
Interest Received			610				792
Interest Paid			(482	)			(253	)
Cash Paid for Operating Expenses			(1,367,082	)			(1,235,486	)
Net Cash Provided by Operations			1,679,044				1,454,763
Cash Flows from Investing Activities:
Certificate of Deposit			(150,112	)			—
Letter of Credit Costs			(12,269	)			(12,218	)
Purchase of Cobalt, Delivery & Installation			(898,405	)			(901,717	)
Purchase of Equipment			(20,006	)			(64,008	)
Equipment Deposit			(393,968	)			—
Warehouse Renovation			(44,945	)			(73,814	)
Net Cash (Used) by Investing			(1,519,705	)			(1,051,757	)
Cash Flows from Financing Activities:
Excess Tax Benefit From Share Based Compensation			42,000				—
Net Increase in Cash			201,339				403,006
Cash at Beginning of Period			2,000,367				1,294,540
Cash at End of Period		$	2,201,706			$	1,697,546
Reconciliation of Net Income to Net Cash Provided by Operations:
Net Income		$	739,671			$	700,013
Adjustments to Reconcile Net Income to Cash Provided or Used:
Amortization			11,851				16,867
Deferred Income Tax			448,300				385,500
Excess Tax Benefit From Share Based Compensation			(42,000	)			—
Depreciation			399,900				337,601
Share-Based Compensation			32,067				38,572
(Increase)/Decrease in Receivables			49,904				(92,539	)
(Increase)/Decrease in Other Receivables			—				(7,428	)
(Increase)/Decrease in Prepaid Expenses			(11,469	)			(31,230	)
Increase/(Decrease) in Payables			(7,944	)			18,893
Increase/(Decrease) in Accruals			58,764				88,514
Net Cash Provided by Operations		$	1,679,044			$	1,454,763
Non-cash Financing Transactions:
Fair Value of Common Stock Issued Pursuant to Exercised Stock Options		$	153,315			$	308,956

 

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

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 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 September 30, 2012, and the results of operations and cash flows for the interim periods presented. Operating results for the period ended September 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.

 

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

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

 

Estimated useful lives are periodically reviewed and if warranted, changes will be made accordingly.

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’s uninsured balances totaled approximately $144,653 as of September 30, 2012 and none as of 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 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. 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 September 30, 2012 and 2011 were $2,675 and $799, respectively and for the nine months ended September 30, 2012 and 2011 were $5,327 and $4,363 respectively.

11. Reclassification

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

 

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

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

 

Note C - Certificate of Deposit

Certificate of deposit totaling $150,112 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 – Equipment Deposit

As of September 30, 2012 the company has paid $393,968 towards the replacement of the Programmable Logic Control (PLC) system expected to be placed in service by the end of the year. See Note L - Commitments and Contingencies for further details.

Note E - 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 F - Letter and Line of Credit). As of September 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 for the three months ended September 30, 2012 and 2011 were $3,272 and $3,261, respectively and for the nine months ended September 30, 2012 and 2011 were $11,851 and $16,867, respectively.

Note F - 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 $150,112 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 September 30, 2012, 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,
		2012				2011				2012				2011
Current
Federal		$	—			$	—			$	—			$	—
State			—				—				—				—
			—				—				—				—
Deferred-Benefit
Federal			106,900				134,200				382,800				329,200
State			18,300				23,000				65,500				56,300
			125,200				157,200				448,300				385,500
Total Income Tax Expense /(Benefit)		$	125,200			$	157,200			$	448,300			$	385,500

 

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

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

 

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:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
Expected Provision at US Statutory Rate		$	112,800			$	141,700			$	403,900			$	369,100
State Income Tax Net of Federal Benefit			12,000				15,100				43,200				39,400
Nondeductible Expenses			400				400				1,200				1,500
Change in Estimates and Available NOL Carryforwards			—				—				—				1,000
Change in Valuation Allowance			—				—				—				(25,500	)
Income Tax Expense / (Benefit)		$	125,200			$	157,200			$	448,300			$	385,500

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, 2012				December 31, 2011
NOL Carryforward - Beginning of Period		$	2,071,925			$	3,672,530
Less Used			(1,069,871	)			(1,600,605	)
Less Expired			—				—
NOL Carryfoward - End of Period		$	1,002,054			$	2,071,925

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

 

		September 30, 2012				December 31, 2011
NOL Carryforward		$	377,100			$	779,700
Accrued Liabilities			17,700				17,700
Stock Options			34,000				39,000
Net Deferred Tax Asset		$	428,800			$	836,400
Current Portion		$	377,100			$	651,000
Noncurrent Portion			51,700				185,400
Total Net Deferred Tax Asset		$	428,800			$	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.

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 September 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.

 

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

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

 

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

Note I - 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 September 30, 2012 and 2011 are 8,500 and 21,500, respectively.

No further options are being issued under the 1999 Plan.

On September 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 September 30, 2012 and 2011 are none and 20,000, 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				17,000
2011			10,000				10,000
2012			10,000				10,000
			43,000				37,000

 

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

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

 

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.

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 September 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			(36,000	)		$	2.43
Expired/Forfeited			(3,000	)		$	2.52
Outstanding At September 30, 2012			110,500			$	2.17				4.13
Vested/Exercisable At September 30, 2012			86,500			$	2.50				3.54

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 September 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:

 

		Nine Months Ended September 30,
		2012		2011
Risk Free Interest Rate		0.62-1.04%		1.85-2.24%
Expected Volatility		80.06-80.25%		84.49-84.66%
Expected Life		5 years		5 years
Dividend Yield		0%		0%

 

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

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

 

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.

For the three months ended September 30, 2012, 1,500 stock options were exercised under a cashless program resulting in the issuance of 938 shares and an excess tax benefit of $1,700. For the nine months ended September 30, 2012, 36,000 stock options were exercised under a cashless program resulting in the issuance of 22,808 shares and an excess tax benefit of $42,000.

For the three months ended September 30, 2012 there were no expired stock options. For the nine months ended September 30, 2012, 3,000 unexercised expired stock options created a $1,300 tax benefit that has been charged against paid-in capital from excess tax benefits.

The Company recognized $11,821 and $14,106 stock-based compensation expense for the three months ended September 30, 2012 and 2011, respectively and $32,067 and $38,572 for the nine months ended September 30, 2012 and 2011, respectively.

As of September 30, 2012, there was $31,626 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 1.25 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.

The Company has recently purchased the following Cobalt from Nordion:

 

Year		Curies				Amount
2010			105,757			$	81,740
2011			499,998			$	1,414,694
2012			299,996			$	898,405

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 ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

 

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FOOD TECHNOLOGY SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

 

The following table sets forth the computation of basic and diluted per share information:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
Numerator:
Net Income		$	206,487			$	259,625			$	739,671			$	700,013
Denominator:
Wtd. Avg. Common Shares Outstanding			2,827,042				2,787,182				2,817,790				2,766,812
Dilutive Effect Of Stock Options			110,500				139,500				110,500				139,500
Wtd. Avg. Common Shares Outstanding, Assuming Dilution			2,937,542				2,926,682				2,928,290				2,906,312

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

Note L – 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 September 30, 2012, the company has paid $393,968 toward the completion of this project.

Note M - 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 September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
Customer 1			30				29				31				39
Customer 2			24				31				29				21
Total			54	%			60	%			60	%			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 N - 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.

 

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

 

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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 $925,654 during the third quarter of 2012 compared to revenues of $1,011,650 for the same period in 2011. This is a decrease of approximately 8.5 percent. The Company had income before taxes during the third quarter of 2012 of $331,687 compared to income before taxes of $416,825 during the third quarter of 2011. This is a decrease of approximately 20.4 percent. For the first nine months of 2012, the Company had revenues of $2,996,094 and income before taxes of $1,187,971. Revenues during the first nine months of 2011 were $2,782,249 and the Company had income before taxes of $1,085,513. Revenues increased by about 7.7 percent and income before taxes increased by approximately 9.4 percent in the nine months of 2012 compared to the same period in 2011.

The Company’s statement of operations reflects non-cash deferred income tax expense for the third quarter of 2012 in the amount of $125,200. This resulted in net income during the third quarter of 2012 of $206,487 versus net income of $259,625 during the same period in 2011, a decrease of 20.5 percent. Similarly, the Company’s statement of operations reflects non-cash deferred income tax expense for the first nine months of 2012 in the amount of $448,300. This resulted in net income of $739,671 during the first nine months of 2012 versus $700,013 during the same period of 2011. This is an increase of approximately 5.7 percent. Management attributes the decrease in revenue experienced in the third quarter to a lessened demand by a medical customer. Management believes this issue was largely confined to one month in the third quarter and does not represent a longer term decrease in their demand.

During the third quarter of 2012, processing costs as a percentage of sales were 16 percent compared to 16.6 percent during the third quarter of 2011. These costs are relatively fixed and the slight decrease in 2012 is not significant. General, administrative and development costs as a percentage of sales during the third quarter of 2012 were 31.6 percent. This compares to 29.1 percent in the third quarter of 2011. These costs are also relatively fixed and the increase in general, administrative and development expenses, as a percentage of sales, is due to the decrease in revenue in 2012.

During the first nine months of 2012, processing costs as a percentage of sales were 16 percent compared to 16.5 percent in the first nine months of 2011. Again, these costs are relatively fixed and the variation is not significant. General, administrative and development costs as a percentage of sales were 30.6 percent during the first none months of 2012. This compares to 31.8 percent during the first nine months 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 in 2012.

 

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 September 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 September 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

 

 

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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: November 12, 2012

 

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