10-Q 1 form10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2010 Commission File Number 0-19047 --------- FOOD TECHNOLOGY SERVICE, INC. (Exact Name of Registrant as Specified in its charter) FLORIDA 59-2618503 (State of Incorporation or Organization) (Employer Identification Number) 502 Prairie Mine Road, Mulberry, FL 33860 (Address of Principal Executive offices)(Zip code) Registrants 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 [ X ] Smaller Reporting Company [ ] 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 June 30, 2010 ------- ---------------- Common Stock $.01 Par Value 2,756,458 shares FOOD TECHNOLOGY SERVICE, INC. TABLE OF CONTENTS PART I: Financial Statements Balance Sheets - June 30, 2010 and 2009 1 - 2 Statements of Operations - Three Months Ended June 30, 2010 and 2009 3 Statements of Operations - Six Months Ended June 30, 2010 and 2009 4 Statements of Cash Flows - Six Months Ended June 30, 2010 and 2009 5 Notes to Financial Statements 6 - 16 PART II: Management's Discussion and Analysis of Financial Condition and Results of Operations & Liquidity and Capital Resources 17-18 PART III: Other Information 19 FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS June 30, December 31, 2010 2009 ------------ ------------ (Unaudited) (Audited) ASSETS ------ Current Assets: Cash $ 1,187,094 $ 610,311 Accounts Receivable, Less Allowance for Doubtful Accounts of $2,500 301,349 213,752 Prepaid Expenses 57,330 31,807 Deferred Tax Asset 321,800 186,000 ------------ ------------ Total Current Assets 1,867,573 1,041,870 ------------ ------------ Property, Plant and Equipment: Buildings 3,282,029 3,282,029 Cobalt 4,404,543 4,404,543 Furniture and Equipment 1,968,780 1,923,743 Less: Accumulated Depreciation (6,186,611) (6,005,524) ------------ ------------ 3,468,741 3,604,791 Land 171,654 171,654 ------------ ------------ Total Property, Plant and Equipment 3,640,395 3,776,445 ------------ ------------ Other Assets: Deferred Tax Asset 802,100 1,128,000 Utility Deposits 5,000 5,000 Other 14,167 - ------------ ------------ Total Other Assets 821,267 1,133,000 ------------ ------------ Total Assets $ 6,329,235 $ 5,951,315 ============ ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 1 FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS June 30, December 31, 2010 2009 ------------ ------------ (Unaudited) (Audited) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Accounts Payable and Accrued Liabilities $ 80,781 $ 36,556 ------------ ------------ Total Current Liabilities 80,781 36,556 ------------ ------------ Stockholders' Equity: Common Stock $.01 Par Value, Authorized 5,000,000 Shares, Issued 2,756,458 27,564 27,564 Paid-In Capital 12,205,407 12,186,827 Deficit (5,966,026) (6,281,141) ------------ ------------ 6,266,945 5,933,250 Less, 5,154 Treasury Shares at Cost (18,491) (18,491) ------------ ------------ Total Stockholders' Equity 6,248,454 5,914,759 ------------ ------------ Total Liabilities and Stockholders' Equity $ 6,329,235 $ 5,951,315 ============ ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 2 FOOD TECHNOLOGY SERVICE, INC. STATEMENTS OF OPERATIONS Three Months Ended June 30, 2010 2009 ------------ ------------ (Unaudited) (Unaudited) Net Revenues $ 761,230 $ 652,724 ------------ ------------ Processing Costs 134,218 111,314 Selling, General and Administrative 259,503 270,483 Depreciation 89,885 98,227 Interest Expense - 6,774 ------------ ------------ 483,606 486,798 Income before Income Taxes 277,624 165,926 Income Taxes - Deferred (104,500) - ------------ ------------ Net Income $ 173,124 $ 165,926 ============ ============ Net Income Per Common Share -Basic $ 0.063 $ 0.060 -Diluted $ 0.061 $ 0.058 Weighted Average Number of Common Shares Used in Computation -Basic 2,756,458 2,756,458 -Diluted 2,827,958 2,839,458 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 3 FOOD TECHNOLOGY SERVICE, INC. STATEMENTS OF OPERATIONS Six Months Ended June 30, 2010 2009 ------------ ------------ (Unaudited) (Unaudited) Net Revenues $ 1,423,054 $ 1,327,554 ------------ ------------ Processing Costs 248,511 234,258 Selling, General and Administrative 488,242 534,959 Depreciation 181,086 197,062 Interest Expense - 13,477 ------------ ------------ 917,839 979,756 Income before Income Taxes 505,215 347,798 Income Taxes - Deferred (190,100) - ------------ ------------ Net Income $ 315,115 $ 347,798 ============ ============ Net Income Per Common Share -Basic $ 0.114 $ 0.126 -Diluted $ 0.111 $ 0.122 Weighted Average Number of Common Shares Used in Computation -Basic 2,756,458 2,756,458 -Diluted 2,827,958 2,839,458 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 4 FOOD TECHNOLOGY SERVICE, INC. STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2010 2009 ------------ ------------ (unaudited) (unaudited) Cash Flows from Operations: Cash Received from Customers $ 1,510,651 $ 1,373,279 Interest Received 1,490 2,199 Cash Paid for Operating Expenses (876,154) (725,805) ------------ ------------ Net Cash Provided/(Used) by Operations 635,987 649,673 Cash Flows from Investing Activities: Letter of Credit Costs (14,167) - Purchase of Equipment (45,037) (21,316) ------------ ------------ Net Cash Provided/(Used) by Investing (59,204) (21,316) Net Increase (Decrease) in Cash 576,783 628,357 Cash at Beginning of Period 610,311 216,978 ------------ ------------ Cash at End of Period $ 1,187,094 $ 845,335 ============ ============ Reconciliation of Net Income (Loss) to Net Cash Provided/(Used) by Operations: Net Income/(Loss) $ 315,115 $ 347,798 Adjustments to Reconcile Net Income/(Loss) to Cash Provided or Used: Amortization - 2,014 Deferred Income Taxes 190,100 - Depreciation 181,087 197,062 Non Cash Payments of Salaries 18,580 16,000 Accrued Interest - 13,478 (Increase)/Decrease in Receivables (87,597) 45,725 (Increase)/Decrease in Prepaid Expenses (25,523) (28,729) Increase/(Decrease) in Payables and Accruals 44,225 56,325 ------------ ------------ Net Cash Provided/(Used) by Operations $ 635,987 $ 649,673 ============ ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 5 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 Note A - Basis of Presentation The accompanying financial statements of Food Technology Service, Inc. (the "Company," "we" or "our") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles. These interim financial statements should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, these financial statements reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position as of June 30, 2010, and the results of operations and cash flows for the interim periods presented. Operating results for the six-month period ended June 30, 2010, are not necessarily indicative of the results that may be expected for the full year. We have evaluated subsequent events for recognition or disclosure through the date this Form 10-Q is filed with the Securities and Exchange Commission. Note B - Summary of Significant Accounting Policies A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: 1. Nature of Business The Company was organized in December 1985 and is engaged in the business of operating a gamma irradiation facility using Cobalt 60 for the sterilization of medical, surgical, pharmaceutical and packaging materials. It also disinfects fruits, vegetables and meat products which extends their shelf life. 2. Use of Estimates Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. 3. Revenue Recognition The primary source of revenue is from treating products with Cobalt. Net Revenue is the gross income from such processing less allowances, if any. Revenues are recorded after the Company's performance obligation is completed and product has been processed in accordance with the customer's specifications and collection of the resulting receivable is probable. A provision is made for doubtful accounts which historically have not been significant. 6 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 Note B - Summary of Significant Accounting Policies (continued) 4. Property, Plant and Equipment Property, plant and equipment are stated at cost. Assets other than Cobalt have been depreciated using the straight-line method over the following lives for both financial statement and tax purposes: Building 31.5 years Furniture and Equipment 5-15 Years The total cost basis of Cobalt has been depreciated using engineering estimates from published tables under which one-half of the remaining value is written off over 5.26 year periods. Estimated useful lives are periodically reviewed and if warranted, changes will be made resulting in acceleration of depreciation. MDS Nordion is the Company's supplier of Cobalt 60 and has agreed to accept the return of all Cobalt 60 that has reached the end of its useful life; therefore, the Company has provided no environmental remediation liability for the disposal of the Cobalt 60. 5. Cash and Cash Equivalents All highly liquid investments with original maturities of three months or less are considered to be cash and cash equivalents. 6. Concentration of Credit Risk The Company maintains its cash in three financial institutions. The Federal Deposit Insurance Corporation insures up to $250,000 per legal entity per financial institution until December 31, 2013. At June 30, 2010, the uninsured cash balance was $592,476. 7. Net Income Per Share Basic net income per share is computed using the weighted average number of common shares outstanding. Diluted net income per share is computed by the weighted average number of common shares outstanding, plus the effect of common stock equivalents that are dilutive. 8. Fair Value of Financial Instruments The carrying value of cash, accounts receivable, prepaid expenses, deposits, accounts payable, accrued liabilities approximate fair value. 7 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 Note B - Summary of Significant Accounting Policies (continued) 9. Stock Option Plans The Company has various stock option plans for employees and other individuals providing services to or serving as Directors of the Company. (See Note D) Compensation cost under the plans is recognized using the fair value recognition provisions of FASB ASC 718. Such cost is recognized for shares expected to vest on a straight-line basis over the requisite service period of the award using the Black-Scholes option-pricing model. 10. Reclassification Certain reclassifications have been made to the prior year's financial statements to conform to the current year's presentation. Note C - Lines of Credit The Company has a letter of credit of $600,000 through MDS Nordion to satisfy the requirements under the Radioactive Materials License from the State of Florida. The letter of credit is guaranteed by MDS Nordion and is collateralized by the Company's warehouse facility. The Company agreed to reimburse MDS Nordion for the associated expenses relating to the letter of credit. The letter of credit bears interest at prime plus 1%. As of June 30, 2010 the letter of credit is still active with a $0 balance. The Company has a separate line of credit available for the short term capital needs of the Company with Magnify Credit Union for $300,000. The line of credit is secured by the Company's warehouse and bears interest at the Wall Street Journal prime plus 1%. As of June 30, 2010 the Company has not used the line of credit. Note D - Income Taxes and Available Tax Loss Carryforwards As of June 30, 2010, the Company had income tax net operating loss ("NOL") carryforward for federal income tax purposes of approximately $4,426,751. The NOL will expire in various years ending through the year 2022. The benefits of NOL carryforward for the three months ended June 30, 2010 and 2009 were $104,500 and $132,163, respectively. The benefits of NOL carryforward for the six months ended June 30, 2010 and 2009 were $190,100 and $63,052, respectively. The components of the provision for income taxes attributable to operations are as follows: 8 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 Note D - Income Taxes and Available Tax Loss Carryforwards (continued) Three Months Ended Six Months Ended June 30, June 30, 2010 2009 2010 2009 ----------- ----------- ----------- ----------- Current Federal $ - $ - $ - $ - State - - - - ----------- ----------- ----------- ----------- $ - $ - =========== =========== =========== =========== Deferred Federal $ 94,400 $ - $ 171,800 $ - State 10,100 - 18,300 - ----------- ----------- ----------- ----------- $ 104,500 $ - $ 190,100 $ - =========== =========== =========== =========== Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows: As of June 30, 2010 As of December 31, 2009 Current Non-Current Current Non-Current ----------- ----------- ----------- ----------- Deferred tax assets NOL carryforwards $ 321,800 $ 802,100 $ 186,000 $ 1,128,000 ----------- ----------- ----------- ----------- Deferred tax asset $ 321,800 $ 802,100 $ 186,000 $ 1,128,000 =========== =========== =========== =========== The change in the valuation allowance is as follows: December 31, 2009 $ 542,000 June 30, 2010 542,000 ----------- Change in valuation allowance $ - =========== 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 2009, as a result of the continuing diversification and growth in customer base, ongoing profits from operations and the Company's revised estimate of future taxable income, it was concluded that it is more likely than not that future taxable income will be sufficient to realize a larger portion of the Company's deferred asset. 9 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 Note D - Income Taxes and Available Tax Loss Carryforwards (continued) The Company believes that its estimate of future operations is conservative and reasonable, but inherently uncertain. Accordingly, if future operations generate taxable income greater than the projections, further adjustments to reduce the reserve are possible. Conversely, if the Company realizes unforeseen material losses in the future and its future projections of income decrease, the allowance could be increased resulting in a charge to income. Income taxes for the periods ended June 30, 2010 and 2009 differ from the amounts computed by applying the effective income tax rates of 37.63% and 37.63%, respectively, to income before income taxes as a result of the following: Three Months Ended June 30, 2010 2009 ----------- ----------- Expected provision at US statutory rate $ 94,400 53,836 State income tax net of federal benefit 10,100 9,216 Change in estimates in available NOL carry forwards - (63,052) ----------- ----------- Income tax expense $ 104,500 $ - =========== =========== Six Months Ended June 30, 2010 2009 ----------- ----------- Expected provision at US statutory rate $ 171,800 112,846 State income tax net of federal benefit 18,300 19,317 Change in estimates in available NOL carry forwards - (132,163) ----------- ----------- Income tax expense $ 190,100 $ - =========== =========== The Company's tax years 2006 through 2009 remain open to examination by taxing jurisdictions. Note E - Stock Options On February 9, 1999 the Board of Directors approved an option program for non- employee Directors. 10 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 Note E - Stock Options (continued) The program was amended in 2001 and 2005 to provide for the annual granting to each non-employee Director of five year options to purchase 1,500 shares of common stock, exercisable at the end of one year at the market value of the shares of common stock on the date of grant. Also, the Chairman of the Board is awarded annually five year options to purchase an additional 2,500 shares. Year Shares Per Share ---- ------ --------- 2006 10,000 $3.28 2007 10,000 $2.52 2008 11,500 $2.18 2009 11,500 $1.89 On June 23, 2000 the Stockholders approved the 2000 Incentive and Non-Statutory Stock Option Plan (the "2000 Plan"). The 2000 Plan is administered by the Board of Directors who is authorized to grant incentive stock options ("ISO's") to Officers and employees of the Company and non-qualified options ("NQO's") for certain other individuals providing services to or serving as Directors of the Company. The maximum number of shares of the Company's Stock that may be issued under the 2000 Plan is 125,000 shares. Options granted and outstanding under this plan are as follows: Year Shares ---- ------- 2005 2,500 2006 100,000 2007 20,000 ------- 122,500 ======= The ISO's are exercisable 20% of the authorized amount immediately and 20% in each of the following four years. ISO's granted to an optionee terminate 30 to 90 days after termination of employment or other relationship, except that ISO's terminate the earlier of the expiration date of the option, or 90 to 180 days in the event of death and 180 days to one year in the event of disability. No further options are being issued under the 2000 Plan. On May 14, 2009 the Stockholders approved the 2009 Incentive and Non-Statutory Stock Option Plan (the "2009 Plan"). 11 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 Note E - Stock Options (continued) The 2009 Plan is administered by the Board of Directors who is authorized to grant incentive stock options ("ISO's") to Officers and employees of the Company and non-qualified options ("NQO's") for certain other individuals providing services to or serving as Directors of the Company. The maximum number of shares of the Company's Stock that may be issued under the 2009 Plan is 125,000 shares. Options granted and outstanding under this plan are as follows: Year Shares ---- ------- 2009 11,500 The aggregate fair market value (determined at the time an ISO is granted) of the Common Stock with respect to which ISO's are exercisable for the first time by any person during any calendar year under the Plans shall not exceed $100,000. The ISO's are exercisable 20% of the authorized amount immediately and 20% in each of the following four years. ISO's granted to an optionee terminate 30 to 90 days after termination of employment or other relationship, except that ISO's terminate the earlier of the expiration date of the option, or 90 to 180 days in the event of death and 180 days to one year in the event of disability. Changes that occurred in options outstanding are summarized below: Three Months Ended June 30, 2010 2009 ---------------- ---------------- Average Average Exercise Exercise Shares Price Shares Price -------- ----- -------- ----- Outstanding at beginning of period 242,250 $2.53 232,250 $2.57 Granted -- -- 11,500 $1.89 Exercised -- -- -- -- Expired/canceled (9,500) $4.24 (1,500) $4.96 -------- ----- ------- ----- Outstanding at end of period 232,750 $2.46 242,250 $2.53 Exercisable at end of period 160,083 $2.73 132,667 $2.92 12 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 Note E - Stock Options (continued) Six Months Ended June 30, 2010 2009 ---------------- ---------------- Average Average Exercise Exercise Shares Price Shares Price -------- ----- -------- ----- Outstanding at beginning of period 242,250 $2.53 232,250 $2.57 Granted -- -- 11,500 $1.89 Exercised -- -- -- -- Expired/canceled (9,500) $4.24 (1,500) $4.96 -------- ----- ------- ----- Outstanding at end of period 232,750 $2.46 242,250 $2.53 Exercisable at end of period 160,083 $2.73 132,667 $2.92 As mentioned in Note B, effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB ASC 718. As a result, additional compensation expense of $7,357 and $8,000 was recorded for the three months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010 and 2009 additional compensation expenses recorded were $18,580 and $16,000, respectively. An additional $41,232 could be recorded over the remaining vesting period of 60 months. The Company used the following assumptions in applying the Black-Scholes pricing method: Three Months Ended Six Months Ended June 30, June 30, 2010 2009 2010 2009 -------- -------- -------- -------- Risk free interest rate 1.98% 1.98% 1.98% 1.98% Expected Volatility 81% 81% 81% 81% Expected Life 5 years 5 years 5 years 5 years Dividend Yield 0% 0% 0% 0% Note F - Related Party Transactions The Company's supplier of Cobalt, MDS Nordion owns approximately 18.19% of the Company's outstanding common stock (see Note C for line of credit). 13 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 Note F - Related Party Transactions (continued) The Company has recently purchased the following Cobalt from MDS Nordion: Year Curies Amount ---- ------- -------- 2007 384,065 $799,523 2008 200,000 470,688 Note G - Earnings Per Share Earnings per share is calculated in accordance with ASC 260-10, "Earnings Per Share". Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the years. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares. Common share equivalents are excluded from the computation of diluted earnings per share if their effects would be anti- dilutive. ASC 260-10 requires the presentation of both Basic EPS and Diluted EPS on the face of the Company's Statements of Operations. The following table sets forth the computation of basic and diluted per share information: Three Months Ended Six Months Ended June 30, June 30, 2010 2009 2010 2009 ---------- ---------- ---------- ---------- Numerator: Net Income $ 171,469 $ 165,296 $ 313,460 $ 347,798 Denominator: Weighted average common shares outstanding 2,756,458 2,756,458 2,756,458 2,756,458 Dilutive effect of stock 71,500 83,000 71,500 83,000 options ---------- ---------- ---------- ---------- Weighted average common shares outstanding, assuming dilution 2,827,958 2,839,458 2,827,958 2,839,458 =========== =========== =========== =========== Potential common shares from out of the money options were excluded from the computation of diluted EPS because calculation of the associated potential common shares have an anti-dilutive effect on EPS. The following table lists options that were excluded from EPS. 14 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 Note G - Earnings Per Share (continued) Out of the money options excluded Three Six Months Ended Months Ended June 30, June 30, 2010 2009 2010 2009 ------ ------ ------ ------ Stock option with exercise price of $3.60 5,000 5,000 5,000 5,000 Stock option with exercise price of $4.56 - 2,500 - 2,500 Stock option with exercise price of $4.12 - 7,000 - 7,000 Stock option with exercise price of $3.56 2,250 2,250 2,250 2,250 Stock option with exercise price of $3.36 2,500 2,500 2,500 2,500 Stock option with exercise price of $3.28 10,000 10,000 10,000 10,000 Stock option with exercise price of $3.24 100,000 100,000 100,000 100,000 Stock option with exercise price of $2.52 10,000 10,000 10,000 10,000 Stock option with exercise price of $2.57 20,000 20,000 20,000 20,000 Stock option with exercise price of $2.18 11,500 - 11,500 - ------- ------- ------- ------- Total anti-dilutive options excluded from EPS 161,250 159,250 161,250 159,250 ======= ======= ======= ======= Note H - Concentration and Credit Risk Although the Company continues to diversify its customer base, three customers accounted for approximately 61% and 64% of revenues for the three months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010 and 2009 three customers accounted for approximately 62% and 67% of revenues, respectively. The Company's cash and accounts receivable are subject to potential credit risk. Management continuously monitors the credit standing of the financial institutions and customers with which the Company deals. A provision has been made for doubtful accounts which historically have not been significant. Note I - Recent Accounting Pronouncements Adoption of New Accounting Standards In May 2009, the FASB issued FASB ASC 855-10-05, "Subsequent Events", which requires companies to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. FASB ASC 855-10-05 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of enters or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. FASB 15 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 Note I - Recent Accounting Pronouncements (continued) ASC 855-10-05, also requires entities to disclose the date through which subsequent events have been evaluated. FASB ASC 855-10-05 is effective for the interim and annual reporting periods ending after June 15, 2009. We adopted the provisions of FASB ASC 855-10-05 for the year ended December 31, 2009, as required, the adoption did not have a material impact on our financial statements. In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" ("The Codification"). The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than Securities and Exchange Commission guidance for publicly-traded companies) is considered non- authoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The adoption of the Codification changed the Company's references to U.S. GAAP accounting standards but did not impact the Company's financial statements. Note J - Subsequent Events The Company will no longer use MDS Nordion to provide the letter of credit of $600,000 to satisfy the requirement under the Radioactive Materials License from the State of Florida. Subsequent to June 30, 2010, the Company negotiated with their financial institution to obtain a letter of credit for $600,000 and will use the Company's assets to secure the letter of credit. Subsequent to June 30, 2010, the Company purchased 105,000 curies of Cobalt from MDS Nordion for approximately $82,000. 16 PART II Management's Discussion and Analysis of Financial Condition and Results of Operations --------- Food Technology Service Inc. had revenues of $761,230 during the second quarter of 2010 compared to revenues of $652,724 for the same period in 2009. This is an increase of approximately 16.4 percent. The Company had net income before taxes during the second quarter of 2010 of $277,624 compared to net income of $165,926 during the second quarter of 2009. This is an increase of approximately 67.3 percent. For the first half of 2010, the Company had revenues of $1,423,054 and net income before taxes of $505,215. Revenues during the first half of 2009 were $1,327,554 and the Company had net income before taxes of $347,798. Revenues increased by about 7.2 percent and net income before taxes increased by approximately 45.3 percent in the first half of 2010 compared to the same period in 2009. The Company's statement of operations reflects non-cash deferred income tax expense for the three months ended June 30, 2010 in the amount of $104,500. In reporting periods prior to December 31, 2009, the Company had presented income tax expense with a corresponding benefit as management continued to reduce its valuation allowance for the deferred tax asset. For reporting periods after December 31, 2009, management discontinued reducing the valuation allowance resulting in a non-cash expense for income taxes. This resulted in net income during the second quarter of 2010 of $173,124 versus net income of $165,296 during the second quarter of 2009. Similarly, the Company's statement of operations reflects non-cash deferred income tax expense for the six months ended June 30, 2010 in the amount of $190,100, with net income of $315,115 during the first half of 2010 verses $347,798 during the same period of 2009. Included in revenue for the second quarter and first half of 2009 is a settlement fee of $85,229 relating to the termination of a warehouse lease with a former customer. Without the settlement fee, revenue from operations for the second quarter and first half of 2009 would have been $567,495 and $1,242,325 respectively. Cost comparisons in the following paragraphs are presented both with and without the lease settlement revenue. During the second quarter of 2010, processing costs as a percentage of sales were 17.6 percent. This compares to 17.1 percent with the lease settlement revenue and 19.6 percent without such revenue during the second quarter of 2009. These costs are relatively fixed and the slight decrease in 2010 reflects less processing time required for the revenue replacing that from the lost customer. General administrative and development costs as a percentage of sales during the second quarter of 2010 were 34.1 percent. This compares to 41.4 percent with the lease settlement revenue and 47.7 percent without such revenue in the second quarter of 2009. These costs are also relatively fixed and the decline in general, administrative and development expenses, as a percentage of sales, is primarily due to the increased sales. During the first half of 2010, processing costs as a percentage of sales were 17.5 percent. This compares to 17.6 percent with the lease settlement revenue and 18.9 percent without such revenue in the first half of 2009. Again, these costs are relatively fixed. General, administrative and development costs as a 17 percentage of sales were 34.3 percent during the first half of 2010. This compares to 40.3 percent during the first half of 2009 with the lease settlement revenue and 43.1 percent during the first half of 2009 without such revenue. The 2009 percentages were slightly elevated by the cost of roof renovations but generally reflect the fixed nature of these costs and the increase in revenue. Liquidity and Capital Resources --------- As of June 30, 2010, the Company has cash on hand of $1,187,094 and accounts receivable of $301,349. 18 PART III OTHER INFORMATION Item 1 Legal Proceedings The company is not involved in any legal proceedings. Item 2-6 Not applicable 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: August 16, 2010 FOOD TECHNOLOGY SERVICE, INC. /S/ Richard G. Hunter --------------------------------- Richard G. Hunter, Ph.D., Chief Executive Officer and Chief Financial Officer 19