10-Q 1 form10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2011 Commission File Number 0-19047 --------- FOOD TECHNOLOGY SERVICE, INC. (Exact Name of Registrant as Specified in its charter) FLORIDA 59-2618503 (State of Incorporation or Organization) (Employer Identification Number) 502 Prairie Mine Road, Mulberry, FL 33860 (Address of Principal Executive offices)(Zip code) Registrant's telephone number, including area code (863) 425-0039 Indicate by check mark whether the Registrant: (1) has filed all by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "accelerated filer", "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller Reporting Company [ X ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes [ ] No [ X ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class March 31, 2011 ------- ---------------- Common Stock $.01 Par Value 2,756,458 shares FOOD TECHNOLOGY SERVICE, INC. TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - March 31, 2011 and December 31, 2010 2 - 3 Statements of Operations - Three Months Ended March 31, 2011 and 2010 4 Statements of Cash Flows - Three Months Ended March 31, 2011 and 2010 5 Notes to Financial Statements 6 - 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4T. Controls and Procedures 18 PART II: OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits 19 SIGNATURES 20 PART I: FINANCIAL INFORMATION Item 1. Financial Statements FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS March 31, December 31, 2011 2010 ------------ ------------ (Unaudited) (Audited) ASSETS ------ Current Assets: Cash $ 1,649,941 $ 1,294,540 Accounts Receivable, Less Allowance for Doubtful Accounts of $5,000 and $2,500 412,221 354,489 Prepaid Expenses 48,955 24,856 Deferred Tax Asset 394,700 369,200 ------------ ------------ Total Current Assets 2,505,817 2,043,085 ------------ ------------ Property, Plant and Equipment: Buildings 3,282,029 3,282,029 Cobalt 5,039,706 4,486,283 Furniture and Equipment 1,992,489 1,981,525 Less: Accumulated Depreciation (6,471,620) (6,366,316) ------------ ------------ 3,842,604 3,383,521 Land 171,654 171,654 ------------ ------------ Total Property, Plant and Equipment 4,014,258 3,555,175 ------------ ------------ Other Assets: Deferred Tax Asset 871,400 987,300 Utility Deposits 5,000 5,000 Prepaid Cobalt - 512,978 Loan Fees - net 20,371 14,955 ------------ ------------ Total Other Assets 896,771 1,520,233 ------------ ------------ Total Assets $ 7,416,846 $ 7,118,493 ============ ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 2 FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS March 31, December 31, 2011 2010 ------------ ------------ (Unaudited) (Audited) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Accounts Payable $ 12,948 $ 9,783 Accrued Liabilities 86,906 16,273 ------------ ------------ Total Current Liabilities 99,854 26,056 ------------ ------------ Stockholders' Equity: Common Stock $.01 Par Value, Authorized 5,000,000 Shares, Issued and Outstanding 2,756,458 shares 27,564 27,564 Paid-In Capital 12,237,303 12,227,059 Deficit (4,929,384) (5,143,695) ------------ ------------ 7,335,483 7,110,928 Less, 5,154 Treasury Shares at Cost (18,491) (18,491) ------------ ------------ Total Stockholders' Equity 7,316,992 7,092,437 ------------ ------------ Total Liabilities and Stockholders' Equity $ 7,416,846 $ 7,118,493 ============ ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 3 FOOD TECHNOLOGY SERVICE, INC. STATEMENTS OF OPERATIONS Three Months Ended March 31, 2011 2010 ------------ ------------ (Unaudited) (Unaudited) Net Revenues $ 859,892 $ 661,824 ------------ ------------ Costs and Operating Expenses Processing Costs 133,820 114,293 Selling, General and Administrative 309,601 229,783 Depreciation and Amortization 112,106 91,201 ------------ ------------ Total Costs and Operating Expenses 555,527 435,277 ------------ ------------ Income from Operations 304,365 226,547 Interest Income 346 1,044 ------------ ------------ Income before Income Taxes 304,711 227,591 Income Tax - Deferred (90,400) (85,600) ------------ ------------ Net Income $ 214,311 $ 141,991 ============ ============ Net Income Per Common Share -Basic $ 0.078 $ 0.052 -Diluted $ 0.071 $ 0.050 Weighted Average Number of Common Shares Used in Computation -Basic 2,756,458 2,756,458 -Diluted 2,998,458 2,849,458 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 4 FOOD TECHNOLOGY SERVICE, INC. STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2011 2010 ------------ ------------ (Unaudited) (Unaudited) Cash Flows from Operations: Cash Received from Customers $ 802,160 $ 601,935 Interest Received 346 1,044 Cash Paid for Operating Expenses (383,477) (337,421) ------------ ------------ Net Cash Provided by Operations 419,029 265,558 Cash Flows from Investing Activities: Loan Fees (12,219) - Purchase of Equipment (10,964) - Cobalt Delivery & Installation (40,445) - ------------ ------------ Net Cash (Used) in Investing (63,628) Net Increase in Cash 355,401 265,558 Cash at Beginning of Period 1,294,540 610,311 ------------ ------------ Cash at End of Period $ 1,649,941 $ 875,869 ============ ============ Reconciliation of Net Income to Net Cash Provided by Operations: Net Income $ 214,311 $ 141,991 Adjustments to Reconcile Net Income to Cash Provided: Amortization 6,803 - Deferred Income Taxes 90,400 85,600 Depreciation 105,304 91,201 Non Cash Payments of Salaries 10,244 11,223 (Increase)/Decrease in Receivables (57,732) (59,889) (Increase)/Decrease in Prepaid Expenses (24,099) (17,534) Increase/(Decrease) in Accounts Payables 3,165 - Increase/(Decrease) in Accrued Liabilities 70,633 12,966 ------------ ------------ Net Cash Provided by Operations $ 419,029 $ 265,558 ============ ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 5 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2011 Note A - Basis of Presentation The accompanying financial statements of Food Technology Service, Inc. (the "Company," "we" or "our") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles. These interim financial statements should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010. In the opinion of management, these financial statements reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position as of March 31, 2011, and the results of operations and cash flows for the interim periods presented. Operating results for the three-month period ended March 31, 2011, are not necessarily indicative of the results that may be expected for the full year. We have evaluated subsequent events for recognition or disclosure through the date this Form 10-Q is filed with the Securities and Exchange Commission. Note B - Summary of Significant Accounting Policies A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: 1. Nature of Business The Company was organized in December 1985 and is engaged in the business of operating a gamma irradiation facility using Cobalt 60 for the sterilization of medical, surgical, pharmaceutical and packaging materials. It also disinfects fruits, vegetables, oysters and meat products to enhance safety or eliminate insect pests. 2. Use of Estimates Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. 3. Revenue Recognition The primary source of revenue is from treating products with 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. 6 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2011 Note B - Summary of Significant Accounting Policies (continued) 4. Accounts Receivable and Allowances for Doubtful Accounts Accounts receivable are customer obligations arising from the sale of services and are due under normal trade terms requiring payment within 30 days from the invoice date. Accounts over ninety days are monitored closely by Management and delinquencies are determined based on payment history, aging analysis and any specific known troubled assets. Receivables are charged off to the allowance for doubtful accounts once management determines that they are uncollectable. 5. Property, Plant and Equipment Property, plant and equipment are stated at cost. Assets other than Cobalt have been depreciated using the straight-line method over the following lives for both financial statement and tax purposes: Building 31.5 Years Furniture and Equipment 5-15 Years The total cost basis of Cobalt has been depreciated using engineering estimates from published tables under which one-half of the remaining value is written off over 5.26 year periods. Estimated useful lives are periodically reviewed and if warranted, changes will be made resulting in acceleration of depreciation. Nordion is the Company's supplier of Cobalt 60. When we purchased the Cobalt, Nordion 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. 6. Cash and Cash Equivalents All highly liquid investments with original maturities of three months or ess are considered to be cash and cash equivalents. 7. Concentration of Credit Risk The Company maintains its cash in three financial institutions. The Federal Deposit Insurance Corporation insures up to $250,000 per legal entity per financial institution and all funds in noninterest-bearing transaction accounts until December 31, 2012. The Company had no uninsured cash balances at March 31, 2011 and December 31, 2010. 7 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2011 Note B - Summary of Significant Accounting Policies (continued) 8. Net Income Per Share Basic net income per share is computed using the weighted average number of common shares outstanding. Diluted net income per share is computed by the weighted average number of common shares outstanding, plus the effect of common stock equivalents that are dilutive. 9. Fair Value of Financial Instruments The carrying value of cash, accounts receivable, prepaid expenses, deposits, accounts payable, accrued liabilities approximate fair value. 10. Stock Option Plans The Company has various stock option plans for employees and other individuals providing services to or serving as Directors of the Company. (See Note I - Stock Options) Compensation cost under the plans is recognized using the fair value recognition provisions of FASB ASC 718. Such cost is recognized for shares expected to vest on a straight-line basis over the requisite service period of the award using the Black-Scholes option-pricing model. 11. Advertising The Company expenses all advertising costs when incurred. Advertising expense was $3,072 and $1,398 for the first quarter ended March 31, 2011 and 2010, respectively. Note C - Certificate of Deposit As of January 2011 the certificate of deposit was not renewed. Note D - Loan Fees As of March 31, 2011 renewal fees in the amount of $12,219 were incurred in connection with the Regions letter of credit (See Note F - Letter and Line of Credit) for a total of $34,973. Amortizations of these fees were based on the life of the loans. Amortization expense for the first quarter ended March 31, 2011 and 2010 were $6,803 and $0, respectively. Note E - Prepaid Cobalt In November 2010 the Company paid $512,978 to Nordion (See Note J - Related Party) for the delivery of 200,000 curies of Cobalt in early 2011. The delivery was received and placed in service in January 2011. 8 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2011 Note F - Letter and Line of Credit The Company no longer uses Nordion to guarantee a $600,000 letter of credit required by the State of Florida as a condition of the Company's Radioactive Materials License. In July, 2010, the Company obtained an irrevocable standby letter of credit of $600,000 through Regions Bank to satisfy State of Florida requirements. The letter of credit will be automatically extended for an additional year unless the bank provides a 120 day written notice to the Company. The letter of credit is collaterized by the Company's real property and has an annual fee of $12,219. The Company has a separate $400,000 line of credit with Regions Bank that is available for the short term capital needs of the Company. The line of credit is secured by the Company's real property and incurs interest at prime plus 1.35%. As of March 31, 2011 the Company has not used the line of credit. Note G - Income Taxes and Available Tax Loss Carryforwards The components of income tax benefit are as follows: Three Months Ended March 31, 2011 2010 ----------- ----------- Current Federal $ - $ - State - - ----------- ----------- $ - $ - =========== =========== Deferred-benefit Federal $ 77,200 $ 73,100 State 13,200 12,500 ----------- ----------- Total benefit for income taxes $ 90,400 $ 85,600 =========== =========== Income taxes for the first quarter ended March 31, 2011 and 2010 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: 9 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2011 Note G - Income Taxes and Available Tax Loss Carryforwards (continued) Three Months Ended March 31, 2011 2010 ----------- ----------- Expected provision at US statutory rate $ 103,600 $ 73,100 State income tax net of federal benefit 11,100 12,500 Nondeductible expenses 200 - Change in estimates and available NOL carryforwards 1,000 - Change in valuation allowance (25,500) - ----------- ----------- Income tax (benefit) $ 90,400 $ 85,600 =========== =========== 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 components of the Company's carryforwards are as follows: March 31, December 31, 2011 2010 ------------ ------------ NOL carryforward - Beginning of period $ 3,672,530 $ 4,933,066 Less used (308,152) (1,099,151) Less expired - (161,385) ------------ ------------ NOL carryfoward - End of period $ 3,364,378 $ 3,672,530 ============ ============ The components of the Company's deferred tax assets are as follows: March 31, December 31, 2011 2010 ------------ ------------ NOL carryforward $ 1,266,100 $ 1,382,000 Less valuation allowance - (25,500) ------------ ------------ Deferred Benefit $ 1,266,100 $ 1,356,500 ============ ============ 10 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2011 Note G - Income Taxes and Available Tax Loss Carryforwards (continued) The change in the valuation allowance is as follows: December 31, 2010 (25,500) March 31, 2011 - ------------ Change in valuation allowance 25,500 ============ Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance has been established to eliminate the net deferred tax benefit due to uncertainty as to whether the tax benefits would ever be realized. During 2011, as a result of the continuing diversification and growth in customer base, ongoing profits from operations and the Company's revised estimate of future taxable income, it was concluded that it is more likely than not that future taxable income will be sufficient to realize all of the Company's deferred asset. The Company believes that its estimate of future operations is conservative and reasonable, but inherently uncertain. If the Company realizes unforeseen material losses in the future and its future projections of income decrease, the allowance could be increased resulting in a charge to income. These amounts have been presented in the financial statements as follows: March 31, December 31, 2011 2010 ------------ ------------ Current $ 394,700 $ 369,200 Non-Current 871,400 987,300 --- -------- ------------ Net Deferred tax asset $ 1,266,100 $ 1,356,500 ============ ============ The Company's tax years 2007 through 2009 remain open to examination by taxing jurisdictions. 11 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2011 Note H - Accrued Liabilities Effective January 1, 2011, the Board of Directors modified the President's employment contract to include a resignation clause. This clause provides two weeks base pay for every full year worked for the company, if six months notice is received before the President leaves. As of March 31, 2011 an accrual of $42,000 is recorded in relation to the resignation clause. Note I - Stock Options On May 14, 2009 the Stockholders approved the 2009 Incentive and Non-Statutory Stock Option Plan (the "2009 Plan"). The 2009 Plan is administered by the Board of Directors who is authorized to grant incentive stock options ("ISO's") to Officers and employees of the Company and non-qualified options ("NQO's") for certain other individuals providing services to or serving as Directors of the Company. The maximum number of shares of the Company's Stock that may be issued under the 2009 Plan is 125,000 shares. Options granted and outstanding under this plan are as follows: Year Shares ---- ------- 2009 11,500 2010 11,500 ------- 23,000 ======= The aggregate fair market value (determined at the time an ISO is granted) of the Common Stock with respect to which ISO's are exercisable for the first time by any person during any calendar year under the Plans shall not exceed $100,000. The ISO's are exercisable 20% of the authorized amount immediately and 20% in each of the following four years. ISO's granted to an optionee terminate 30 to 90 days after termination of employment or other relationship, except that ISO's terminate the earlier of the expiration date of the option, or 90 to 180 days in the event of death and 180 days to one year in the event of disability. A summary of the status of the Company's stock options as of March 31, 2011 and changes during the three months ended March 31, 2011 is as follows: 12 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2011 Note I - Stock Options (continued) Wtd.Avg. Number Wtd.Avg. Remaining of Exercise Contractual Shares Price Life (Yrs) -------- ------ --------- Outstanding at December 31, 2010 242,000 $ 2.43 Granted -- -- Exercised -- -- Expired/forfeited -- -- -------- ------ Outstanding at March 31, 2011 242,000 $ 2.43 2.77 ======== ====== ====== Vested/exercisable at March 31, 2011 182,000 $ 2.63 2.08 ======== ====== ====== A summary of the status of the Company's nonvested stock options as of March 31, 2011 and changes during the three months ended March 31, 2011 is as follows: Number Wtd. Avg. of Grant Date Shares Fair Value -------- ---------- Nonvested at December 31, 2010 64,500 $0.58 Granted - - Vested (4,500) $1.14 -------- ---------- Nonvested at March 31, 2011 60,000 $0.55 ======== ========== Expired/Forfeited during the period - - ======== ========== The Company estimated the fair value at the date of grant using the Black Scholes option valuation model with the following assumptions: Three Months Ended March 31, 2011 2010 -------- -------- Risk free interest rate 2.24% 1.98% Expected volatility 85% 81% Expected life 5 years 5 years Dividend yield 0% 0% Weighted average grant date fair value NA NA 13 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2011 Note I - Stock Options (continued) 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. The Company recognized $10,244 and $11,223 stock-based compensation expense for the first quarter ended March 31, 2011 and 2010, respectively. As of March 31, 2011, there was $25,966 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 1.20 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 200,000 512,978 In November 2010, the Company paid Nordion approximately $510,000 to purchase Cobalt for delivery during the first quarter of 2011. This prepayment allowed the Company to receive a discount on the price of the Cobalt. The Cobalt was delivered as scheduled in January 2011. Note K - Earnings Per Share Earnings per share 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. 14 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2011 Note K - Earnings Per Share (continued) 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 March 31, 2011 2010 ---------- ---------- Numerator: Net Income $ 214,311 $ 141,991 =========== =========== Denominator: Weighted average common shares outstanding 2,756,458 2,756,458 Dilutive effect of stock options 242,000 93,000 ---------- ---------- Weighted average common shares outstanding, assuming dilution 2,998,458 2,849,458 =========== =========== 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. Out of the money stock options excluded Three Months Ended March 31, 2011 2010 ------ ------ Stock option with exercise price of $3.60 - 5,000 Stock option with exercise price of $4.56 - 2,500 Stock option with exercise price of $4.12 - 7,000 Stock option with exercise price of $3.56 - 2,250 Stock option with exercise price of $3.36 - 2,500 Stock option with exercise price of $3.28 - 10,000 Stock option with exercise price of $3.24 - 100,000 Stock option with exercise price of $2.57 - 20,000 ------- ------- Total anti-dilutive options excluded from EPS - 149,250 ======= ======= 15 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2011 Note L - Concentration and Credit Risk Although the Company continues to diversify its customer base, three customers accounted for approximately 63% revenues for both quarters ended March 31, 2011 and 2010. 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 Subsequent to March 31, 2011, the Company entered into an agreement to purchase 300,000 curies of cobalt at a cost of approximately $840,000. Installation is expected during the second or third quarter of 2011. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Food Technology Service, Inc. had revenues of $859,892 during the first quarter of 2011 compared to revenues of $661,824 for the same period in 2010. This is an increase of about 30 percent. The Company had income before taxes during the first quarter of 2011 of $304,711 compared to income before taxes of $227,591 during the first quarter of 2010. This is an increase of about 33.9 percent. The Company's statement of operations reflects non-cash deferred income tax expense for the first quarter of 2011 in the amount of $90,400. This resulted in net income during the first quarter of 2011 of $214,311 versus net income of $141,991 during the same period in 2010, an increase of 51 percent. Management attributes increased revenue to continued growth in demand for medical sterilization. In addition, about 10% of the Company's revenue during the first quarter of 2011 resulted from an intermittent customer. This customer has a long relationship with the Company and their needs are sporadic and their volumes are large. We anticipate this customer using the facility at least through the first quarter of 2012. During the first quarter of 2011, processing costs as a percentage of sales were 15.6 percent compared to 17.3 percent in the first quarter of 2010. These costs are relatively fixed and the decrease reflects the increased revenue. General, administrative and development costs as a percentage of sales during the first quarter of 2011 were 36.0 percent compared to 34.6 percent in the first quarter of 2010. Again these costs are relatively fixed and the increase was due to overtime, supplies, security guards, increased depreciation and other expenses associated with the Cobalt loading in January, 2011. The Company has recently entered into an agreement to purchase an additional 300,000 curies of Cobalt at a cost of about $840,000 in order to accommodate increasing demand and the intermittent customer. Installation is expected during the second or third quarter of 2011. Liquidity and Capital Resources As of March 31, 2011, the Company has cash on hand of $1,649,941 and accounts receivable of $412,221. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable. 17 Item 4T. Controls and Procedures The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f). The Company's internal control system was designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. As of the end of the period covered by this report, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures by our Chief Executive Officer who also acts as the Company's Chief Financial Officer. Based upon that evaluation, our Chief Executive/Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report. In accordance with Rule 13a-15 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934 (the "Act"), the term "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of March 31, 2011 by using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework. Based on this assessment, management believes that as of March 31, 2011, 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. 18 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 19 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: May 11, 2011 FOOD TECHNOLOGY SERVICE, INC. /S/ Richard Hunter --------------------------------- Richard Hunter, Ph.D., Chief Executive Officer and Chief Financial Officer 20