AMERICAN VANGUARD CORP - Quarter Report: 2010 June (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

FOR THE TRANSITION PERIOD FROM              TO             

Commission file number 001-13795

AMERICAN VANGUARD CORPORATION

(949) 260-1200

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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 (§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  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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 latest practicable date.

Common Stock, $.10 Par Value—27,373,657 shares as of August 2, 2010.

Table of Contents

AMERICAN VANGUARD CORPORATION

INDEX

Table of Contents

PART I. FINANCIAL INFORMATION

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Number in thousands except per share data)

(Unaudited)

See notes to consolidated financial statements.

3

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Number in thousands, excerpt per share data)

ASSETS (note 7)

Note: The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date. See notes to consolidated financial statements.

4

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Numbers in thousands, except share data)

For The Three Months Ended March 31, 2010 and June 30, 2010

(Unaudited)

See notes to consolidated financial statements

5

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Numbers in thousands, except share data)

For The Six Months Ended June 30, 2010 and 2009

(Unaudited)

See notes to consolidated financial statements.

6

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Numbers in thousands, except share data)

(Unaudited)

1. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation, have been included. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

2. Property, plant and equipment at June 30, 2010 and December 31, 2009 consists of the following:

3. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. The components of inventories consist of the following:

4. Based on similar economic and operational characteristics, the Company’s business is aggregated into one reportable segment. Selective enterprise information is as follows:

5. On March 4, 2010, the Board of Directors declared a cash dividend of $0.01 per share. The dividend was distributed on April 16, 2010 to stockholders of record at the close of business on April 2, 2010. Cash dividends paid April 16, 2010 totaled $271.

7

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, continued

(Numbers in thousands, except share data)

On March 9, 2009, the Board of Directors declared a cash dividend of $0.05 per share. The dividend was distributed on April 15, 2009, to stockholders of record at the close of business on March 31, 2009. Cash dividends paid April 15, 2009 totaled $1,341.

6. FASB ASC 260 (SFAS No. 128), Earnings Per Share (“EPS”) requires dual presentation of basic EPS and diluted EPS on the face of all income statements. Basic EPS is computed as net income divided by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects potential dilution that could occur if securities or other contracts, which, for the Company, consists of options to purchase shares of the Company’s common stock are exercised.

The components of basic and diluted earnings per share were as follows:

The assumed exercise of stock options has been excluded for the three months to the end of June 30, 2009 because to do so would be anti-dilutive to the earnings per share calculation. Had we included this element, we would have disclosed assumed exercise of stock options in the amount of 631, and a diluted share basis of 27,712.

7. Substantially all of the Company’s assets are pledged as collateral with its banks.

The Company has various different loans in place that together constitute the short-term and long-term loan balances shown in the balance sheet at June 30, 2010 and December 31, 2009. These are summarized in the following table:

The Company has four key covenants to its senior, secured credit facility with its banking syndicate. The covenants are as follows: (1) the Company must maintain its borrowings below a certain consolidated funded debt ratio, (2) the Company must limit its annual spending on the acquisition of fixed asset capital additions, (3) the Company must maintain a certain consolidated fixed charge coverage ratio, and (4) the Company must maintain a certain modified current ratio which compares the on hand value of receivables plus inventory with the level of its working capital revolver debt. As of June 30, 2010 the Company met all covenants in that credit facility¹.

8

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, continued

(Numbers in thousands, except share data)

At June 30, 2010, based on its performance against the covenants listed above, the Company had the capacity to increase its’ borrowings by up to $50,376 under the credit facility agreement.

For further information, refer to the consolidated financial statements and footnotes thereto (specifically note 2) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

8. Reclassification—Certain items may have been reclassified (if appropriate), in the prior period consolidated financial statements to conform with the June 30, 2010 presentation.

9. Total comprehensive income includes, in addition to net income, changes in equity that are excluded from the consolidated statements of operations and are recorded directly into a separate section of stockholders’ equity on the consolidated balance sheets.

Comprehensive income and its components consist of the following:

10. Stock Based Compensation Expense—The Company accounts for stock-based awards to employees and directors in accordance with FASB ASC 718 [SFAS No. 123 (revised 2004)], “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including shares of common stock granted for services, employee stock options, and employee stock purchases related to the Employee Stock Purchase Plan (“employee stock purchases”) based on estimated fair values.

Stock Options—During the six months ended June 30, 2010, the Company amended an option to extend the expiration date for a terminated employee to purchase 72,000 shares of common stock. The award would have expired 3 months after termination. The Company extended the expiration date to one year and recognized an award-based compensation expense of $8 for the modification.

During the six months ended June 30, 2010 and 2009, the Company recognized stock-based compensation expense related to stock options, excluding the expense related to the above modification, of approximately $4 each quarter.

As of June 30, 2010, the Company had approximately $11 of unamortized stock-based compensation expenses related to unvested stock options outstanding. This amount will be recognized over the weighted-average period of 0.7 years. This projected expense will change if any stock options are granted or cancelled prior to the respective reporting periods or if there are any changes required to be made for estimated forfeitures.

Restricted Shares—During the six months ended June 30, 2009, the Company granted employees a total of 101,188 shares of common stock. The shares will cliff vest after three years of service. The shares were valued at $11.75 per share (or $1,189 in total), which was the publicly traded share price as of the date of grant, and the Company is recognizing the corresponding expense over the required service period of three years. During the six months ended June 30, 2010, no restricted shares were granted.

There were 15,744 restricted shares of common stock that were forfeited during the six months ended June 30, 2010. The shares were not vested when terminated.

9

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, continued

(Numbers in thousands, except share data)

During the six months ended June 30, 2010 and 2009, the Company recognized stock-based compensation expense related to restricted shares of $321 and $395, respectively.

As of June 30, 2010, the Company had approximately $1,077 of unamortized stock-based compensation expense related to unvested restricted shares. This amount will be recognized over the weighted-average period of 1.4 years. This projected expense will change if any restricted shares are granted or cancelled prior to the respective reporting periods or if there are any changes required to be made for estimated forfeitures.

11. Legal Proceedings—Summarized below are litigation matters in which there has been material activity or developments since the filing of the Company’s Form 10-Q for the period ended March 31, 2010.

A. DBCP Cases

A number of suits have been filed against AMVAC, alleging injury from exposure to the agricultural chemical 1,2-dibromo-3-chloropropane (“DBCP”). DBCP was manufactured by several chemical companies, including Dow Chemical Company, Shell Oil Company and AMVAC and was approved by the U.S. EPA to control nematodes. DBCP was also applied on banana farms in Latin America. The U.S. EPA suspended registrations of DBCP in October 1979, except for use on pineapples in Hawai’i. The EPA suspension was partially based on 1977 studies by other manufacturers that indicated a link between male sterility and exposure to DBCP among their factory production workers producing the product. There are approximately 100 lawsuits, foreign and domestic, filed by former banana workers in which AMVAC has been named as a party. Fourteen of these suits have been filed in the United States (with prayers for unspecified damages) and the remainder have been filed in Nicaragua. All of these actions are in various stages and allege injury from exposure to DBCP, including claims for sterility.

On June 4, 2010, nine complaints were filed in the Circuit Court of the First Circuit for the State of Hawai’i, a representative one of which is captioned Mendez et al. v. Dow Chemical Company et al., in which a total of 60 individual workers (50 of whom are from Panama, six from Ecuador and four from Costa Rica) seek damages for physical injuries allegedly arising from exposure to DBCP in the late 1970’s. Other defendants named in the lawsuits include Shell Oil Company, Occidental Petroleum Corporation, Dole Food Company, and Amvac Chemical Corporation, to name but a few. Amvac has not yet been served with any of these complaints, and there has been no discovery to date. Amvac intends to defend these matters vigorously citing, among other things, the fact that, to its best knowledge, it has never sold DBCP to certain of the countries identified in the complaints. At this stage, the Company believes that a loss in these matters is neither probable nor reasonably estimable and has not set up a loss contingency therefor.

On July 15, 2010, based upon a finding of fraud, the Los Angeles Superior Court overturned a $2.3 million verdict against defendants Dole Food Company and Dow Chemical Company that had been reached in 2007 by that same court in favor of six Nicaraguan banana workers in an action entitled Tellez (involving claims for injuries allegedly arising from exposure to DBCP).

B. Other Matters

Shenkel v. Western Exterminator. On May 30, 2008, an action entitled Kurt Shenkel and Carol Ann Shenkel v. Western Exterminator Company, et al. [including AMVAC Chemical Corporation] was filed with the Superior Court of the State of California, Central District as Case No. BC391795, in which plaintiff Kurt Shenkel, who worked as a landscaper and gardener in Southern California between 1967 and 2007, alleges that he suffered personal injury—specifically, Parkinson’s disease—from toxins in the several dozen herbicides and pesticides (including AMVAC’s Vapam) distributed and sold by the 29 co-defendants during plaintiff’s work history. The action against Amvac was dismissed with prejudice on March, 2010 in conjunction with a settlement under which Amvac paid cash consideration in the amount of $10.

On or about April 6, 2010, the Pest Management Regulatory Agency (“PMRA”) notified the Company of its intention to cancel the Canadian registration for the compound, pentachloronitrobenzene in that country, citing as a reason the Company’s failure to provide certain manufacturing data to the agency in a timely fashion. The Company has subsequently provided the agency with the required data, and PMRA has extended its notice to permit continued registration through at least the end of the calendar year. We expect to continue working with PMRA in order to retain some or all uses for the compound in that country and, at this stage, cannot say whether adverse action is probable. Thus, we cannot conclude that a loss is either probable or reasonably estimable and accordingly have not set up a loss contingency.

10

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, continued

(Numbers in thousands, except share data)

12. Recently Issued Accounting Guidance—In October 2009, FASB updated the Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force. The objective of this Update is to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Subtopic 605-25, Revenue Recognition-Multiple Element Arrangements, establishes the accounting and reporting guidance for arrangements under which the vendor will perform multiple revenue-generating activities. The amendments in this standard will affect accounting and reporting for all vendors that enter into multiple-deliverable arrangements with their customers. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company will monitor its sales activities in the future that may be affected by this update.

11

Table of Contents

FORWARD-LOOKING STATEMENTS/RISK FACTORS:

The Company, from time-to-time, may discuss forward-looking statements including assumptions concerning the Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to a number of risks, uncertainties and other factors. In connection with the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statements identifying important factors which, among other things, could cause the actual results and events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions contained in the entire Report. Such factors include, but are not limited to: product demand and market acceptance risks; the effect of economic conditions; weather conditions; changes in regulatory policy; the impact of competitive products and pricing; changes in foreign exchange rates; product development and commercialization difficulties; capacity and supply constraints or difficulties; availability of capital resources; general business regulations, including taxes and other risks as detailed from time-to-time in the Company’s reports and filings filed with the U.S. Securities and Exchange Commission (the “SEC”). It is not possible to foresee or identify all such factors. For more detailed information, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

RESULTS OF OPERATIONS

Quarter Ended June 30

Overall financial performance (including net sales and net income) for the quarter ended June 30, 2010 has improved as compared to the same period in 2009. Our net sales for the period are up approximately 10% to $52,172, compared to $47,485 for the second quarter of 2009. Net sales for our crop business are $44,851 which is up 12% over the comparable period in 2009 when net sales were $39,868. Net sales for non-crop products during the second quarter of 2010 are $7,321, which was slightly down from $7,617 in the comparable period of 2009.

In the crop sector, healthier market conditions persisted through the second quarter of 2010 as compared to those of the same period in 2009. After following a conservative approach toward procurement, reducing inventories and ordering products on an as-needed basis throughout 2009, distribution and growers managed to work through much of the inventories in the channel and restocked in the second quarter. Further, we are not seeing the kind of tight credit restrictions on growers that were prevalent in 2009. In addition, increased acres in cotton and peanuts (key crops into which the Company has significant product sales) coupled with more normalized weather in the Midwest (which gave growers more time to prepare their fields for planting) presented favorable conditions for placement of several of our product lines. A more detailed discussion of sales performance by group and product line appears below.

12

Table of Contents

Net sales of our insecticides in the second quarter of 2010 were up by approximately 53% to $26,871 as compared to $17,566 for the comparable period in 2009. Within this segment, net sales of our granular soil insecticides were up approximately 42%, led by Counter and Thimet. With net sales up by about 40% over the comparable period of 2009, Counter experienced both greater acceptance for use as a nematicide in corn and experienced a resurgence of use on sugar beets, particularly those planted in areas of heavy pest pressure, while Thimet enjoyed higher net sales due in part to increased peanut acres. In addition, our cotton insecticide performed well, benefiting from increased cotton acres.

Within the product group of herbicides/fungicides/fumigants, we experienced net sales in the second quarter of 2010 that were essentially flat with the comparable period in 2009 ($14,170 v. $14,043). Net sales of our herbicides were up approximately 56% with the majority of that gain constituting strong sales of our post-emergent corn herbicide, Impact (up about 61%). Favorable weather conditions in the Midwest during planting season coupled with a very focused sales and marketing plan led to the Impact gains. Net sales of our fungicides, however, were down sharply from the prior quarter, led by PCNB, which experienced a drop of approximately 55% quarter over quarter; this decline arose primarily from formulation issues that had been experienced in late 2009 and which the company has since remedied.

Within the product group of other products (which includes plant growth regulators, molluscicides and tolling activity), we experienced a drop of approximately 54% in net sales during the second quarter of 2010 as compared to the same period in 2009 ($3,810 v. $8,259). This drop arose primarily from three factors. First we had no net sales of our cotton defoliant Folex; last year we had obtained a supply of that material earlier in the year and were able to record sales by this time. This year, we expect our supply to be received in the third quarter and to pick up Folex sales in that quarter. Second, we experienced a decline in third party tolling activity; as indicated below, our factory capacity was more fully consumed with activity relating to synthesis of our own products. Third, during the same period in 2009, we collected data compensation from third parties in the amount of $1,400; we had no such collection in the second quarter of 2010.

While having net sales that were essentially flat with the comparable period last year, our non-crop business experienced a different mix of sales. We saw an increase in sales of our pest strip products (over double that of second quarter 2009) with the introduction of private label brands destined for retail shelves. However, this gain was offset by the timing of order placement of our public health products which particularly affected customers in the Gulf region who are adopting a “wait and see” approach at this time.

Cost of sales for the quarter ended at $32,939 or about 63% of net sales compared to $31,066 or about 65% of net sales for the same period of 2009. Gross margin for the quarter for all product lines was up slightly (to 37% from 35%) for the comparable period. With respect to our crop products, gross margin for the period was 35%, up slightly over the 34% gross margin in the comparable period of 2009. Although our factories operated effectively at a full capacity and consequently generated no under absorption in the period and our proprietary products maintained gross margins at or near historical levels, our three generic product lines (Orthene, Bifenthrin and Permethrin) generated comparatively higher sales, but at lower margins, due to heavy pricing pressure. Our non-crop products had a gross margin of about 49% for the second quarter of 2010, which represented a significant increase over the gross margin of 38% in the comparable period of 2009, primarily as a result of unabsorbed manufacturing cost in 2009.

It should be noted that, when making comparisons with other companies’ financial statements, the Company reports distribution costs in operating expenses and not as part of cost of sales.

Operating expenses for the second quarter of 2010 remained essentially flat compared to 2009 increasing only by $99 to end at $15,636 as compared to last year’s expense of $15,537 during the comparable period. The differences in operating expenses by department are as follows:

13

Table of Contents

Interest costs, net of capitalized interest, were $914 in the three months to June 30, 2010 as compared to $906 in the same period of 2009. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense

The Company’s average overall debt for the three months ended June 30, 2010 was $71,732 as compared to $113,871 for the three months ended June 30, 2009. As a result of intense focus on inventory and accounts receivable levels, the revolving line of credit is significantly reduced as compared to the same period in 2009. As can be seen from the table above, our effective interest rate during the period was 5.1% as compared to 3.2% for 2009. The increase is partly a result of the change in interest rate levels following the First Amendment to the Company’s senior credit facility agreement dated as of March 5, 2010.

The Company’s income tax expense was $1,040 for the three months ending June 30, 2010 as compared to income tax benefit of $20 for the same period of last year. The Company’s effective rate has increased to 39% mainly due to its financial performance year to date. The Company is pleased to report the IRS audit for 2006 and 2007 tax years has closed. Any adjustments related to the IRS audit were accrued for in the prior year through ASC 740 (“FIN 48”). The Company has recently began a California Franchise Tax Board audit for the 2004 through 2008 tax years related to R&D tax credits claimed by the Company in those years.

Overall our net income for the three months to June 2010 increased by $1,647 ending at $1,643 compared to a loss of $(4) for the same period of 2009.

14

Table of Contents

Six Months Ended June 30

Overall financial performance (including net sales and net income) for the six month period ended June 30, 2010 is improved as compared to the same period in 2009. Our net sales for the period are up approximately 7% to $98,884, compared to $92,122 for the first half of 2009. Net sales for the first half of 2010 of our crop business are $83,790 which constitutes an increase of about 8% over the net sales of $77,663 in the comparable period of 2009. Net sales of non-crop products for the period are $15,094, which constitutes an increase of about 4% over the net sales of $14,459 in the comparable period of 2009. A more detailed discussion of product groups and products having a material effect on net sale for each of the crop and non-crop product lines appears below.

With respect to our crop products, over the course of the first six months of 2010, we have seen generally favorable market conditions as compared to the same period in 2009. As mentioned above, the procurement practices of 2009 served to reduce inventory in the channels. Thus, over the first half of 2010, we have been able to sell most of our seasonal products into the channel effectively. Also, Midwest weather conditions permitted a longer planting season, which enabled growers to take more time and deliberation in preparing their fields (for example, soil insecticides). This, in turn, enabled us to sell product into both first and second quarters of 2010. Further, both cotton and peanut acres have increased in 2010 as compared to 2009, and we have recorded increased sales of certain products for use with those crops. A more detailed discussion of sales performance by product group and product line follows.

Net sales of our insecticides in the first six months of 2010 were up approximately 42% to $47,284 as compared to $33,380 for the comparable period in 2009. Within this segment, net sales of our granular soil insecticides were up approximately 25%, largely due to increased net sales of Counter, which, as mentioned above, continues to earn market acceptance for use in nematode control on corn as well as for heavy pest pressure on sugar beets and Thimet due largely to increased peanut acres in the southeast. Our cotton acres inseciticides also generated strong sales during the period, due to increased cotton acres.

Within the product group of herbicides/fungicides/fumigants, we experienced net sales in the first six months of 2010 that were down about 10% with the comparable period in 2009 ($28,050 v. $31,264). Net sales of our herbicide products were up approximately 11%, led by our post-emergent corn herbicide, Impact, which posted an increase of approximately 35% in net sales over the comparable six month period in 2009, due to both favorable weather and a well orchestrated plan of distribution. Net sales of our fungicides, however, were down by approximately 28% during the first half of 2010 as compared to the same period in 2009; this decline was due largely to PCNB decrease in net sales of approximately 27% that was a result of an isolated formulation issue which is now resolved. Net sales of our fumigants were essentially flat as compared to the first half of 2009.

Within the segment of other products (which includes plant growth regulators, molluscicides and tolling activity), we experienced an approximately 35% drop in net sales during the first six months of 2010 as compared to the same period in 2009 ($8,456 v. $13,019). This drop arose primarily from three factors. First we recorded no sales of our cotton defoliant Folex in this period; whereas, last year we had obtained a supply of that material earlier in the year and were able to record sales in the first half of the year, this year we are receiving our supply in the third quarter, after which we are expected to pick up Folex sales. Second, third party tolling activity was down significantly when compared with the comparable period of 2009. Third, as mentioned in our discussion on the financial performance in the second quarter, we collected data compensation payments in the amount of $1,400 in the first half of 2009 as compared to $868 in 2010.

15

Table of Contents

Our non-crop business featured net sales that were up slightly over the comparable six month period in 2009. The mix of product sales differed from the prior period. This is essentially a timing issue on one sizable contract. Sales are expected in the third quarter. Specifically, Naled sales (our mosquito adulticide) were up by approximately 37% due to distribution orders ahead of normal mosquito season. Similarly, net sales of pest strips rose sharply (by 44%) with the introduction of new private label products. These gains, however, were offset by reduced sales of Orthene, which were down approximately 70% amid challenging market conditions.

Cost of sales for the six month period ended at $60,727 or about 61% of net sales compared to $57,147 or about 62% of net sales for the same period of 2009. Gross margins for the period for all products was flat up 1% to 39% as compared to the same period of 2009. With respect to gross margin, during the first half of 2010, we have seen improvement in absorption of factory overhead costs; however, our three generic product lines (Orthene, bifenthrin and permethrin) generated comparatively higher sales, but at much lower margins, due to heavy pricing pressure.

It should be noted that, when making comparisons with other companies’ financial statements, the Company reports distribution costs in operating expenses and not as part of cost of sales.

Operating expenses decreased by $1,296 to $30,804 as compared to last year’s expense of $32,100. The differences in operating expenses by department are as follows:

16

Table of Contents

Interest costs, net of capitalized interest, were $1,665 in the six months to June 30, 2010 as compared to $1,771 in the same period of 2009. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense