Despite an increase in sales, US salads-to-soup maker Vaughan Foods saw net profits drop as a result of "wildly increasing costs".

The company incurred a third-quarter net loss of $1.2m, or $0.25 per share, compared to net income of $96,000 or $0.02 per share, in the third quarter of 2007.

Sales increased 16.6% to $23.9m in the quarter, compared with $20.5m in the comparable 2007 quarter.

Operating losses experienced in the first and second quarters of 2008 caused the company to be in violation of the financial covenant in its loan agreement from 30 June.

As a result, Vaughan has not met the agreed-upon "benchmarks of performance" and has informed its lender that it will seek other financing sources to replace the existing loan agreement.

Sales increased by 47.2% to $69.1 million during the year-to-date period in 2008. The acquisition of Allison's Gourmet Kitchens represented $12.3m of the $22.2m revenue increase in the year-to-date period.

The company incurred a net loss of $2.1m for the 2008 year-to-date-period, compared to an income of $462,000 in the comparable period.

"2008 has been anomalous for Vaughan Foods as well as many others in the food industry," said Herb Grimes, chairman and CEO of Vaughan Foods. "Despite solid revenue growth, the unprecedented velocity of increases in commodity and transportation costs in the first three quarters of 2008, were particularly challenging to manage.

"Although costs have moderated recently, it will be a period of time before we can fully recover from the impact to our financial condition caused by wildly increasing costs this year."