Attached files
UNITED STATES 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 September 30, 2017
| ☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to _____________
Commission File No. 333-133624
WHERE FOOD COMES FROM, INC.
(exact name of registrant as specified in its charter)
| Colorado | 43-1802805 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
202 6th Street, Suite 400
Castle Rock, CO 80104
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code:
(303) 895-3002
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ☒ 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, or a small reporting company. See definitions of “large accelerated filer” and “accelerated filer” and “smaller reporting entity” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer: | ☐ | Accelerated filer: | ☐ | |
| Non-accelerated filer: | ☐ | Smaller reporting company: | ☒ | |
| Emerging growth company | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of November 2, 2017, was [24,703,535].
| Where Food Comes From, Inc. | ||||
| Table of Contents | ||||
| September 30, 2017 | ||||
| Part 1 - Financial Information | ||||
| Item 1. | Financial Statements | 3 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||
| Item 4. | Controls and Procedures | 25 | ||
| Part II - Other Information | ||||
| Item 1. | Legal Proceedings | 26 | ||
| Item 1A. | Risk Factors | 26 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 | ||
| Item 6. | Exhibits | 26 | ||
2
| Where Food Comes From, Inc. |
| Consolidated Balance Sheets |
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,809,867 | $ | 2,489,985 | ||||
| Accounts receivable, net of allowance | 1,911,275 | 1,344,646 | ||||||
| Short-term investments | 740,739 | 733,104 | ||||||
| Prepaid expenses and other current assets | 381,261 | 203,744 | ||||||
| Total current assets | 6,843,142 | 4,771,479 | ||||||
| Property and equipment, net | 1,122,594 | 1,229,350 | ||||||
| Intangible and other assets, net | 4,076,860 | 4,228,228 | ||||||
| Goodwill | 2,652,250 | 2,652,250 | ||||||
| Deferred tax assets, net | 157,560 | — | ||||||
| Total assets | $ | 14,852,406 | $ | 12,881,307 | ||||
| Liabilities and Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 719,026 | $ | 333,784 | ||||
| Accrued expenses and other current liabilities | 1,326,091 | 480,047 | ||||||
| Customer deposits and deferred revenue | 849,285 | 524,396 | ||||||
| Current portion of notes payable | 8,525 | — | ||||||
| Current portion of capital lease obligations | 7,477 | 4,067 | ||||||
| Total current liabilities | 2,910,404 | 1,342,294 | ||||||
| Capital lease obligations, net of current portion | 27,320 | 15,735 | ||||||
| Notes payable, net of current portion | 45,640 | — | ||||||
| Lease incentive obligation | 149,898 | 158,025 | ||||||
| Deferred tax liabilities, net | — | 49,440 | ||||||
| Total liabilities | 3,133,262 | 1,565,494 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Contingently redeemable non-controlling interest | 1,601,294 | 1,888,135 | ||||||
| Equity: | ||||||||
| Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued or outstanding | — | — | ||||||
| Common stock, $0.001 par value; 95,000,000 shares authorized; 24,964,684 issued and 24,703,535 outstanding at 9/30/2017 24,890,121 issued and 24,647,186 outstanding at 12/31/2016 | 24,964 | 24,890 | ||||||
| Additional paid-in-capital | 10,314,549 | 10,052,597 | ||||||
| Treasury stock | (564,688 | ) | (524,892 | ) | ||||
| 261,149 shares at 9/30/2017 | ||||||||
| 242,935 shares at 12/31/2016 | ||||||||
| Retained earnings (accumulated deficit) | 343,025 | (124,917 | ) | |||||
| Total equity | 10,117,850 | 9,427,678 | ||||||
| Total liabilities and stockholders’ equity | $ | 14,852,406 | $ | 12,881,307 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
| Where Food Comes From, Inc. |
| Consolidated Statements of Income |
| (Unaudited) |
| Three months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Revenues: | ||||||||
| Verification and certification service revenue | $ | 3,672,587 | $ | 2,963,853 | ||||
| Product sales | 687,235 | 380,393 | ||||||
| Software license, maintenance and support services revenue | 243,186 | — | ||||||
| Consulting service revenue | 131,427 | — | ||||||
| Total revenues | 4,734,435 | 3,344,246 | ||||||
| Costs of revenues: | ||||||||
| Labor and other costs of services | 1,890,888 | 1,522,203 | ||||||
| Costs of products | 410,309 | 220,599 | ||||||
| Cost of software license, maintenance and support services | 141,902 | — | ||||||
| Total costs of revenues | 2,443,099 | 1,742,802 | ||||||
| Gross profit | 2,291,336 | 1,601,444 | ||||||
| Selling, general and administrative expenses | 1,841,597 | 1,239,834 | ||||||
| Income from operations | 449,739 | 361,610 | ||||||
| Other expense (income): | ||||||||
| Interest expense | 287 | 649 | ||||||
| Other (income) expense, net | (1,691 | ) | 1,008 | |||||
| Income before income taxes | 451,143 | 359,953 | ||||||
| Income tax expense | 199,000 | 135,000 | ||||||
| Net income | 252,143 | 224,953 | ||||||
| Net loss attributable to non-controlling interest | 38,049 | — | ||||||
| Net income attributable to Where Food Comes From, Inc. | $ | 290,192 | $ | 224,953 | ||||
| Per share - net income attributable to Where Food Comes From, Inc.: | ||||||||
| Basic | $ | 0.01 | $ | 0.01 | ||||
| Diluted | $ | 0.01 | $ | 0.01 | ||||
| Weighted average number of common shares outstanding: | ||||||||
| Basic | 24,705,934 | 23,772,967 | ||||||
| Diluted | 24,886,147 | 23,929,011 | ||||||
| * less than $0.01 per share | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
| Where Food Comes From, Inc. |
| Consolidated Statements of Income |
| (Unaudited) |
| Year to date ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Revenues: | ||||||||
| Verification and certification service revenue | $ | 9,152,520 | $ | 7,733,613 | ||||
| Product sales | 1,226,141 | 855,986 | ||||||
| Software license, maintenance and support services revenue | 532,684 | — | ||||||
| Consulting service revenue | 399,120 | — | ||||||
| Total revenues | 11,310,465 | 8,589,599 | ||||||
| Costs of revenues: | ||||||||
| Labor and other costs of services | 4,860,857 | 3,973,299 | ||||||
| Costs of products | 743,308 | 490,162 | ||||||
| Cost of software license, maintenance and support services | 362,139 | — | ||||||
| Total costs of revenues | 5,966,304 | 4,463,461 | ||||||
| Gross profit | 5,344,161 | 4,126,138 | ||||||
| Selling, general and administrative expenses | 5,023,446 | 3,412,211 | ||||||
| Income from operations | 320,715 | 713,927 | ||||||
| Other expense (income): | ||||||||
| Interest expense | 603 | 1,347 | ||||||
| Other income, net | (10,989 | ) | (2,623 | ) | ||||
| Income before income taxes | 331,101 | 715,203 | ||||||
| Income tax expense | 150,000 | 264,950 | ||||||
| Net income | 181,101 | 450,253 | ||||||
| Net loss attributable to non-controlling interest | 286,841 | 31,605 | ||||||
| Net income attributable to Where Food Comes From, Inc. | $ | 467,942 | $ | 481,858 | ||||
| Per share - net income attributable to Where Food Comes From, Inc.: | ||||||||
| Basic | $ | 0.02 | $ | 0.02 | ||||
| Diluted | $ | 0.02 | $ | 0.02 | ||||
| Weighted average number of common shares outstanding: | ||||||||
| Basic | 24,673,080 | 23,817,980 | ||||||
| Diluted | 24,834,931 | 23,969,134 | ||||||
| * less than $0.01 per share | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
| Where Food Comes From, Inc. |
| Consolidated Statements of Cash Flows |
| (Unaudited) |
| Year to date ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 181,101 | $ | 450,253 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 634,152 | 199,460 | ||||||
| Stock-based compensation expense | 130,637 | 84,457 | ||||||
| Common stock issued for services rendered | 25,000 | — | ||||||
| Deferred tax expense | (207,000 | ) | 264,950 | |||||
| Bad debt expense | 17,525 | — | ||||||
| Loss on disposal of property and equipment | — | 7,480 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (584,154 | ) | (313,804 | ) | ||||
| Short-term investments | (7,635 | ) | — | |||||
| Prepaid expenses and other assets | (177,517 | ) | (26,453 | ) | ||||
| Accounts payable | 385,242 | 54,133 | ||||||
| Accrued expenses and other current liabilities | 846,044 | 253,357 | ||||||
| Customer deposits and deferred revenue | 324,889 | 224,751 | ||||||
| Lease incentive obligation | (8,127 | ) | — | |||||
| Net cash provided by operating activities | 1,560,157 | 1,198,584 | ||||||
| Investing activities: | ||||||||
| Acquisition of Validus, remaining 40% interest | — | (162,707 | ) | |||||
| Acquisition of A Bee Organic | (150,000 | ) | — | |||||
| Purchases of property and equipment | (55,609 | ) | (429,333 | ) | ||||
| Proceeds from sale of property and equipment | — | 11,990 | ||||||
| Net cash used in investing activities | (205,609 | ) | (580,050 | ) | ||||
| Financing activities: | ||||||||
| Repayments of notes payable | — | (16,211 | ) | |||||
| Repayments of capital lease obligations | (3,038 | ) | (3,543 | ) | ||||
| Proceeds from stock option exercise | 8,168 | 44,519 | ||||||
| Stock repurchase under Buyback Plan | (39,796 | ) | (179,647 | ) | ||||
| Net cash used in financing activities | (34,666 | ) | (154,882 | ) | ||||
| Net change in cash | 1,319,882 | 463,652 | ||||||
| Cash at beginning of year | 2,489,985 | 3,781,397 | ||||||
| Cash at end of year | $ | 3,809,867 | $ | 4,245,049 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
6
| Where Food Comes From, Inc. |
| Consolidated Statement of Equity |
| Year to date ended September 30, 2017 |
| (Unaudited) |
| Additional | Accumulated | |||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Deficit/Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Stock | Earnings | Total | |||||||||||||||||||
| Balance at December 31, 2016 | 24,647,186 | 24,890 | 10,052,597 | (524,892 | ) | (124,917 | ) | 9,427,678 | ||||||||||||||||
| Acquisition of A Bee Organic | 45,684 | 45 | 98,176 | — | — | 98,221 | ||||||||||||||||||
| Issuance of common shares for acquisition-related consulting services | 11,628 | 12 | 24,988 | — | — | 25,000 | ||||||||||||||||||
| Stock based compensation expense | — | 130,637 | — | — | 130,637 | |||||||||||||||||||
| Issuance of common shares upon exercise of options | 7,001 | 7 | 8,161 | — | — | 8,168 | ||||||||||||||||||
| Repurchase of common shares under Buyback Program | (18,214 | ) | — | — | (39,796 | ) | — | (39,796 | ) | |||||||||||||||
| Vesting of restricted stock awards | 10,250 | 10 | (10 | ) | — | — | — | |||||||||||||||||
| Net income attributable to Where Food Comes From, Inc. | — | — | — | — | 467,942 | 467,942 | ||||||||||||||||||
| Balance at September 30, 2017 | 24,703,535 | $ | 24,964 | $ | 10,314,549 | $ | (564,688 | ) | $ | 343,025 | $ | 10,117,850 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1 - The Company and Basis of Presentation
Business Overview
Where Food Comes From, Inc. is a Colorado corporation based in Castle Rock, Colorado (“WFCF”, the “Company,” “our,” “we,” or “us”). The Company’s principal business is conducting both on-site and desk audits to verify that claims being made about livestock, food, other high-value specialty crops and agricultural products are accurate. We also employ a software-as-a-service (“SaaS”) revenue model that bundles annual software licenses with ongoing software enhancements and upgrades and a wide range of professional services that generate incremental revenue specific to the food and agricultural industry. Finally, the Company’s Where Food Comes From Source Verified® retail and restaurant labeling program utilizes the verification of product attributes to connect consumers directly to the source of the food they purchase through product labeling and web-based information sharing and education. Most of our customers are located throughout the United States.
Basis of Presentation
Our unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the results of operations, financial position and cash flows of Where Food Comes From, Inc. and its subsidiaries, International Certification Services, Inc. (“ICS”), Validus, Sterling Solutions, LLC (“Sterling”) and SureHarvest (collectively referred to as “we,” “us,” and “our” throughout this Form 10-Q). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues, costs and expenses during the reporting period. All significant intercompany transactions and amounts have been eliminated. The results of businesses acquired are included in the consolidated financial statements from the date of the acquisition. Actual results could differ from the estimates.
The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements and footnotes thereto for the year ended December 31, 2016, included in our Form 10-K filed on February 28, 2017. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. The financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations. The consolidated operating results for the period ended September 30, 2017 are not necessarily indicative of the results to be expected for any other interim period of any future year.
Seasonality
Our business is subject to seasonal fluctuations. Significant portions of our verification and certification service revenue is typically realized during late May through early October when the calf marketings and the growing seasons are at their peak. Because of the seasonality of the business and our industry, results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
8
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Recently Issued Accounting Pronouncements
Lease Accounting
In February 2016, the FASB issued ASU 2016-02, “Leases,” which will require lessees to recognize a right-of-use asset and a lease liability for all leases that are not short-term in nature. For a lessor, the accounting applied is largely unchanged from previous guidance. The new rules will be effective for the Company in the first quarter of 2019. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations and cash flows. Although the evaluation is ongoing, the Company expects that the adoption will impact the Company’s financial statements as the standard requires the recognition on the balance sheet of a right of use asset and corresponding lease liability for all leases, including operating leases, that are not short-term, which differs from current guidance. The Company is currently analyzing its contracts to determine whether they contain a lease under the revised guidance and has not quantified the amount of the asset and liability that will be recognized on the Company’s balance sheet.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes current revenue recognition requirements and industry-specific guidance. The codification was amended through additional ASUs and, as amended, requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company is required to adopt the new standard in the first quarter of 2018 and may adopt either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption using one of two retrospective application methods. The Company has developed an approach for the implementation of the guidance including a review of revenue streams and contracts to identify any differences in timing, measurement or presentation of revenue recognition. Currently, the Company has not completed its estimate of the quantitative impact and has engaged a third party to assist in its evaluation. While the Company is still in the process of completing its evaluation of the standard, it currently believes the most significant impact will be related to accounting for its software license, maintenance and support revenue, and the timing in which those revenues are recognized.
Clarifying the Definition of a Business
In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business,” which provides guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU amends ASC 805 to provide a more robust framework to use in determining when a set of assets and activities is a business. In addition, the amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The new guidance will be effective for the Company in the first quarter of 2018. The Company is currently evaluating the provisions of this new guidance and has not determined the impact this standard may have on its financial condition, results of operations, cash flows and related disclosures.
Simplifying the Test for Goodwill Impairment
In April 2017, the FASB has issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which removes step 2 from the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company is required to adopt the new standard in 2020. The Company is currently evaluating the provisions of this new guidance and has not determined the impact this standard may have on its financial condition, results of operations, cash flows and related disclosures.
9
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 2 – Business Acquisitions
SureHarvest Acquisition
On December 28, 2016, we entered into an Asset Purchase Agreement (the “SureHarvest Purchase Agreement”), by and among the Company, SureHarvest Services LLC (the “Buyer” or “SureHarvest”); and SureHarvest, Inc., a California corporation (the “Seller” or “SureHarvest, Inc.”). We acquired substantially all the assets of the Seller. SureHarvest develops software and provides services related to sustainability measurement and benchmarking, traceability, verification and certification to the food and agriculture industries.
Pursuant to the SureHarvest Purchase Agreement, WFCF purchased the business assets of the Seller for total consideration of approximately $2.8 million, comprised of approximately $1,122,000 in cash and 850,852 shares of common stock of WFCF valued at approximately $1,710,000 based on the closing price of our stock on December 28, 2016, of $2.01 per share. Additionally, we issued the Seller a 40% membership interest in SureHarvest, with the Company holding a 60% interest.
Following the thirty-six-month anniversary of the effective date of the SureHarvest Purchase Agreement, the Company shall have the option, but not the obligation, to purchase all the units (the 40% interest) of SureHarvest held by the Seller, and the Seller shall have the option, but not the obligation, to require the Company to purchase all the units of SureHarvest held by the Seller. The purchase price for the units shall be equal to the amount the selling holders of the units would be entitled to receive upon a liquidation of SureHarvest assuming all of the assets of SureHarvest are sold for a purchase price equal to the product of eight and half times trailing twelve-month earnings before income taxes, depreciation and amortization, as defined, subject to an $8 million ceiling.
Because SureHarvest, Inc. at its option, can require the Company to purchase its 40% interest in SureHarvest, the SureHarvest non-controlling interest meets the definition of a contingently redeemable non-controlling interest. Redeemable non-controlling interests are presented at the greater of their carrying amount or redemption value at the end of each reporting period and are shown as a separate caption between liabilities and equity (mezzanine section) in the accompanying consolidated balance sheet.
The following unaudited pro forma information presents the results of operations for the three and nine months ended September 30, 2016, as if the acquisition of SureHarvest had occurred on January 1, 2016. This pro forma information does not reflect any integration activities or cost savings from operating efficiencies, synergies, asset dispositions or other restructurings that could result from the acquisition, nor does it purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.
| Three months | Year to date | |||||||
| ended | ended | |||||||
September 30, 2016 | September 30, 2016 | |||||||
| Total revenue | $ | 3,732,770 | $ | 9,622,988 | ||||
| Net income attributable to Where Food Comes From, Inc. | $ | 229,434 | $ | 397,259 | ||||
| Basic and diluted earnings per share | $ | 0.01 | $ | 0.02 | ||||
| * less than $0.01 per share | ||||||||
10
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
A Bee Organic Acquisition
On May 30, 2017, we acquired A Bee Organic for $150,000 in cash and 45,684 shares of common stock of WFCF valued at approximately $98,000 based on the closing price of our stock on May 30, 2017, of $2.15 per share. The acquisition primarily consisted of the existing customer relationships and represents further expansion of our verification and certification solutions into hydroponics/aquaponics and apiary spaces. We believe the total consideration paid approximates the fair value of the assets acquired. We have allocated the total consideration to our identifiable intangible assets to be amortized over an estimated useful life of 8 years.
Note 3 – Basic and Diluted Net Income per Share
Basic net income per share was computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and restricted stock awards are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
The following is a reconciliation of the share data used in the basic and diluted income per share computations:
Three months ended September 30, | Year to date ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Basic: | ||||||||||||||||
| Weighted average shares outstanding | 24,705,934 | 23,772,967 | 24,673,080 | 23,817,980 | ||||||||||||
| Diluted: | ||||||||||||||||
| Weighted average shares outstanding | 24,705,934 | 23,772,967 | 24,673,080 | 23,817,980 | ||||||||||||
| Weighted average effects of dilutive securities | 180,213 | 156,044 | 161,851 | 151,154 | ||||||||||||
| Total | 24,886,147 | 23,929,011 | 24,834,931 | 23,969,134 | ||||||||||||
| Antidilutive securities: | 94,000 | 25,668 | 94,000 | 25,168 | ||||||||||||
The effect of the inclusion of the antidilutive shares would have resulted in an increase in earnings per share. Accordingly, the weighted average shares outstanding have not been adjusted for antidilutive shares.
11
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 4 – Intangible and Other Assets
The following table summarizes our intangible and other assets:
| September 30, | December 31, | Estimated | ||||||||
| 2017 | 2016 | Useful life | ||||||||
| Intangible assets subject to amortization: | ||||||||||
| Tradenames and Trademarks | $ | 282,307 | $ | 282,307 | 2.5 - 8.0 years | |||||
| Accreditations | 88,663 | 88,663 | 5.0 years | |||||||
| Customer Relationships | 3,084,551 | 2,836,330 | 8.0 - 15.0 years | |||||||
| Beneficial Lease Arrangement | 120,200 | 120,200 | 11.0 years | |||||||
| Patents | 970,100 | 970,100 | 4.0 years | |||||||
| 4,545,821 | 4,297,600 | |||||||||
| Less accumulated amortization | 947,506 | 547,917 | ||||||||
| 3,598,315 | 3,749,683 | |||||||||
| Tradenames/trademarks (not subject to amortization) | 465,000 | 465,000 | ||||||||
| 4,063,315 | 4,214,683 | |||||||||
| Deposit | 13,545 | 13,545 | ||||||||
| $ | 4,076,860 | $ | 4,228,228 | |||||||
Note 5 – Stock-Based Compensation
In addition to cash compensation, the Company may compensate certain service providers, including employees, directors, consultants, and other advisors, with equity based compensation in the form of stock options and restricted stock awards. The Company recognizes all equity-based compensation as stock-based compensation expense based on the fair value of the compensation measured at the grant date. For stock options, fair value is calculated at the date of grant using the Black-Scholes-Merton option pricing model. For restricted stock awards, fair value is the closing stock price for the Company’s common stock on the grant date. The expense is recognized over the vesting period of the grant. For the periods presented, all stock-based compensation expense was classified as a component within selling, general and administrative expense in the Company’s consolidated statements of income.
The amount of stock-based compensation expense is as follows:
Three months ended September 30, | Year to date ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Stock options | $ | 14,687 | $ | 5,855 | $ | 44,100 | $ | 26,297 | ||||||||
| Restricted stock awards | 26,480 | 21,774 | 86,537 | 58,160 | ||||||||||||
| Total | $ | 41,167 | $ | 27,629 | $ | 130,637 | $ | 84,457 | ||||||||
12
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
As of September 30, 2017, the estimated unrecognized compensation cost from unvested awards which will be recognized ratably over the remaining vesting phase is as follows:
| Years ended December 31st: | Unvested
stock options | Unvested
restricted stock awards | Total
Unrecognized Compensation Expense | ||||||||||
| 2017 (three months remaining) | $ | 14,715 | $ | 23,781 | $ | 38,496 | |||||||
| 2018 | 58,695 | 62,833 | 121,528 | ||||||||||
| 2019 | 53,552 | 11,426 | 64,978 | ||||||||||
| $ | 126,962 | $ | 98,040 | $ | 225,002 | ||||||||
Equity Incentive Plans
Our 2016 Equity Incentive Plan (the “Equity Incentive Plan”) provides for the issuance of stock-based awards to employees, officers, directors and consultants. The Plan permits the granting of stock awards and stock options. The vesting of stock-based awards is generally subject to the passage of time and continued employment through the vesting period.
Stock Option Activity
Stock option activity under our Equity Incentive Plan is summarized as follows:
| Weighted Avg. | |||||||||||||||||||||
| Weighted Avg. | Weighted Avg. | Remaining | Aggregate | ||||||||||||||||||
| Number of | Exercise Price | Fair Value | Contractual Life | Intrinsic | |||||||||||||||||
| Awards | per Share | per Share | (in years) | Value | |||||||||||||||||
| Outstanding, December 31, 2016 | 273,586 | $ | 1.22 | $ | 1.22 | 7.05 | $ | 217,892 | |||||||||||||
| Granted | — | $ | — | $ | — | — | |||||||||||||||
| Exercised | (7,001 | ) | $ | 1.17 | $ | 1.24 | 5.76 | ||||||||||||||
| Expired/Forfeited | — | $ | — | $ | — | — | |||||||||||||||
| Outstanding, September 30, 2017 | 266,585 | $ | 1.23 | $ | 1.22 | 6.31 | $ | 294,559 | |||||||||||||
| Exercisable, September 30, 2017 | 172,585 | $ | 0.86 | $ | 0.87 | 4.74 | $ | 253,199 | |||||||||||||
| Unvested, September 30, 2017 | 94,000 | $ | 1.89 | $ | 1.87 | 9.21 | $ | 41,360 | |||||||||||||
The aggregate intrinsic value represents the total pre-tax intrinsic value (the aggregate difference between the closing price of our common stock on September 30, 2017 and the exercise price for the in-the-money options) that would have been received by the option holders if all the in-the-money options had been exercised on September 30, 2017.
13
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Restricted Stock Activity
Restricted stock activity under our Equity Incentive Plan is summarized as follows:
| Weighted Avg | |||||||||
| Number of | Grant Date | ||||||||
| Options | Fair Value | ||||||||
| Non-vested restricted shares, December 31, 2016 | 136,000 | $ | 2.44 | ||||||
| Granted | — | $ | — | ||||||
| Vested | (10,250 | ) | $ | 2.15 | |||||
| Forfeited | (18,750 | ) | $ | 2.18 | |||||
| Non-vested restricted shares, September 30, 2017 | 107,000 | $ | 2.52 | ||||||
Note 6 – Income Taxes
Deferred tax assets and liabilities have been determined based upon the differences between the financial statement amounts and the tax bases of assets and liabilities as measured by enacted tax rates expected to be in effect when these differences are expected to reverse. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our net operating loss (“NOL”) carry forwards are the most significant component of our deferred tax assets; however, the ultimate realization of our deferred tax assets is dependent upon generation of future taxable income. We consider past history, the scheduled reversal of taxable temporary differences, projected future taxable income, and tax planning strategies in making this assessment. Utilization of our NOL carry forwards reduces our federal and state income tax liability incurred.
The Company’s subsidiary, SureHarvest, is a California limited liability company (“LLC”). As an LLC, management believes SureHarvest is not subject to income taxes, and such taxes are the responsibility of the respective members.
The provision or benefit for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the three months ended September 30, 2017 and 2016, we recorded income tax expense of $199,000 and $135,000 respectively. For the nine months ended September 30, 2017 and 2016, we recorded income tax expense of $150,000 and $264,950 respectively.
Note 7 – Notes Payable
Notes Payable consist of the following:
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Medved Ford Inc. Loan | $ | 54,165 | $ | — | ||||
| Less current portion of notes payable | 8,525 | — | ||||||
| Long-term portion of notes payable | $ | 45,640 | $ | — | ||||
In September 2017, we entered into a note payable of $54,165 for the purchase of a vehicle. Interest and principal payments are due in equal monthly installments of $1,087 over five years beginning October 2017. This note bears an interest rate of 7.44% per annum and is fully secured by the vehicle.
14
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 8 – Commitments and Contingencies
Unison Revolving Line of Credit
The Company has a revolving line of credit (“LOC”) agreement which matures April 12, 2020. The LOC provides for $75,080 in working capital. The interest rate is at the Wall Street Journal prime rate plus 1.50% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due on maturity. As of September 30, 2017, the effective interest rate was 5.5%. The LOC is collateralized by all the business assets of ICS. As of September 30, 2017, there were no amounts outstanding under this LOC.
Operating Leases & Lease Incentive Obligation
The Company relocated its headquarters within Castle Rock, Colorado, during the third quarter 2016 and entered into a new lease agreement with The Move, LLC for approximately 8,000 square feet of office space. This space is being leased from a company in which our CEO and President, each a related party to the Company, have a 27% ownership interest. The lease agreement has an initial term of five years plus two renewal periods, which the Company is more likely than not to renew. The office space lease term commenced August 1, 2016. Rental payments are approximately $19,000 per month, which includes common area charges, and provides for escalating rental payments annually over the term of the lease. The Company recognizes rent expense on a straight-line basis over the non-cancelable lease term and option renewal periods. The resulting deferred rent is included in accrued expenses and other current liabilities on the consolidated balance sheet.
The Company recorded leasehold improvements of approximately $406,400, which included approximately $163,000 in lease incentives. Leasehold improvements are included in property and equipment on the consolidated balance sheet. Lease incentives have been included in lease incentive obligation as a long-term liability on the consolidated balance sheet and will reduce rent expense on a straight-line basis over 15 years. Lease incentives are excluded from minimum lease payments in the schedule below.
In August 2017, the Company entered into the first amendment of its lease agreement with The Move, LLC to provide for an additional 7,700 square feet of office space to commence December 1, 2017. The additional space is currently not approved for occupancy. Total rental payments beginning December 1, 2017 will increase to approximately $27,000 per month, which includes common area charges, and provides for escalating rental payments annually over the term of the lease. The Company will also receive approximately $230,000 in lease incentives to build-out the new additional square footage. All other terms will remain the same.
15
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
As of September 30, 2017, future minimum lease payments for all operating leases are as follows:
| Years ended December 31st: | Total | ||||
| 2017 (remaining three months) | $ | 77,611 | |||
| 2018 | 364,564 | ||||
| 2019 | 362,630 | ||||
| 2020 | 349,755 | ||||
| 2021 | 360,287 | ||||
| Thereafter | 4,048,955 | ||||
| Total lease commitments | $ | 5,563,802 | |||
Legal proceedings
From time to time, we may become involved in various legal actions, administrative proceedings and claims in the ordinary course of business. We generally record losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable. We are not aware of any legal actions currently pending against us.
Note 9 – Contingently Redeemable Non-Controlling Interest
Contingently redeemable non-controlling interest on our consolidated balance sheet represents the non-controlling interest related to the SureHarvest acquisition, in which the non-controlling interest holder, at its election, can require the Company to purchase its 40% investment in SureHarvest. Below is a table reflecting the activity of the contingently redeemable non-controlling interest at September 30, 2017.
| Balance, December 31, 2016 | $ | 1,888,135 | ||
| Net loss attributable to non-controlling interest in SureHarvest for the nine months ended Sept 30, 2017 | (286,841 | ) | ||
| Balance, September 30, 2017 | $ | 1,601,294 |
The contingently redeemable non-controlling interest was adjusted to the greater of the carrying value or redemption value as of each period end.
Note 10 - Segments
With each acquisition, we assess the need to disclose discrete information related to our operating segments. Because of the similarities of certain of our acquisitions that provide certification and verification services, we aggregate operations into one verification and certification services reportable segment. The factors considered in determining this aggregated reporting segment include the economic similarity of the businesses, the nature of services provided, production processes, types of customers and distribution methods. The Company’s chief operating decision maker (the Company’s CEO) allocates resources and assesses the performance of its certification and verification services activities as one segment, which includes products sales.
With the acquisition of SureHarvest Services, the Company determined that it also has a software sales and related consulting services segment, which meet the quantitative threshold to be considered a reporting segment in the third quarter 2017. This segment includes software license, maintenance, support and consulting service revenues.
16
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Management makes decisions, measures performance, and manages the business utilizing internal reporting operating segment information. Performance of operating segments are based on net sales, gross profit, selling, general and administrative expenses and most importantly, operating income.
The company eliminates intercompany transfers between segments for management reporting purposes. The following table shows information for reportable operating segments:
Three months ended September 30, | Year to date ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Verification and Certification Segment: | ||||||||||||||||
| Assets | $ | 10,409,289 | $ | 9,442,909 | $ | 10,409,289 | $ | 9,442,909 | ||||||||
| Verification and certification revenues | $ | 3,672,587 | $ | 2,963,853 | $ | 9,152,520 | $ | 7,733,613 | ||||||||
| Products sales | 687,235 | 380,393 | 1,226,141 | 855,986 | ||||||||||||
| Total segment revenue | $ | 4,359,822 | $ | 3,344,246 | $ | 10,378,661 | $ | 8,589,599 | ||||||||
| Gross profit - verification and certification gross profit | $ | 1,825,680 | $ | 1,441,650 | $ | 4,474,382 | $ | 3,760,314 | ||||||||
| Gross profit - products | 276,926 | 159,794 | 482,833 | 365,824 | ||||||||||||
| Total segment gross profit | $ | 2,102,606 | $ | 1,601,444 | $ | 4,957,215 | $ | 4,126,138 | ||||||||
| Selling, general and administrative expenses | 1,558,442 | 1,239,834 | 3,920,771 | 3,412,211 | ||||||||||||
| Segment operating income | $ | 544,164 | $ | 361,610 | $ | 1,036,444 | $ | 713,927 | ||||||||
| Software Sales and Related Consulting Segment: | ||||||||||||||||
| Assets | $ | 4,443,117 | $ | — | $ | 4,443,117 | $ | — | ||||||||
| Software license, maintenance and support services | 243,186 | $ | — | $ | 532,684 | $ | — | |||||||||
| Consulting service revenue | 131,427 | — | 399,120 | — | ||||||||||||
| Total segment revenue | $ | 374,613 | $ | — | $ | 931,804 | $ | — | ||||||||
| Gross profit - software license, maintenance and support services | $ | 101,284 | $ | — | $ | 170,544 | $ | — | ||||||||
| Gross profit - consulting service revenue | 87,446 | — | 216,402 | — | ||||||||||||
| Total segment gross profit | $ | 188,730 | $ | — | $ | 386,946 | $ | — | ||||||||
| Selling, general and administrative expenses | 283,155 | — | 1,102,675 | — | ||||||||||||
| Segment operating loss | $ | (94,425 | ) | $ | — | $ | (715,729 | ) | $ | — | ||||||
Consolidated Information: | ||||||||||||||||
| Verification and certification segment | $ | 10,409,289 | $ | 9,442,909 | $ | 10,409,289 | $ | 9,442,909 | ||||||||
| Software and related consulting segment | 4,443,117 | — | 4,443,117 | — | ||||||||||||
| Consolidated Assets | $ | 14,852,406 | $ | 9,442,909 | $ | 14,852,406 | $ | 9,442,909 | ||||||||
| Verification and certification segment | $ | 4,359,822 | $ | 3,344,246 | $ | 10,378,661 | $ | 8,589,599 | ||||||||
| Software and related consulting segment | 374,613 | — | 931,804 | — | ||||||||||||
| Consolidated Revenues: | $ | 4,734,435 | $ | 3,344,246 | $ | 11,310,465 | $ | 8,589,599 | ||||||||
| Verification and certification segment | $ | 2,102,606 | $ | 1,601,444 | $ | 4,957,215 | $ | 4,126,138 | ||||||||
| Software and related consulting segment | 188,730 | — | 386,946 | — | ||||||||||||
| Consolidated Gross Profit: | $ | 2,291,336 | $ | 1,601,444 | $ | 5,344,161 | $ | 4,126,138 | ||||||||
| Verification and certification segment | $ | 1,558,442 | $ | 1,239,834 | $ | 3,920,771 | $ | 3,412,211 | ||||||||
| Software and related consulting segment | 283,155 | — | 1,102,675 | — | ||||||||||||
| Consolidated Selling, General and Administrative Expenses: | $ | 1,841,597 | $ | 1,239,834 | $ | 5,023,446 | $ | 3,412,211 | ||||||||
| Verification and certification segment | $ | 544,164 | $ | 361,610 | $ | 1,036,444 | $ | 713,927 | ||||||||
| Software and related consulting segment | (94,425 | ) | — | (715,729 | ) | — | ||||||||||
| Consolidated Income from Operations: | $ | 449,739 | $ | 361,610 | $ | 320,715 | $ | 713,927 | ||||||||
17
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 11 – Supplemental Cash Flow Information
| Year to date ended September 30, | ||||||||
| 2017 | 2016 | |||||||
Cash paid for: | ||||||||
| Interest expense | $ | 603 | $ | 876 | ||||
| Income taxes | $ | 184,440 | $ | — | ||||
| Non-cash investing and financing activities: | ||||||||
| Common stock issued for remaining interest in Validus Verification Services LLC | $ | — | $ | 200,100 | ||||
| Equipment acquired under a capital lease | $ | 18,033 | $ | 22,439 | ||||
| Vehicle acquired under note payable | $ | 54,165 | $ | — | ||||
| Lease incentive obligation | $ | — | $ | 162,540 | ||||
| Common stock issued in acquisition of A Bee Organic | $ | 98,221 | $ | — | ||||
| Common stock issued for acquisition-related consulting fess | $ | 25,000 | $ | — | ||||
18
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Form 10−K for the fiscal year ended December 31, 2016. The following discussion and analysis includes historical and certain forward−looking information that should be read together with the accompanying consolidated financial statements, related footnotes and the discussion below of certain risks and uncertainties that could cause future operating results to differ materially from historical results or from the expected results indicated by forward−looking statements.
Business Overview
Where Food Comes From, Inc. and its subsidiaries (“WFCF”, “the Company”, “our”, “we”, or “us”) is a leading trusted resource for third-party verification of food and agricultural production practices in North America. The Company supports more than 15,000 farmers, ranchers, vineyards, wineries, processors, retailers, distributors, trade associations and restaurants with a wide variety of value-added services provided through its family of verifiers, including IMI Global, International Certification Services (“ICS”), Validus Verification Services (“Validus”), Sterling Solutions, SureHarvest Services (“SureHarvest”), and our newest acquisition, A Bee Organic. In order to have credibility, product claims such as gluten-free, non-GMO, non-hormone treated, humane handling, and others require verification by an independent third-party such as WFCF. The Company’s principal business is conducting both on-site and desk audits to verify that claims being made about livestock, food, other high-value specialty crops and agricultural products are accurate. In addition, the Company’s Where Food Comes From Source Verified® retail and restaurant labeling program utilizes the verification of product attributes to connect consumers directly to the source of the product they purchase through product labeling and web-based information sharing and education. With the use of Quick Response Code (“QR”) technology, consumers can instantly access information about the producers behind their food.
WFCF was founded in 1996 and incorporated in the state of Colorado as a subchapter C corporation in 2005. The Company’s shares of common stock trade on the OTCQB marketplace under the stock ticker symbol, “WFCF”.
The Company’s original name – Integrated Management Information, Inc. (d.b.a. IMI Global, Inc.) – was changed to Where Food Comes From, Inc. in 2012 to better reflect the Company’s mission. Early growth was attributable to source and age verification services for beef producers who wanted access to markets overseas following the discovery of “mad cow” disease in the U.S. Over the years, WFCF has expanded its portfolio to include verification and software services for most food groups and 30 standards. This growth has been achieved both organically and through the acquisition of other companies.
19
Current Marketplace Opportunities
Because of growing demand for increased transparency into food and agricultural production practices, we believe there are three main market drivers to promote forward momentum for our business:
Market Driver #1 - Consumer awareness and expectations
| ● | The 13th Edition of “The Why? Behind The Buy,” based on the annual survey conducted by Acosta, a leading full-service sales and marketing agency in the consumer packaged goods industry, was released in December 2016. The survey found that today’s shoppers are seeking positive culinary experiences, making deliberate decisions from the store to the stove, including wanting to feel good about the foods they eat, have pride in the brands they buy and share their cooking journeys online. The survey also explores the key factors contributing to this experiential evolution for grocery shoppers, including the growing natural/organics category. Shoppers’ spending on healthy products has seen steady growth in the past several years, driven by the desire of shoppers to feel good about the foods they’re eating. “From online grocery ordering and a desire to explore new foods, to natural products and socially responsible brands, consumers are at the wheel when it comes to steering the CPG industry in a new direction…there’s no doubt that this evolution will continue in the coming year, so it’s up to the industry to adapt by leaning into these trends and building trust and loyalty among all shoppers.” Colin Stewart, senior vice president at Acosta. |
| ● | According to research dated March 2016 from Sullivan Higdon & Sink FoodThink, only one-third of consumers think the agriculture community and food companies are transparent. The research appears in “Evolving Trust in the Food Industry,” a white paper with insights into Americans’ knowledge and trust of the food industry and how those perceptions have changed from 2012 to 2016. These numbers are an improvement from 2012, when only 22% and 19% agreed that the agricultural community and food companies, respectively, are transparent. Increasing media attention and dialogue about food production, and the food industry’s willingness to be more open about its production practices, have likely caused this increase in perceived transparency. In turn, this provides consumers the knowledge to have definite opinions on the degree of industry transparency and an increased desire for more knowledge about how their food is produced. |
| ● | According to the United States Department of Agriculture (“USDA”) website, the U.S. market for certified organic products continues to grow in double digits with 24,650 operations at the end of 2016, which reflects a 13% growth rate between the end of 2015 and 2016. Increasing consumer demand for healthy, better-for-you products produced with sustainable agricultural practices is driving growth in the organic market. |
Market Driver #2 - Global competitiveness among retailers
| ● | Restaurant chains and retailers with dominant market shares and large buying power, like McDonald’s and Wal-Mart, are leading the way in prioritizing sustainable food supply initiatives in answer to consumer demands. With information literally at our fingertips, Google searches and smart phone apps are making it easier to expose where sustainable food supply chains are, and where they are not. |
| ● | Producers, packers, distributors and retailers understand that verification, identification and traceability are key competitive differentiators. Oftentimes, it is necessary for export into international markets, including Korea, Russia and the European Union. |
Market Driver #3 - Government regulation
| ● | In January 2013, the Food Safety Modernization Act (“FSMA”) issued two major proposed rules regarding preventive controls in human/animal food and produce safety. Compliance dates for some businesses began September 2016. Under the new rules, the food safety plan defined by the regulation differs from traditional hazard analysis and critical control points (“HACCP”) plans. It must include a hazard analysis, preventive controls, monitoring procedures, corrective action procedures, verification procedures, a supply chain program, and a recall program. We continue to see significant movement in companies requesting our consulting expertise to developing programs designed to assist them in maintaining compliance with the new rules. |
20
| ● | The Animal Disease Traceability Rule primarily covers beef cattle 18 months of age or older. Under the final rule, unless specifically exempted, livestock moved interstate must be officially identified and accompanied by an interstate certificate of veterinary inspection or other documentation, such as owner-shipper statements or brand certificates. |
| ● | The Saudi Arabia market closed to U.S. beef in 2012. Since that time, the beef industry has been working with the U.S. government to re-open that market, which officially happened in early August 2016. In order to be approved to meet the export requirements, a company must have or must be approved by a USDA process verified plan (“PVP”) and meet the Saudi Arabia export verification requirements. U.S. exports to Saudi Arabia in 2010 and 2011 were valued at approximately $30 million. We believe the Saudi Arabia market focuses on the highest quality middle meats, making it a valuable market for the U.S. to re-gain access. |
| ● | On June 12, 2017, officials announced the technical requirements for beef exports to the People’s Republic of China. Export verification (“EV”) requirements include source and age verification with the use of a program compliant tag. In addition, China bans the use of synthetic growth promotants, including ractopamine. So, although there is not a formal non-hormone component to the EV requirements for the supply chain, due to China’s residue testing, packers will be seeking non-hormone treated cattle (“NHTC”) and/or Verified Natural cattle to ensure continued market access. China is the world’s second largest buyer of beef, but beef imports from the US to China have been banned since the 2003 Bovine Spongiform Encephalopathy (“BSE”) outbreak, also known as “Mad Cow Disease.” |
Seasonality
Our business is subject to seasonal fluctuations. Significant portions of our verification and certification service revenue is typically realized during late May through early October when the calf marketings and the growing seasons are at their peak. Because of the seasonality of the business and our industry, results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
Liquidity and Capital Resources
At September 30, 2017, we had cash, cash equivalents and short-term investments of $4,550,606 compared to $3,223,089 at December 31, 2016. Our working capital at September 30, 2017 was $3,932,738 compared to $3,429,185 at December 31, 2016.
Net cash provided by operating activities for the nine months ended September 30, 2017 was $1,560,157 compared to net cash provided of $1,210,574 during the same period in 2016. Net cash provided by operating activities is driven by our net income (loss) and adjusted by non-cash items. Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock based compensation expense, and deferred taxes.
Net cash used in investing activities for the nine months ended September 30, 2017, was $205,609 compared to $592,040 used in the 2016 period. Net cash used in the 2017 period was primarily attributable to the acquisition of A Bee Organic, as well as routine purchases of property and equipment. Net cash used in the 2016 period was primarily attributable to the acquisition of the non-controlling interest of Validus, as well as routine purchases of property and equipment.
Net cash used in financing activities for the nine months ended September 30, 2017, was $34,666 compared to $154,882 used in the 2016 period. Net cash used in the 2017 period was due to repayments under lease obligations of $3,038 and repurchase of common shares under the Buyback Plan of $39,796, offset by cash received from stock option exercises of approximately $8,200. Net cash used in the 2016 period was due to repayments of debt and lease obligations of $19,754 and repurchase of common shares under the Buyback Plan of $179,647 offset by proceeds from stock option exercises of approximately $44,519.
21
Historically, our growth has been funded through a combination of cash flow from operations, convertible debt from private investors and private placement offerings. We continually evaluate all funding options including additional offerings of our securities to private, public and institutional investors and other credit facilities as they become available.
The primary driver of our operating cash flow is our third-party verification solutions, specifically the gross margin generated from services provided. Therefore we focus on the elements of those operations including revenue growth and long term projects that ensure a steady stream of operating profits to enable us to meet our cash obligations. On a weekly basis we review the performance of each of our revenue streams focusing on third party verification solutions compared with prior periods and our operating plan. We believe that our various sources of capital, including cash flow from operating activities, overall improvement in our performance, and our ability to obtain additional financing are adequate to finance current operations, our acquisition strategy and the repayment of current debt obligations. We are not aware of any other event or trend that would negatively affect our liquidity. In the event such a trend develops, we believe that there are sufficient financing avenues available to us and from our internal cash generating capabilities to adequately manage our ongoing business.
The culmination of all our efforts toward net income has brought opportunities to us including: increased investor confidence and renewed interest in our company, third-party interest in our expertise, as well as the potential to develop business relationships with long term strategic partners. In keeping with our core business, we will continue to review our business model with a focus on profitability, long term capital solutions and the potential impact of acquisitions or divestitures, if such an opportunity arises.
Our plan for continued growth is based upon acquisitions, and continuing to add more accreditations to our products and services, as well as intensifying our focus on international markets. We believe that there are significant growth opportunities available to us because often the only means to entry as imposed on international market imports/exports is via a quality verification program.
Debt Facility
The Company has a revolving line of credit (“LOC”) agreement which matures April 12, 2020. The LOC provides for $75,080 in working capital. The interest rate is at the Wall Street Journal prime rate plus 1.50% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due on maturity. As of September 30, 2017, the effective interest rate was 5.5%. The LOC is collateralized by all the business assets of ICS. As of September 30, 2017, there were no amounts outstanding under this LOC.
Off-Balance Sheet Arrangements
As of September 30, 2017, we had no off-balance sheet arrangements of any type.
22
RESULTS OF OPERATIONS
Third quarter and year to date ended September 30, 2017 compared to the same periods in fiscal year 2016
The following table shows information for reportable operating segments:
Three months ended September 30, | Year to date ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Verification and Certification Segment: | ||||||||||||||||
| Assets | $ | 10,409,289 | $ | 9,442,909 | $ | 10,409,289 | $ | 9,442,909 | ||||||||
| Verification and certification revenues | $ | 3,672,587 | $ | 2,963,853 | $ | 9,152,520 | $ | 7,733,613 | ||||||||
| Products sales | 687,235 | 380,393 | 1,226,141 | 855,986 | ||||||||||||
| Total segment revenue | $ | 4,359,822 | $ | 3,344,246 | $ | 10,378,661 | $ | 8,589,599 | ||||||||
| Gross profit - verification and certification gross profit | $ | 1,825,680 | $ | 1,441,650 | $ | 4,474,382 | $ | 3,760,314 | ||||||||
| Gross profit - products | 276,926 | 159,794 | 482,833 | 365,824 | ||||||||||||
| Total segment gross profit | $ | 2,102,606 | $ | 1,601,444 | $ | 4,957,215 | $ | 4,126,138 | ||||||||
| Selling, general and administrative expenses | 1,558,442 | 1,239,834 | 3,920,771 | 3,412,211 | ||||||||||||
| Segment operating income | $ | 544,164 | $ | 361,610 | $ | 1,036,444 | $ | 713,927 | ||||||||
| Software Sales and Related Consulting Segment: | ||||||||||||||||
| Assets | $ | 4,443,117 | $ | — | $ | 4,443,117 | $ | — | ||||||||
| Software license, maintenance and support services | 243,186 | $ | — | $ | 532,684 | $ | — | |||||||||
| Consulting service revenue | 131,427 | — | 399,120 | — | ||||||||||||
| Total segment revenue | $ | 374,613 | $ | — | $ | 931,804 | $ | — | ||||||||
| Gross profit - software license, maintenance and support services | $ | 101,284 | $ | — | $ | 170,544 | $ | — | ||||||||
| Gross profit - consulting service revenue | 87,446 | — | 216,402 | — | ||||||||||||
| Total segment gross profit | $ | 188,730 | $ | — | $ | 386,946 | $ | — | ||||||||
| Selling, general and administrative expenses | 283,155 | — | 1,102,675 | — | ||||||||||||
| Segment operating loss | $ | (94,425 | ) | $ | — | $ | (715,729 | ) | $ | — | ||||||
| Consolidated Information: | ||||||||||||||||
| Verification and certification segment | $ | 10,409,289 | $ | 9,442,909 | $ | 10,409,289 | $ | 9,442,909 | ||||||||
| Software and related consulting segment | 4,443,117 | — | 4,443,117 | — | ||||||||||||
| Consolidated Assets | $ | 14,852,406 | $ | 9,442,909 | $ | 14,852,406 | $ | 9,442,909 | ||||||||
| Verification and certification segment | $ | 4,359,822 | $ | 3,344,246 | $ | 10,378,661 | $ | 8,589,599 | ||||||||
| Software and related consulting segment | 374,613 | — | 931,804 | — | ||||||||||||
| Consolidated Revenues: | $ | 4,734,435 | $ | 3,344,246 | $ | 11,310,465 | $ | 8,589,599 | ||||||||
| Verification and certification segment | $ | 2,102,606 | $ | 1,601,444 | $ | 4,957,215 | $ | 4,126,138 | ||||||||
| Software and related consulting segment | 188,730 | — | 386,946 | — | ||||||||||||
| Consolidated Gross Profit: | $ | 2,291,336 | $ | 1,601,444 | $ | 5,344,161 | $ | 4,126,138 | ||||||||
| Verification and certification segment | $ | 1,558,442 | $ | 1,239,834 | $ | 3,920,771 | $ | 3,412,211 | ||||||||
| Software and related consulting segment | 283,155 | — | 1,102,675 | — | ||||||||||||
| Consolidated Selling, General and Administrative Expenses: | $ | 1,841,597 | $ | 1,239,834 | $ | 5,023,446 | $ | 3,412,211 | ||||||||
| Verification and certification segment | $ | 544,164 | $ | 361,610 | $ | 1,036,444 | $ | 713,927 | ||||||||
| Software and related consulting segment | (94,425 | ) | — | (715,729 | ) | — | ||||||||||
| Consolidated Income from Operations: | $ | 449,739 | $ | 361,610 | $ | 320,715 | $ | 713,927 | ||||||||
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Verification and Certification Segment
Verification and certification service revenues consist of fees charged for verification audits and other verification and certification related services that the Company performs for customers. We have recently begun including fees earned from our WFCF labeling program in our verification and certification revenues due to the immateriality of the revenue stream and because as it represents a value-added extension of our source verification. Verification and certification service revenue for the three months and year to date period ended September 30, 2017 increased approximately $708,734, or 23.9%, and $1,418,907, or 18.3%, respectively, compared to the same periods in 2016. Overall, the increase is due to an increase in new verification customers, as well as an increase in product offerings. We are seeing increased demand from cattle producers in response to the re-opening of the export market to China as discussed above.
Our product sales are an ancillary part of our verification and certification services and represent sales of cattle identification ear tags. Product sales for the three months and year to date period ended September 30, 2017 increased approximately $306,842, or 80.7%, and $370,155, or 43.2%, respectively, compared to the same periods in 2016. Overall, our product sales have increased primarily in response to the re-opening of the China export market and the requirement for source and age verification using an identification tag at birth.
Costs of revenues for our verification and certification segment for the three months and year to date period ended September 30, 2017 were approximately $2.26 million and $5.42 million, respectively, compared to approximately $1.74 million and $4.46 million, respectively, for the same periods in 2016. Gross margin for the three months and year to date period ended September 30, 2017 improved slightly to 48.2% and 47.9%, respectively, compared to 47.9% and 48.0%, respectively, for the same periods in 2016. Our margins are impacted by various costs such as cost of products, salaries and benefits, insurance, and taxes. Because certain elements of our cost of revenues are fixed in nature, incremental sales positively impact our margins.
Selling, general and administrative expenses for the three months and year to date period ended September 30, 2017 were approximately $1.56 million and $3.92 million, respectively, compared to $1.24 million and $3.41 million, respectively, for the same periods in 2016. Overall, the increase in our selling, general and administrative expenses is due in part to slightly higher head count, increased sales and marketing costs, and increasing costs related to being a publicly held company and implementing new accounting standards. The year to date period ended September 30, 2017 also included $118,000 in acquisition-related (legal, accounting and consulting) expenses of SureHarvest and A Bee Organic.
Software Sales and Related Consulting Segment
Software license, maintenance and support services revenue for the three months and year to date period ended September 30, 2017 of $243,186 and $532,684, respectively, represents a new revenue stream specific to our acquisition of SureHarvest, as further described in Note 2 to the consolidated financial statements above. SureHarvest employs a software-as-a-service (SaaS) revenue model that bundles annual software licenses with ongoing software enhancements and upgrades and a wide range of professional services that generate incremental revenue specific to the food and agricultural industry.
Consulting service revenue for the three months and year to date period ended September 30, 2017 of $131,427 and $399,120, respectively, primarily represents fees earned from professional appearances, customer education and training related services. It is a new revenue stream specific to our acquisition of SureHarvest, as further described in Note 2 to the consolidated financial statements above.
Selling, general and administrative expenses for the three months and year to date period ended September 30, 2017 were approximately $283,100 and $1.10 million. Approximately $424,500 is due to amortization and depreciation expense related to assets acquired with the SureHarvest acquisition; and approximately $675,400 in salaries, professional services and other general and administrative costs.
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As with all of our acquisitions, we continue to identify synergies and implement best practices. We focus our efforts to create value in various ways such as: improving the performance of our acquisitions, removing excess capacity, creating market access for products, acquiring skills and technologies more quickly or at lower cost than we can build in-house, exploiting our industry-specific scalability and bundling opportunities, and picking winners early and helping them develop their businesses. Achieving any, or all of these strategies take time to implement. We have learned that it takes about 2-3 years after acquisition date to fully understand the complexities of our larger acquisitions, at which time, we have seen solid improvements in revenues and/or costs.
Income Tax Expense
The provision or benefit for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the three months ended September 30, 2017 and 2016, we recorded income tax expense of $199,000 and $135,000 respectively. For the nine months ended September 30, 2017 and 2016, we recorded income tax expense of $150,000 and $264,950 respectively.
Net Income and Per Share Information
As a result of the foregoing, net income attributable to WFCF shareholders for the three months ended September 30, 2017 was $290,192, or $0.01 per basic and diluted common share, compared to $224,953, or $0.01 per basic and diluted common share for the same period in 2016. Net income attributable to WFCF shareholders for the year to date period ended September 30, 2017 was $467,942 or $0.02 per basic and diluted common share, compared to $481,858 or $0.02 per basic and diluted common share for the same period in 2016.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rule 13a-15(e) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective based on our evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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From time to time, we may become involved in various legal actions, administrative proceedings and claims in the ordinary course of business. We generally record losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable.
Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 2016 Annual Report on Form 10−K, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. As of September 30, 2017, there have been no material changes to the risks disclosed in our most recent Annual Report on Form 10−K. We may also disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In connection with the A Bee Organic acquisition, we issued 45,684 shares of common stock of Where Food Comes From, Inc. valued at approximately $98,200 based upon the closing price of our stock on May 30, 2017, of $2.15 per share.
For services rendered by our advisors in connection with the A Bee Organic acquisition, we issued 11,628 shares of common stock of WFCF valued at approximately $25,000 based upon the closing price of our stock on May 30, 2017, of $2.15 per share.
The issuance of these shares of our common stock described above was pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended and related state private offering exemptions. All of the investors were Accredited Investors as defined in the Securities Act who took their shares for investments purposes without a view to distribution and had access to information concerning the Company and its business prospects, as required by the Securities Act. In addition, there was no general solicitation or advertising for these shares. All certificates for these shares issued pursuant to Section 4(2) contain a restrictive legend. Finally, our stock transfer agent has been instructed not to transfer any of such shares, unless such shares are registered for resale or there is an exemption with respect to their transfer.
(a) Exhibits
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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: November 2, 2017 | Where Food Comes From, Inc. | |
| By: | /s/ John K. Saunders | |
| Chief Executive Officer | ||
| By: | /s/ Dannette Henning | |
| Chief Financial Officer |
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