Where Food Comes From, Inc.
Condensed Consolidated Statements of
Income
(Unaudited)
|
|
Three months ended
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
2,948,945
|
|
|
$
|
2,655,792
|
|
Product sales
|
|
|
380,393
|
|
|
|
371,699
|
|
Other revenue
|
|
|
14,908
|
|
|
|
25,417
|
|
Total revenues
|
|
|
3,344,246
|
|
|
|
3,052,908
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
Labor and other costs of services
|
|
|
1,522,203
|
|
|
|
1,362,800
|
|
Costs of products
|
|
|
220,599
|
|
|
|
216,298
|
|
Total costs of revenues
|
|
|
1,742,802
|
|
|
|
1,579,098
|
|
Gross profit
|
|
|
1,601,444
|
|
|
|
1,473,810
|
|
Selling, general and administrative expenses
|
|
|
1,239,834
|
|
|
|
1,171,513
|
|
Income from operations
|
|
|
361,610
|
|
|
|
302,297
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
649
|
|
|
|
380
|
|
Other expense (income), net
|
|
|
1,008
|
|
|
|
(2,242
|
)
|
Income before income taxes
|
|
|
359,953
|
|
|
|
304,159
|
|
Income tax expense
|
|
|
135,000
|
|
|
|
92,000
|
|
Net income
|
|
|
224,953
|
|
|
|
212,159
|
|
Net income attributable to non-controlling interests
|
|
|
—
|
|
|
|
(30,549
|
)
|
Net income attributable to Where Food Comes From, Inc.
|
|
$
|
224,953
|
|
|
$
|
181,610
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,772,967
|
|
|
|
23,813,295
|
|
Diluted
|
|
|
23,929,011
|
|
|
|
23,981,133
|
|
The
accompanying notes are an integral part of these financial statements.
Where Food Comes From, Inc.
Condensed Consolidated Statements of
Income
(Unaudited)
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
7,665,590
|
|
|
$
|
6,576,781
|
|
Product sales
|
|
|
855,986
|
|
|
|
951,556
|
|
Other revenue
|
|
|
68,023
|
|
|
|
84,999
|
|
Total revenues
|
|
|
8,589,599
|
|
|
|
7,613,336
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
Labor and other costs of services
|
|
|
3,973,299
|
|
|
|
3,403,398
|
|
Costs of products
|
|
|
490,162
|
|
|
|
573,759
|
|
Total costs of revenues
|
|
|
4,463,461
|
|
|
|
3,977,157
|
|
Gross profit
|
|
|
4,126,138
|
|
|
|
3,636,179
|
|
Selling, general and administrative expenses
|
|
|
3,412,211
|
|
|
|
3,120,379
|
|
Income from operations
|
|
|
713,927
|
|
|
|
515,800
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,347
|
|
|
|
1,253
|
|
Other income, net
|
|
|
(2,623
|
)
|
|
|
(6,721
|
)
|
Income before income taxes
|
|
|
715,203
|
|
|
|
521,268
|
|
Income tax expense
|
|
|
264,950
|
|
|
|
213,285
|
|
Net income
|
|
|
450,253
|
|
|
|
307,983
|
|
Net loss attributable to non-controlling interest
|
|
|
31,605
|
|
|
|
72,584
|
|
Net income attributable to Where Food Comes From, Inc.
|
|
$
|
481,858
|
|
|
$
|
380,567
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,817,980
|
|
|
|
23,791,825
|
|
Diluted
|
|
|
23,969,134
|
|
|
|
23,972,897
|
|
The
accompanying notes are an integral part of these financial statements.
Where Food Comes From, Inc.
Condensed Consolidated Statements of
Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
1,210,574
|
|
|
$
|
1,383,239
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of Validus Verification Services, remaining interest
|
|
|
(162,707
|
)
|
|
|
—
|
|
Purchases of property and equipment
|
|
|
(429,333
|
)
|
|
|
(22,779
|
)
|
Net cash used in investing activities
|
|
|
(592,040
|
)
|
|
|
(22,779
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Repayments of notes payable
|
|
|
(16,211
|
)
|
|
|
(5,555
|
)
|
Repayments of capital lease obligations
|
|
|
(3,543
|
)
|
|
|
(3,275
|
)
|
Stock repurchase under Buyback Program
|
|
|
(179,647
|
)
|
|
|
—
|
|
Proceeds from stock option exercise
|
|
|
44,519
|
|
|
|
50,589
|
|
Net cash (used in) provided by financing activities
|
|
|
(154,882
|
)
|
|
|
41,759
|
|
Net change in cash and cash equivalents
|
|
|
463,652
|
|
|
|
1,402,219
|
|
Cash and cash equivalents at beginning of period
|
|
|
3,781,397
|
|
|
|
2,583,058
|
|
Cash and cash equivalents at end of period
|
|
$
|
4,245,049
|
|
|
$
|
3,985,277
|
|
The
accompanying notes are an integral part of these financial statements.
Where Food Comes From, Inc.
Condensed Consolidated Statement of Equity
Nine Months ended September 30, 2016
(Unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Total
|
|
Balance at January 1, 2016
|
|
|
23,736,487
|
|
|
$
|
23,822
|
|
|
$
|
7,446,634
|
|
|
$
|
(177,916
|
)
|
|
$
|
(558,088
|
)
|
|
$
|
6,734,452
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
84,457
|
|
|
|
—
|
|
|
|
—
|
|
|
|
84,457
|
|
Issuance of common shares upon exercise of options
|
|
|
68,749
|
|
|
|
69
|
|
|
|
44,450
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,519
|
|
Repurchase of common stock under Buyback program
|
|
|
(76,343
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(179,647
|
)
|
|
|
—
|
|
|
|
(179,647
|
)
|
Issuance of common shares for remaining interest in Validus
|
|
|
93,057
|
|
|
|
93
|
|
|
|
199,979
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200,072
|
|
Acquisition of noncontrolling interest in Validus
|
|
|
—
|
|
|
|
—
|
|
|
|
541,986
|
|
|
|
—
|
|
|
|
—
|
|
|
|
541,986
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
481,858
|
|
|
|
481,858
|
|
Balance at September 30, 2016
|
|
|
23,821,950
|
|
|
$
|
23,984
|
|
|
$
|
8,317,506
|
|
|
$
|
(357,563
|
)
|
|
$
|
(76,230
|
)
|
|
$
|
7,907,697
|
|
The
accompanying notes are an integral part of these financial statements.
Note 1 - The Company and Basis of Presentation
Business Overview
Where Food Comes From, Inc. is a Colorado
corporation based in Castle Rock, Colorado (the “Company,” “WFCF”, “our,” “we,”
or “us”). We provide verification and certification solutions for the agriculture, livestock and food industry. Most
of our customers are located throughout the United States.
On September 16, 2013, we acquired a 60%
interest in Validus Verification Services LLC (“Validus”) which consisted of the auditing business of Praedium Ventures,
LLC (“Praedium”), previously known as Validus Ventures LLC. This acquisition was accounted for using the acquisition
method of accounting and, accordingly, its results are included in the Company’s consolidated financial statements from the
date of acquisition. On February 29, 2016, the Company exercised its call option to acquire the remaining 40% (Note 2).
Basis of Presentation
The accompanying
unaudited condensed consolidated financial statements include the results of operations, financial position and cash flows of
Where
Food Comes From, Inc.
and its wholly-owned subsidiaries, International Certification Services,
Inc. (“ICS”), Validus, and Sterling Solutions, LLC (“Sterling”) (collectively referred to as “we,”
“us,” and “our” throughout this Form 10-Q). All intercompany balances have been eliminated in consolidation.
The condensed
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, 2015, included in our Form 10-K filed on February 16, 2016. 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, 2016 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 revenues are typically realized during the second and third quarters of the fiscal year 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.
Recent Accounting Pronouncements
We have considered recently issued accounting pronouncements
and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.
Note 2 – Business Acquisition
Validus Acquisition
On September
16, 2013, we entered into an Asset Purchase and Contribution Agreement (the “Purchase Agreement”), by and among the
Company, Validus, and Praedium (the “Seller”).
In connection with this transaction, the Seller was issued a
40% interest in Validus, with the Company holding a 60% interest. The Company had the first right of refusal on the remaining 40%
of the outstanding stock and a call option to acquire the remaining 40% interest.
Effective
February 29, 2016, the Company exercised its call option to purchase the remaining 40% interest of Validus in exchange for cash
consideration of approximately $162,700, and 93,057 shares of common stock valued at approximately $200,100, pursuant to the Purchase
Agreement, dated September 16, 2013. The carrying amount of the contingently redeemable non-controlling interest was adjusted to
$0 to reflect the change in the Company’s ownership interest up to 100%. The difference between the fair value of the consideration
paid and the carrying value of the non-controlling interest on the date of the transaction, which totaled approximately $542,000,
was adjusted to equity.
Note 3 - Basic and Diluted Net Income
per Share
Basic net income per share was computed
by dividing net 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 warrants 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 schedule is a reconciliation
of the share data used in the basic and diluted net income per share computations:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
23,772,967
|
|
|
|
23,813,295
|
|
|
|
23,817,980
|
|
|
|
23,791,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
23,772,967
|
|
|
|
23,813,295
|
|
|
|
23,817,980
|
|
|
|
23,791,825
|
|
Weighted average effects of dilutive securities
|
|
|
156,044
|
|
|
|
167,838
|
|
|
|
151,154
|
|
|
|
181,072
|
|
Total
|
|
|
23,929,011
|
|
|
|
23,981,133
|
|
|
|
23,969,134
|
|
|
|
23,972,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive securities:
|
|
|
25,668
|
|
|
|
95,834
|
|
|
|
25,168
|
|
|
|
75,334
|
|
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.
Note 4 – Intangible Assets and
Other Assets
The following table summarizes our intangible
and other assets:
|
|
September 30,
|
|
|
December 31,
|
|
|
Estimated
|
|
|
2016
|
|
|
2015
|
|
|
useful life
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
Tradenames/Trademarks
|
|
$
|
64,307
|
|
|
$
|
64,307
|
|
|
2.5 - 8.0 years
|
Accreditations
|
|
|
88,663
|
|
|
|
88,663
|
|
|
5.0 years
|
Customer Relationships
|
|
|
1,401,330
|
|
|
|
1,401,330
|
|
|
8.0 - 15.0 years
|
Beneficial Lease Arrangement
|
|
|
120,200
|
|
|
|
120,200
|
|
|
11.0 years
|
|
|
|
1,674,500
|
|
|
|
1,674,500
|
|
|
|
Less accumulated amortization
|
|
|
509,150
|
|
|
|
392,846
|
|
|
|
|
|
|
1,165,350
|
|
|
|
1,281,654
|
|
|
|
Tradenames/Trademarks (not subject to amortization)
|
|
|
465,000
|
|
|
|
465,000
|
|
|
indefinite
|
|
|
|
1,630,350
|
|
|
|
1,746,654
|
|
|
|
Deposits
|
|
|
13,545
|
|
|
|
13,545
|
|
|
|
Intangible and other assets, net
|
|
$
|
1,643,895
|
|
|
$
|
1,760,199
|
|
|
|
Note 5 - Stock-Based Compensation
Our stock-based award plans (collectively
referred to as the “Plan”) provide for the issuance of stock-based awards to employees, officers, directors and consultants.
The Plans permit the granting of stock awards and stock options. The vesting of stock-based awards is generally subject to meeting
certain performance-based objectives, the passage of time or a combination of both, and continued employment through the vesting
period.
The fair value of stock options is estimated
using the Black-Scholes option-pricing model, which incorporates ranges of assumptions for inputs. Our assumptions are as follows:
|
•
|
Dividend yield is based on our historical and anticipated policy of not paying cash dividends.
|
|
•
|
Expected volatility assumptions were derived from our actual volatilities.
|
|
•
|
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of
grant with maturity dates approximately equal to the expected term at the grant date.
|
|
•
|
The expected term of options represents the period of time that options granted are expected to
be outstanding giving consideration to vesting schedules, based on historical exercise patterns, which we believe are representative
of future behavior.
|
There were 29,500 shares of restricted
stock granted for the nine months ended September 30, 2016. These shares of restricted stock had a weighted average grant date
fair value of $2.31 and vest in March 2017. For the nine months ended September 30, 2015, 83,000 shares of restricted stock were
granted. No stock options were granted during the nine months ended September 30, 2016 and 2015, respectively. Total stock-based
compensation for the third quarters ended September 30, 2016 and 2015, was approximately $27,600 and $33,500, respectively. Total
stock-based compensation expense for the nine months ended September 30, 2016 and 2015 was approximately $84,500 and $83,600, respectively.
Stock based compensation expense is included in general and administrative expense in the statements of income.
Note 6 – Equity Incentive Plan
Stock option activity under our Equity
Incentive Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
Weighted Avg.
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
|
Contractual Life
|
|
|
Aggregate
|
|
|
|
Options/Warrants
|
|
|
per Share
|
|
|
per Share
|
|
|
(in years)
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
266,003
|
|
|
$
|
0.84
|
|
|
$
|
0.85
|
|
|
|
6.43
|
|
|
$
|
416,278
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
(68,749
|
)
|
|
$
|
0.65
|
|
|
$
|
1.55
|
|
|
|
5.23
|
|
|
|
|
|
Canceled
|
|
|
(500
|
)
|
|
$
|
1.85
|
|
|
$
|
1.85
|
|
|
|
7.30
|
|
|
|
|
|
Outstanding, September 30, 2016
|
|
|
196,754
|
|
|
$
|
0.90
|
|
|
$
|
0.92
|
|
|
|
5.84
|
|
|
$
|
295,799
|
|
Exercisable, September 30, 2016
|
|
|
189,999
|
|
|
$
|
0.86
|
|
|
$
|
0.88
|
|
|
|
5.78
|
|
|
$
|
291,809
|
|
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, 2016
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, 2016.
|
|
|
|
|
Weighted Avg
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Options
|
|
|
Fair
Value
|
|
Non-vested options, December 31, 2015
|
|
44,173
|
|
|
$
|
1.44
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
Vested
|
|
(36,918
|
)
|
|
$
|
1.05
|
|
Forfeited
|
|
(500
|
)
|
|
$
|
1.85
|
|
Non-vested options, September 30, 2016
|
|
6,755
|
|
|
$
|
1.85
|
|
Unrecognized compensation expense at September
30, 2016, was approximately $3,400.
Restricted stock activity under our Equity Incentive Plan is
summarized as follows:
|
|
|
|
|
Weighted Avg.
|
|
|
|
No. of Restricted
|
|
|
Exercise Price
|
|
|
|
Stock Shares
|
|
|
per Share
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
74,000
|
|
|
$
|
2.63
|
|
Granted
|
|
|
29,500
|
|
|
$
|
2.31
|
|
Canceled
|
|
|
(500
|
)
|
|
$
|
1.85
|
|
Outstanding, September 30, 2016
|
|
|
103,000
|
|
|
$
|
2.54
|
|
Approximately 26,500 and 28,000 shares
of restricted stock vested during the three and nine month periods ended September 30, 2016, respectively. Unrecognized compensation
expense at September 30, 2016, was approximately $182,600. These costs are expected to be recognized over a weighted average period
of 1.62 years.
Note 7 – 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. 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 provision
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, 2016 and 2015, we recorded
income tax expense of $135,000 and $92,000, respectively. For the nine months ended September 30, 2016 and 2015, we recorded income
tax expense of approximately $265,000 and $213,000, respectively.
Note 8 - Notes Payable
Equipment Note Payable
In December 2012, we entered into a note
payable of $37,407 for the purchase of a vehicle. Interest and principal payments were due in equal monthly installments of $715
over five years beginning January 2013. This note carried an interest rate of 5.5% per annum and was collateralized by the vehicle.
During the quarter ended September 30, 2016, the Company paid this note in full upon trade-in of the vehicle. The new vehicle was
paid for in cash.
ICS Revolving Line of Credit
ICS has a revolving line of credit (LOC)
agreement which matures April 1, 2017. The LOC provides for $70,050 in working capital. The interest rate is at the New York prime
rate plus 2.250% 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, 2016, the effective
interest rate was 5.75%. The LOC is collateralized by all the business assets of ICS. As of September 30, 2016, ICS had no amounts
outstanding under this LOC.
Note 9 - Commitments and Contingencies
Operating Leases
The Company relocated its headquarters
within Castle Rock, Colorado, during the third quarter 2016 and entered into a new lease agreement for approximately 8,000 square
feet of office space. This space is being leased from a company in which our CEO and president, a related party to the Company,
owns 27%. 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. The monthly rental payments are approximately $19,000 the first
year 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 of approximately
$8,500 is included in 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 other long-term liabilities 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.
Note 9 - Commitments and Contingencies (continued)
In September 2013, the Company entered
into a lease agreement with a related party for its Urbandale, Iowa office space. The lease is for a period of three years, expires
October 31, 2016, and requires rental payments of approximately $2,600 per month. There is no renewal feature. In addition to primary
rent, the lease requires additional payments for operating costs and other common area maintenance costs. At the end of the lease
term, the Company will operate under similar terms on a month-to-month basis.
The Company also owns approximately ¾
acre on which a 2,300 square foot building is located in Medina, North Dakota. The Company leases space in this building under
a five-year lease with an expiration date of March 1, 2018. One additional option to renew for a five-year term exists and is deemed
to automatically renew unless written notice is provided 60 days before the end of the term. The Company is charged a monthly rental
rate of approximately $150 plus all utilities, taxes and other expenses based on actual expenses to maintain the building.
As of September 30, 2016, future minimum
lease payments are as follows:
Years ended
December 31,
|
|
Total
|
|
2016 (remaining three months)
|
|
$
|
59,922
|
|
2017
|
|
|
232,218
|
|
2018
|
|
|
237,615
|
|
2019
|
|
|
244,432
|
|
2020
|
|
|
251,765
|
|
Thereafter
|
|
|
3,173,570
|
|
Total lease commitments
|
|
$
|
4,199,522
|
|
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.
Capital Leases
The Company had a capital lease for certain office equipment with a base rent of $405 per month. This
63-month lease was due to expire in April 2017. Approximately $22,300 in asset cost was included in property and equipment and
is being amortized over 63 months. Imputed interest of 5.25% was used in determining the minimum lease payments. During the second
quarter 2016, the Company traded in the office equipment under a new capital lease agreement. The new lease expires in July 2021.
Approximately $22,400 in asset cost was included in property and equipment and is being amortized over the lease term of 63 months.
Imputed interest of 3.33% was used in determining the minimum lease payments.
Note 9 - Commitments and Contingencies (continued)
Capital Leases (continued)
As of September 30, 2016, future minimum lease
payments for capital leases are as follows:
Years Ending December 31,
|
|
Amount
|
|
2016 (remaining three months)
|
|
$
|
1,166
|
|
2017
|
|
|
4,664
|
|
2018
|
|
|
4,664
|
|
2019
|
|
|
4,664
|
|
2020
|
|
|
4,664
|
|
Thereafter
|
|
|
2,723
|
|
Future minimum lease payments
|
|
|
22,545
|
|
Less amount representing interest
|
|
|
(1,748
|
)
|
Present value of net minimum lease payments
|
|
|
20,797
|
|
Less current portion
|
|
|
(4,033
|
)
|
Capital lease obligations
|
|
$
|
16,764
|
|
Note 10 – Contingently Redeemable Non-controlling
Interest
Contingently redeemable non-controlling
interest on our condensed consolidated balance sheet represents the non-controlling interest related to the Validus
acquisition, in which the non-controlling interest holder, at its election, can require the Company to purchase its 40%
investment in Validus. Below is a table reflecting the activity of the contingently redeemable non-controlling interest at
September 30, 2016. As discussed in Note 2, the Company exercised its call option to acquire the remaining non-controlling
interest effective February 29, 2016.
Balance, December 31, 2015
|
|
$
|
936,370
|
|
Loss for year to date period ended February 29, 2016
|
|
|
(31,605
|
)
|
Acquisition of non-controlling interest, March 1, 2016
|
|
|
|
|
Cash paid
|
|
|
(162,707
|
)
|
Fair market value of stock
|
|
|
(200,072
|
)
|
Adjusted to APIC
|
|
|
(541,986
|
)
|
Balance, September 30, 2016
|
|
$
|
—
|
|
The contingently redeemable non-controlling interest was adjusted to the greater of the carrying value or redemption value as of
each period end.
Note 11 – Supplemental Cash Flow Information
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash paid during the year:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
876
|
|
|
$
|
893
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common stock issued in connection with acquisitoin of Validus Verification
Services, remaining interest
|
|
$
|
200,100
|
|
|
$
|
—
|
|
Equipment acquired under capital lease
|
|
$
|
22,439
|
|
|
$
|
—
|
|
Lease incentive obligation
|
|
$
|
162,540
|
|
|
$
|
—
|
|
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This information should be read in conjunction
with the condensed 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, 2015. The following discussion and
analysis includes historical and certain forward−looking information that should be read together with the accompanying condensed
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 North American
trusted resource for third-party verification of food production practices. The Company supports more than 10,000 farmers, ranchers,
processors, retailers, distributors, and restaurants with a wide variety of value-added services provided through its family of
verifiers, including IMI Global, International Certification Services, Validus Verification Services, and Sterling Solutions. 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 Where Food Comes From. The Company’s principal business is conducting
both on-site and desk audits to verify that claims being made about livestock, crops and other food products are accurate. In addition,
the Company’s Where Food Comes From® retail and restaurant labeling program connects consumers directly to the source
of the food they purchase by requiring all product carrying the label to be sourced from third-party verified suppliers. 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 on January 1, 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, Where Food Comes
From has expanded its portfolio to include verification services for most food groups and more than 30 standards. This growth has
been achieved both organically and through the acquisition of other companies.
Current Marketplace Opportunities
Because of growing demand for increased transparency into food production
practices, we believe there are three main market drivers to promote forward momentum for our business:
|
1)
|
Consumer awareness and expectations
|
|
•
|
A recent survey conducted by Acosta, a leading full-service sales and marketing agency in the consumer
packaged goods industry, which was released in 2015, indicates consumers are actually changing their shopping habits in the grocery
store. Increasingly more Americans are shopping the perimeter of the grocery store rather than stocking their pantries, and choosing
to cook healthy meals at home, even if it comes at a higher cost.
|
|
•
|
According to the US Grocery Shopper Trends 2014 Report, more than 25% of consumers surveyed are
seeking products that are minimally processed, locally grown or produced, with recognizable and a short list of ingredients. Jenny
Zegler, Global Food and Drink Analyst at Mintel, said “these trends explore how consumers’ evolving priorities, opportunities
from advancements in functional formulation and the almost inescapable reach of technology will affect food and drink in the coming
year. Consumers are not only the influencers, as shifting economics, natural phenomena and social media are shaping what, how,
where and with whom consumers are choosing to eat and drink…”
|
|
•
|
Based on a survey in the March 13, 2014 Cone Communication Food Issues Trend Tracker, food safety
and nutritional value rose to the top as the most important factors when hitting the grocery aisles. Additionally, at least two-thirds
of Americans prioritized the following as other significant factors when deciding what makes it into the shopping cart: locally
produced, sustainable packaging, animal welfare, non-GMO, protection and renewal of natural resources.
|
|
•
|
Three in five Americans are on the lookout for non GMO-labeled foods when shopping. Per the March
13, 2014 Cone Communication Food Issues Trend Tracker, 39% believe that non-GMO foods are healthier, 32% are concerned about the
effects on the environment, and 24% question the ethics behind the use of GMO’s.
|
|
•
|
According to the USDA website, the U.S. market for certified organic products was estimated at
more than $39 billion as of October 2015 while USDA-approved organic operations have grown more than 250% since 2002. Increasing
consumer demand for healthy, better-for-you products produced with sustainable agricultural practices is driving growth in the
organic market.
|
|
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, and many times is necessary for export into international markets, including
Korea, Russia and the European Union.
|
|
•
|
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 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 have begun to see significant movement in companies requesting our consulting expertise to developing programs
designed to assist them in maintaining compliance with the new rules.
|
|
•
|
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 has been 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 PVP, like our Verified Natural product.
U.S. exports to Saudi Arabia in 2010 and 2011 were valued at $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.
|
|
•
|
After a recent visit to the US which included an audit of the beef supply chain, Chinese officials
announced in September 2016 that the ban on imports of US beef has been lifted. While the technical requirements for export verification
have yet to be determined, source and age verification will be required, at a minimum. China is the world’s second largest buyer
of beef, but beef imports from the US to China have been banned since 2003 BSE outbreak.
|
Current Concerns in Our Industry
U.S. beef exports to the European Union (EU) must
be third-party verified as High Quality Beef (a USDA feeding claim) and non-hormone treated cattle (NHTC). With duty-free access
to the EU lowering the cost of doing business in Europe, we believe that it offers significantly more potential for third-party
NHTC verification services and High Quality Beef verification services. However, due to the current strength of the US dollar,
we are seeing downward pressure on NHTC cattle prices causing the momentum of these programs to slow.
Cattle markets moved to the lowest level since
2011 in the continuation of a trend that began during the first quarter of this year. High prices in cattle date back to the drought
of 2012. When grain prices exploded to all-time highs, animal protein producers could not afford to feed their herds. As feed prices
rose, producers sent the animals to processing plants early to avoid losses that would result from high feed costs. It takes between
18 and 24 months to raise cattle, so thus began the great cattle bull market of 2014. Moreover, the population of planet Earth
now stands at over 7.3 billion people. In Asia, diets have changed as wealth has grown. A traditional rice-based diet now includes
more complex proteins, which has increased demand for beef and pork in the region. In 2015 and early 2016, ample supplies of grains
lowered the input costs for producing cattle. Therefore, lower grain or feed prices filtered through and caused the price of live
cattle to drop over the course of 2015, and this continued into 2016.
During the second quarter, a rally in soybean and
soybean product prices caused feed prices to rally. Live cattle prices fell as producers were facing a similar scenario they saw
in 2012. The potential for an early slaughter to avoid high feed prices caused live cattle futures to fall as soybeans, and other
grain prices moved higher. Slower growth in China along with rising feed prices has contributed to lower cattle prices during the
second quarter of 2016. Lower cattle prices are driving many producers to reduce overall operating costs, which includes opting
out of certain verification programs.
We believe this may be a short-sighted reaction
and we encourage our customers to stay in those verification programs. We continue to see higher premiums paid for verified beef.
We also know that early slaughter creates a short-term oversupply and increases the chances of another shortage developing in 2017
as herd sizes decline. Retail meats markets have remained virtually unchanged. At this time, we have no way to reasonably estimate
the future impact this could have on our business. Management continues to monitor the situation. We believe we have diversified
our product offerings across multiple species such that it will not have a significant negative impact on our 2016 operations.
Highly Pathogenic Avian Influenza, more commonly
known as Bird Flu, refers to strains of influenza that primarily affect several types of birds, including farmed poultry, i.e.
chickens, geese, turkeys and ducks. The virus spreads through infected birds, via their saliva, nasal secretions, feces, and feed.
With the outbreak of the virus in 2015, state poultry associations limited poultry movements to control the spread of avian influenza.
This included limiting our ability to conduct onsite audits. In May 2016, the United Egg Producers Association authorized our company
to resume conducting onsite audits. We believe that our experience in bio-security considerations and the core competency needed
to deal with verification system design gives us a competitive advantage creating a barrier to entry for less sophisticated third-party
verification companies.
Seasonality
Our business is subject to seasonal fluctuations.
Significant portions of our revenues are typically realized during the second and third quarters of the fiscal year 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, 2016, we had cash and cash equivalents
of $4,245,049 compared to $3,781,397 of cash and cash equivalents at December 31, 2015. Our working capital at September 30, 2016
was $4,526,054 compared to $4,251,600 at December 31, 2015.
Net cash provided by operating activities for the
nine months ended September 30, 2016 was approximately $1,210,600 compared to net cash provided of approximately $1,383,200 during
the same period in 2015. Net cash provided by operating activities is driven by our net income and adjusted by non-cash items.
Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock based compensation expense, and deferred
taxes. In addition, deferred revenue, which due to the changes in timing of our annual billings in the current period, increased
by approximately $192,800.
Net cash used in investing activities for the nine
month period ended September 30, 2016, was approximately $592,000 compared to approximately $22,800 used in the 2015 period. Net
cash used in the nine month period ended September 30, 2016, was primarily attributable to cash paid of approximately $162,700
in the acquisition of the non-controlling interest of Validus, as well as purchases of property and equipment of approximately
$429,300. Net cash used in the 2015 period was attributable to the purchase of property and equipment of approximately $22,800.
Net cash used in financing activities for the nine
month period ended September 30, 2016, was approximately $154,900 compared to cash provided of $41,800 in the 2015 period. Net
cash used in the nine month period ended September 30, 2016, was due to repayments of debt and lease obligations of approximately
$19,800 and repurchase of common shares under the Buyback Program of approximately $179,600 offset by proceeds from stock option
exercises of approximately $44,500. Net cash provided in the 2015 period was due to stock option exercises of approximately $50,600
offset by repayments of debt and lease obligations of approximately $8,800.
Historically, our growth has been funded through
a combination of 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 as well as 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 primarily based
upon acquisitions 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
ICS has a revolving line of credit (LOC) agreement
which was renewed on April 1, 2014 and matures April 1, 2017. The LOC provides for $70,050 in working capital. The interest rate
is at the New York prime rate plus 2.250% 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. The LOC is collateralized
by all the business assets of ICS.
Off-Balance Sheet Arrangements
As of September 30, 2016, we had no off-balance
sheet arrangements of any type.
RESULTS OF OPERATIONS
Third quarter and year to date period ended
September 30, 2016 compared to the same periods in fiscal year 2015
Revenues
Total revenues for the third quarter ended September
30, 2016, increased 9.5% compared to the same period in 2015. Total revenues for the year to date period ended September 30, 2016
increased 12.8%.
Service revenues include sales of our US Verified
solutions and related consulting, program development and web-based development services. Service revenues for the quarter ended
September 30, 2016, of approximately $2,948,900 increased approximately $293,200 or 11.0% compared to the same period in 2015.
Service revenues for the year to date period ended September 30, 2016, of approximately $7,665,600 increased $1,088,800 or 16.6%
compared to the same period in 2015. Overall, the increase is due to both an increase in new verification customers, as well as
an increase in product offerings.
Product sales represent sales of cattle identification
ear tags. Product sales of approximately $380,400 for the third quarter ended September 30, 2016 increased approximately $8,700
or 2.3% compared to the same period in 2015. Product sales of approximately $856,000 for the year to date period ended September
30, 2016 decreased approximately $95,600 or 10.0% compared to same period in 2015. As further discussed under Current Concerns
in Our Industry, product sales have mostly decreased in response to a slowing NHTC beef export market due to the strength of the
US dollar.
Other revenue primarily represents the fees earned
from our WFCF labeling program. Other revenue of approximately $14,900 for the third quarter ended September 30, 2016 decreased
approximately $10,500 or 41.3% compared to the same period in 2015. Other revenue of approximately $68,000 for the year to date
period ended September 30, 2016 decreased approximately $17,000 or 20.0% compared to the same period in 2015.
Cost of Revenues and Gross Margin
Cost of revenues for the third quarter ended September
30, 2016 was approximately $1,742,800 compared to approximately $1,579,100 during the same period in 2015. Cost of revenues for
the year to date period ended September 30, 2016 was approximately $4,463,500 compared to $3,977,200 during the same period in
2015. Gross margin for the third quarter ended 2016 fell slightly to 47.9% of revenues compared to 48.3% of revenues for the third
quarter ended 2015. Gross margin for the year to date period ended September 30, 2016 improved slightly to 48.0% compared to 47.8%
during the same period in 2015. Overall the year to date improvement is due to absorption of costs over a higher sales base, as
well as a slight change in product mix coupled with bundling opportunities where we can provide multiple verifications and/or certifications
with one site visit.
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
Selling, general and administrative expenses for
the third quarter 2016 were approximately $1,239,800, an increase of approximately $68,300, or 5.8% over the third quarter ended
2015. Selling, general and administrative expenses for the year to date period ended September 30, 2016 were approximately $3,412,200,
an increase of approximately $291,800 or 9.4%. Overall, the increase in our selling, general and administrative expenses is due
in part to higher head count, increased sales and marketing costs, and higher costs related to being a publicly held company, as
well as higher lease costs under the terms of our lease agreement executed in August 2016. In addition, the Company is making significant
investments in IT process redesigns related to the integration and standardization of differing field audit and accounting systems
used by IMI Global, ICS and Validus. However, in spite of an increase in costs, selling, general and administrative costs as a
percentage of revenue decreased to 39.7% for the nine months ended September 30, 2016 compared to 41.0% for the same period in
2015.
Income Tax Expense
The provision
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 third quarters ended September 30, 2016 and 2015, we recorded
income tax expense of approximately $135,000 and $92,000, respectively. For the year to date periods ended September 30, 2016 and
2015, we recorded income tax expense of approximately $265,000 and $213,300, respectively.
Net Income and Per Share Information
As a result of the foregoing, net income attributable
to WFCF shareholders for the third quarter ended September 30, 2016 was approximately $225,000, or $0.01 per basic and diluted
common share, compared to approximately $181,600, or $0.01 per basic and diluted common share for the same period in 2015. Net
income attributable to WFCF shareholders for the year to date period ended September 30, 2016 was approximately $481,900 or $0.02
per basic and diluted common share, compared to approximately $380,600 or $0.02 per basic and diluted common share for the same
period in 2015.