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 also 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. 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 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 is continuing to evaluate 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 or decided upon the
method of adoption.
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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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. In
connection with this transaction, Praedium 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. 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, net of taxes of $110,900, was adjusted to equity.
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. The consideration paid by WFCF in connection with this acquisition was determined by arms-length
negotiations between WFCF and SureHarvest, Inc. The transaction was financed through cash on hand.
The SureHarvest Purchase Agreement provides for
a period of eighteen months to support any indemnification claims for breach of Seller representations, warranties and covenants.
It also includes non-dilution provisions.
SureHarvest, Inc. made certain additional customary
covenants, including not soliciting or initiating discussions, engaging in negotiations or providing any non-public information
concerning alternative business combination transactions with respect to the transaction and covenants not to compete.
The Company has the right of first refusal on the
remaining 40% membership interest of SureHarvest. At any time 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 the 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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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 table below summarizes the final allocated
fair values assigned to the assets and liabilities acquired in addition to the excess of the purchase price over the net assets
acquired:
|
|
Dec. 28, 2016
|
|
Accounts receivable
|
|
|
290,692
|
|
Property and equipment
|
|
|
572,620
|
|
Accounts payable and accrued expenses
|
|
|
(138,562
|
)
|
Indentifiable intangible assets
|
|
|
2,623,100
|
|
Excess attributable to goodwill
|
|
|
1,372,488
|
|
Total fair value
|
|
|
4,720,338
|
|
Fair value of non-controlling interest
|
|
|
(1,888,135
|
)
|
Total consideration
|
|
$
|
2,832,203
|
|
On the acquisition date, the fair value of the
non-controlling interest was estimated to be $1,888,135. This amount was based upon the gross consideration that would have been
paid assuming 100% of the outstanding stock had been acquired. Excess attributable to goodwill reflects the excess over the identifiable
intangible assets acquired based on the preliminary provisional allocation of the purchase price. Goodwill is primarily attributable
to the operational and financial benefits expected to be realized from the acquisition, including cost saving synergies from operating
efficiencies, future growth in bundling opportunities across divisions and brands, realized savings from a more sophisticated information
technology infrastructure, and strategic advances from expansion of our intellectual property. The final amounts of the components
of intangible assets have been recorded as follows:
|
|
Dec. 28, 2016
|
|
Indentifiable intangible assets and goodwill:
|
|
|
|
|
Trademarks
|
|
$
|
218,000
|
|
Patents
|
|
|
970,100
|
|
Customer relationships
|
|
|
1,435,000
|
|
Goodwill
|
|
|
1,372,488
|
|
Total intangible assets and goodwill
|
|
$
|
3,995,588
|
|
The useful lives for intangible assets are expected
to be between 3 and 15 years.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
The following unaudited pro forma information
presents the results of operations for the three months ended March 31, 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 ended
|
|
|
|
March 31, 2016
|
|
Total revenue
|
|
$
|
2,820,794
|
|
Net income attributable to Where Food Comes From, Inc.
|
|
$
|
69,515
|
|
Basic and diluted earnings per share
|
|
$
|
—
|
|
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 March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Basic:
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
24,648,036
|
|
|
|
23,753,000
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
24,648,036
|
|
|
|
23,753,000
|
|
Weighted average effects of dilutive securities
|
|
|
133,475
|
|
|
|
151,880
|
|
Total
|
|
|
24,781,511
|
|
|
|
23,904,880
|
|
|
|
|
|
|
|
|
|
|
Antidilutive securities:
|
|
|
94,000
|
|
|
|
98,751
|
|
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.
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:
|
|
March 31,
|
|
|
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
|
|
|
2,836,330
|
|
|
|
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
|
|
|
|
4,297,600
|
|
|
|
4,297,600
|
|
|
|
Less accumulated amortization
|
|
|
678,045
|
|
|
|
547,917
|
|
|
|
|
|
|
3,619,555
|
|
|
|
3,749,683
|
|
|
|
Tradenames/trademarks (not subject to amortization)
|
|
|
465,000
|
|
|
|
465,000
|
|
|
|
|
|
|
4,084,555
|
|
|
|
4,214,683
|
|
|
|
Deposit
|
|
|
13,545
|
|
|
|
13,545
|
|
|
|
|
|
$
|
4,098,100
|
|
|
$
|
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 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 statements of income.
The
amount of stock-based compensation expense is as follows:
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
$
|
14,691
|
|
|
$
|
11,805
|
|
Restricted stock awards
|
|
|
30,366
|
|
|
|
17,807
|
|
Total
|
|
$
|
45,057
|
|
|
$
|
29,612
|
|
Where
Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
As
of March 31, 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
(nine months remaining)
|
|
|
$
|
44,123
|
|
|
$
|
87,677
|
|
|
$
|
131,800
|
|
|
2018
|
|
|
|
58,695
|
|
|
|
81,001
|
|
|
|
139,696
|
|
|
2019
|
|
|
|
53,552
|
|
|
|
25,046
|
|
|
|
78,598
|
|
|
|
|
|
$
|
156,370
|
|
|
$
|
193,724
|
|
|
$
|
350,094
|
|
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
|
|
|
|
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
|
Contractual Life
|
|
|
Aggregate
|
|
|
|
|
Awards
|
|
|
per Share
|
|
|
per Share
|
|
|
(in years)
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
|
273,586
|
|
|
$
|
1.22
|
|
|
$
|
1.22
|
|
|
|
7.05
|
|
|
$
|
217,892
|
|
Granted
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
|
(5,000
|
)
|
|
$
|
1.10
|
|
|
$
|
1.20
|
|
|
|
5.41
|
|
|
|
|
|
Expired/Forfeited
|
|
|
|
.
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding, March 31, 2017
|
|
|
|
268,586
|
|
|
$
|
0.84
|
|
|
$
|
0.85
|
|
|
|
6.43
|
|
|
$
|
416,278
|
|
Exercisable, December 31, 2016
|
|
|
|
174,836
|
|
|
$
|
0.83
|
|
|
$
|
0.85
|
|
|
|
5.46
|
|
|
$
|
204,438
|
|
Unvested, March 31, 2017
|
|
|
|
94,000
|
|
|
$
|
1.89
|
|
|
$
|
1.87
|
|
|
|
9.71
|
|
|
$
|
17,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value represents the total pre-tax intrinsic value (the aggregate difference between the closing price of
our common stock on March 31, 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 March 31, 2017.
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
|
|
|
|
(4,000
|
)
|
|
$
|
2.10
|
|
Forfeited
|
|
|
|
—
|
|
|
$
|
—
|
|
Non-vested restricted shares, March 31, 2017
|
|
|
|
132,000
|
|
|
$
|
2.45
|
|
|
|
|
|
|
|
|
|
|
|
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 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 March 31, 2017 and 2016, we recorded
income tax expense of $3,000 and $49,950, respectively.
Note 7
– 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 $70,080
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 March 31, 2017, the effective interest rate was 5.5%. The LOC is collateralized by all the business
assets of ICS. As of March 31, 2017, there were no amounts outstanding under this LOC.
Where
Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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
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.
As
of March 31, 2017, future minimum lease payments for all operating leases are as follows:
Years ended December 31st:
|
|
|
Total
|
|
2017 (remaining nine months)
|
|
|
$
|
183,819
|
|
2018
|
|
|
|
220,749
|
|
2019
|
|
|
|
227,060
|
|
2020
|
|
|
|
233,871
|
|
2021
|
|
|
|
240,888
|
|
Thereafter
|
|
|
|
2,707,132
|
|
Total lease commitments
|
|
|
$
|
3,813,519
|
|
|
|
|
|
|
|
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
8 – 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 March 31,
2017.
Balance, December 31, 2016
|
|
$
|
1,888,135
|
|
Net loss attributable to non-controlling interest in SureHarvest for the three months ended March 31, 2017
|
|
|
(125,405
|
)
|
Balance, March 31, 2017
|
|
$
|
1,762,730
|
|
The
contingently redeemable non-controlling interest was adjusted to the greater of the carrying value or redemption value as of each
period end.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 9 – Supplemental Cash Flow Information
|
|
Three Months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
162
|
|
|
$
|
295
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common stock issued for remaining interest in Validus Verification Services LLC
|
|
$
|
—
|
|
|
$
|
200,072
|
|