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 June 30, 2018
|
☐
|
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
6
th
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 August 8, 2018, was 24,805,169.
Where Food Comes From, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,061,152
|
|
|
$
|
2,705,778
|
|
Accounts receivable, net of allowance
|
|
|
1,979,029
|
|
|
|
1,898,749
|
|
Short-term investments
|
|
|
749,110
|
|
|
|
743,206
|
|
Prepaid expenses and other current assets
|
|
|
242,306
|
|
|
|
245,073
|
|
Total current assets
|
|
|
6,031,597
|
|
|
|
5,592,806
|
|
Property and equipment, net
|
|
|
1,513,682
|
|
|
|
1,068,087
|
|
Intangible and other assets, net
|
|
|
3,754,305
|
|
|
|
3,948,530
|
|
Goodwill
|
|
|
2,624,690
|
|
|
|
2,652,250
|
|
Deferred tax assets, net
|
|
|
114,622
|
|
|
|
79,622
|
|
Total assets
|
|
$
|
14,038,896
|
|
|
$
|
13,341,295
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
539,563
|
|
|
$
|
457,307
|
|
Accrued expenses and other current liabilities
|
|
|
664,328
|
|
|
|
555,129
|
|
Customer deposits and deferred revenue
|
|
|
1,135,034
|
|
|
|
851,185
|
|
Current portion of notes payable
|
|
|
9,803
|
|
|
|
9,446
|
|
Current portion of capital lease obligations
|
|
|
7,627
|
|
|
|
7,527
|
|
Total current liabilities
|
|
|
2,356,355
|
|
|
|
1,880,594
|
|
Notes payable, net of current portion
|
|
|
37,431
|
|
|
|
42,452
|
|
Capital lease obligations, net of current portion
|
|
|
21,580
|
|
|
|
25,419
|
|
Lease incentive obligation
|
|
|
141,771
|
|
|
|
147,189
|
|
Total liabilities
|
|
|
2,557,137
|
|
|
|
2,095,654
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently redeemable non-controlling interest
|
|
|
1,548,195
|
|
|
|
1,574,765
|
|
|
|
|
|
|
|
|
|
|
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; 25,190,338 (2018) and 24,972,684 (2017) shares issued, and 24,805,169 (2018) and 24,652,895 (2017) shares outstanding
|
|
|
25,190
|
|
|
|
24,972
|
|
Additional paid-in-capital
|
|
|
10,544,034
|
|
|
|
10,353,037
|
|
Treasury stock of 385,169 (2018) and 319,789 (2017) shares
|
|
|
(865,380
|
)
|
|
|
(724,530
|
)
|
Retained earnings
|
|
|
229,720
|
|
|
|
17,397
|
|
Total equity
|
|
|
9,933,564
|
|
|
|
9,670,876
|
|
Total liabilities and stockholders’ equity
|
|
$
|
14,038,896
|
|
|
$
|
13,341,295
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Where Food Comes From, Inc.
Consolidated Statements of Income
(Unaudited)
|
|
Three months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
Verification and certification service revenue
|
|
$
|
3,507,757
|
|
|
$
|
2,925,298
|
|
Product sales
|
|
|
496,312
|
|
|
|
295,640
|
|
Software license, maintenance and support services revenue
|
|
|
263,316
|
|
|
|
130,234
|
|
Software-related consulting service revenue
|
|
|
170,923
|
|
|
|
150,910
|
|
Total revenues
|
|
|
4,438,308
|
|
|
|
3,502,082
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
Costs of verification and certification services
|
|
|
1,850,555
|
|
|
|
1,573,858
|
|
Costs of products
|
|
|
319,970
|
|
|
|
179,133
|
|
Costs of software license, maintenance and support services
|
|
|
168,511
|
|
|
|
92,775
|
|
Costs of software-related consulting services
|
|
|
87,546
|
|
|
|
66,128
|
|
Total costs of revenues
|
|
|
2,426,582
|
|
|
|
1,911,894
|
|
Gross profit
|
|
|
2,011,726
|
|
|
|
1,590,188
|
|
Selling, general and administrative expenses
|
|
|
1,770,468
|
|
|
|
1,711,020
|
|
Income (loss) from operations
|
|
|
241,258
|
|
|
|
(120,832
|
)
|
Other expense (income):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,315
|
|
|
|
154
|
|
Other income, net
|
|
|
(5,122
|
)
|
|
|
(7,970
|
)
|
Income (loss) before income taxes
|
|
|
245,065
|
|
|
|
(113,016
|
)
|
Income tax expense (benefit)
|
|
|
80,000
|
|
|
|
(52,000
|
)
|
Net income (loss)
|
|
|
165,065
|
|
|
|
(61,016
|
)
|
Net loss attributable to non-controlling interest
|
|
|
11,774
|
|
|
|
123,387
|
|
Net income attributable to Where Food Comes From, Inc.
|
|
$
|
176,839
|
|
|
$
|
62,371
|
|
|
|
|
|
|
|
|
|
|
Per share - net income attributable to Where Food Comes From, Inc.:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
*
|
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,718,430
|
|
|
|
24,664,882
|
|
Diluted
|
|
|
24,896,195
|
|
|
|
24,822,563
|
|
* less than $0.01 per share
The accompanying notes are an integral part of these consolidated financial statements.
Where Food Comes From, Inc.
Consolidated Statements of Income
(Unaudited)
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
Verification and certification service revenue
|
|
$
|
6,303,951
|
|
|
$
|
5,479,933
|
|
Product sales
|
|
|
850,206
|
|
|
|
538,906
|
|
Software license, maintenance and support services revenue
|
|
|
550,760
|
|
|
|
289,498
|
|
Software-related consulting service revenue
|
|
|
354,193
|
|
|
|
267,693
|
|
Total revenues
|
|
|
8,059,110
|
|
|
|
6,576,030
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
Costs of verification and certification services
|
|
|
3,301,164
|
|
|
|
2,831,231
|
|
Costs of products
|
|
|
545,945
|
|
|
|
332,999
|
|
Costs of software license, maintenance and support services
|
|
|
305,945
|
|
|
|
220,237
|
|
Costs of software-related consulting services
|
|
|
163,007
|
|
|
|
138,738
|
|
Total costs of revenues
|
|
|
4,316,061
|
|
|
|
3,523,205
|
|
Gross profit
|
|
|
3,743,049
|
|
|
|
3,052,825
|
|
Selling, general and administrative expenses
|
|
|
3,474,942
|
|
|
|
3,181,849
|
|
Income (loss) from operations
|
|
|
268,107
|
|
|
|
(129,024
|
)
|
Other expense (income):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,394
|
|
|
|
316
|
|
Other income, net
|
|
|
(8,040
|
)
|
|
|
(9,298
|
)
|
Income (loss) before income taxes
|
|
|
273,753
|
|
|
|
(120,042
|
)
|
Income tax expense (benefit)
|
|
|
88,000
|
|
|
|
(49,000
|
)
|
Net income (loss)
|
|
|
185,753
|
|
|
|
(71,042
|
)
|
Net loss attributable to non-controlling interest
|
|
|
26,570
|
|
|
|
248,792
|
|
Net income attributable to Where Food Comes From, Inc.
|
|
$
|
212,323
|
|
|
$
|
177,750
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
24,683,264
|
|
|
|
24,656,398
|
|
Diluted
|
|
|
24,871,523
|
|
|
|
24,802,564
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
Where Food Comes From, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
185,753
|
|
|
$
|
(71,042
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
501,603
|
|
|
|
420,915
|
|
Lease incentive obligation
|
|
|
(5,418
|
)
|
|
|
(5,418
|
)
|
Stock-based compensation expense
|
|
|
80,021
|
|
|
|
89,470
|
|
Common stock issued for services rendered
|
|
|
—
|
|
|
|
25,000
|
|
Deferred tax expense (benefit)
|
|
|
(35,000
|
)
|
|
|
(82,000
|
)
|
Bad debt expense
|
|
|
10,097
|
|
|
|
10,249
|
|
Changes in operating assets and liabilities, net of effect from acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(90,377
|
)
|
|
|
(138,570
|
)
|
Short-term investments
|
|
|
(5,904
|
)
|
|
|
(7,284
|
)
|
Prepaid expenses and other assets
|
|
|
2,767
|
|
|
|
(189,368
|
)
|
Accounts payable
|
|
|
82,256
|
|
|
|
94,814
|
|
Accrued expenses and other current liabilities
|
|
|
135,801
|
|
|
|
100,805
|
|
Customer deposits and deferred revenue
|
|
|
257,247
|
|
|
|
541,976
|
|
Net cash provided by operating activities
|
|
|
1,118,846
|
|
|
|
789,547
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of Sow Organic
|
|
|
(450,000
|
)
|
|
|
—
|
|
Acquisition of A Bee Organic
|
|
|
—
|
|
|
|
(150,000
|
)
|
Purchases of property and equipment
|
|
|
(162,869
|
)
|
|
|
(20,563
|
)
|
Purchases of other long-term assets
|
|
|
(1,350
|
)
|
|
|
—
|
|
Net cash used in investing activities
|
|
|
(614,219
|
)
|
|
|
(170,563
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Repayments of notes payable
|
|
|
(4,664
|
)
|
|
|
—
|
|
Repayments of capital lease obligations
|
|
|
(3,739
|
)
|
|
|
(2,017
|
)
|
Proceeds from stock option exercise
|
|
|
—
|
|
|
|
8,168
|
|
Stock repurchase under Stock Buyback Plan
|
|
|
(140,850
|
)
|
|
|
(26,723
|
)
|
Net cash used in financing activities
|
|
|
(149,253
|
)
|
|
|
(20,572
|
)
|
Net change in cash
|
|
|
355,374
|
|
|
|
598,412
|
|
Cash at beginning of year
|
|
|
2,705,778
|
|
|
|
2,489,985
|
|
Cash at end of year
|
|
$
|
3,061,152
|
|
|
$
|
3,088,397
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Where Food Comes From, Inc.
Consolidated Statement of Equity
Six months ended June 30, 2018
(Unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
|
24,652,895
|
|
|
$
|
24,972
|
|
|
$
|
10,353,037
|
|
|
$
|
(724,530
|
)
|
|
$
|
17,397
|
|
|
$
|
9,670,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of acquisition fair value adjustment
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(321,937
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(321,937
|
)
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
80,021
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80,021
|
|
Issuance of common shares in acquisition of Sow Organic LLC
|
|
|
217,654
|
|
|
|
218
|
|
|
|
432,913
|
|
|
|
—
|
|
|
|
—
|
|
|
|
433,131
|
|
Repurchase of common shares under Stock Buyback Plan
|
|
|
(65,380
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(140,850
|
)
|
|
|
—
|
|
|
|
(140,850
|
)
|
Net income attributable to Where Food Comes From,
Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
212,323
|
|
|
|
212,323
|
|
Balance at June 30, 2018
|
|
|
24,805,169
|
|
|
$
|
25,190
|
|
|
$
|
10,544,034
|
|
|
$
|
(865,380
|
)
|
|
$
|
229,720
|
|
|
$
|
9,933,564
|
|
The accompanying notes are an integral part of these consolidated 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 (“WFCF”, the “Company,”
“our,” “we,” or “us”). We are an independent, third-party food verification company 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 care about food and other agricultural products, how it is grown and raised, the quality of what we
eat, what farmers and ranchers do, and authentically telling that story to the consumer. Our team visits farms and ranches and
looks at their plants, animals, and records, and compares the information we collect to specific standards or claims that farms
and ranches want to make about how they are producing food. We strive to ensure that everyone involved in the food business -
from growers and farmers to retailers and shoppers – can count on WFCF to provide authentic and transparent information
about the food we eat and how, where, and by whom it is produced.
We
also provide sustainability programs, compliance management and farming information management solutions to drive sustainable
value creation. We 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 Verifications Services, LLC (“Validus”), Sterling Solutions
(“Sterling”), SureHarvest Services, Inc. (“SureHarvest”), A Bee Organic and our most recent acquisition,
Sow Organic (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, 2017, included in our Form 10-K filed on April 2, 2018. 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 quarter and year to date period ended June 30, 2018 are not necessarily
indicative of the results to be expected for any other interim period of any future year.
Reclassifications
Certain
prior year amounts have been reclassified to conform to current year presentation. Net income and shareholders’ equity were
not affected by these reclassifications.
Seasonality
Our
business is subject to seasonal fluctuations. Significant portions of our verification and certification service revenue are 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.
Recent
Accounting Pronouncements
The
Financial Accounting Standards Board (FASB) Accounting Standards Codification is the sole source of authoritative GAAP other than
SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standards Update (ASU) to communicate
changes to the codification. The Company considers the applicability and impact of all ASU’s. ASU’s not listed below
were assessed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial
statements.
Recently
Adopted Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (ASC 606), which created a comprehensive,
five-step model for revenue recognition that requires a company to recognize revenue to depict the transfer of promised goods
or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services.
Under ASC 606, a company will be required to use more judgment and make more estimates when considering contract terms as well
as relevant facts and circumstances when identifying performance obligations, estimating the amount of variable consideration
in the transaction price and allocating the transaction price to each separate performance obligation. The Company adopted this
standard on January 1, 2018 using the modified retrospective approach. Refer to Note 12, “Revenue,” for a further
discussion on the adoption of ASC 606.
Recently
Issued Accounting Pronouncements
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.
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. We continue to execute on our implementation plan and we are currently
gathering lease data to derive the impact of the ASU on its financial statements. The adoption is anticipated to have a material
impact on assets and liabilities due to the recognition of lease rights and obligations on the balance sheet effective January
1, 2019. However, we do not expect the adoption to have a material impact to our consolidated results of operations or statement
of cash flows.
In
June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting, which simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments
is substantially the same as those made to employees. Under this ASU, share based awards to nonemployees will be measured at fair
value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any
are present, and awards will continue to be classified according to Accounting Standards Codification (“ASC”) 718
upon vesting which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees. This
ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and
early adoption is permitted. We are in the process of evaluating the impact of adoption of this ASU on our consolidated financial
statements.
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
$1,534,900. 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.
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.
Sow
Organic Acquisition
On
May 16, 2018, we acquired Sow Organic for $450,000 in cash and 217,654 shares of common stock of WFCF valued at approximately
$433,100 based on the closing price of our stock on May 16, 2018, of $1.99 per share. We believe the transaction adds complementary
solutions and services. Sow Organic’s software as a service (SaaS) model allows organic certification bodies to automate
and accelerate new customer onboarding by converting traditional paper-based processes to digital format, resulting in lower costs,
improved workflow management and increased productivity. Sow Organic’s unique design allows certification bodies to digitize
any certification scheme. Likewise, the software affords producers and handlers a more efficient way to become certified and to
digitally manage their records on an ongoing basis, including completing annual certification requirements fully online. We intend
to further develop the organic business opportunity and collaborate on a broader rollout of the solution to other certification
markets where the tool is equally suited to improve efficiencies and reduce costs in the certification process. This transaction
further strengthens our intellectual property portfolio, which we believe represents a distinct competitive advantage for the
Company.
This
acquisition did not materially affect the Company’s consolidated results of operations. The following table summarizes the
preliminary purchase price allocated fair values assigned to the assets acquired in addition to the excess of the purchase price
over the net assets acquired:
|
|
May 16, 2018
|
|
Property and equipment
|
|
$
|
445,000
|
|
Indentifiable intangible assets
|
|
|
143,754
|
|
Excess attributable to goodwill
|
|
|
294,377
|
|
Total consideration
|
|
$
|
883,131
|
|
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.
Out
of Period Adjustment
For
the periods prior to December 31, 2017, the Company discovered that a discount for the lack of marketability related to certain
lock-up provisions within our purchase agreements had not been considered for stock issued in which the restriction exceeds one-year.
The company evaluated the impact of not recording the discount in the Consolidated Balance Sheet in the historical period presented
and concluded that the effect was immaterial. We corrected the immaterial error in the current period by recording an out-of-period
adjustment for approximately $321,900 to decrease goodwill and additional paid-in-capital.
In
evaluating the adjustment, we referred to the SEC Staff Accounting Bulletin (SAB) No. 99, including SAB Topic 1.M, which provides
guidance on the assessment of materiality and states that “the omission or misstatement of an item in a financial report
is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment
of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.”
We also referred to SAB 108 for guidance on considering the effects of prior year misstatements when quantifying misstatements
in current year financial statements and the assessment of materiality.
Our
analysis of the materiality of the adjustment was performed by reviewing quantitative and qualitative factors. We determined based
on this analysis that the adjustment was not material to the current period and any prior periods.
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 June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
24,718,430
|
|
|
|
24,664,882
|
|
|
|
24,683,264
|
|
|
|
24,656,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
24,718,430
|
|
|
|
24,664,882
|
|
|
|
24,683,264
|
|
|
|
24,656,398
|
|
Weighted average effects of dilutive securities
|
|
|
177,765
|
|
|
|
157,681
|
|
|
|
188,259
|
|
|
|
146,166
|
|
Total
|
|
|
24,896,195
|
|
|
|
24,822,563
|
|
|
|
24,871,523
|
|
|
|
24,802,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive securities:
|
|
|
124,000
|
|
|
|
94,000
|
|
|
|
124,000
|
|
|
|
94,000
|
|
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 and Other Assets
The
following table summarizes our intangible and other assets:
|
|
June 30,
|
|
|
December 31,
|
|
|
Estimated
|
|
|
2018
|
|
|
2017
|
|
|
Useful Life
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
Tradenames and trademarks
|
|
$
|
292,307
|
|
|
$
|
282,307
|
|
|
2.5 - 8.0 years
|
Accreditations
|
|
|
85,395
|
|
|
|
97,706
|
|
|
5.0 years
|
Customer relationships
|
|
|
3,218,305
|
|
|
|
3,084,551
|
|
|
8.0 - 15.0 years
|
Beneficial lease arrangement
|
|
|
—
|
|
|
|
120,200
|
|
|
11.0 years
|
Patents
|
|
|
970,100
|
|
|
|
970,100
|
|
|
4.0 years
|
|
|
|
4,566,107
|
|
|
|
4,554,864
|
|
|
|
Less accumulated amortization
|
|
|
1,290,347
|
|
|
|
1,084,879
|
|
|
|
|
|
|
3,275,760
|
|
|
|
3,469,985
|
|
|
|
Tradenames/trademarks (not subject to amortization)
|
|
|
465,000
|
|
|
|
465,000
|
|
|
|
|
|
|
3,740,760
|
|
|
|
3,934,985
|
|
|
|
Other
|
|
|
13,545
|
|
|
|
13,545
|
|
|
|
|
|
$
|
3,754,305
|
|
|
$
|
3,948,530
|
|
|
|
In
connection with our acquisition of ICS in 2012, we recorded a beneficial lease arrangement of $120,200 related to a 2,300-square
foot building located on approximately ¾ acre in Medina, North Dakota.
On January 12,
2018, the Company purchased the 2,300-square foot building and terminated the lease. The net book value of the beneficial lease
arrangement at December 31, 2017 was approximately $56,500 and was fully amortized in January 2018.
Note
5 – Accrued Expenses and Other Current Liabilities
The
following table summarizes our accrued expenses and other current liabilities as of:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Income and sales taxes payable
|
|
$
|
75,589
|
|
|
$
|
255,099
|
|
Payroll related accruals
|
|
|
372,967
|
|
|
|
148,408
|
|
Professional fees and other expenses
|
|
|
95,991
|
|
|
|
80,326
|
|
Deferred rent expense
|
|
|
119,781
|
|
|
|
71,296
|
|
|
|
$
|
664,328
|
|
|
$
|
555,129
|
|
Note
6 – Notes Payable
Notes
Payable consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Vehicle note
|
|
$
|
47,234
|
|
|
$
|
51,898
|
|
Less current portion of notes payable and other long-term debt
|
|
|
(9,803
|
)
|
|
|
(9,446
|
)
|
Notes payable and other long-term debt
|
|
$
|
37,431
|
|
|
$
|
42,452
|
|
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.
Unison
Revolving Line of Credit
The
Company has a revolving line of credit (“LOC”) agreement which matures April 12, 2020. The LOC provides for $75,050
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 June 30, 2018, and December 31, 2017, the effective interest
rate was 5.5%. The LOC is collateralized by all the business assets of ICS. As of June 30, 2018, and December 31, 2017, there
were no amounts outstanding under this LOC.
Note
7 – 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 June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
$
|
19,944
|
|
|
$
|
14,722
|
|
|
$
|
36,375
|
|
|
$
|
29,413
|
|
Restricted stock awards
|
|
|
22,175
|
|
|
|
29,691
|
|
|
|
43,646
|
|
|
|
60,057
|
|
Total
|
|
$
|
42,119
|
|
|
$
|
44,413
|
|
|
$
|
80,021
|
|
|
$
|
89,470
|
|
On
March 8, 2018, the Company awarded stock options to purchase 25,000 shares of the Company’s common stock at an exercise
price of $2.55 per share to one of our business consultants. The Company estimated the fair value of stock options using the Black-Scholes-Merton
option pricing model with the following assumptions:
|
|
2018
|
|
2017
|
|
Number of options awarded to purchase common shares
|
|
25,000
|
|
None
|
|
Risk-free interest rate
|
|
2.60%
|
N/A
|
|
Expected volatility
|
|
154.3%
|
N/A
|
|
Assumed dividend yield
|
|
N/A
|
|
N/A
|
|
Expected life of options from the date of grant
|
|
9.8 years
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
On
July 9, 2018, the Company awarded stock options to purchase 70,750 shares of Company common stock to all eligible full-time employees,
excluding the executive officers. The grant-date exercise price is $1.80 per share.
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
|
|
2018 (remaining six months)
|
|
|
|
59,426
|
|
|
|
30,184
|
|
|
|
89,610
|
|
2019
|
|
|
|
115,223
|
|
|
|
15,674
|
|
|
|
130,897
|
|
2020
|
|
|
|
62,636
|
|
|
|
4,251
|
|
|
|
66,887
|
|
2021
|
|
|
|
24,272
|
|
|
|
706
|
|
|
|
24,978
|
|
|
|
|
$
|
261,557
|
|
|
$
|
50,815
|
|
|
$
|
312,372
|
|
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:
|
|
|
Number of
awards
|
|
|
Weighted avg.
exercise price
per share
|
|
|
Weighted avg.
fair value
per share
|
|
|
Weighted avg.
remaining
contractual life
(in years)
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
|
266,585
|
|
|
$
|
1.23
|
|
|
$
|
1.22
|
|
|
|
6.06
|
|
|
$
|
462,508
|
|
Granted
|
|
|
|
25,000
|
|
|
$
|
2.55
|
|
|
$
|
2.51
|
|
|
|
9.70
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired/Forfeited
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding, June 30, 2018
|
|
|
|
291,585
|
|
|
$
|
1.34
|
|
|
$
|
1.33
|
|
|
|
5.92
|
|
|
$
|
173,810
|
|
Exercisable, June 30, 2018
|
|
|
|
203,914
|
|
|
$
|
1.02
|
|
|
$
|
1.03
|
|
|
|
4.68
|
|
|
$
|
173,810
|
|
Unvested, June 30, 2018
|
|
|
|
87,671
|
|
|
$
|
2.08
|
|
|
$
|
2.06
|
|
|
|
8.81
|
|
|
$
|
—
|
|
The aggregate intrinsic value represents
the total pre-tax intrinsic value (the aggregate difference between the closing price of our common stock on June 30, 2018 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 June 30, 2018.
Restricted Stock Activity
Restricted stock activity under our Equity Incentive Plan is
summarized as follows:
|
|
|
Number of
options
|
|
|
Weighted avg.
grant date
fair value
|
|
Non-vested restricted shares, December 31, 2017
|
|
|
|
99,000
|
|
|
$
|
2.56
|
|
Granted
|
|
|
|
5,000
|
|
|
$
|
2.55
|
|
Vested
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
|
—
|
|
|
$
|
—
|
|
Non-vested restricted shares, June 30, 2018
|
|
|
|
104,000
|
|
|
$
|
2.56
|
|
Note 8 – Income Taxes
On December 22, 2017, the U.S. government
enacted comprehensive tax legislation (the “Tax Act”), which significantly revises the ongoing U.S. corporate income
tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing
a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs, among other things.
The Company is subject to the provisions
of the FASB ASC 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax
rates be recognized in the period the tax rate change was enacted. Due to the complexities involved in accounting for the recently
enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 requires
that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent
such estimate has been determined.
Pursuant to the SAB118, the Company is
allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related
tax impacts. The final impact on the Company from the Tax Act’s transition tax legislation may differ from the aforementioned
estimates due to the complexity of calculating and supporting with primary evidence. Such differences could be material, due to,
among other things, changes in interpretations of the Tax Act, future legislative action to address questions that arise because
of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any
updates or changes to estimates the Company has utilized to calculate the transition tax’s reasonable estimate. The Company will
continue to evaluate the impact of the U.S. Tax Act and will record any resulting tax adjustments during 2018.
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 June 30, 2018 we recorded income tax expense of $80,000 compared
to an income tax benefit of $52,000 for the 2017 period. For the six months ended June 30, 2018 we recorded income tax expense
of $88,000 compared to an income tax benefit of $49,000 for the 2017 period.
Note 9 – Commitments and Contingencies
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 The Move, LLC 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. In August 2017, the Company amended its lease agreement with The Move, LLC to provide
for an additional 7,700 square feet of office space commencing on December 1, 2017. The additional space is currently not approved
for occupancy. Total rental payments beginning December 1, 2017 increased from $18,000 to approximately $35,100 per month. The
rental payments include common area charges and are subject to annual increases 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 sheets. 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. In connection with the August 2017 amended lease agreement with The Move, LLC, the Company will receive an additional $230,000
in lease incentives to build-out the new additional square footage.
In September 2017, the Company entered
into a new lease agreement for our Urbandale, Iowa office space. The lease is for a period of two years and expires on August 31,
2019. Rental payments are approximately $2,900 per month, which includes common area charges, and are subject to annual increases
over the term of the lease.
The Company also owns approximately ¾
acre on which a 2,300-square foot building is located in Medina, North Dakota. Until January 12, 2018, the Company leased space
in this building under a five-year lease with an expiration date of March 1, 2018.
Under the
lease,
the Company was charged a monthly rental rate of approximately $150 plus all insurance, taxes and other costs based
on actual expenses to maintain the building.
On January 12, 2018, the Company purchased the 2,300-square
foot building and terminated the lease. The purchase price of approximately $135,600 was funded by cash on hand.
In connection with our acquisition of SureHarvest,
we added two locations in California: Soquel and Modesto. Our office space in Soquel expires on November 30, 2018 and requires
rental payments of approximately $2,700 per month. In addition to primary rent, this lease requires additional payments for operating
costs and other common area maintenance costs. The monthly rental payments for our leased space in Modesto is approximately $600
and the lease agreement is month-to-month.
As of June 30, 2018, future minimum lease payments for all operating leases are as follows:
Years ended December 31st:
|
|
|
Total
|
|
2018 (remaining six months)
|
|
|
|
254,913
|
|
2019
|
|
|
|
479,498
|
|
2020
|
|
|
|
468,620
|
|
2021
|
|
|
|
482,678
|
|
2022
|
|
|
|
497,159
|
|
Thereafter
|
|
|
|
4,927,253
|
|
Total lease commitments
|
|
|
|
7,110,121
|
|
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.
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.
The table below reflects the activity of
the contingently redeemable non-controlling interest at June 30, 2018:
Balance, January 1, 2018
|
|
$
|
1,574,765
|
|
Net loss attributable to non-controlling interest in SureHarvest for the year to date period ended June 30, 2018
|
|
|
(26,570
|
)
|
Balance, June 30, 2018
|
|
$
|
1,548,195
|
|
The contingently redeemable non-controlling
interest has been 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 product sales.
Additionally, the Company determined that
it also has a software sales and related consulting services segment. This segment includes software license, maintenance, support
and software-related consulting service revenues.
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 June 30, 2018
|
|
|
Three months ended June 30, 2017
|
|
|
|
Verification and Certification Segment
|
|
|
Software Sales and Related Consulting Segment
|
|
|
Consolidated
|
|
|
Verification and Certification Segment
|
|
|
Software Sales and Related Consulting Segment
|
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Verification and certification service revenue
|
|
$
|
3,507,757
|
|
|
$
|
—
|
|
|
$
|
3,507,757
|
|
|
$
|
2,925,298
|
|
|
$
|
—
|
|
|
$
|
2,925,298
|
|
Product sales
|
|
|
496,312
|
|
|
|
—
|
|
|
|
496,312
|
|
|
|
295,640
|
|
|
|
—
|
|
|
|
295,640
|
|
Software license, maintenance and support services revenue
|
|
|
—
|
|
|
|
263,316
|
|
|
|
263,316
|
|
|
|
—
|
|
|
|
130,234
|
|
|
|
130,234
|
|
Software-related consulting service revenue
|
|
|
—
|
|
|
|
170,923
|
|
|
|
170,923
|
|
|
|
—
|
|
|
|
150,910
|
|
|
|
150,910
|
|
Total revenues
|
|
$
|
4,004,069
|
|
|
$
|
434,239
|
|
|
$
|
4,438,308
|
|
|
$
|
3,220,938
|
|
|
$
|
281,144
|
|
|
$
|
3,502,082
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of verification and certification services
|
|
|
1,850,555
|
|
|
|
—
|
|
|
|
1,850,555
|
|
|
|
1,573,858
|
|
|
|
—
|
|
|
|
1,573,858
|
|
Costs of products
|
|
|
319,970
|
|
|
|
—
|
|
|
|
319,970
|
|
|
|
179,133
|
|
|
|
—
|
|
|
|
179,133
|
|
Costs of software license, maintenance and support services
|
|
|
—
|
|
|
|
168,511
|
|
|
|
168,511
|
|
|
|
—
|
|
|
|
92,775
|
|
|
|
92,775
|
|
Costs of software-related consulting services
|
|
|
—
|
|
|
|
87,546
|
|
|
|
87,546
|
|
|
|
—
|
|
|
|
66,128
|
|
|
|
66,128
|
|
Total costs of revenues
|
|
|
2,170,525
|
|
|
|
256,057
|
|
|
|
2,426,582
|
|
|
|
1,752,991
|
|
|
|
158,903
|
|
|
|
1,911,894
|
|
Gross profit
|
|
|
1,833,544
|
|
|
|
178,182
|
|
|
|
2,011,726
|
|
|
|
1,467,947
|
|
|
|
122,241
|
|
|
|
1,590,188
|
|
Selling, general and administrative expenses
|
|
|
1,500,446
|
|
|
|
270,022
|
|
|
|
1,770,468
|
|
|
|
1,280,665
|
|
|
|
430,355
|
|
|
|
1,711,020
|
|
Segment operating income (loss)
|
|
$
|
333,098
|
|
|
$
|
(91,840
|
)
|
|
$
|
241,258
|
|
|
$
|
187,282
|
|
|
$
|
(308,114
|
)
|
|
$
|
(120,832
|
)
|
|
|
Six months ended June 30, 2018
|
|
|
Six months ended June 30, 2017
|
|
|
|
Verification and Certification Segment
|
|
|
Software Sales and Related Consulting Segment
|
|
|
Consolidated
|
|
|
Verification and Certification Segment
|
|
|
Software Sales and Related Consulting Segment
|
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Verification and certification service revenue
|
|
$
|
6,303,951
|
|
|
$
|
—
|
|
|
$
|
6,303,951
|
|
|
$
|
5,479,933
|
|
|
$
|
—
|
|
|
$
|
5,479,933
|
|
Product sales
|
|
|
850,206
|
|
|
|
—
|
|
|
|
850,206
|
|
|
|
538,906
|
|
|
|
—
|
|
|
|
538,906
|
|
Software license, maintenance and support services revenue
|
|
|
—
|
|
|
|
550,760
|
|
|
|
550,760
|
|
|
|
—
|
|
|
|
289,498
|
|
|
|
289,498
|
|
Software-related consulting service revenue
|
|
|
—
|
|
|
|
354,193
|
|
|
|
354,193
|
|
|
|
—
|
|
|
|
267,693
|
|
|
|
267,693
|
|
Total revenues
|
|
$
|
7,154,157
|
|
|
$
|
904,953
|
|
|
$
|
8,059,110
|
|
|
$
|
6,018,839
|
|
|
$
|
557,191
|
|
|
$
|
6,576,030
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of verification and certification services
|
|
|
3,301,164
|
|
|
|
—
|
|
|
|
3,301,164
|
|
|
|
2,831,231
|
|
|
|
—
|
|
|
|
2,831,231
|
|
Costs of products
|
|
|
545,945
|
|
|
|
—
|
|
|
|
545,945
|
|
|
|
332,999
|
|
|
|
—
|
|
|
|
332,999
|
|
Costs of software license, maintenance and support services
|
|
|
—
|
|
|
|
305,945
|
|
|
|
305,945
|
|
|
|
—
|
|
|
|
220,237
|
|
|
|
220,237
|
|
Costs of software-related consulting services
|
|
|
—
|
|
|
|
163,007
|
|
|
|
163,007
|
|
|
|
—
|
|
|
|
138,738
|
|
|
|
138,738
|
|
Total costs of revenues
|
|
|
3,847,109
|
|
|
|
468,952
|
|
|
|
4,316,061
|
|
|
|
3,164,230
|
|
|
|
358,975
|
|
|
|
3,523,205
|
|
Gross profit
|
|
|
3,307,048
|
|
|
|
436,001
|
|
|
|
3,743,049
|
|
|
|
2,854,609
|
|
|
|
198,216
|
|
|
|
3,052,825
|
|
Selling, general and administrative expenses
|
|
|
2,910,840
|
|
|
|
564,102
|
|
|
|
3,474,942
|
|
|
|
2,362,330
|
|
|
|
819,519
|
|
|
|
3,181,849
|
|
Segment operating income (loss)
|
|
$
|
396,208
|
|
|
$
|
(128,101
|
)
|
|
$
|
268,107
|
|
|
$
|
492,279
|
|
|
$
|
(621,303
|
)
|
|
$
|
(129,024
|
)
|
Note 11 – Supplemental
Cash Flow Information
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash paid during the year:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
2,394
|
|
|
$
|
316
|
|
Income taxes
|
|
$
|
304,765
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common stock issued in connection with acquisition of Sow Organic
|
|
$
|
433,131
|
|
|
$
|
—
|
|
Common stock issued in connection with acquisition of A Bee Organic
|
|
$
|
—
|
|
|
$
|
98,221
|
|
Common stock issued for acquisition-related consulting fees
|
|
$
|
—
|
|
|
$
|
25,000
|
|
Note 12 – Revenue from Contracts with Customers
Impact of ASC 606 Adoption
On January 1, 2018, the Company adopted
Accounting Standards Update, Topic 606, “Revenue from Contracts with Customers” (ASC 606) using the modified retrospective
method of transition. Under this method of transition, we applied ASU 606 to all new contracts entered into on or after January
1, 2018 and all existing contracts for which all (or substantially all) of the revenue attributable to a contract had not been
recognized under legacy revenue guidance as of January 1, 2018.
ASU 606 supersedes nearly all existing
revenue recognition guidance under U.S. GAAP and includes a five-step process to recognize revenue when promised goods or services
are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods
or services.
The impact of adoption on our current period results is as follows:
|
|
Six months ended June 30, 2018
|
|
|
|
Under ASC 606
|
|
|
Under ASC 605
|
|
|
Increase / (Decrease)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Verification and certification service revenue
|
|
$
|
—
|
|
|
$
|
70,250
|
|
|
$
|
(70,250
|
)
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of verification and certification services
|
|
$
|
—
|
|
|
$
|
70,250
|
|
|
$
|
(70,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net income (loss)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Retained earnings
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Changes to verification and certification
service revenue and costs of verification and certification services are due to the conclusion that fees collected on behalf of
the Non-GMO Project related to the Company’s Non-GMO verification services should be excluded from the transaction price
(and, thus, revenue), as these amounts are collected on behalf of a third party. This represents a change from our accounting practice
under legacy revenue guidance of presenting these amounts on a gross basis in verification and certification service revenue, with
an offsetting amount presented as an expense in costs of verification and certification services.
Revenue Recognition
Verification and Certification Segment
We offer a range of products and services
to maintain identification, traceability, and verification systems. We conduct 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 generate revenue
primarily from the sale of our verification solutions, consulting services and hardware sales. We sell our products and services
directly to customers at various levels in the livestock and agricultural supply chains.
Verification and certification service
revenue primarily consists of fees charged for verification audits and other verification services that the Company performs for
customers.
A more detailed summary of our verification
and certification services is included in the subsections below.
Animal Verification and Certification
Services
Our animal verification and certification
services contracts are generally structured in one of the following ways: (i) we commit to perform the required number of animal
audits to verify a customer’s compliance with a standard or claim, or (ii) we commit to perform animal audit services at
a fixed price by site or location type as requested by our customer during an annual period. These contract structures are discussed
in more detail in the subsections below.
Contract to Provide Required Number
of Animal Audit Services
For certain of our animal verification
and certification services, we commit to perform the required number of location or site audits within our customer’s supply
chain to verify customer’s compliance with a contractually-specified standard or claim. Each location or site audit is typically
very short-term in nature, with a typical duration of one to two weeks. Upon completion of an audit, we provide the customer with
an audit verification report for the specific site or location that was audited. Payment is made by customer upon completion of
each site or location audit.
We generally enter into revenue contracts
with a one-year term. Our customers generally have the right to terminate the contract without prejudice with thirty days’
written notice. We have determined that, as a result of the termination provisions present in these contracts, the accounting contract
term is a thirty-day period, with each thirty-day time increment representing a separate accounting contract under ASC 606.
Furthermore, we have concluded that there
is a single performance obligation that is a series comprised of each distinct location or site audit performed. Our customers
are charged a standard daily rate for the provision of an audit based on scale of site operations and geographical location. Consideration
attributable to each audit within the series is variable, as the number of days required to complete each audit is not known until
performance of that audit occurs. We have concluded that it is appropriate to allocate variable consideration (that is, the number
of days required to complete an audit) to each audit within the series. This is because the consideration that we earn for each
audit relates specifically to our efforts to transfer to our customer that discrete audit, and the resulting audit opinion or verification
report, for that specified site or location, and this allocation is consistent with the allocation objective as defined in ASC
606. As a result, instances in which the Company evaluates and applies the constraint on variable consideration are immaterial.
We further concluded that over-time recognition
is appropriate because: (i) our performance of audits does not create an asset with an alternative use, as the audit and related
verification report relates to facts and circumstances that are specific to each customer site or location (that is, there is a
practical limitation on our ability to readily direct the asset to another customer) and (ii) we have an enforceable right to payment,
inclusive of a reasonable profit, for performance completed to date. We utilize an input method to measure over-time progress of
each audit within the series based on the number of audit days performed.
We do, however, note that there are instances
in which we only have an enforceable right to payment upon completion of an audit, and thus, over-time recognition is not permitted.
For these contracts, revenue is recognized at the point in time at which an audit is completed. This does not result in a significant
difference in the timing of revenue recognition (as compared to those audits that are recognized over time) due to the very short-term
duration of an audit.
Our customer may also have the option to
purchase incremental review services (for example, an investigative audit or video review services) that are unrelated to the audit
services to verify compliance with a specified standard or claim. The incremental review services are also typically very short-term
in nature (that is, one to two weeks). We have concluded that these optional purchases do not reflect a material right under ASC
606 because the incremental review services are performed at standard pricing that would be charged to other similarly situated
customers. Upon customer request for an incremental review service, we believe that our customer has made a discrete purchasing
decision that should be treated as a separate accounting contract under ASC 606.
We charge a fixed fee for the incremental
review service, and thus, upon customer request, we are entitled to fixed consideration for that service under ASC 606. We concluded
that over-time revenue recognition is appropriate for incremental review services because: (i) our performance of incremental review
services does not create an asset with an alternative use because that review service, and the associated customer deliverable,
relates to facts and circumstances that are specific to each customer site or location (that is, there is a practical limitation
on our ability to readily direct the asset to another customer) and (ii) we have an enforceable right to payment, inclusive of
a reasonable profit, for performance completed to date on incremental review services. We utilize a time-based input method to
measure progress toward complete satisfaction of an incremental review service, which is based on the number of hours performed
on the incremental review service relative to the total number of hours required to complete that review service. As previously
mentioned, our incremental review services are typically completed within one to two weeks of a customer request.
Contract to Provide Animal Audit Services
at Customer Request
Other animal verification and certification
services contracts are structured such that we commit to perform audit services at a fixed price by site or location type as requested
by our customer during an annual period. Performance of an audit typically occurs within a one to two-week period. We invoice our
customer upon completion of an audit, and payment is due from customer within thirty days or less of receipt of invoice.
Under this contract structure, the customer
is, in effect, provided a pricing list for animal audit services, and pricing is effective over a one-year period. We have concluded
that enforceable rights and obligations do not arise until a customer actually engages us to perform an audit service documented
in the pricing list; therefore, each customer request represents a purchasing decision that is a separate accounting contract under
ASC 606.
We note that the termination provisions
specified in our pricing lists vary. In certain instances, a customer may only have the right to terminate in the event of non-performance.
Alternatively, in other contracts, a customer may have the right to terminate without prejudice at any time or with thirty days’
written notice. However, regardless of the termination provision specified, we have concluded that the accounting contract term
is equal to the duration of the requested audit service (that is, the termination provisions generally do not affect the accounting
contract term for each requested audit service).
Upon a customer’s request for an
audit service, consideration is fixed, as we charge the customer a fixed fee by audit type over the annual period per the pricing
list.
We concluded that over-time revenue recognition
is appropriate for a requested audit service because: (i) our performance of the requested audit service does not create an asset
with an alternative use as that audit, and the associated audit report, relate to facts and circumstances that are specific to
each customer site or location (that is, there is a practical limitation on our ability to readily direct the asset to another
customer) and (ii) we have an enforceable right to payment, inclusive of a reasonable profit, for performance completed to date
on a requested audit. A time-based input method is utilized to measure progress toward complete satisfaction of an audit based
on the number of hours performed on that audit relative to the total number of hours expected to be required to complete the audit.
As previously mentioned, our audit services are typically completed within one to two weeks of a customer request.
Other Considerations for Animal Certification
and Verification Services
In connection with the provision of on-site
audits related to animal certification and verification services, reimbursable expenses are incurred and billed to customers, and
such amounts are recognized on a gross basis as both revenue and cost of revenue.
Any amounts collected on behalf of a third
party and remitted in full to that third party are excluded from the transaction price and, thus, revenue.
Crop and Other Processed Product Verification
and Certification Services
Third party crop and other processed product
audits are generally structured such that we commit to perform an independent audit to verify that food producers and/or farmers
comply with certain standards. We generally provide verification services related to organic, Non-GMO and gluten-free standards.
Depending on the crop or product type, verification audit activities may take two months to one year to complete. During this assessment
period, various integrated audit activities and/or input reviews are performed in accordance with the regulations specified by
the relevant standard.
The fee structure is such that customers
pay an annual assessment fee for a crop or other processed product to verify compliance with the specified standard. This fee is
payable upfront on a nonrefundable basis. Our customers can typically terminate a crop or other processed product audit at any
time without prejudice. However, given the nonrefundable upfront payment structure for the annual assessment service, we have concluded
that the contract term is one year. We record the upfront payment made by customer for the annual assessment service as deferred
revenue.
The audit activities and input reviews
required in the provision of an annual assessment are not distinct under ASC 606, and consequently, we account for an annual assessment
as a single integrated performance obligation.
For certain of our third-party crop and
other processed product audits, the annual assessment fee is fixed for the annual period. In other scenarios, the annual assessment
fee may be variable due to increased review activities required for incremental inputs to a crop or processed product identified
through the assessment process. At the time that an incremental input is identified, which generally occurs in the early stages
of an annual assessment, the incremental consideration for the provision of review services related to that incremental input also
becomes known.
We allocate the transaction price derived
from the annual assessment fee to the single integrated performance obligation for that annual assessment. Revenue related to the
annual assessment is recognized over time in accordance with ASC 606. This is because the annual assessment service does not create
an asset with an alternative use, as it relates to facts and circumstances that are specific to a customer’s crop or processed
product. Further, we have an enforceable right to payment for performance completed to date on the annual assessment due to the
nonrefundable upfront payment made by customer. We utilize an input method to measure progress toward satisfaction of the annual
assessment based on the percentage of activities/phases or input reviews completed under the annual assessment.
As it relates to the upfront payment for
the annual assessment, we have utilized the practical expedient that exempts us from adjusting consideration for the effects of
a significant financing component when we expect that the period between customer payment and the provision of the related service
is one year or less.
In certain contracts, an independent third-party
inspection may be required for a site or location in our customer’s supply chain in accordance with the regulations for a
specified standard. An inspection is performed by an independent third-party inspector, and the customer is charged an hourly rate
for these inspection services.
Under this scenario, a separate accounting
contract arises upon initiation and performance of an inspection, and we typically invoice our customer for the inspection upon
completion of the inspection service. Given that customer has the ability to terminate at any time without prejudice, we have concluded
that the contract term for each inspection ends as control of an inspection service transfers. Inspections are generally short-term
in nature with a term ranging from a few days to two weeks.
We have further determined that inspections
are distinct from an annual assessment. Consideration attributable to an inspection is variable, as the inspector is only able
to provide a high-level estimate of the cost of the inspection based on the inspector’s hourly rate until the inspector is
at the relevant producer/supplier site to determine the time and level of effort required to complete the inspection. Given the
very short-term nature of an inspection, variability related to an inspection generally resolves itself within a reporting period.
However, we are typically required by certain regulations to provide an inspection cost estimate to our customer, and, if required,
we utilize that estimate as our estimate of variable consideration. The cost estimate is generally derived from the cost to perform
the prior-year inspection for that specific customer site or location or, when required, the historical cost to provide an inspection
for a comparable site or location. In our experience, the historical cost of inspections has been predictive of the future cost
of an inspection.
Other Considerations for Crop and Other
Processed Product Verification Services
Reimbursable expenses incurred in the provision
of an annual assessment or required inspection are billed to our customers, and such amounts are recognized on a gross basis as
both revenue and cost of revenue.
In addition, any amounts collected on behalf
of a third party and remitted in full to that third party are excluded from the transaction price and, thus, revenue.
Product Sales
Product sales are primarily generated from
the sale of cattle identification ear tags. Each customer purchase request represents a purchasing decision made by customer. As
such, enforceable rights and obligations (and, thus, a separate accounting contract under ASC 606) arise at the time a customer
submits its purchase request to us. At the time of request, we are entitled to fixed consideration, as the sales quantity and related
price of the product is known. All of our customers are charged the same fixed price per tag.
Revenue for product sales is recognized
upon delivery of the goods to customer, at which point title, custody and risk of loss transfer to the customer. We typically deliver
product to the customer within a few days of customer’s sales request. At the time of delivery, we invoice our customer for
the related product sales and record invoiced amounts to accounts receivable. Payment is typically due by customer upon receipt
of invoice.
In relation to our product sales, the sales
taxes collected from customers and remitted to government authorities are excluded from revenue.
Additionally, we do not typically provide
right of return or warranty on product sales.
Software Sales and Related Consulting
Segment
We predominately offer software products
via a SaaS model, which is an annual subscription based model. Support services are generally included in the subscription. We
also provide web hosting services on an annual basis to all of our customers in conjunction with their software subscription. Customers
have the ability to terminate without prejudice upon thirty days’ written notice; however, the subscription fee, inclusive
of maintenance and support services, and the web hosting fee are paid upfront by the customer on a nonrefundable basis. Consequently,
we have concluded that the contract term for the annual software subscription and web hosting services is one year.
We have determined that a software license
subscription and the related hosting service should be accounted for as a service transaction, as we provide the functionality
of our software through the hosting arrangement. The SaaS arrangement provides customers with unlimited access to our software
and, thus, is accounted for as a series of distinct daily service periods that provide substantially the same service (that is,
continuous access to the hosted software) each day during the annual contract term. Further, the provision of basic technical support
services also represents a stand ready obligation that is a series of distinct daily service periods that provide substantially
the same service (that is, access to our technical support infrastructure) during the annual contract term. Because the basic technical
support services and SaaS each represent performance obligations that are a series of distinct daily service periods, we have elected
to combine these performance obligations.
We are entitled to fixed consideration
for the software license subscription, inclusive of support services, and the related hosting service. The software license subscription
and hosting fees in our contracts represent the standalone selling price for that related service. This is because the fees charged
for the software license subscription and hosting service represent the software license subscription and hosting service fees
that are charged to other customers with a similar level of data loaded into the software (regardless of whether that customer
contracts for professional services). Accordingly, the software license subscription and hosting fees are allocated to the combined
SaaS performance obligation.
We recognize revenue related to the SaaS
arrangement over time because a customer simultaneously receives and consumes the benefit from the provision of access to the hosted
software over the annual subscription period. Accordingly, we utilize a time-based output measure of progress that results in a
straight-line attribution of revenue. That is, revenue related to the combined SaaS obligation should be recognized daily on a
straight-line basis over the one-year subscription term, as this reflects the direct measurement of value to a customer of the
provision of access to the software via hosting each day.
As it relates to the upfront payment for
the software subscription and hosting service, we have utilized the practical expedient that exempts us from adjusting consideration
for the effects of a significant financing component when we expect that the period between customer payment and the provision
of the related service is one year or less.
In addition, we record the upfront payment
made by customer for the annual assessment service as deferred revenue.
In some of our SaaS contracts, we also
provide software-related consulting services to our customers during an annual software subscription period. Consulting services
fees are derived from a standard rate card by employee level, and we invoice for consulting services monthly on a time incurred
basis. Due to the termination provisions present in our SaaS contracts, our customers have an in-substance renewal decision each
month for further consulting services (that is, via their decision not to terminate the contract each month). Accordingly, the
contract term for consulting services is on a month-to-month basis within the annual subscription period.
We have concluded that consulting services
are distinct from the SaaS arrangement. To the extent that consulting services result in a software enhancement or new functionality,
we have determined that those consulting services are still distinct because added features typically provide new, discrete capabilities
with independent value to a customer and a customer accesses the SaaS in a single-tenant architecture. Further, additional features
and functionality are often made available to a customer substantially after the “go-live” date of the software (via
the hosting service). As a result, our software-related consulting services represent distinct performance obligations.
We recognize revenue over time in accordance
with ASC 606. This is because our performance does not create an asset with an alternative use, as consulting services, and, if
applicable, any related software enhancements, are highly tailored to the farming industry specific to the given customer, and
we have an enforceable right to payment, inclusive of profit, for performance completed to date. As a result, for our consulting
services, we have elected to utilize the practical expedient that allows us to recognize revenue in the amount to which we have
a right to invoice, as we believe that we have a right to consideration from a customer in an amount that corresponds directly
with the value to the customer of our performance completed to date for the provision of consulting services.
Other Significant Judgments
Principal versus Agent Considerations
Under certain of our verification and certification
service contracts, a third-party inspector may be required to perform an independent inspection of a site or location within our
customer’s supply chain in accordance with regulations of a certain standard or claim. In this scenario, we have concluded
that we are the principal in the provision of inspection services to our customer, as we control the inspection service, and the
related inspection report, before it is transferred to our customer. In accordance with this conclusion, we present revenue related
to inspections on a gross basis, with customer payment for an inspection presented as revenue and the inspection cost paid to the
third-party inspector presented as an expense.
In addition, we utilize a third party to
provide web hosting services in the provision of our SaaS arrangements. In this scenario, we are primarily responsible for fulfilling
the promise to provide web hosting services to the customer, and we establish the fee that the customer is charged for the web
hosting services. Consequently, we have also concluded that we are the principal in the provision of web hosting services under
our SaaS arrangements. As such, we present revenue on a gross basis, with consideration received from our customer for the web
hosting service recorded as revenue and the cost paid to the third party to provide those web hosting services recorded as an expense.
Disaggregation of Revenue
We have identified four material revenue
categories in our business: (i) verification and certification service revenue, (ii) product sales, (iii) software license, maintenance
and support services revenue and (iv) software-related consulting service revenue.
Revenue attributable to each of our identified revenue categories
is disaggregated in the table below.
|
|
|
Three months ended June 30, 2018
|
|
|
|
Six months ended June 30, 2018
|
|
|
Verification and Certification Segment
|
|
|
Software Sales and Related Consulting Segment
|
|
|
Consolidated
|
|
|
Verification and Certification Segment
|
|
|
Software Sales and Related Consulting Segment
|
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Verification and certification service revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
3,507,757
|
|
|
$
|
—
|
|
|
$
|
3,507,757
|
|
|
$
|
6,303,951
|
|
|
$
|
—
|
|
|
$
|
6,303,951
|
|
Software license, maintenance and support services revenue
|
|
|
496,312
|
|
|
|
—
|
|
|
|
496,312
|
|
|
|
850,206
|
|
|
|
—
|
|
|
|
850,206
|
|
Software-related consulting service revenue
|
|
|
—
|
|
|
|
263,316
|
|
|
|
263,316
|
|
|
|
—
|
|
|
|
550,760
|
|
|
|
550,760
|
|
Total revenues
|
|
|
—
|
|
|
|
170,923
|
|
|
|
170,923
|
|
|
|
—
|
|
|
|
354,193
|
|
|
|
354,193
|
|
|
|
$
|
4,004,069
|
|
|
$
|
434,239
|
|
|
$
|
4,438,308
|
|
|
$
|
7,154,157
|
|
|
$
|
904,953
|
|
|
$
|
8,059,110
|
|
Transaction Price Allocated to Remaining Performance Obligations
We generally enter into revenue contracts
with a one-year term. In certain instances, we have concluded that our contract term is less than one year because: (i) the termination
provisions present in the contract impact the contract term under ASC 606 or (ii) a contract under ASC 606 arises at the time our
customer requests the provision of a good or service that is delivered within or over a few days to a couple of weeks. As a result
of our short-term contract structures, we have utilized the practical expedient in ASC 606-10-50-14 that exempts us from disclosure
of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that
has an original expected duration of one year or less.
Contract Balances
Under our animal verification and certification
services contracts, we invoice customers once the performance obligation for the provision of a site or location audit has been
satisfied, at which point payment is unconditional. In addition, any product sales are invoiced upon delivery to the customer,
at which point payment is also unconditional. Accordingly, our animal verification and certification services contracts do not
give rise to a contract asset under ASC 606; rather, invoiced amounts reflect accounts receivable.
Under our crop and other processed product
verification and certification services, a nonrefundable payment for an annual assessment of compliance with a standard is typically
made by our customers upfront upon contract execution. That is, payment is made in advance of the provision of annual assessment
services. Accordingly, we recognize deferred revenue upon receipt of the upfront payment from our customers for crop and other
processed product audit assessment services. Revenue is subsequently recognized, and the related deferred revenue is reduced, over
the one-year period during which assessment services are provided to the customer using the over-time measure of progress selected
in accordance with ASC 606. To the extent that an inspection is required during the annual assessment period, we invoice customers
once the performance obligation for the inspection has been satisfied, at which point payment is unconditional. As such, inspection
services give rise to accounts receivable.
Our software subscriptions, web hosting,
and support services are paid by our customers upfront on a nonrefundable basis. That is, payment is made in advance of the provision
of these services to our customers. As a result, we recognize deferred revenue upon receipt of the upfront payment from our customers
for software subscriptions, web hosting and maintenance and support services. Revenue is subsequently recognized, and the related
deferred revenue is reduced, on a straight-line basis during the annual contract term that these stand ready services are provided
to customer.
Software-related consulting services are
invoiced monthly on a time incurred basis, at which point we have an enforceable right to payment for those services. Because payment
is unconditional upon invoicing, our software-related consulting services are reflected as accounts receivable.
As of June 30, 2018, and January 1, 2018,
accounts receivable from contracts with customers, net of allowance for doubtful accounts, were approximately $1,979,000 and $1,898,700,
respectively.
As of June 30, 2018, and January 1, 2018,
deposits and deferred revenue from contracts with customers were approximately $1,108,400 and $851,200, respectively. The balance
of these contract liabilities at the beginning of the period is expected to be recognized as revenue during 2018.
Costs to fulfill a contract
We incur a fixed cost, payable to a third-party
provider, to perform set-up activities for new (or first-year) customers that contract for our software subscription and hosting
services. We have concluded that those set-up activities do not transfer a good or service as defined in ASC 606 to our customers.
We capitalize fixed set-up costs as an
asset on the following basis: (i) the fixed set-up costs incurred relate specifically to a customer contract for our software subscription
and hosting service, (ii) the fixed set-up costs incurred are expected to be recovered via provision of the software subscription
and hosting service to that customer and (iii) the set-up costs generate or enhance resources of the Company by permitting us to
provide software subscription and hosting services to our customer, which, in turn, generates revenues.
Capitalized costs related to those set-up
activities are amortized on a straight-line basis over the one-year license subscription and hosting period.
The ending balance at June 30, 2018 of
capitalized assets attributable to the set-up costs incurred to fulfill software subscription and hosting contracts was not material.
No set-up costs related to our software subscription and hosting services were incurred for the six months ended June 30, 2018.
In addition, amortization of capitalized
set-up costs for the six months ended June 30, 2018 was not material, and no impairment loss was incurred related to capitalized
set-up costs for the six months ended June 30, 2018.
Commissions and other costs to obtain a
contract are expensed as incurred as our contracts are typically completed in one year or less, and where applicable, we generally
would incur these costs whether or not we ultimately obtain the contract.
Note 13 – Subsequent Event
On
August 9, 2018, the Company purchased a
ten percent membership interest in Progressive Beef, LLC for an aggregate purchase price of approximately $1 million payable
in cash of $900,000 and 50,340 shares of common stock of WFCF valued at approximately $91,100 based upon the closing price
of our stock on August 9, 2018, of $1.81 per share. Where Food Comes From is the exclusive
certifier for Progressive Beef.
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, 2017. 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 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, Validus Verification Services, Sterling Solutions, SureHarvest Services and 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, crops and other food products are accurate. In addition, we develop software
and provide services related to sustainability measurement and benchmarking, traceability, verification and certification to the
food and agriculture industries. 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. 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 that 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. We verify claims to over 40 independent 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:
Market
Driver #1 - Consumer awareness and expectations
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●
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The
13
th
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 (“CPG”) 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 health products has seen steady growth in the past several years, driven
by the desire of shoppers to feel good about the foods they are 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,” said Colin Stewart, senior vice president
at Acosta.
|
|
●
|
According
to research dated March 2016 from Sullivan Higdon & Sink FoodThink, only one-third
of consumers believe that 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 Organic Trade Association’s 2018 Organic Industry Survey, American consumers
in 2017 filled more of their grocery carts with organic, buying everything from organic
produce and organic ice cream to organic fresh juices and organic dried beans. Organic
sales in the U.S. totaled a new record of $49.4 billion in 2017, up 6.4 percent from
the previous year. Organic continued to increase its penetration into the total food
market, and now accounts for 5.5 percent of the food sold in retail channels in the U.S.
|
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 response 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, China and the European Union.
|
Market
Driver #3 - Government regulation
|
●
|
The
Animal Disease Traceability Rule promulgated by the USDA 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 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
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 U.S. to China have been banned
since the 2003 Bovine Spongiform Encephalopathy outbreak, also known as “mad cow
Disease.”
|
Seasonality
Our
business is subject to seasonal fluctuations. Significant portions of our verification and certification service revenue are 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
June 30, 2018, we had cash, cash equivalents and short-term investments of approximately $3,810,300 compared to approximately
$3,449,000 at December 31, 2017. Our working capital at June 30, 2018 was approximately $3,675,200 compared to $3,712,200 at December
31, 2017.
Net
cash provided by operating activities for the six months ended June 30, 2018 was approximately $1,118,800 compared to net cash
provided of $789,500 during the same period in 2017. 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 six months ended June 30, 2018, was $614,200 compared to $170,600 used in the 2017 period.
Net cash used in the 2018 period was primarily attributable to the acquisition Sow Organic for $450,000 in cash and $135,600 for
the 2,300-square foot building located in Medina, North Dakota, which was previously leased. Net cash used in the 2017 period
was primarily attributable to the acquisition of A Bee Organic, as well as routine purchase of property and equipment.
Net
cash used in financing activities for the six months ended June 30, 2018, was $149,300 compared to $20,600 used in the 2017 period.
Net cash used in the both the 2018 and 2017 period was primarily due to the repurchase of common shares under the Stock Buyback
Plan.
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 has brought significant opportunities to us,
including increased
investor confidence and renewed interest in our company,
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 way to overcome import or export
restrictions 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 upon maturity. As of June 30, 2018, and December 31, 2017, the effective interest rate was 5.5%. The LOC is collateralized
by all the business assets of International Certification Services, Inc. (“ICS”). As of June 30, 2018, and December
31, 2017, there were no amounts outstanding under this LOC.
Off-Balance
Sheet Arrangements
As
of June 30, 2018, we had no off-balance sheet arrangements of any type.
RESULTS
OF OPERATIONS
Three
and six months ended June 30, 2018 compared to the same periods in fiscal year 2017
The
following table shows information for reportable operating segments:
|
|
Three months ended June 30, 2018
|
|
|
Three months ended June 30, 2017
|
|
|
|
Verification
and
Certification
Segment
|
|
|
Software Sales
and Related
Consulting
Segment
|
|
|
Consolidated
|
|
|
Verification
and
Certification
Segment
|
|
|
Software Sales
and Related
Consulting
Segment
|
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Verification and certification service revenue
|
|
$
|
3,507,757
|
|
|
$
|
—
|
|
|
$
|
3,507,757
|
|
|
$
|
2,925,298
|
|
|
$
|
—
|
|
|
$
|
2,925,298
|
|
Product sales
|
|
|
496,312
|
|
|
|
—
|
|
|
|
496,312
|
|
|
|
295,640
|
|
|
|
—
|
|
|
|
295,640
|
|
Software license, maintenance and support services revenue
|
|
|
—
|
|
|
|
263,316
|
|
|
|
263,316
|
|
|
|
—
|
|
|
|
130,234
|
|
|
|
130,234
|
|
Software-related consulting service revenue
|
|
|
—
|
|
|
|
170,923
|
|
|
|
170,923
|
|
|
|
—
|
|
|
|
150,910
|
|
|
|
150,910
|
|
Total revenues
|
|
$
|
4,004,069
|
|
|
$
|
434,239
|
|
|
$
|
4,438,308
|
|
|
$
|
3,220,938
|
|
|
$
|
281,144
|
|
|
$
|
3,502,082
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of verification and certification services
|
|
|
1,850,555
|
|
|
|
—
|
|
|
|
1,850,555
|
|
|
|
1,573,858
|
|
|
|
—
|
|
|
|
1,573,858
|
|
Costs of products
|
|
|
319,970
|
|
|
|
—
|
|
|
|
319,970
|
|
|
|
179,133
|
|
|
|
—
|
|
|
|
179,133
|
|
Costs of software license, maintenance and support services
|
|
|
—
|
|
|
|
168,511
|
|
|
|
168,511
|
|
|
|
—
|
|
|
|
92,775
|
|
|
|
92,775
|
|
Costs of software-related consulting services
|
|
|
—
|
|
|
|
87,546
|
|
|
|
87,546
|
|
|
|
—
|
|
|
|
66,128
|
|
|
|
66,128
|
|
Total costs of revenues
|
|
|
2,170,525
|
|
|
|
256,057
|
|
|
|
2,426,582
|
|
|
|
1,752,991
|
|
|
|
158,903
|
|
|
|
1,911,894
|
|
Gross profit
|
|
|
1,833,544
|
|
|
|
178,182
|
|
|
|
2,011,726
|
|
|
|
1,467,947
|
|
|
|
122,241
|
|
|
|
1,590,188
|
|
Selling, general and administrative expenses
|
|
|
1,500,446
|
|
|
|
270,022
|
|
|
|
1,770,468
|
|
|
|
1,280,665
|
|
|
|
430,355
|
|
|
|
1,711,020
|
|
Segment operating income (loss)
|
|
$
|
333,098
|
|
|
$
|
(91,840
|
)
|
|
$
|
241,258
|
|
|
$
|
187,282
|
|
|
$
|
(308,114
|
)
|
|
$
|
(120,832
|
)
|
|
|
Six months ended June 30, 2018
|
|
|
Six months ended June 30, 2017
|
|
|
|
Verification
and
Certification
Segment
|
|
|
Software Sales
and Related
Consulting
Segment
|
|
|
Consolidated
|
|
|
Verification
and
Certification
Segment
|
|
|
Software Sales
and Related
Consulting
Segment
|
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Verification and certification service revenue
|
|
$
|
6,303,951
|
|
|
$
|
—
|
|
|
$
|
6,303,951
|
|
|
$
|
5,479,933
|
|
|
$
|
—
|
|
|
$
|
5,479,933
|
|
Product sales
|
|
|
850,206
|
|
|
|
—
|
|
|
|
850,206
|
|
|
|
538,906
|
|
|
|
—
|
|
|
|
538,906
|
|
Software license, maintenance and support services revenue
|
|
|
—
|
|
|
|
550,760
|
|
|
|
550,760
|
|
|
|
—
|
|
|
|
289,498
|
|
|
|
289,498
|
|
Software-related consulting service revenue
|
|
|
—
|
|
|
|
354,193
|
|
|
|
354,193
|
|
|
|
—
|
|
|
|
267,693
|
|
|
|
267,693
|
|
Total revenues
|
|
$
|
7,154,157
|
|
|
$
|
904,953
|
|
|
$
|
8,059,110
|
|
|
$
|
6,018,839
|
|
|
$
|
557,191
|
|
|
$
|
6,576,030
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of verification and certification services
|
|
|
3,301,164
|
|
|
|
—
|
|
|
|
3,301,164
|
|
|
|
2,831,231
|
|
|
|
—
|
|
|
|
2,831,231
|
|
Costs of products
|
|
|
545,945
|
|
|
|
—
|
|
|
|
545,945
|
|
|
|
332,999
|
|
|
|
—
|
|
|
|
332,999
|
|
Costs of software license, maintenance and support services
|
|
|
—
|
|
|
|
305,945
|
|
|
|
305,945
|
|
|
|
—
|
|
|
|
220,237
|
|
|
|
220,237
|
|
Costs of software-related consulting services
|
|
|
—
|
|
|
|
163,007
|
|
|
|
163,007
|
|
|
|
—
|
|
|
|
138,738
|
|
|
|
138,738
|
|
Total costs of revenues
|
|
|
3,847,109
|
|
|
|
468,952
|
|
|
|
4,316,061
|
|
|
|
3,164,230
|
|
|
|
358,975
|
|
|
|
3,523,205
|
|
Gross profit
|
|
|
3,307,048
|
|
|
|
436,001
|
|
|
|
3,743,049
|
|
|
|
2,854,609
|
|
|
|
198,216
|
|
|
|
3,052,825
|
|
Selling, general and administrative expenses
|
|
|
2,910,840
|
|
|
|
564,102
|
|
|
|
3,474,942
|
|
|
|
2,362,330
|
|
|
|
819,519
|
|
|
|
3,181,849
|
|
Segment operating income (loss)
|
|
$
|
396,208
|
|
|
$
|
(128,101
|
)
|
|
$
|
268,107
|
|
|
$
|
492,279
|
|
|
$
|
(621,303
|
)
|
|
$
|
(129,024
|
)
|
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. F
ees earned from our WFCF labeling program
are also included in our verification and certification revenues
as it represents a value-added
extension of our source verification. Verification and certification service revenue for the three and six months ended June 30,
2018 increased approximately $582,500, or 19.9%, and $824,000, or 15.0%, respectively, compared to the same periods in 2017. 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 in “Current
Marketplace Opportunities.”
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 and six months ended June 30, 2018 increased approximately $200,700, or 67.9% and $311,300,
or 57.8%, respectively, compared to the same periods in 2017. 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 for cattle.
Costs
of revenues for our verification and certification segment for the three and six months ended June 30, 2018 were approximately
$2.17 million and $3.85 million, respectively, compared to approximately $1.75 million and $3.16 million, respectively, for the
same periods in 2017. Gross margin for the three months ended June 30, 2018 improved slightly to 45.8% compared to 45.6% in 2017.
Gross margin for the six months ended June 30, 2018 decreased slightly to 46.2% compared to 47.4% in 2017. Fluctuations in our
margins are predominately due to product mix changes. Additionally, our margins are impacted by various costs such as cost of
products, salaries and benefits, insurance, and taxes.
Selling,
general and administrative expenses for the three and six months ended June 30, 2018 increased approximately 17.2% and 23.2%,
respectively compared to the same periods in 2017. Overall, the increase in our selling, general and administrative expenses is
due in part to slightly higher head count, an increase in base salaries, the accelerated amortization of the ICS beneficial lease
arrangement previously discussed, increased square footage and corresponding rent expense for the corporate headquarters, and
increasing public company compliance costs and professional fees due to implementing new accounting standards.
Software
Sales and Related Consulting Segment
Software
license, maintenance and support services revenue is a revenue stream specific to our acquisitions of SureHarvest and Sow Organic.
We employ a 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. Software license,
maintenance and support services revenue for the three and six months ended June 30, 2018 increased approximately $133,100, or
102.2%, and $261,300, or 90.3%, respectively, compared to the same periods in 2017. The increase is predominately due to a significant
increase in the number of billable hours of staff focused on software enhancements and upgrades.
Software-related
consulting service revenue primarily represents fees earned from professional appearances, customer education and training related
services specific to our acquisition of SureHarvest. Software-related consulting service revenue for the three and six months
ended June 30, 2018 increased approximately $20,000, or 13.3%, and $86,500, or 32.3%, respectively compared to the same periods
in 2017. The increase is predominately due to growth in customer education and training services.
Costs
of revenues for our software sales and related consulting segment for the three and six months ended June 30, 2018 were approximately
$256,100 and $469,000, respectively, compared to approximately $158,900 and $359,000, respectively, for the same periods in 2017.
Gross margin for the three months ended June 30, 2018 decreased slightly to 41.0% compared to 43.5% for the same period in 2017.
The decrease was predominately due to additional costs absorbed from the Sow Organic acquisition. Gross margin for the six months
ended June 30, 2018 improved to 48.2% compared to 35.6% for the same period in 2017. Our margins were positively impacted by improvements
in overall efficiency and the number of our billable hours, as well as other variable costs of salaries and benefits, insurance,
and taxes.
Selling,
general and administrative expenses for the three and six months ended June 30, 2018 decreased approximately 37.3% and 31.2%,
respectively, compared to the same periods in 2017. The decrease is predominately due to some employee turnover and re-alignment
with a shift from non-billable hours to billable hours to reduce fixed costs.
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 acquired businesses, removing excess capacity, creating market access
for products, acquiring skills and technologies more quickly or at a 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 can take two to three years after an acquisition to fully
understand the complexities of a larger acquisition, 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 and six months ended June 30,
2018, we recorded income tax expense of $80,000 and $88,000, respectively, compared to income tax benefit of $52,000 and $49,000,
respectively for the comparable periods in 2017.
Net
Income and Per Share Information
As
a result of the foregoing, net income attributable to WFCF shareholders for the three months ended June 30, 2018 was approximately
$176,800, or $0.01 per basic and diluted common share, compared to $62,400, or less than $0.01 per basic and diluted
common share for the same period in 2017. Net income attributable to WFCF shareholders for the six months ended June 30, 2018
was approximately $212,300, or $0.01 per basic and diluted common share, compared to $177,800, or $0.01 per basic and diluted
common share for the same period in 2017.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management, including our principal executive and financial officers, have conducted an evaluation of the effectiveness of the
design and operation of our “disclosure controls and procedures,” as such term is defined under Rules 13a-15(e) and
15d-15(e) of the Exchange Act, to ensure that information we are required to disclose in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms,
and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated
and communicated to management, including our principal executive and financial officers, as appropriate, to allow timely decisions
regarding required disclosure. Based on that evaluation, our principal executive and financial officers concluded, as a result
of the material weakness in internal control over financial reporting discussed below, that our disclosure controls and procedures
were not effective as of the end of the period covered by this report. However, we believe that the financial statements included
in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods
presented.
In
July 2018, management concluded that a material weakness existed with respect to management placing undue reliance on their third-party
specialist’s valuation of restricted stock issued in connection with our business acquisitions. This impacts equity and
the calculation of goodwill. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
Since
such time, management is implementing the following measure to remediate the material weakness related to the process of valuation
in connection with our business acquisitions. Management is implementing a review process that is performed in collaboration with
outside legal counsel and third-party valuation specialists, where valuations of our business acquisitions are considered and
analyzed to determine if discounts on the issuance of restricted stock has been appropriately considered. The valuations are further
reviewed and approved by management to ensure the underlying information used by the valuation specialist is complete and accurate
and that the valuation is consistent with generally accepted accounting principles.
Based
on our assessment, we consider that the material weakness related to the process of valuation of restricted stock issued in connection
with our business acquisitions has not been fully remediated and is still present as of June 30, 2018 as the remedial measures
have not operated effectively for a sufficient period of time for management to conclude, through testing, that the applicable
controls have operated effectively for a sufficient period of time.
Internal
Control Over Financial Reporting
As
previously discussed, management revised its policies and procedures with respect to controls over the process of valuation of
restricted stock issued in connection with our business acquisitions. Additionally, with the adoption of ASC Topic 606 as further
described in Note 11 to the Consolidated Financial Statements in Part I of this Quarterly Report, we have analyzed our internal
control over financial reporting framework and implemented new controls around contract inception and contract modifications,
as well as periodic reviews of material contracts. Except as described above, there have not been any other 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.
PART
II – OTHER INFORMATION
ITEM
1. 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.
ITEM
1A. RISK FACTORS
Our
business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 2017
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 June 30, 2018,
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 Sow Organic acquisition, we issued 217,654 shares of common stock of Where Food Comes From, Inc. valued at
approximately $433,100 based upon the closing price of our stock on May 16, 2018, of $1.99 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.
ITEM
6. EXHIBITS
(a)
Exhibits
Number
|
|
Description
|
10.1
|
|
Asset
Purchase Agreement between Where Food Comes From, Inc and Sow Organic, LLC signed on May 16, 2018
|
31.1
|
|
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2
|
|
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1
|
|
Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
|
Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
|
101.INS
|
|
XBRL Instance Document
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
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:
August 14, 2018
|
Where
Food Comes From, Inc.
|
|
|
|
By:
|
/s/ John K. Saunders
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
By:
|
/s/ Dannette Henning
|
|
|
|
Chief
Financial Officer
|