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 March 31, 2019
|
|
☐
|
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 every Interactive
Data File required to be submitted 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 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 ☒
Securities registered pursuant to Section 12(b) of the
Act:
Title of each class
|
Trading
Symbol
|
Name of each exchange on which registered
|
Common Stock, $0.001 par value
|
WFCF
|
OTC Markets Group
|
The
number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of May 10, 2019, was 24,921,498.
Where Food Comes From, Inc.
Table of Contents
March 31, 2019
Where
Food Comes From, Inc.
Consolidated
Balance Sheets
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Assets
|
|
|
(Unaudited)
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,452,477
|
|
|
$
|
1,482,391
|
|
Accounts receivable, net of allowance
|
|
|
2,005,766
|
|
|
|
2,205,162
|
|
Short-term investments in certificates of deposit
|
|
|
246,506
|
|
|
|
245,597
|
|
Prepaid expenses and other current assets
|
|
|
428,619
|
|
|
|
439,424
|
|
Total current assets
|
|
|
5,133,368
|
|
|
|
4,372,574
|
|
Property and equipment, net
|
|
|
1,765,595
|
|
|
|
1,675,472
|
|
Operating lease right-of-use assets
|
|
|
3,359,810
|
|
|
|
—
|
|
Long-term investments in certificates of deposit
|
|
|
254,246
|
|
|
|
252,999
|
|
Investment in Progressive Beef
|
|
|
991,115
|
|
|
|
991,115
|
|
Intangible and other assets, net
|
|
|
3,698,000
|
|
|
|
3,852,121
|
|
Goodwill
|
|
|
3,143,734
|
|
|
|
3,143,734
|
|
Deferred tax assets, net
|
|
|
203,923
|
|
|
|
175,923
|
|
Total assets
|
|
$
|
18,549,791
|
|
|
$
|
14,463,938
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
691,562
|
|
|
$
|
533,925
|
|
Accrued expenses and other current liabilities
|
|
|
567,935
|
|
|
|
419,619
|
|
Customer deposits and deferred revenue
|
|
|
1,362,882
|
|
|
|
727,854
|
|
Current portion of notes payable
|
|
|
10,299
|
|
|
|
10,173
|
|
Current portion of finance lease obligations
|
|
|
7,303
|
|
|
|
11,309
|
|
Current portion of operating lease obligations
|
|
|
210,847
|
|
|
|
—
|
|
Total current liabilities
|
|
|
2,850,828
|
|
|
|
1,702,880
|
|
Notes payable, net of current portion
|
|
|
30,440
|
|
|
|
32,220
|
|
Finance lease obligations, net of current portion
|
|
|
31,968
|
|
|
|
32,747
|
|
Operating lease obligation, net of current portion
|
|
|
3,647,424
|
|
|
|
—
|
|
Deferred rent liability
|
|
|
—
|
|
|
|
119,187
|
|
Lease incentive obligation
|
|
|
—
|
|
|
|
362,088
|
|
Total liabilities
|
|
|
6,560,660
|
|
|
|
2,249,122
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently redeemable non-controlling interest
|
|
|
1,405,172
|
|
|
|
1,449,007
|
|
|
|
|
|
|
|
|
|
|
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;
|
|
|
|
|
|
|
|
|
25,473,115 (2019) and 25,473,115 (2018) shares issued, and
|
|
|
|
|
|
|
|
|
24,921,498 (2019) and 24,968,256 (2018) shares outstanding
|
|
|
25,473
|
|
|
|
25,473
|
|
Additional paid-in-capital
|
|
|
11,075,966
|
|
|
|
11,031,264
|
|
Treasury stock of 551,617 (2019) and 504,859 (2018) shares
|
|
|
(1,192,484
|
)
|
|
|
(1,109,061
|
)
|
Retained earnings
|
|
|
675,004
|
|
|
|
818,133
|
|
Total equity
|
|
|
10,583,959
|
|
|
|
10,765,809
|
|
Total liabilities and stockholders' equity
|
|
$
|
18,549,791
|
|
|
$
|
14,463,938
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Where Food Comes From, Inc.
Consolidated Statements of Operations
(Unaudited)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Verification and certification service revenue
|
|
$
|
2,811,694
|
|
|
$
|
2,796,194
|
|
Product sales
|
|
|
641,058
|
|
|
|
353,894
|
|
Software license, maintenance and support services revenue
|
|
|
295,029
|
|
|
|
287,444
|
|
Software-related consulting service revenue
|
|
|
206,759
|
|
|
|
183,270
|
|
Total revenues
|
|
|
3,954,540
|
|
|
|
3,620,802
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
Costs of verification and certification services
|
|
|
1,562,090
|
|
|
|
1,450,609
|
|
Costs of products
|
|
|
443,185
|
|
|
|
225,975
|
|
Costs of software license, maintenance and support services
|
|
|
154,003
|
|
|
|
137,434
|
|
Costs of software-related consulting services
|
|
|
129,536
|
|
|
|
75,461
|
|
Total costs of revenues
|
|
|
2,288,814
|
|
|
|
1,889,479
|
|
Gross profit
|
|
|
1,665,726
|
|
|
|
1,731,323
|
|
Selling, general and administrative expenses
|
|
|
1,966,339
|
|
|
|
1,704,474
|
|
(Loss)/income from operations
|
|
|
(300,613
|
)
|
|
|
26,849
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
Dividend income from Progressive Beef
|
|
|
(30,000
|
)
|
|
|
—
|
|
Other income, net
|
|
|
(2,696
|
)
|
|
|
(2,918
|
)
|
Gain on sale of assets
|
|
|
(1,000
|
)
|
|
|
—
|
|
Interest expense
|
|
|
3,047
|
|
|
|
1,079
|
|
(Loss)/income before income taxes
|
|
|
(269,964
|
)
|
|
|
28,688
|
|
Income tax (benefit)/expense
|
|
|
(83,000
|
)
|
|
|
8,000
|
|
Net (loss)/income
|
|
|
(186,964
|
)
|
|
|
20,688
|
|
Net loss attributable to non-controlling interest
|
|
|
43,835
|
|
|
|
14,796
|
|
Net (loss)/income attributable to Where Food Comes From, Inc.
|
|
$
|
(143,129
|
)
|
|
$
|
35,484
|
|
|
|
|
|
|
|
|
|
|
Per share - net (loss)/income attributable to Where Food Comes From, Inc.:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
*
|
|
|
$
|
*
|
|
Diluted
|
|
$
|
*
|
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,957,082
|
|
|
|
24,648,610
|
|
Diluted
|
|
|
24,957,082
|
|
|
|
24,845,002
|
|
* 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 Cash Flows
(Unaudited)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(186,964
|
)
|
|
$
|
20,688
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
260,121
|
|
|
|
272,500
|
|
Lease incentive obligation
|
|
|
—
|
|
|
|
(2,709
|
)
|
Gain on sale of assets
|
|
|
(1,000
|
)
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
44,702
|
|
|
|
37,902
|
|
Deferred tax benefit
|
|
|
(28,000
|
)
|
|
|
(46,000
|
)
|
Bad debt expense
|
|
|
—
|
|
|
|
8,900
|
|
Changes in operating assets and liabilities, net of effect from acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
199,396
|
|
|
|
366,515
|
|
Short-term investments
|
|
|
(2,156
|
)
|
|
|
(1,916
|
)
|
Prepaid expenses and other assets
|
|
|
10,805
|
|
|
|
(71,951
|
)
|
Accounts payable
|
|
|
157,637
|
|
|
|
1,713
|
|
Accrued expenses and other current liabilities
|
|
|
148,316
|
|
|
|
111,671
|
|
Customer deposits and deferred revenue
|
|
|
635,028
|
|
|
|
617,352
|
|
Right of use assets and liabilities, net
|
|
|
14,062
|
|
|
|
—
|
|
Net cash provided by operating activities
|
|
|
1,251,947
|
|
|
|
1,314,665
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets
|
|
|
1,000
|
|
|
|
—
|
|
Purchases of property, equipment and software development costs
|
|
|
(196,373
|
)
|
|
|
(152,949
|
)
|
Purchases of other long-term assets
|
|
|
—
|
|
|
|
(1,350
|
)
|
Net cash used in investing activities
|
|
|
(195,373
|
)
|
|
|
(154,299
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Repayments of notes payable
|
|
|
(1,654
|
)
|
|
|
(2,312
|
)
|
Repayments of finance lease obligations
|
|
|
(1,411
|
)
|
|
|
(1,862
|
)
|
Stock repurchase under Stock Buyback Plan
|
|
|
(83,423
|
)
|
|
|
(39,648
|
)
|
Net cash used in financing activities
|
|
|
(86,488
|
)
|
|
|
(43,822
|
)
|
Net change in cash
|
|
|
970,086
|
|
|
|
1,116,544
|
|
Cash at beginning of period
|
|
|
1,482,391
|
|
|
|
2,705,778
|
|
Cash at end of period
|
|
$
|
2,452,477
|
|
|
$
|
3,822,322
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Where Food Comes From, Inc.
Consolidated Statement of Equity
(Unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
|
24,652,895
|
|
|
|
24,972
|
|
|
|
10,353,037
|
|
|
|
(724,530
|
)
|
|
|
17,397
|
|
|
$
|
9,670,876
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
37,902
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,902
|
|
Repurchase of common shares under Stock Buyback Plan
|
|
|
(15,680
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(39,648
|
)
|
|
|
—
|
|
|
|
(39,648
|
)
|
Net income attributable to Where Food Comes From, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,484
|
|
|
|
35,484
|
|
Balance at March 31, 2018
|
|
|
24,637,215
|
|
|
$
|
24,972
|
|
|
$
|
10,390,939
|
|
|
$
|
(764,178
|
)
|
|
$
|
52,881
|
|
|
$
|
9,704,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
24,968,256
|
|
|
$
|
25,473
|
|
|
$
|
11,031,264
|
|
|
$
|
(1,109,061
|
)
|
|
$
|
818,133
|
|
|
$
|
10,765,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
44,702
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,702
|
|
Repurchase of common shares under Stock Buyback Plan
|
|
|
(46,758
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(83,423
|
)
|
|
|
—
|
|
|
|
(83,423
|
)
|
Net loss attributable to Where Food Comes From, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(143,129
|
)
|
|
|
(143,129
|
)
|
Balance at March 31, 2019
|
|
|
24,921,498
|
|
|
$
|
25,473
|
|
|
$
|
11,075,966
|
|
|
$
|
(1,192,484
|
)
|
|
$
|
675,004
|
|
|
$
|
10,583,959
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1 – The Company and Basis of
Presentation
Business Overview
Where Food Comes From, Inc. is a Colorado
corporation based in Castle Rock, Colorado (“WFCF”, the “Company,” “our,” “we,”
or “us”). 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, Sow Organic and JVF Consulting (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, 2018,
included in our Form 10-K filed on March 29, 2019. 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 ended March 31, 2019 are not necessarily indicative of the results to be expected for any other
interim period of any future year.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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 February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842), which requires lessees to recognize a right-of-use asset and a lease liability for all leases that are
not short-term in nature. Accounting for finance leases is substantially unchanged. Topic 842 is effective for fiscal years beginning
after December 15, 2018. We adopted the new lease standard as of January 1, 2019 using a modified retrospective transition. Under
the effective date method, financial results reported in periods prior to 2019 are unchanged. We also elected the package of practical
expedients, which among other things, does not require reassessment of lease classification.
To assist in quantifying the impact on
our consolidated financial statements and supplementing our existing disclosures, we designed internal controls over the adoption
and implemented a software solution to manage and account for our leases. The adoption had a significant impact on our consolidated
balance sheet due to the recognition of approximately $3.9 million of operating lease liabilities with corresponding right-of-use
(“ROU”) assets for operating leases of $3.44 million as of January 1, 2019. The difference between the lease liability
and the ROU asset primarily represents the existing deferred rent liabilities balances before adoption, resulting from historical
straight-lining of operating leases. Balances for deferred rent and lease incentive obligation, which were historically presented
separately, were cleared to zero and reclassed to our operating ROU assets.
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. The Company adopted the new guidance on January 1, 2019 and it did not have any effect on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In June
2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses
on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current
U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance
will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference
between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect
over the instrument’s contractual life.
The Company is required to adopt the new standard in 2020.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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.
In August
2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 8420): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement.” ASU 2018-13 modifies the requirements associated with the hierarchy associated
with Level 1, Level 2 and Level 3 fair value measurements. The provisions of this ASU are effective for reporting periods after
December 15, 2019; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated
financial statements.
In August
2018 the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software - Customer’s Accounting for Implementation
Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends the requirements for capitalizing implementation
costs incurred in a hosting arrangement that is a service contract to align with the requirements for capitalizing implementation
costs incurred to develop or obtain internal-use software. The update is effective for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the
impact on our consolidated financial statements and the timing of adoption of this update.
Note 2 – Business Acquisitions
Sow Organic Acquisition
On May 16, 2018, we acquired substantially
all of the assets of Sow Organic for $450,000 in cash and 217,654 shares of common stock of WFCF valued at approximately $433,100.
We believe the transaction further diversifies our offerings by adding complementary solutions and services available to new and
existing customers. 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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
We believe the impacts on proforma revenue
and earnings are immaterial. The following table summarizes the final fair values assigned to the assets and liabilities acquired
in addition to the excess of the purchase price over the net assets acquired at the acquisition date.
Sow Organic, LLC
:
|
|
May 16, 2018
|
|
Software acquired
|
|
$
|
156,000
|
|
Identifiable intangible assets:
|
|
|
—
|
|
Tradenames and trademarks
|
|
|
48,000
|
|
Non-compete agreements
|
|
|
84,000
|
|
Customer relationships
|
|
|
162,000
|
|
Goodwill
|
|
|
433,131
|
|
Total consideration
|
|
$
|
883,131
|
|
Excess attributable to goodwill reflects
the excess over the identifiable intangible assets acquired based on the final 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.
JVF Consulting Acquisition
On August 30, 2018, we acquired substantially
all of the assets of JVF Consulting, LLC (“Seller” or “JVF”) for $500,000 in cash and 158,437 shares of
common stock of WFCF valued at approximately $315,300. We believe the transaction adds value to certain of our existing software
solutions which are based on intellectual property built and owned by the Seller. JVF is currently the largest technology provider
to our SureHarvest division. With this acquisition, WFCF controls the intellectual property associated with its current Software
as a Service (SaaS) offerings. Additionally, WFCF employed three of the Seller’s employees who enhance our ability to address
new markets and services with our SaaS Solutions.
We believe the impacts on proforma revenue
and earnings are immaterial. The following table summarizes the final fair values assigned to the assets and liabilities acquired
in addition to the excess of the purchase price over the net assets acquired at the acquisition date.
JVF Consulting, LLC
:
|
|
August 30, 2018
|
|
Software acquired
|
|
$
|
207,000
|
|
Identifiable intangible assets:
|
|
|
|
|
Tradenames and trademarks
|
|
|
87,000
|
|
Non-compete agreements
|
|
|
37,000
|
|
Customer relationships
|
|
|
104,000
|
|
Goodwill
|
|
|
380,290
|
|
Total consideration
|
|
$
|
815,290
|
|
Excess attributable to goodwill reflects
the excess over the identifiable intangible assets acquired based on the final 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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 3 – Basic and Diluted Net
Income per Share
Basic net income per share was computed
by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period.
Diluted net income per share is based on the assumption that all dilutive convertible shares and stock options were converted or
exercised. Dilution is computed by applying the treasury stock method. Under this method, options and restricted stock awards are
assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby
were used to purchase common stock at the average market price during the period.
The following is a reconciliation of the
share data used in the basic and diluted income per share computations:
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Basic:
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
24,957,082
|
|
|
|
24,648,610
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
24,957,082
|
|
|
|
24,648,610
|
|
Weighted average effects of dilutive securities
|
|
|
—
|
|
|
|
196,392
|
|
Total
|
|
|
24,957,082
|
|
|
|
24,845,002
|
|
|
|
|
|
|
|
|
|
|
Antidilutive securities:
|
|
|
265,700
|
|
|
|
124,000
|
|
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 – Investment in Progressive Beef, LLC
On
August
9, 2018, the Company purchased a ten percent membership interest in Progressive Beef, LLC (“Progressive Beef”)
for an aggregate purchase price of approximately $991,000. The purchase price was 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 primary certifier for Progressive Beef. For the first quarter ended
March 31, 2019, the Company received dividend income from Progressive Beef of $30,000 representing a distribution of their
earnings. The income is reflected within the “other (expense) income” section of the Company’s Consolidated
Statement of Income for the quarter ended March 31, 2019. The investment is accounted for as a financial instrument under ASC 321
and the Company has elected to apply the practical expedient to value the investment at cost minus impairment, if any, plus
or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of
the same issuer. The Company completed a qualitative assessment and determined that there were no impairment indicators as of
March 31, 2019.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 5 – Intangible and Other Assets
The following table summarizes our intangible
and other assets:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Tradenames and trademarks
|
|
$
|
417,307
|
|
|
$
|
417,307
|
|
Accreditations
|
|
|
85,395
|
|
|
|
85,395
|
|
Customer relationships
|
|
|
3,350,551
|
|
|
|
3,350,551
|
|
Patents
|
|
|
970,100
|
|
|
|
970,100
|
|
Non-compete agreements
|
|
|
121,000
|
|
|
|
121,000
|
|
|
|
|
4,944,353
|
|
|
|
4,944,353
|
|
Less accumulated amortization
|
|
|
1,731,679
|
|
|
|
1,577,558
|
|
|
|
|
3,212,674
|
|
|
|
3,366,795
|
|
Tradenames/trademarks (not subject to amortization)
|
|
|
465,000
|
|
|
|
465,000
|
|
|
|
|
3,677,674
|
|
|
|
3,831,795
|
|
Other assets
|
|
|
20,326
|
|
|
|
20,326
|
|
Intangible and other assets:
|
|
$
|
3,698,000
|
|
|
$
|
3,852,121
|
|
Note 6 – Accrued Expenses and Other Current Liabilities
The following table summarizes
our accrued expenses and other current liabilities as of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Income and sales taxes payable
|
|
$
|
25,800
|
|
|
$
|
19,978
|
|
Payroll related accruals
|
|
|
224,572
|
|
|
|
147,798
|
|
Professional fees and other expenses
|
|
|
317,563
|
|
|
|
251,843
|
|
|
|
$
|
567,935
|
|
|
$
|
419,619
|
|
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 7 – Notes Payable
Notes
Payable consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Vehicle note
|
|
$
|
40,739
|
|
|
$
|
42,393
|
|
Less current portion of notes payable and other long-term debt
|
|
|
(10,299
|
)
|
|
|
(10,173
|
)
|
Notes payable and other long-term debt
|
|
$
|
30,440
|
|
|
$
|
32,220
|
|
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 $75,080 in working
capital. The interest rate is at the Wall Street Journal prime rate plus 1.50% and is adjusted daily. Principal and interest are
payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance
due on
maturity
. As of March 31, 2019 and December
31, 2018, the effective interest rate was 7.0%. The LOC is collateralized by all the business assets of ICS. As of March 31, 2019,
and December 31, 2018, there were no amounts outstanding under this LOC.
Note 8 – 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 March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
$
|
38,744
|
|
|
$
|
16,431
|
|
Restricted stock awards
|
|
|
5,958
|
|
|
|
21,471
|
|
Total
|
|
$
|
44,702
|
|
|
$
|
37,902
|
|
During first quarter 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. No awards were granted during the first quarter 2019.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
The Company estimated the fair value of
stock options using the Black-Scholes-Merton option pricing model with the following assumptions:
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Number of options awarded to purchase common shares
|
|
|
None
|
|
|
|
25,000
|
|
Risk-free interest rate
|
|
|
N/A
|
|
|
|
2.60
|
%
|
Expected volatility
|
|
|
N/A
|
|
|
|
154.3
|
%
|
Assumed dividend yield
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected life of options from the date of grant
|
|
|
N/A
|
|
|
|
9.8 years
|
|
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
|
|
2019 (remaining nine months)
|
|
|
|
118,789
|
|
|
|
9,716
|
|
|
|
128,505
|
|
2020
|
|
|
|
110,072
|
|
|
|
4,251
|
|
|
|
114,323
|
|
2021
|
|
|
|
66,770
|
|
|
|
706
|
|
|
|
67,476
|
|
|
|
|
$
|
295,631
|
|
|
$
|
14,673
|
|
|
$
|
310,304
|
|
Equity Incentive Plans
Our 2016 Equity Incentive Plan (the “Equity
Incentive Plan”) provides for the issuance of stock-based awards to employees, officers, directors and consultants. The Plan
permits the granting of stock awards and stock options. The vesting of stock-based awards is generally subject to the passage of
time and continued employment through the vesting period.
Stock Option Activity
Stock option activity under our Equity
Incentive Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted avg.
|
|
|
|
|
|
|
|
|
|
|
Weighted avg.
|
|
|
Weighted avg.
|
|
|
remaining
|
|
|
|
|
|
|
|
Number of
|
|
|
exercise price
|
|
|
grant date fair
|
|
|
contractual life
|
|
|
Aggregate
|
|
|
|
|
awards
|
|
|
per share
|
|
|
value per share
|
|
|
(in years)
|
|
|
intrinsic value
|
|
Outstanding, December 31, 2018
|
|
|
|
434,451
|
|
|
$
|
1.49
|
|
|
$
|
1.47
|
|
|
|
6.91
|
|
|
$
|
230,039
|
|
Granted
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired/Forfeited
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding, March 31, 2019
|
|
|
|
434,451
|
|
|
$
|
1.49
|
|
|
$
|
1.47
|
|
|
|
6.67
|
|
|
$
|
226,039
|
|
Exercisable, March 31, 2019
|
|
|
|
235,710
|
|
|
$
|
1.16
|
|
|
$
|
1.16
|
|
|
|
4.52
|
|
|
$
|
197,593
|
|
Unvested, March 31, 2019
|
|
|
|
198,741
|
|
|
$
|
1.89
|
|
|
$
|
1.83
|
|
|
|
9.21
|
|
|
$
|
28,447
|
|
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
The aggregate intrinsic value represents
the total pre-tax intrinsic value (the aggregate difference between the closing price of our common stock on March 31, 2019 and
the exercise price for the in-the-money options) that would have been received by the option holders if all the in-the-money options
had been exercised on March 31, 2019.
Restricted Stock Activity
Restricted stock activity under our Equity Incentive Plan is
summarized as follows:
|
|
|
|
|
Weighted avg.
|
|
|
|
Number of
|
|
|
grant date
|
|
|
|
options
|
|
|
fair value
|
|
Non-vested restricted shares, December 31, 2018
|
|
|
30,000
|
|
|
$
|
2.38
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
Vested
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
Non-vested restricted shares, March 31, 2019
|
|
|
30,000
|
|
|
$
|
2.38
|
|
Note 9 – Income Taxes
Deferred tax assets and liabilities have
been determined based upon the differences between the financial statement amounts and the tax bases of assets and liabilities
as measured by enacted tax rates expected to be in effect when these differences are expected to reverse. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
The 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 Company is not providing for income taxes for the 40%
interest owned by unrelated members of SureHarvest.
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 March 31, 2019 we recorded an income tax benefit of $83,000
compared to income tax expense of $8,000 for the 2018 period.
Note 10 – 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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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 the 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 customers 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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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 the 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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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 the 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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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 March 31, 2019
|
|
Three months ended March 31, 2018
|
|
|
|
Verification
and
Certification
Segment
|
|
Software
Sales and
Related
Consulting
Segment
|
|
Eliminations
and Other
|
|
Consolidated
|
|
Verification
and
Certification
Segment
|
|
Software
Sales and
Related
Consulting
Segment
|
|
Eliminations
and Other
|
|
Consolidated
|
|
Verification and certification service revenue
|
|
$
|
2,811,694
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,811,694
|
|
|
$
|
2,796,194
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,796,194
|
|
Product sales
|
|
|
641,058
|
|
|
|
—
|
|
|
|
—
|
|
|
|
641,058
|
|
|
|
353,894
|
|
|
|
—
|
|
|
|
—
|
|
|
|
353,894
|
|
Software license, maintenance and support services revenue
|
|
|
—
|
|
|
|
343,566
|
|
|
|
(48,537
|
)
|
|
|
295,029
|
|
|
|
—
|
|
|
|
287,444
|
|
|
|
—
|
|
|
|
287,444
|
|
Software-related consulting service revenue
|
|
|
—
|
|
|
|
221,223
|
|
|
|
(14,464
|
)
|
|
|
206,759
|
|
|
|
—
|
|
|
|
183,270
|
|
|
|
—
|
|
|
|
183,270
|
|
Total revenues
|
|
$
|
3,452,752
|
|
|
$
|
564,789
|
|
|
$
|
(63,001
|
)
|
|
$
|
3,954,540
|
|
|
$
|
3,150,088
|
|
|
$
|
470,714
|
|
|
$
|
—
|
|
|
$
|
3,620,802
|
|
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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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 March 31, 2019, and December 31,
2018, accounts receivable from contracts with customers, net of allowance for doubtful accounts, were approximately $2,005,800
and $2,205,200, respectively.
As of March 31, 2019, and December 31,
2018, deposits and deferred revenue from contracts with customers were approximately $1,362,900 and $727,900, respectively. The
balance of the contract liabilities at March 31, 2019 and December 31, 2018 are expected to be recognized as revenue within one
year or less of the invoice date.
Costs to fulfill a contract
Prior to August 2018, we incurred a fixed
cost, payable to JVF Consulting, LLC, a third-party provider, to perform set-up activities for new (or first-year) customers that
contract for our software subscription and hosting services. As previously discussed in Note 2, on August 30, 2018, we acquired
JVF Consulting, which included three key employees. We concluded that those set-up activities performed by JVF did 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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
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 March 31, 2019 and
December 31, 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 first
quarter ended March 31, 2019 or the year-ended December 31, 2018.
In addition, amortization of capitalized
set-up costs for the first quarter ended March 31, 2019 or the year ended December 31, 2018 was not material, and no impairment
loss was incurred related to capitalized set-up costs.
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 11 – Leases
We
adopted ASU 2016-02: Leases (Topic 842) as of January 1, 2019. We determine if an arrangement is a lease at inception.
Operating leases are included in operating lease right-of-use (ROU) assets, current operating lease liabilities and
noncurrent operating lease liabilities in our consolidated balance sheet. Finance leases are included in property and
equipment, current finance lease obligations and long-term finance lease obligations in our
consolidated balance sheet.
ROU assets
represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated
present value of lease payments over the lease term.
As the discount rates in the Company's lease are not implicit, the Company estimated the incremental borrowing rate based on the rate of interest the Company would have to pay to borrow a similar amount on a collateralized basis over a similar term.
Our lease
term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of
12 months or less are not recorded on the balance sheet. Our lease agreements do not contain any residual value guarantees.
We have
operating and finance leases for corporate offices, other regional offices, and certain equipment. Our leases have remaining lease
terms of 1 year to 15 years, some of which include multiple options to extend the leases for up to 5 years each.
Where Food Comes From, Inc.
Notes to the Consolidated Financial
Statements
(Unaudited)
The components of lease expense
were as follows:
|
|
Three months ended
|
|
|
|
March 31, 2019
|
|
Operating lease cost
|
|
$
|
119,697
|
|
Finance lease cost
|
|
|
|
|
Amortization of ROU assets
|
|
$
|
2,267
|
|
Interest on finance lease obligations
|
|
$
|
2,006
|
|
Total net lease cost
|
|
$
|
123,970
|
|
Included
in the table above, is $92,200 of operating lease cost for our corporate headquarters.
This space is being leased from The
Move, LLC. Our CEO and President, each a related party to WFCF, have a 24.3% jointly-held ownership interest in The Move, LLC.
Rent expense
for the quarter ended March 31, 2018 was $126,200.
Supplemental balance sheet
information related to leases was as follows:
|
|
March 31, 2019
|
|
Operating leases:
|
|
Related Party
|
|
|
Other
|
|
|
Total
|
|
Operating lease ROU assets
|
|
$
|
3,059,939
|
|
|
$
|
299,871
|
|
|
$
|
3,359,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
144,078
|
|
|
$
|
66,769
|
|
|
$
|
210,847
|
|
Noncurrent operating lease liabilities
|
|
|
3,379,897
|
|
|
|
267,527
|
|
|
|
3,647,424
|
|
Total operating lease liabilities
|
|
$
|
3,523,975
|
|
|
$
|
334,296
|
|
|
$
|
3,858,271
|
|
Finance leases:
|
|
March 31, 2019
|
|
Property and equipment, at cost
|
|
$
|
47,367
|
|
Accumulated amortization
|
|
|
(15,794
|
)
|
Property and equipment, net
|
|
$
|
31,573
|
|
|
|
|
|
|
Current obligations of finance leases
|
|
$
|
7,303
|
|
Finance leases, net of current obligations
|
|
|
31,968
|
|
Total finance lease liabilities
|
|
$
|
39,271
|
|
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
|
|
|
Operating leases
|
|
|
11.7
|
|
Finance leases
|
|
|
3.6
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
|
5.8
|
%
|
Finance leases
|
|
|
20.9
|
%
|
Where Food Comes From, Inc.
Notes to the Consolidated Financial
Statements
(Unaudited)
Supplemental cash flow and
other information related to leases was as follows:
|
|
Three months ended
|
|
|
|
March 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
100,110
|
|
Operating cash flows from finance leases
|
|
$
|
2,006
|
|
Financing cash flows from finance leases
|
|
$
|
1,411
|
|
Maturities of lease liabilities
were as follows:
Years Ending December 31st,
|
|
Operating Leases
|
|
|
Finance Leases
|
|
2019 (remaining nine months)
|
|
$
|
321,306
|
|
|
$
|
10,861
|
|
2020
|
|
|
422,164
|
|
|
|
15,705
|
|
2021
|
|
|
434,829
|
|
|
|
14,143
|
|
2022
|
|
|
447,874
|
|
|
|
10,984
|
|
2023
|
|
|
461,310
|
|
|
|
5,609
|
|
Thereafter
|
|
|
3,308,155
|
|
|
|
—
|
|
Total lease payments
|
|
|
5,395,638
|
|
|
|
57,302
|
|
Less amount representing interest
|
|
|
(1,537,637
|
)
|
|
|
(18,031
|
)
|
Total lease obligations
|
|
|
3,858,271
|
|
|
|
39,271
|
|
Less current portion
|
|
|
(210,847
|
)
|
|
|
(7,303
|
)
|
Long-term lease obligations
|
|
$
|
3,647,424
|
|
|
$
|
31,968
|
|
As previously
reported in the 2018 Form 10-K under ASC Topic 840, future minimum lease payments under the Company’s operating lease agreements
that had initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2018 were as follows:
Years ended December 31st
:
|
|
Total
|
|
2019
|
|
$
|
420,370
|
|
2020
|
|
|
421,590
|
|
2021
|
|
|
432,079
|
|
2022
|
|
|
447,264
|
|
2023
|
|
|
460,682
|
|
Thereafter
|
|
|
3,327,705
|
|
Total lease commitments
|
|
$
|
5,509,690
|
|
Note 12 – Commitments and Contingencies
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
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”). We purchased the business assets of the Seller for total consideration of approximately $2.66 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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial
Statements
(Unaudited)
Following the thirty-six-month anniversary
of the effective date of the SureHarvest Purchase Agreement, the Company shall have the option, but not the obligation, to purchase
all the units (the 40% interest) of SureHarvest held by the Seller, and the Seller shall have the option, but not the obligation,
to require the Company to purchase all the units of SureHarvest held by the Seller. The purchase price for the units shall be equal
to the amount the selling holders of the units would be entitled to receive upon a liquidation of SureHarvest assuming all of the
assets of SureHarvest are sold for a purchase price equal to the product of eight and half times trailing twelve-month earnings
before income taxes, depreciation and amortization, as defined, subject to an $8 million ceiling.
Because SureHarvest, Inc. at its option,
can require the Company to purchase its 40% interest in SureHarvest, the SureHarvest non-controlling interest meets the definition
of a contingently redeemable non-controlling interest. Redeemable non-controlling interests are presented at the greater of their
carrying amount or redemption value at the end of each reporting period and are shown as a separate caption between liabilities
and equity (mezzanine section) in the accompanying consolidated balance sheet.
The table below reflects the activity of
the contingently redeemable non-controlling interest:
Balance, December 31, 2018
|
|
$
|
1,449,007
|
|
Net loss attributable to non-controlling interest in SureHarvest for the year to date period ended March 31, 2019
|
|
|
(43,835
|
)
|
Balance, March 31, 2019
|
|
$
|
1,405,172
|
|
Note 13 – 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 reportable
segment. The operating segments included in the aggregated verification and certification segment include IMI Global, ICS, and
Validus. 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 also determined that it has
a software sales and related consulting reportable segment. SureHarvest, which includes Sow Organic and JVF Consulting, is the
sole operating segment. This segment includes software license, maintenance, support and software-related consulting service revenues.
The Company’s chief operating decision
maker (the Company’s CEO) allocates resources and assesses the performance of its operating segments. Segment 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.
Where Food Comes From, Inc.
Notes to the Consolidated Financial
Statements
(Unaudited)
The Company eliminates intercompany transfers
between segments for management reporting purposes. The following table shows information for reportable operating segments:
|
|
Three months ended
March 31, 2019
|
|
|
Three months ended
March 31, 2018
|
|
|
|
Verification and Certification
Segment
|
|
|
Software Sales and
Related Consulting Segment
|
|
|
Eliminations and Other
|
|
|
Consolidated Totals
|
|
|
Verification and Certification
Segment
|
|
|
Software Sales and
Related Consulting Segment
|
|
|
Eliminations and Other
|
|
|
Consolidated Totals
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible and other assets, net
|
|
$
|
1,424,275
|
|
|
$
|
2,273,725
|
|
|
$
|
—
|
|
|
$
|
3,698,000
|
|
|
$
|
1,591,786
|
|
|
$
|
2,166,298
|
|
|
$
|
—
|
|
|
$
|
3,758,084
|
|
Goodwill
|
|
|
1,133,122
|
|
|
|
2,010,612
|
|
|
|
—
|
|
|
|
3,143,734
|
|
|
|
1,279,762
|
|
|
|
1,372,488
|
|
|
|
—
|
|
|
|
2,652,250
|
|
Total assets
|
|
|
13,031,344
|
|
|
|
5,518,447
|
|
|
|
—
|
|
|
|
18,549,791
|
|
|
|
9,830,255
|
|
|
|
4,253,835
|
|
|
|
—
|
|
|
|
14,084,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Verification and certification service revenue
|
|
$
|
2,811,694
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,811,694
|
|
|
$
|
2,796,194
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,796,194
|
|
Product sales
|
|
|
641,058
|
|
|
|
—
|
|
|
|
—
|
|
|
|
641,058
|
|
|
|
353,894
|
|
|
|
—
|
|
|
|
—
|
|
|
|
353,894
|
|
Software license, maintenance
and support services revenue
|
|
|
—
|
|
|
|
343,566
|
|
|
|
(48,537
|
)
|
|
|
295,029
|
|
|
|
—
|
|
|
|
287,444
|
|
|
|
—
|
|
|
|
287,444
|
|
Software-related consulting
service revenue
|
|
|
—
|
|
|
|
221,223
|
|
|
|
(14,464
|
)
|
|
|
206,759
|
|
|
|
—
|
|
|
|
183,270
|
|
|
|
—
|
|
|
|
183,270
|
|
Total revenues
|
|
$
|
3,452,752
|
|
|
$
|
564,789
|
|
|
$
|
(63,001
|
)
|
|
$
|
3,954,540
|
|
|
$
|
3,150,088
|
|
|
$
|
470,714
|
|
|
$
|
—
|
|
|
$
|
3,620,802
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of verification and certification services
|
|
|
1,594,763
|
|
|
|
—
|
|
|
|
(32,673
|
)
|
|
|
1,562,090
|
|
|
|
1,450,609
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,450,609
|
|
Costs of products
|
|
|
443,185
|
|
|
|
—
|
|
|
|
—
|
|
|
|
443,185
|
|
|
|
225,975
|
|
|
|
—
|
|
|
|
—
|
|
|
|
225,975
|
|
Costs of software license, maintenance and support
services
|
|
|
—
|
|
|
|
154,003
|
|
|
|
—
|
|
|
|
154,003
|
|
|
|
—
|
|
|
|
137,434
|
|
|
|
—
|
|
|
|
137,434
|
|
Costs of software-related
consulting services
|
|
|
—
|
|
|
|
129,536
|
|
|
|
—
|
|
|
|
129,536
|
|
|
|
—
|
|
|
|
75,461
|
|
|
|
—
|
|
|
|
75,461
|
|
Total costs of revenues
|
|
|
2,037,948
|
|
|
|
283,539
|
|
|
|
(32,673
|
)
|
|
|
2,288,814
|
|
|
|
1,676,584
|
|
|
|
212,895
|
|
|
|
—
|
|
|
|
1,889,479
|
|
Gross profit
|
|
|
1,414,804
|
|
|
|
281,250
|
|
|
|
(30,328
|
)
|
|
|
1,665,726
|
|
|
|
1,473,504
|
|
|
|
257,819
|
|
|
|
—
|
|
|
|
1,731,323
|
|
Depreciation & amortization
|
|
|
81,938
|
|
|
|
178,183
|
|
|
|
—
|
|
|
|
260,121
|
|
|
|
77,997
|
|
|
|
138,046
|
|
|
|
—
|
|
|
|
216,043
|
|
Other
operating expenses
|
|
|
1,510,592
|
|
|
|
225,954
|
|
|
|
(30,328
|
)
|
|
|
1,706,218
|
|
|
|
1,332,397
|
|
|
|
156,034
|
|
|
|
—
|
|
|
|
1,488,431
|
|
Segment operating (loss)/income
|
|
$
|
(177,726
|
)
|
|
$
|
(122,887
|
)
|
|
$
|
—
|
|
|
$
|
(300,613
|
)
|
|
$
|
63,110
|
|
|
$
|
(36,261
|
)
|
|
$
|
—
|
|
|
$
|
26,849
|
|
Other items to reconcile
segment operating income (loss) to net income attributable to WFCF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income)
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,649
|
)
|
|
|
(30,649
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,839
|
)
|
|
|
(1,839
|
)
|
Income tax (benefit)/expense
|
|
|
—
|
|
|
|
—
|
|
|
|
(83,000
|
)
|
|
|
(83,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
8,000
|
|
|
|
8,000
|
|
Net loss attributable to
non-controlling interest
|
|
|
—
|
|
|
|
43,835
|
|
|
|
—
|
|
|
|
43,835
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,796
|
|
|
|
14,796
|
|
Net (loss)/income attributable to WFCF
|
|
$
|
(177,726
|
)
|
|
$
|
(79,052
|
)
|
|
$
|
113,649
|
|
|
$
|
(143,129
|
)
|
|
$
|
63,110
|
|
|
$
|
(36,261
|
)
|
|
$
|
8,635
|
|
|
$
|
35,484
|
|
Note 14 – Supplemental Cash Flow Information
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash paid during the year:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
3,047
|
|
|
$
|
1,079
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
7,283
|
|
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, 2018. 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,
consumer brands 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, 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.
Through
our more recent acquisitions, including SureHarvest Services LLC; Sow Organic, LLC; and JVF Consulting, LLC, we 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. 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 2006. 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) – 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 and
40 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
|
●
|
Per
the August 2017 edition of Global Organic Food Market produced by TechSci Research, the
global organic food market stood at $110.25 billion in 2016 and is projected to grow
at a compounded annual growth rate of 16.15%, in value terms, during 2017 – 2022,
to reach $262.85 billion by 2022. Growing awareness regarding health benefits of organic
food consumption, rising per capita spending on organic food products and increasing
health concerns due to the growing number of chemical poisoning cases are expected to
drive global organic food market in the coming years. In addition, continuing product
innovations and aggressive marketing strategies adopted by major players and online retailers
would positively influence the global organic food market during forecast period.
|
|
●
|
Per
the 2018 U.S. Grocery Shopper Trends produced by the Food Marketing Institute, shoppers
evaluate a food retailer by how well it supports an overarching goal of eating well.
Eating well means meeting one’s needs, pleasures and values through food experiences
delivering health, taste or discovery and mindful connections. As consumers navigate
a landscape of increasing choice around their sources for food, shopping well has come
to mean more than just meeting eating needs within budget. Shopping well affords engagement
with food discovery and ethical sourcing, even as it prompts shoppers to evolve their
eating well aspirations. Shoppers continue to look “beyond the shelf” in
their purchase decisions. Grass-fed beef has seen more engagement since last year’s
study, as have local and fair-trade products, amidst an otherwise consistent picture
of sustainable and ethical shopper behaviors. Shoppers also report a higher reliance
on their food store to ensure food safety, with less reliance on the Food and Drug Administration.
Consumers believe it is especially important for retailers to provide detailed information
(transparency) about the products they sell.
|
Market
Driver #2 - Global competitiveness among retailers
|
●
|
Producers,
restaurant chains and retailers with dominant market shares and large buying power, like
Dannon, 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. Although animal disease traceability does not prevent disease, an
efficient and accurate traceability system reduces the number of animals and response
time involved in a disease investigation.
|
|
●
|
Cattle
export verification (“EV”) requirements to China include source and age verification
with the use of a program compliant ear 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 seek non-hormone treated cattle and/or verified natural cattle to ensure continued
market access. China is the world's second largest buyer of beef.
|
|
●
|
The
development of the U.S. Hemp Authority Certified program demonstrates commitment toward
high standards and transparency with hemp cultivation. The 2014 Farm Bill allowed farmers
to start pilot programs for hemp alongside their agricultural programs. As of 2018, a
new bill allows farmers to grow hemp with all the protections traditional farming receives.
This Farm Bill allows farmers to legally grow hemp, which means more CBD products on
the shelves. Through this bill, hemp will no longer be considered a controlled substance
but rather take its place alongside all other types of traditional farming.
|
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
March 31, 2019, we had cash, cash equivalents and certificates of deposits (classified as short-term and long-term investments)
of approximately $2,953,200 compared to approximately $1,981,000 at December 31, 2018. Our working capital at March 31, 2019 was
approximately $2,282,500 compared to $2,669,700 at December 31, 2018.
Net
cash provided by operating activities for the three months ended March 31, 2019 was approximately $1,251,900 compared to net cash
provided of $1,314,700 during the same period in 2018. 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 three months ended March 31, 2019, was $195,400 compared to $154,300 used in the 2018
period. Net cash used in the 2019 and 2018 period was primarily attributable to routine purchases of property, equipment and software
development costs.
Net
cash used in financing activities for the three months ended March 31, 2019, was $86,500 compared to $43,800 used in the 2018
period. Net cash used in both the 2019 and 2018 periods was primarily due to the repurchase of common shares under the Stock Buyback
Plan.
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 annual
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.
Additionally, 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.
Our
plan for continued growth is primarily based upon continued expansion of verification bundling opportunities, as well as acquisitions
in national and international markets. We believe that there are significant growth opportunities available to us because often
the only way to differentiate a product or brand, or overcome import/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 March 31, 2019, and December 31, 2018, the effective interest rate was 7.0%. The LOC is collateralized
by all the business assets of International Certification Services, Inc. (“ICS”). As of March 31, 2019, and December
31, 2018, there were no amounts outstanding under this LOC.
Off-Balance
Sheet Arrangements
As
of March 31, 2019, we had no off-balance sheet arrangements of any type.
RESULTS
OF OPERATIONS
Three
months ended March 31, 2019 compared to the same period in fiscal year 2018
The
following table shows information for reportable operating segments:
|
|
Three
months ended March 31, 2019
|
|
|
Three
months ended March 31, 2018
|
|
|
|
|
Verification
and Certification Segment
|
|
|
|
Software
Sales and Related Consulting Segment
|
|
|
|
Eliminations
and Other
|
|
|
|
Consolidated
Totals
|
|
|
|
Verification
and Certification Segment
|
|
|
|
Software
Sales and Related Consulting Segment
|
|
|
|
Eliminations
and Other
|
|
|
|
Consolidated
Totals
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
and other assets, net
|
|
$
|
1,424,275
|
|
|
$
|
2,273,725
|
|
|
$
|
—
|
|
|
$
|
3,698,000
|
|
|
$
|
1,591,786
|
|
|
$
|
2,166,298
|
|
|
$
|
—
|
|
|
$
|
3,758,084
|
|
Goodwill
|
|
|
1,133,122
|
|
|
|
2,010,612
|
|
|
|
—
|
|
|
|
3,143,734
|
|
|
|
1,279,762
|
|
|
|
1,372,488
|
|
|
|
—
|
|
|
|
2,652,250
|
|
Total
assets
|
|
|
13,031,344
|
|
|
|
5,518,447
|
|
|
|
—
|
|
|
|
18,549,791
|
|
|
|
9,830,255
|
|
|
|
4,253,835
|
|
|
|
—
|
|
|
|
14,084,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Verification
and certification service revenue
|
|
$
|
2,811,694
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,811,694
|
|
|
$
|
2,796,194
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,796,194
|
|
Product
sales
|
|
|
641,058
|
|
|
|
—
|
|
|
|
—
|
|
|
|
641,058
|
|
|
|
353,894
|
|
|
|
—
|
|
|
|
—
|
|
|
|
353,894
|
|
Software
license, maintenance and support services revenue
|
|
|
—
|
|
|
|
343,566
|
|
|
|
(48,537
|
)
|
|
|
295,029
|
|
|
|
—
|
|
|
|
287,444
|
|
|
|
—
|
|
|
|
287,444
|
|
Software-related
consulting service revenue
|
|
|
—
|
|
|
|
221,223
|
|
|
|
(14,464
|
)
|
|
|
206,759
|
|
|
|
—
|
|
|
|
183,270
|
|
|
|
—
|
|
|
|
183,270
|
|
Total
revenues
|
|
$
|
3,452,752
|
|
|
$
|
564,789
|
|
|
$
|
(63,001
|
)
|
|
$
|
3,954,540
|
|
|
$
|
3,150,088
|
|
|
$
|
470,714
|
|
|
$
|
—
|
|
|
$
|
3,620,802
|
|
Costs
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of verification and certification services
|
|
|
1,594,763
|
|
|
|
—
|
|
|
|
(32,673
|
)
|
|
|
1,562,090
|
|
|
|
1,450,609
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,450,609
|
|
Costs
of products
|
|
|
443,185
|
|
|
|
—
|
|
|
|
—
|
|
|
|
443,185
|
|
|
|
225,975
|
|
|
|
—
|
|
|
|
—
|
|
|
|
225,975
|
|
Costs
of software license, maintenance and support services
|
|
|
—
|
|
|
|
154,003
|
|
|
|
—
|
|
|
|
154,003
|
|
|
|
—
|
|
|
|
137,434
|
|
|
|
—
|
|
|
|
137,434
|
|
Costs
of software-related consulting services
|
|
|
—
|
|
|
|
129,536
|
|
|
|
—
|
|
|
|
129,536
|
|
|
|
—
|
|
|
|
75,461
|
|
|
|
—
|
|
|
|
75,461
|
|
Total
costs of revenues
|
|
|
2,037,948
|
|
|
|
283,539
|
|
|
|
(32,673
|
)
|
|
|
2,288,814
|
|
|
|
1,676,584
|
|
|
|
212,895
|
|
|
|
—
|
|
|
|
1,889,479
|
|
Gross
profit
|
|
|
1,414,804
|
|
|
|
281,250
|
|
|
|
(30,328
|
)
|
|
|
1,665,726
|
|
|
|
1,473,504
|
|
|
|
257,819
|
|
|
|
—
|
|
|
|
1,731,323
|
|
Depreciation
& amortization
|
|
|
81,938
|
|
|
|
178,183
|
|
|
|
—
|
|
|
|
260,121
|
|
|
|
77,997
|
|
|
|
138,046
|
|
|
|
—
|
|
|
|
216,043
|
|
Other
operating expenses
|
|
|
1,510,592
|
|
|
|
225,954
|
|
|
|
(30,328
|
)
|
|
|
1,706,218
|
|
|
|
1,332,397
|
|
|
|
156,034
|
|
|
|
—
|
|
|
|
1,488,431
|
|
Segment
operating (loss)/income
|
|
$
|
(177,726
|
)
|
|
$
|
(122,887
|
)
|
|
$
|
—
|
|
|
$
|
(300,613
|
)
|
|
$
|
63,110
|
|
|
$
|
(36,261
|
)
|
|
$
|
—
|
|
|
$
|
26,849
|
|
Other
items to reconcile segment operating income (loss) to net income attributable to WFCF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense (income)
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,649
|
)
|
|
|
(30,649
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,839
|
)
|
|
|
(1,839
|
)
|
Income
tax (benefit)/expense
|
|
|
—
|
|
|
|
—
|
|
|
|
(83,000
|
)
|
|
|
(83,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
8,000
|
|
|
|
8,000
|
|
Net
loss attributable to non-controlling interest
|
|
|
—
|
|
|
|
43,835
|
|
|
|
—
|
|
|
|
43,835
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,796
|
|
|
|
14,796
|
|
Net
(loss)/income attributable to WFCF
|
|
$
|
(177,726
|
)
|
|
$
|
(79,052
|
)
|
|
$
|
113,649
|
|
|
$
|
(143,129
|
)
|
|
$
|
63,110
|
|
|
$
|
(36,261
|
)
|
|
$
|
8,635
|
|
|
$
|
35,484
|
|
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 months ended March 31, 2019
increased approximately $15,500, or 0.6% compared to 2018. The increase is due to an increase in new verification customers, as
well as an increase in product offerings.
Our
product sales are an ancillary part of our verification and certification services and represent sales of cattle identification
ear tags. Product sales for the three months ended March 31, 2019 increased approximately $287,200, or 81.1% compared to the same
period in 2018. Overall, our product sales have increased primarily in response to the growth 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 months ended March 31, 2019 were approximately $2.04
million compared to approximately $1.68 million for the same period in 2018. Gross margin for the three months ended March 31,
2019 decreased to 41.0% compared to 46.8% in 2018 primarily due to competitive pricing offered to dairy calf ranches for significantly
higher purchase volumes of cattle identification ear tags. Our margins are generally impacted by various costs such as cost of
products, salaries and benefits, insurance, and taxes.
Other
operating expenses for the three months ended March 31, 2019 increased approximately 13.4% compared to the same period in 2018.
Overall, the increase in other operating expenses is due to increased marketing efforts, more specifically, we had a larger presence
at the 2019 Annual Cattle Industry Convention and Trade Show hosted by the National Cattlemen’s Beef Association. We also
incurred additional expenses due to a company-wide auditor conference we hosted at our corporate headquarters and increasing public
company compliance costs.
Software
Sales and Related Consulting Segment
Software
license, maintenance and support services revenue is a revenue stream specific to our acquisitions of SureHarvest, Sow Organic
and JVF Consulting. 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.
For the three months ended March 31, 2019, software license, maintenance and support services revenue increased approximately
19.5% over 2018 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. Software-related consulting service revenue for the three months ended March 31, 2019 increased approximately 20.7%
compared to the same period in 2018. 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 months ended March 31, 2019 were approximately
$283,500 compared to approximately $212,900 for the same period in 2018. Gross margin for the three months ended March 31, 2019
decreased to 49.8% compared to 54.8% for the same period in 2018. The decrease was predominately due to additional costs absorbed
from the Sow Organic and JVF acquisitions.
Other
operating expenses for the three months ended March 31, 2019 increased approximately 44.8% compared to the same period in 2018.
The increase is predominately due to additional fixed costs absorbed from the Sow Organic and JVF acquisitions.
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, at which time, we have seen solid improvements in revenues and/or costs.
Dividend
Income from Progressive Beef
On
August 9, 2018, the Company purchased a ten percent membership interest in Progressive Beef,
LLC (“Progressive Beef”) for an aggregate purchase price of approximately $991,000. For the three months ended March
31, 2019, the Company received dividend income of $30,000 from Progressive Beef representing a distribution of their earnings.
Income
Tax Expense
The
provision or benefit for income taxes is recorded at the end of each interim period based on the Company's best estimate of its
effective income tax rate expected to be applicable for the full fiscal year. For the three months ended March 31, 2019, we recorded
income tax benefit of $83,000 compared to income tax expense of $8,000 for the same period in 2018.
Net
Income and Per Share Information
As
a result of the foregoing, net loss attributable to WFCF shareholders for the three months ended March 31, 2019 was approximately
$143,100, or less than a penny per basic and diluted common share, compared to net income of $35,500, or less than a penny per
basic and diluted common share for the same period in 2018.
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 weaknesses 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.
Material
Weaknesses in Internal Control over Financial Reporting and Remediation Plan
In
connection with the audit of our consolidated financial statements for the year ended December 31, 2018, we and our independent
registered public accounting firm identified material weaknesses in our internal control over financial reporting. 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 our annual or interim financial statements will not be prevented or detected
on a timely basis.
|
●
|
As
a smaller reporting company, we have limited accounting and financial reporting personnel
and other resources with which to address our internal controls over financial reporting.
Due to limited accounting personnel, we did not apply the appropriate level of review,
oversight and segregation of duties to the accounting and financial reporting function.
This resulted in the identification of a material weakness in our internal control over
financial reporting. As of March 31, 2019, we have hired additional accounting personnel.
Additionally, we are in the process of implementing more robust review, supervision and
monitoring of the financial reporting process also intended to remediate the identified
material weakness.
|
|
●
|
The
Company lacked effective procedures for ensuring review and approval related to journal
entries. Due to the related risks associated with financial reporting, this deficiency
has been deemed an individual material weakness. As of March 31, 2019, we have strengthened
controls around the journal entry process, including limiting access and ensuring all
journal entries are reviewed and approved by appropriate personnel.
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We
also identified a material weakness related to general information technology controls
in the areas of user access to systems that support the Company’s financial reporting
processes. We did not implement a procedure or control to periodically review the access
granted in order to ensure that users of our information systems had the appropriate
access relative to the user’s job responsibilities. We did not restrict and maintain
network access accounts to only employees in the information technology department and
had no compensating controls. With the acquisition of JVF Consulting in August 2018,
we added 3 additional information technology professionals with knowledge of security,
networking and infrastructure. These individuals are committed to ensuring user access
is documented, properly approved and routinely monitored to determine appropriateness.
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The
material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and
management has concluded, through testing, that these controls are operating effectively. The Company expects that the remediation
of these material weaknesses will be completed prior to the end of fiscal year 2019.
In
light of these material weaknesses, in preparing our financial statements for the quarter ended March 31, 2019, we performed additional
analyses and procedures to ensure that our consolidated financial statements included in this Form 10-Q have been prepared in
accordance with U.S. GAAP. There have been no material misstatements identified in the financial statements as a result of these
deficiencies.
Management
believes that the foregoing efforts will effectively remediate the material weaknesses. As we continue to evaluate and work to
improve our internal control over financial reporting, management may determine to take additional measures to address the material
weaknesses or to modify the remediation plans described above.
Internal
Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule
13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements and can only provide reasonable assurance with respect to financial statement preparation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The
changes in our internal control over financial reporting that occurred prior to and during the quarter ended March 31, 2019, that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting are described
above under the heading “Material Weakness in Internal Control over Financial Reporting and Remediation Plan.”
With
the adoption of ASC Topic 842 as further described in Note 1 and Note 11 to the Consolidated Financial Statements in Part I of
this Quarterly Report, we designed internal controls over the adoption and implemented a software solution to manage and account
for our leases. This enabled us in quantifying the impact on our consolidated financial statements and supplementing our existing
disclosures.
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 2018
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 March 31, 2019,
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
Issuer
Purchases of Equity Securities
On
January 7, 2008, we announced our intention to buy back up to one million shares of our common stock from the open market (“Stock
Buyback Plan”). Our Stock Buyback Plan has been and will be used to return capital to shareholders and to minimize the dilutive
impact of stock options and other share-based awards. In the future, we may consider additional share repurchases under our plan
based on several factors, including our cash position, share price, operational liquidity, and planned investment and financing
needs.
Activity
for the quarter ended March 31, 2019 is as follows:
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Number
of Shares
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|
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Cost
of Shares
|
|
|
Average
Cost per Share
|
|
Shares
purchased - January 2019
|
|
|
|
8,401
|
|
|
$
|
16,406
|
|
|
$
|
1.95
|
|
Shares
purchased - February 2019
|
|
|
|
1,500
|
|
|
|
2,750
|
|
|
$
|
1.83
|
|
Shares
purchased - March 2019
|
|
|
|
36,857
|
|
|
|
64,267
|
|
|
$
|
1.74
|
|
Total
|
|
|
|
46,758
|
|
|
|
83,423
|
|
|
$
|
1.78
|
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ITEM
6. EXHIBITS
(a)
Exhibits
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:
May 14, 2019
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Where
Food Comes From, Inc.
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By:
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/s/
John K. Saunders
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Chief
Executive Officer
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By:
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/s/
Dannette Henning
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Chief
Financial Officer
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