Company Quick10K Filing
Where Food Comes From
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 25 $42
10-Q 2019-11-14 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
10-Q 2019-05-14 Quarter: 2019-03-31
10-K 2019-03-29 Annual: 2018-12-31
10-Q 2018-11-13 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-14 Quarter: 2018-03-31
10-K 2018-04-02 Annual: 2017-12-31
10-Q 2017-11-02 Quarter: 2017-09-30
10-Q 2017-08-03 Quarter: 2017-06-30
10-Q 2017-05-09 Quarter: 2017-03-31
10-K 2017-02-28 Annual: 2016-12-31
10-Q 2016-11-08 Quarter: 2016-09-30
10-Q 2016-08-11 Quarter: 2016-06-30
10-Q 2016-05-05 Quarter: 2016-03-31
10-K 2016-02-16 Annual: 2015-12-31
10-Q 2015-10-29 Quarter: 2015-09-30
10-Q 2015-07-30 Quarter: 2015-06-30
10-Q 2015-05-04 Quarter: 2015-03-31
10-K 2015-02-18 Annual: 2014-12-31
10-Q 2014-11-03 Quarter: 2014-09-30
10-Q 2014-08-04 Quarter: 2014-06-30
10-Q 2014-05-05 Quarter: 2014-03-31
10-K 2014-03-04 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-01 Quarter: 2013-06-30
10-Q 2013-05-01 Quarter: 2013-03-31
10-K 2013-03-06 Annual: 2012-12-31
10-Q 2012-11-05 Quarter: 2012-09-30
10-Q 2012-08-01 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-K 2012-03-26 Annual: 2011-12-31
8-K 2019-12-17 Other Events
8-K 2019-12-05 Accountant, Exhibits
8-K 2019-11-27 Officers
8-K 2019-11-14 Earnings, Exhibits
8-K 2019-08-13 Earnings, Exhibits
8-K 2019-05-13 Earnings, Shareholder Vote, Exhibits
8-K 2019-03-25 Earnings, Exhibits
8-K 2018-11-13 Earnings, Exhibits
8-K 2018-08-29 Enter Agreement, Sale of Shares
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-07-02 Accountant
8-K 2018-05-21 Accountant, Exhibits
8-K 2018-05-17 Shareholder Vote
8-K 2018-05-16 Other Events, Exhibits
8-K 2018-05-14 Earnings, Exhibits
8-K 2018-03-27 Earnings, Exhibits
8-K 2018-01-05 Other Events
WFCF 2019-09-30
Note 1 - The Company and Basis of Presentation
Note 2 - Business Acquisitions
Note 3 - Basic and Diluted Net Income per Share
Note 4 - Investment in Progressive Beef, Llc
Note 5 - Intangible and Other Assets
Note 6 - Accrued Expenses and Other Current Liabilities
Note 7 - Notes Payable
Note 8 - Stock-Based Compensation
Note 9 - Income Taxes
Note 10 - Revenue Recognition
Note 11 - Leases
Note 12 - Commitments and Contingencies
Note 13 - Segments
Note 14 - Supplemental Cash Flow Information
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

Where Food Comes From Earnings 2019-09-30

WFCF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
SLTK 44 2 7 2 1 -9 -9 43 26% -5.0 -491%
CCUR 43 62 10 3 0 2 2 37 0% 18.3 3%
CLSK 43 33 3 2 0 -52 -44 48 21% -1.1 -159%
SMRN 43 0 0 0 0 -0 -0 43 100% -97.1 -501%
MMND 42 2 0 5 5 1 1 42 88% 57.6 24%
WFCF 42 19 7 19 8 1 2 39 42% 16.2 4%
UGHL 42 0 1 0 0 -0 -0 42 20% -172.1 -308%
SHMP 41 3 5 0 0 -6 -6 40 -6.6 -209%
RXII 41 12 2 0 0 -7 -7 30 0% -4.1 -61%
PRSI 41 63 137 60 15 3 14 20 26% 1.5 5%

10-Q 1 wfcf-10q_093019.htm QUARTERLY REPORT

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended September 30, 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 6th Street, Suite 400 

Castle Rock, CO 80104 

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code: 

(303) 895-3002

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.         Yes ☒                   No ☐      

 

Indicate by check mark whether the registrant has submitted electronically 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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

  Large accelerated filer:   Accelerated filer:
  Non-accelerated filer:   Smaller reporting company:
  Emerging growth company      

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

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(s)

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 November 4, 2019, was 24,733,302. 

 

 

 

 

 

Where Food Comes From, Inc. 

Table of Contents 

September 30, 2019

 

Part 1 - Financial Information

 

 

 

Item 1.

Financial Statements

       3

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

      32

 

 

 

Item 4.

Controls and Procedures

      38

 

 

 

Part II - Other Information

 

 

 

Item 1.

Legal Proceedings

      40

 

 

 

Item 1A.

Risk Factors

      40

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

      40

 

 

 

Item 6.

Exhibits

      40

     

2 

 

 

Where Food Comes From, Inc.

Consolidated Balance Sheets

             

   September 30,   December 31, 
   2019   2018 
Assets  (Unaudited)     
Current assets:          
Cash and cash equivalents  $3,420,278   $1,482,391 
Accounts receivable, net of allowance   2,972,579    2,205,162 
Short-term investments in certificates of deposit   256,802    245,597 
Prepaid expenses and other current assets   205,841    439,424 
Total current assets   6,855,500    4,372,574 
Property and equipment, net   1,569,480    1,675,472 
Right-of-use assets   3,331,344     
Long-term investments in certificates of deposit       252,999 
Investment in Progressive Beef   991,115    991,115 
Intangible and other assets, net   3,397,797    3,852,121 
Goodwill   3,143,734    3,143,734 
Deferred tax assets, net   248,923    175,923 
Total assets  $19,537,893   $14,463,938 
           
Liabilities and Equity          
Current liabilities:          
Accounts payable  $1,014,904   $533,925 
Accrued expenses and other current liabilities   1,133,594    492,601 
Deferred revenue   951,826    654,872 
Current portion of notes payable   10,689    10,173 
Current portion of finance lease obligations   8,054    11,309 
Current portion of operating lease obligations   232,903     
Total current liabilities   3,351,970    1,702,880 
Notes payable, net of current portion   24,966    32,220 
Finance lease obligations, net of current portion   23,798    32,747 
Operating lease obligation, net of current portion   3,588,040     
Deferred rent liability       119,187 
Lease incentive obligation       362,088 
Total liabilities   6,988,774    2,249,122 
           
Commitments and contingencies          
           
Contingently redeemable non-controlling interest   1,267,178    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; 25,498,115 (2019) and 25,473,115 (2018) shares issued, and 24,784,625 (2019) and 24,968,256 (2018) shares outstanding   25,498    25,473 
Additional paid-in-capital   11,159,709    11,031,264 
Treasury stock of 713,490 (2019) and 504,859 (2018) shares   (1,480,281)   (1,109,061)
Retained earnings   1,577,015    818,133 
Total equity   11,281,941    10,765,809 
Total liabilities and stockholders' equity  $19,537,893   $14,463,938 

 

The accompanying notes are an integral part of these consolidated financial statements.

  

3 

 

 

Where Food Comes From, Inc.

 Consolidated Statements of Operations

(Unaudited)

 

   Three months ended September 30, 
   2019   2018 
Revenues:        
Verification and certification service revenue  $4,759,383   $3,906,996 
Product sales   1,086,272    783,303 
Software license, maintenance and support services revenue   226,816    208,541 
Software-related consulting service revenue   160,011    226,538 
Total revenues   6,232,482    5,125,378 
Costs of revenues:          
Costs of verification and certification services   2,673,200    2,098,462 
Costs of products   696,579    489,149 
Costs of software license, maintenance and support services   153,452    183,942 
Costs of software-related consulting services   122,224    117,303 
Total costs of revenues   3,645,455    2,888,856 
Gross profit   2,587,027    2,236,522 
Selling, general and administrative expenses   1,973,032    1,819,019 
Income from operations   613,995    417,503 
Other expense (income):          
Dividend income from Progressive Beef   (30,000)   (100,000)
Other income, net   (2,028)   (3,516)
Interest expense   2,459    1,361 
Income before income taxes   643,564    519,658 
Income tax expense   184,001    169,000 
Net income   459,563    350,658 
Net loss attributable to non-controlling interest   81,359    26,691 
Net income attributable to Where Food Comes From, Inc.  $540,922   $377,349 
           
Per share - net income attributable to Where Food Comes From, Inc.:          
Basic  $0.02   $0.02 
Diluted  $0.02   $0.02 
           
Weighted average number of common shares outstanding:          
Basic   24,791,534    24,900,919 
Diluted   24,971,625    25,074,477 

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

4 

 

 

Where Food Comes From, Inc.

 Consolidated Statements of Operations

(Unaudited)

 

   Nine months ended September 30, 
   2019   2018 
Revenues:        
Verification and certification service revenue  $11,314,318   $10,210,947 
Product sales   2,362,663    1,633,509 
Software license, maintenance and support services revenue   821,779    759,301 
Software-related consulting service revenue   576,521    580,731 
Total revenues   15,075,281    13,184,488 
Costs of revenues:          
Costs of verification and certification services   6,332,564    5,399,626 
Costs of products   1,537,837    1,035,094 
Costs of software license, maintenance and support services   469,065    489,887 
Costs of software-related consulting services   394,660    280,310 
Total costs of revenues   8,734,126    7,204,917 
Gross profit   6,341,155    5,979,571 
Selling, general and administrative expenses   5,624,559    5,293,961 
Income from operations   716,596    685,610 
Other expense (income):          
Dividend income from Progressive Beef   (90,000)   (100,000)
Other income, net   (7,195)   (11,556)
Gain on sale of assets   (1,000)    
Interest expense   7,648    3,755 
Income before income taxes   807,143    793,411 
Income tax expense   230,090    257,000 
Net income   577,053    536,411 
Net loss attributable to non-controlling interest   181,829    53,261 
Net income attributable to Where Food Comes From, Inc.  $758,882   $589,672 
           
Per share - net income attributable to Where Food Comes From, Inc.:          
Basic  $0.03   $0.02 
Diluted  $0.03   $0.02 
           
Weighted average number of common shares outstanding:          
Basic   24,879,556    24,756,262 
Diluted   25,062,349    24,938,699 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5 

 

 

Where Food Comes From, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine months ended September 30, 
   2019   2018 
         
Operating activities:          
Net income  $577,053   $536,411 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   802,416    742,780 
Lease incentive obligation       (8,127)
Gain on sale of assets   (1,000)    
Stock-based compensation expense   128,470    125,239 
Deferred tax (benefit) expense   (73,000)   57,376 
Bad debt expense   26,803    10,000 
 Changes in operating assets and liabilities, net of effect from acquisitions:          
Accounts receivable   (794,220)   (674,398)
Short-term investments   (11,205)   (3,196)
Prepaid expenses and other assets   233,583    (62,403)
Accounts payable   480,979    278,425 
Accrued expenses and other current liabilities   640,993    544,473 
Deferred revenue   296,954    71,831 
Right of use assets and liabilities, net   26,793     
Net cash provided by operating activities   2,334,619    1,618,411 
           
Investing activities:          
Acquisition of Sow Organic       (450,000)
Acquisition of JVF Consulting       (500,000)
Investment in Progressive Beef       (900,000)
Proceeds from sale of assets   1,000     
Purchases of property, equipment and software development costs   (268,269)   (325,227)
Proceeds from maturity of short-term investments   252,999    250,000 
Redemption (purchases) of other long-term assets       (1,350)
Net cash used in investing activities   (14,270)   (1,926,577)
           
Financing activities:          
Repayments of notes payable   (6,738)   (7,062)
Repayments of finance lease obligations   (4,504)   (5,918)
Stock repurchase under Stock Buyback Plan   (371,220)   (140,850)
Net cash used in financing activities   (382,462)   (153,830)
Net change in cash   1,937,887    (461,996)
Cash at beginning of period   1,482,391    2,705,778 
Cash at end of period  $3,420,278   $2,243,782 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6 

 

 

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 January 1, 2018   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 
                               
Effect of acquisition fair value adjustment           (321,937)           (321,937)
Stock-based compensation expense           42,119            42,119 
Issuance of common shares in acquisition of Sow Organic LLC   217,654    218    432,913            433,131 
Repurchase of common shares under Stock Buyback Plan   (49,700)           (101,202)       (101,202)
Net income attributable to Where Food Comes From, Inc.                   176,839    176,839 
Balance at June 30, 2018   24,805,169   $25,190   $10,544,034   $(865,380)  $229,720   $9,933,564 
                               
Stock-based compensation expense           45,218            45,218 
Issuance of common shares for investment in Progressive Beef LLC   50,340    50    91,065            91,115 
Issuance of common shares in acquisition of JVF Consulting LLC   158,437    159    315,132            315,291 
Vesting of restricted shares issued to employees   74,000    74    (74)            
Net income attributable to Where Food Comes From, Inc.                   377,349    377,349 
Balance at September 30, 2018   25,087,946   $25,473   $10,995,375   $(865,380)  $607,069   $10,762,537 

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

7 

 

  

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 January 1, 2019   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 
                               
Stock-based compensation expense           47,096            47,096 
Repurchase of common shares under Stock Buyback Plan   (95,348)           (168,769)       (168,769)
Net income attributable to Where Food Comes From, Inc.                   361,089    361,089 
Balance at June 30, 2019   24,826,150   $25,473   $11,123,062   $(1,361,253)  $1,036,093   $10,823,375 
                               
Stock-based compensation expense           36,672            36,672 
Vesting of restricted shares to Employees   25,000    25    (25)            
Repurchase of common shares under Stock Buyback Plan   (66,525)           (119,028)       (119,028)
Net income attributable to Where Food Comes From, Inc.                   540,922    540,922 
Balance at September 30, 2019   24,784,625   $25,498   $11,159,709   $(1,480,281)  $1,577,015   $11,281,941 

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

8 

 

 

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. Certain prior year amounts have been reclassified to conform to current year presentation. Net income and shareholders’ equity were not affected by these reclassifications. 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 three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for any other interim period of any future year.

 

9 

 

 

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 $3.90 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 asset.

 

In September 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 September 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 currently required to adopt the new standard in 2023.

 

10 

 

 

Where Food Comes From, Inc. 

Notes to the Consolidated Financial Statements

(Unaudited) 

 

In April 2017, the FASB 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. The company does not expect the new guidance to have an impact on its consolidated financial statements.

 

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.

11 

 

 

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.

 

12 

 

 

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 September 30,   Nine months ended September 30, 
   2019   2018   2019   2018 
Basic:                
Weighted average shares outstanding   24,791,534    24,900,919    24,879,556    24,756,262 
                     
Diluted:                    
Weighted average shares outstanding   24,791,534    24,900,919    24,879,556    24,756,262 
Weighted average effects of dilutive securities   180,091    173,558    182,793    182,437 
Total   24,971,625    25,074,477    25,062,349    24,938,699 
                     
Antidilutive securities:   283,459    202,750    283,459    202,750 

 

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 three months ended September 30, 2019, the Company received dividend income from Progressive Beef of $30,000 representing a distribution of their earnings. For the nine months ended September 30, 2019, the Company received dividend income totaling $90,000.  The income is reflected within the “other (expense) income” section of the Company’s Consolidated Statement of Income for the three and nine months ended September 30, 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 September 30, 2019.  

 

13 

 

 

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:

 

   September 30,   December 31,   Estimated
   2019   2018   Useful Life

Intangible assets subject to amortization: 

           
Tradenames and trademarks  $417,307   $417,307   2.5  - 8.0 years
Accreditations   85,395    85,395   5.0 years
Customer relationships   3,350,551    3,350,551   3.0 - 15.0 years
Patents   970,100    970,100   4.0 years
Non-compete agreements   121,000    121,000   5.0 years
    4,944,353    4,944,353    
Less accumulated amortization   2,031,882    1,577,558    
    2,912,471    3,366,795    
Tradenames/trademarks (not subject to amortization)   465,000    465,000    
    3,377,471    3,831,795    
Other assets   20,326    20,326    
    Intangible and other assets:  $3,397,797   $3,852,121    

 

Note 6 – Accrued Expenses and Other Current Liabilities

 

The following table summarizes our accrued expenses and other current liabilities as of:

 

   September 30,   December 31, 
   2019   2018 
Income and sales taxes payable  $36,616   $19,978 
Payroll related accruals   814,184    147,798 
Customer deposits   113,279    72,982 
Professional fees and other expenses   169,515    251,843 
   $1,133,594   $492,601 

 

Note 7 – Notes Payable

 

Notes Payable consist of the following:

 

   September 30,   December 31, 
   2019   2018 
         
Vehicle note  $35,655   $42,393 
Less current portion of notes payable and other long-term debt   (10,689)   (10,173)
Notes payable and other long-term debt  $24,966   $32,220 

 

14 

 

 

Where Food Comes From, Inc. 

Notes to the Consolidated Financial Statements

(Unaudited)

 

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 September 30, 2019 and December 31, 2018, the effective interest rate was 6.5% and 7.0%, respectively. The LOC is collateralized by all the business assets of ICS.  As of September 30, 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 operations.

 

The amount of stock-based compensation expense is as follows:

 

   Three months ended September 30,   Nine months ended September 30, 
   2019   2018   2019   2018 
Stock options  $33,975   $28,445   $113,857   $64,820 
Restricted stock awards   2,697    16,773    14,613    60,419 
Total  $36,672   $45,218   $128,470   $125,239 

 

During three months ended March 31, 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. During the three months ended September 30, 2019, the Company awarded stock options to purchase 10,000 shares of the Company’s common stock at an exercise price of $1.71 per share to the members on the Company’s Board of Directors.  No other stock options were awarded during the nine months ended September 30, 2019.

 

15 

 

 

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:

 

   Nine months ended September 30, 
   2019   2018 
Number of options awarded to purchase common shares   10,000    105,750 
Risk-free interest rate   1.50%    2.6% - 2.8% 
Expected volatility   100.3%    149.3 - 154.3% 
Assumed dividend yield   N/A    N/A 
Expected life of options from the date of grant   9.8 years    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 three months)    36,909    1,061    37,970 
2020    113,378    4,251    117,629 
2021    70,896    706    71,602 
2022    3,722        3,722 
    $224,905   $6,018   $230,923 

 

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    10,000   $1.53   $1.71    10.00   $ 
Exercised       $   $       $ 
Expired/Forfeited    (7,325)  $1.83   $1.86       $ 
Outstanding, September 30, 2019    437,126   $1.46   $1.49    6.23   $148,775 
Exercisable, September 30, 2019    256,919   $1.21   $1.22    4.43   $148,775 
Unvested, September 30, 2019    180,207   $1.81   $1.88    8.78   $ 

 

16 

 

 

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 September 30, 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 September 30, 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    (25,000)  $2.35 
Forfeited       $ 
Non-vested restricted shares, September 30, 2019    5,000   $2.55 

 

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 and nine months ended September 30, 2019 we recorded an income tax expense of approximately $184,000 and $230,100, respectively, compared to income tax expense of $169,000 and $257,000 for the same 2018 periods.

 

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.

 

17 

 

 

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.

 

18 

 

 

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.

 

19 

 

 

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.

 

20 

 

 

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.

 

21 

 

 

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. 

 

22 

 

 

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 September 30, 2019   Three months ended September 30, 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
 
Revenues:                                        
Verification and certification service revenue  $4,759,383   $   $   $4,759,383   $3,906,996   $   $   $3,906,996 
Product sales   1,086,272            1,086,272    783,303            783,303 
Software license, maintenance and support services revenue       286,816    (60,000)   226,816        208,541        208,541 
Software-related consulting service revenue       196,723    (36,712)   160,011        226,538        226,538 
Total revenues  $5,845,655   $483,539   $(96,712)  $6,232,482   $4,690,299   $435,079   $   $5,125,378 
                                         

 

   Nine months ended September 30, 2019   Nine months ended September 30, 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
 
Revenues:                                        
Verification and certification service revenue  $11,314,318   $   $   $11,314,318   $10,210,947   $   $   $10,210,947 
Product sales   2,362,663            2,362,663    1,633,509            1,633,509 
Software license, maintenance and support services revenue       969,056    (147,277)   821,779        759,301        759,301 
Software-related consulting service revenue       660,755    (84,234)   576,521        580,731        580,731 
Total revenues  $13,676,981   $1,629,811   $(231,511)  $15,075,281   $11,844,456   $1,340,032   $   $13,184,488 

 

23 

 

 

Where Food Comes From, Inc. 

Notes to the Consolidated Financial Statements 

(Unaudited)

 

Transaction Price Allocated to Remaining Performance Obligations

 

We generally enter into revenue contracts with a one-year term. In certain instances, we have concluded that our contract term is less than one year because: (i) the termination provisions present in the contract impact the contract term under ASC 606 or (ii) a contract under ASC 606 arises at the time our customer requests the provision of a good or service that is delivered within or over a few days to a couple of weeks. As a result of our short-term contract structures, we have utilized the practical expedient in ASC 606-10-50-14 that exempts us from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

 

Contract Balances

 

Under our animal verification and certification services contracts, we invoice customers once the performance obligation for the provision of a site or location audit has been satisfied, at which point payment is unconditional. In addition, any product sales are invoiced upon delivery to the customer, at which point payment is also unconditional. Accordingly, our animal verification and certification services contracts do not give rise to a contract asset under ASC 606; rather, invoiced amounts reflect accounts receivable.

 

Under our crop and other processed product verification and certification services, a nonrefundable payment for an annual assessment of compliance with a standard is typically made by our customers upfront upon contract execution. That is, payment is made in advance of the provision of annual assessment services. Accordingly, we recognize deferred revenue upon receipt of the upfront payment from our customers for crop and other processed product audit assessment services. Revenue is subsequently recognized, and the related deferred revenue is reduced, over the one-year period during which assessment services are provided to the customer using the over-time measure of progress selected in accordance with ASC 606. To the extent that an inspection is required during the annual assessment period, we invoice customers once the performance obligation for the inspection has been satisfied, at which point payment is unconditional. As such, inspection services give rise to accounts receivable.

 

Our software subscriptions, web-hosting, and support services are paid by our customers upfront on a nonrefundable basis. That is, payment is made in advance of the provision of these services to our customers. As a result, we recognize deferred revenue upon receipt of the upfront payment from our customers for software subscriptions, web-hosting and maintenance and support services. Revenue is subsequently recognized, and the related deferred revenue is reduced, on a straight-line basis during the annual contract term that these stand-ready services are provided to customer.

 

Software-related consulting services are invoiced monthly on a time-incurred basis, at which point we have an enforceable right to payment for those services. Because payment is unconditional upon invoicing, our software-related consulting services are reflected as accounts receivable.

 

As of September 30, 2019, and December 31, 2018, accounts receivable from contracts with customers, net of allowance for doubtful accounts, were approximately $2,972,600 and $2,205,200, respectively.

 

As of September 30, 2019, and December 31, 2018, deposits and deferred revenue from contracts with customers were approximately $1,065,100 and $727,900, respectively. The balance of the contract liabilities at September 30, 2019 and December 31, 2018 are expected to be recognized as revenue within one year or less of the invoice date. 

 

 24

 

 

Where Food Comes From, Inc. 

Notes to the Consolidated Financial Statements 

(Unaudited)

 

The following table reflects the changes in our contract liabilities during the three month period ended September 30, 2019:

 

Deferred revenue:    
Unearned revenue June 30, 2019 $1,143,158 
Unearned billings  434,005 
Revenue recognized  (625,337)
Unearned revenue September 30, 2019 $951,826 

 

The following table reflects the changes in our contract liabilities during the nine month period ended September 30, 2019:      

 

Deferred revenue:    
Unearned revenue January 1, 2019 $654,872 
Unearned billings  2,187,176 
Revenue recognized  (1,890,222)
Unearned revenue September 30, 2019 $951,826 

 

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.

 

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 September 30, 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 three months ended September 30, 2019 or the year-ended December 31, 2018.

 

In addition, amortization of capitalized set-up costs for the three months ended September 30, 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.

 

 25

 

 

Where Food Comes From, Inc. 

Notes to the Consolidated Financial Statements 

(Unaudited)

 

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 the 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.

 

The components of lease expense were as follows:

 

  Three months ended
September 30, 2019
  Nine months ended
September 30, 2019
 
Operating lease cost $115,674  $353,267 
Finance lease cost        
Amortization of assets  2,025   6,558 
Interest on finance lease obligations  1,763   5,723 
Total net lease cost $119,462  $365,548 

  

Included in the table above, is $92,200 and $276,600 for the three and nine months ended September 30, 2019, respectively, 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 three and nine months ended September 30, 2018 was $154,200 and $435,300, respectively.

 

 26

 

 

Where Food Comes From, Inc. 

Notes to the Consolidated Financial Statements 

(Unaudited)

 

Supplemental balance sheet information related to leases was as follows:

  

 

September 30, 2019

 

Operating leases:

Related Party

 

Other

 

Total 

 
Right of use asset $2,975,520  $332,869  $3,308,389 
             
Current operating lease liabilities  153,456   79,447   232,903 
Noncurrent operating lease liabilities  3,301,204   286,836   3,588,040 
Total operating lease liabilities $3,454,660  $366,283  $3,820,943 

 

Finance leases: September 30, 2019
Right of use asset, at cost $43,041 
Accumulated amortization  (20,086)
Right of use asset, net $22,955 
     
Current obligations of finance leases $8,054 
Finance leases, net of current obligations  23,798 
Total finance lease liabilities $31,852 
     
Weighted average remaining lease term (in years):    
Operating leases  11.2 
Finance leases  3.2 
     
Weighted average discount rate:    
Operating leases  5.8%
Finance leases  20.8%

  

Supplemental cash flow and other information related to leases was as follows:

 

  Nine months ended 
  September 30, 2019 
Cash paid for amounts included in the measurement of lease liabilities:    
Operating cash flows from operating leases $319,586 
Operating cash flows from finance leases $5,723 
Financing cash flows from finance leases $4,504 

 

 27

 

 

Where Food Comes From, Inc. 

Notes to the Consolidated Financial Statements 

(Unaudited)

 

Maturities of lease liabilities were as follows:

 

Years Ending December 31st,   Operating Leases  Finance Leases 
2019 (remaining three months)   $110,773  $3,705 
2020    448,992   13,597 
2021    461,657   12,355 
2022    465,758   10,050 
2023    461,310   4,514 
Thereafter    3,308,155    
Total lease payments    5,256,645   44,221 
Less amount representing interest    (1,435,702)  (12,369)
Total lease obligations    3,820,943   31,852 
Less current portion    (232,903)  (8,054)
Long-term lease obligations   $3,588,040  $23,798 

 

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.

 

 28

 

 

Where Food Comes From, Inc. 

Notes to the Consolidated Financial Statements 

(Unaudited)

 

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.

 

Following the thirty-nine-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 September 30, 2019  (181,829)
Balance, September 30, 2019 $1,267,178 

 

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. 

 

 29

 

 

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 September 30, 2019  Three months ended September 30, 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 $1,343,955  $2,053,842  $  $3,397,797  $2,883,887  $1,983,577  $  $4,867,464 
Goodwill  1,133,122   2,010,612      3,143,734   1,840,956   1,372,488      3,213,444 
Total assets  14,214,110   5,323,783      19,537,893   14,274,121   1,229,225      15,503,346 
                                 
Revenues:                                
Verification and certification service revenue $4,759,383  $  $  $4,759,383  $3,906,996  $  $  $3,906,996 
Product sales  1,086,272         1,086,272   783,303         783,303 
Software license, maintenance and support services revenue     286,816   (60,000)  226,816      208,541      208,541 
Software-related consulting service revenue     196,723   (36,712)  160,011      226,538      226,538 
Total revenues $5,845,655  $483,539  $(96,712) $6,232,482  $4,690,299  $435,079  $  $5,125,378 
Costs of revenues:                                
Costs of verification and certification services  2,733,350      (60,150)  2,673,200   2,098,462         2,098,462 
Costs of products  696,579         696,579   489,149         489,149 
Costs of software license, maintenance and support services     153,452      153,452      183,942      183,942 
Costs of software-related consulting services     122,224      122,224      117,303      117,303 
Total costs of revenues  3,429,929   275,676   (60,150)  3,645,455   2,587,611   301,245      2,888,856 
Gross profit  2,415,726   207,863   (36,562)  2,587,027   2,102,688   133,834      2,236,522 
Depreciation & amortization  78,620   178,568      257,188   102,944   138,230      241,174 
Other operating expenses  1,519,708   232,698   (36,562)  1,715,844   1,442,568   135,277      1,577,845 
 Segment operating (loss)/income $817,398  $(203,403) $  $613,995  $557,176  $(139,673) $  $417,503 
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:                                
Other expense (income)  (29,563)  (6)     (29,569)  (102,155)        (102,155)
Income tax (benefit)/expense        184,001   184,001         169,000   169,000 
Net loss attributable to non-controlling interest     81,359      81,359      26,691      26,691 
Net (loss)/income attributable to WFCF $846,961  $(122,038) $(184,001) $540,922  $659,331  $(112,982) $(169,000) $377,349 

 

  Nine months ended September 30, 2019  Nine months ended September 30, 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 $1,343,955  $2,053,842  $  $3,397,797  $2,883,887  $1,983,577  $  $4,867,464 
Goodwill  1,133,122   2,010,612      3,143,734   1,840,956   1,372,488      3,213,444 
Total assets  14,214,110   5,323,783      19,537,893   14,274,121   1,229,225      15,503,346 
                                 
Revenues:                                
Verification and certification service revenue $11,314,318  $  $  $11,314,318  $10,210,947  $  $  $10,210,947 
Product sales  2,362,663         2,362,663   1,633,509         1,633,509 
Software license, maintenance and support services revenue     969,056   (147,277)  821,779      759,301      759,301 
Software-related consulting service revenue     660,755   (84,234)  576,521      580,731      580,731 
Total revenues $13,676,981  $1,629,811  $(231,511) $15,075,281  $11,844,456  $1,340,032  $  $13,184,488 
Costs of revenues:                                
Costs of verification and certification services  6,455,687      (123,123)  6,332,564   5,399,626         5,399,626 
Costs of products  1,537,837         1,537,837   1,035,094         1,035,094 
Costs of software license, maintenance and support services     469,065      469,065      489,887      489,887 
Costs of software-related consulting services     394,660      394,660      280,310      280,310 
Total costs of revenues  7,993,524   863,725   (123,123)  8,734,126   6,434,720   770,197      7,204,917 
Gross profit  5,683,457   766,086   (108,388)  6,341,155   5,409,736   569,835      5,979,571 
Depreciation & amortization  263,209   539,207      802,416   328,370   414,410      742,780 
Other operating expenses  4,229,813   700,718   (108,388)  4,822,143   4,127,982   423,199      4,551,181 
Segment operating (loss)/income $1,190,435  $(473,839) $  $716,596  $953,384  $(267,774) $  $685,610 
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:                                
Other expense (income)  (89,538)  (1,009)     (90,547)  (108,661)  860      (107,801)
Income tax (benefit)/expense        230,090   230,090         257,000   257,000 
Net loss attributable to non-controlling interest     181,829      181,829      53,261      53,261 
Net (loss)/income attributable to WFCF $1,279,973  $(291,001) $(230,090) $758,882  $1,062,045  $(215,373) $(257,000) $589,672 

 

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Where Food Comes From, Inc. 

Notes to the Consolidated Financial Statements 

(Unaudited)

 

Note 14 – Supplemental Cash Flow Information                                                                      

  

  Nine months ended September 30, 
  2019  2018 
Cash paid during the year:        
Interest expense $8,768  $3,755 
Income taxes $131,268  $418,965 
         
Non-cash investing and financing activites:        
Common stock issued in connection with acquisition of Sow Organic $  $433,131 
Common stock issued in connection with investment in Progressive Beef $  $91,115 
Common Stock issued in connection with acquisition of JVF Consulting $  $315,291 
Equipment acquired under a capital lease $  $19,809 
Lease incentive obligation $  $230,220 

 

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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.

 

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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.

 

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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 September 30, 2019, we had cash, cash equivalents and certificates of deposits (classified as short-term and long-term investments) of approximately $3,677,100 compared to approximately $1,981,000 at December 31, 2018. Our working capital at September 30, 2019 was approximately $3,503,500 compared to $2,669,700 at December 31, 2018.

 

Net cash provided by operating activities for the nine months ended September 30, 2019 was approximately $2,334,600 compared to net cash provided of $1,618,400 during the same period in 2018. Net cash provided by operating activities is driven by our net income and adjusted by non-cash items. Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock-based compensation expense, and deferred taxes. 

 

Net cash used in investing activities for the nine months ended September 30, 2019, was approximately $14,300 compared to cash used in investing activities of $1,926,600 used in the 2018 period. Net cash used during the 2019 period was primarily attributable to routine purchases of property, equipment and software development costs offset by the redemption of a $250,000 certificate of deposit. The 2018 period net cash used was attributable to business acquisitions (Sow Organic and JVF Consulting) and other business investments (Progressive Beef) which utilized $1,850,000 of cash, $135,600 for the purchase of a 2,300-square foot building located in Medina, North Dakota, which was previously leased, approximately $140,300 for leasehold improvements for the expansion of our Corporate Office, and approximately $49,400 for other routine purchases of property and equipment, offset by $250,000 in proceeds from the maturity of a certificate of deposit.

 

Net cash used in financing activities for the nine months ended September 30, 2019, was approximately $382,500 compared to $153,800 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.

 

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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 September 30, 2019, and December 31, 2018, the effective interest rate was 6.5% and 7.0%, respectively.  The LOC is collateralized by all the business assets of International Certification Services, Inc. (“ICS”).  As of September 30, 2019, and December 31, 2018, there were no amounts outstanding under this LOC.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2019, we had no off-balance sheet arrangements of any type.   

 

RESULTS OF OPERATIONS

 

Three and nine months ended September 30, 2019 compared to the same period in fiscal year 2018

 

The following table shows information for reportable operating segments:

 

  Three months ended September 30, 2019  Three months ended September 30, 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 $1,343,955  $2,053,842  $  $3,397,797  $2,883,887  $1,983,577  $  $4,867,464 
Goodwill  1,133,122   2,010,612      3,143,734   1,840,956   1,372,488      3,213,444 
Total assets  14,214,110   5,323,783      19,537,893   14,274,121   1,229,225      15,503,346 
                                 
Revenues:                                
Verification and certification service revenue $4,759,383  $  $  $4,759,383  $3,906,996  $  $  $3,906,996 
Product sales  1,086,272         1,086,272   783,303         783,303 
Software license, maintenance and support services revenue     286,816   (60,000)  226,816      208,541      208,541 
Software-related consulting service revenue     196,723   (36,712)  160,011      226,538      226,538 
Total revenues $5,845,655  $483,539  $(96,712) $6,232,482  $4,690,299  $435,079  $  $5,125,378 
Costs of revenues:                                
Costs of verification and certification services  2,733,350      (60,150)  2,673,200   2,098,462         2,098,462 
Costs of products  696,579         696,579   489,149         489,149 
Costs of software license, maintenance and support services     153,452      153,452      183,942      183,942 
Costs of software-related consulting services     122,224      122,224      117,303      117,303 
Total costs of revenues  3,429,929   275,676   (60,150)  3,645,455   2,587,611   301,245      2,888,856 
Gross profit  2,415,726   207,863   (36,562)  2,587,027   2,102,688   133,834      2,236,522 
Depreciation & amortization  78,620   178,568      257,188   102,944   138,230      241,174 
Other operating expenses  1,519,708   232,698   (36,562)  1,715,844   1,442,568   135,277      1,577,845 
 Segment operating (loss)/income $817,398  $(203,403) $  $613,995  $557,176  $(139,673) $  $417,503 
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:                                
Other expense (income)  (29,563)  (6)     (29,569)  (102,155)        (102,155)
Income tax (benefit)/expense        184,001   184,001         169,000   169,000 
Net loss attributable to non-controlling interest     81,359      81,359      26,691      26,691 
Net (loss)/income attributable to WFCF $846,961  $(122,038) $(184,001) $540,922  $659,331  $(112,982) $(169,000) $377,349 

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  Nine months ended September 30, 2019  Nine months ended September 30, 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 $1,343,955  $2,053,842  $  $3,397,797  $2,883,887  $1,983,577  $  $4,867,464 
Goodwill  1,133,122   2,010,612      3,143,734   1,840,956   1,372,488      3,213,444 
Total assets  14,214,110   5,323,783      19,537,893   14,274,121   1,229,225      15,503,346 
                                 
Revenues: