Company Quick10K Filing
Where Food Comes From
Price1.72 EPS0
Shares25 P/E57
MCap43 P/FCF18
Net Debt-3 EBIT1
TEV40 TEV/EBIT37
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-14
10-K 2019-12-31 Filed 2020-03-05
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-14
10-K 2018-12-31 Filed 2019-03-29
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-14
10-K 2017-12-31 Filed 2018-04-02
10-Q 2017-09-30 Filed 2017-11-02
10-Q 2017-06-30 Filed 2017-08-03
10-Q 2017-03-31 Filed 2017-05-09
10-K 2016-12-31 Filed 2017-02-28
10-Q 2016-09-30 Filed 2016-11-08
10-Q 2016-06-30 Filed 2016-08-11
10-Q 2016-03-31 Filed 2016-05-05
10-K 2015-12-31 Filed 2016-02-16
10-Q 2015-09-30 Filed 2015-10-29
10-Q 2015-06-30 Filed 2015-07-30
10-Q 2015-03-31 Filed 2015-05-04
10-K 2014-12-31 Filed 2015-02-18
10-Q 2014-09-30 Filed 2014-11-03
10-Q 2014-06-30 Filed 2014-08-04
10-Q 2014-03-31 Filed 2014-05-05
10-K 2013-12-31 Filed 2014-03-04
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-01
10-Q 2013-03-31 Filed 2013-05-01
10-K 2012-12-31 Filed 2013-03-06
10-Q 2012-09-30 Filed 2012-11-05
10-Q 2012-06-30 Filed 2012-08-01
10-Q 2012-03-31 Filed 2012-05-15
10-K 2011-12-31 Filed 2012-03-26
8-K 2020-05-14
8-K 2020-05-07
8-K 2020-03-05
8-K 2019-12-17
8-K 2019-12-05
8-K 2019-11-27
8-K 2019-11-14
8-K 2019-08-13
8-K 2019-05-13
8-K 2019-03-25
8-K 2018-11-13
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8-K 2018-07-02
8-K 2018-05-21
8-K 2018-05-17
8-K 2018-05-16
8-K 2018-05-14
8-K 2018-03-27
8-K 2018-01-05

WFCF 10Q Quarterly Report

Note 1 - The Company and Basis of Presentation
Note 2 - Business Acquisitions
Note 3 - Basic and Diluted Net Loss 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
Note 15 - Subsequent Events
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 2020-03-31

Balance SheetIncome StatementCash Flow
2016128402012201420172020
Assets, Equity
10.07.95.83.81.7-0.42012201420172020
Rev, G Profit, Net Income
1.40.80.3-0.3-0.8-1.42012201420172020
Ops, Inv, Fin

10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the Quarterly period ended March 31, 2020
   
[  ] 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 [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a small reporting company. See definitions of “large accelerated filer” and “accelerated filer” and “smaller reporting entity” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

 

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 May 1, 2020, was 24,908,032.

 

 

 

 

 

 

Where Food Comes From, Inc.

Table of Contents

March 31, 2020

 

Part 1 - Financial Information
     
Item 1. Financial Statements 3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 4. Controls and Procedures 22
     
Part II - Other Information
     
Item 1. Legal Proceedings 23
     
Item 1A. Risk Factors 23
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
     
Item 6. Exhibits 23

 

2

 

 

Where Food Comes From, Inc.

Consolidated Balance Sheets

 

(Amounts in thousands, except per share amounts) 

March 31,

2020

  

December 31,  

2019

 
   (Unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $2,964   $2,638 
Accounts receivable, net of allowance   1,972    2,515 
Short-term investments in certificates of deposit   259    258 
Prepaid expenses and other current assets   289    450 
Total current assets   5,484    5,861 
Property and equipment, net   1,575    1,545 
Operating lease right-of-use assets   3,204    3,268 
Investment in Progressive Beef   991    991 
Intangible and other assets, net   3,410    3,248 
Goodwill   2,946    2,946 
Deferred tax assets, net   383    378 
Total assets  $17,993   $18,237 
           
Liabilities and Equity          
Current liabilities:          
Accounts payable  $681   $1,023 
Accrued expenses and other current liabilities   583    674 
Deferred revenue   1,413    797 
Current portion of finance lease obligations   9    8 
Current portion of operating lease obligations   247    239 
Total current liabilities   2,933    2,741 
Finance lease obligations, net of current portion   19    21 
Operating lease obligation, net of current portion   3,460    3,526 
Total liabilities   6,412    6,288 
           
Commitments and contingencies          
           
Equity:          
Preferred stock, $0.001 par value; 5,000 shares authorized; none issued or outstanding   -    - 
Common stock, $0.001 par value; 95,000 shares authorized; 25,802 shares issued, and 24,893 (2020) and  24,977 (2019) shares outstanding   26    26 
Additional paid-in-capital   11,456    11,425 
Treasury stock of 909 (2020) and 825 (2019) shares   (1,823)   (1,665)
Retained earnings   1,922    2,163 
Total equity   11,581    11,949 
Total liabilities and stockholders’ equity  $17,993   $18,237 

 

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 March 31, 
(Amounts in thousands, except per share amounts)   2020    2019 
Revenues:          
Verification and certification service revenue  $2,803   $2,812 
Product sales   725    641 
Software license, maintenance and support services revenue   143    295 
Software-related consulting service revenue   241    207 
Total revenues   3,912    3,955 
Costs of revenues:          
Costs of verification and certification services   1,534    1,562 
Costs of products   502    443 
Costs of software license, maintenance and support services   146    154 
Costs of software-related consulting services   120    130 
Total costs of revenues   2,302    2,289 
Gross profit   1,610    1,666 
Selling, general and administrative expenses   1,964    1,967 
(Loss)/income from operations   (354)   (301)
Other expense (income):          
Dividend income from Progressive Beef   (30)   (30)
Other income, net   (2)   (3)
Gain on sale of assets   -    (1)
Gain on foreign currency exchange   (3)   - 
Interest expense   2    3 
(Loss)/income before income taxes   (321)   (270)
Income tax (benefit)/expense   (80)   (83)
Net (loss)/income   (241)   (187)
Net loss attributable to non-controlling interest   -    44 
Net (loss)/income attributable to Where Food Comes From, Inc.  $(241)  $(143)
           
Per share - net (loss)/income attributable to Where Food Comes From, Inc.:          
Basic  $ *   $* 
Diluted  $ *   $* 
           
Weighted average number of common shares outstanding:          
Basic   24,947    24,957 
Diluted   24,947    24,957 
* less than $0.01 per share          

 

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

 

4

 

 

Where Food Comes From, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

   Three months ended March 31, 
(Amounts in thousands)  2020   2019 
         
Operating activities:          
Net (loss)/income  $(241)  $(187)
Adjustments to reconcile net loss to net cash  provided by operating activities:          
Depreciation and amortization   233    260 
Gain on sale of assets   -    (1)
Stock-based compensation expense   31    45 
Deferred tax benefit   (5)   (28)
Changes in operating assets and liabilities,  net of effect from acquisitions:          
Accounts receivable   543    199 
Short-term investments   (1)   (2)
Prepaid expenses and other assets   161    11 
Accounts payable   (342)   158 
Accrued expenses and other current liabilities   (91)   148 
Deferred revenue   616    635 
Right of use assets and liabilities, net   (8)   13 
Net cash provided by operating activities   896    1,251 
           
Investing activities:          
Acquisition of Postelsia Holdings, Ltd.   (300)   - 
Proceeds from sale of assets   -    1 
Purchases of property, equipment and software development costs   (110)   (196)
Net cash used in investing activities   (410)   (195)
           
Financing activities:          
Repayments of notes payable   -    (2)
Repayments of finance lease obligations   (2)   (1)
Stock repurchase under Stock Buyback Plan   (158)   (83)
Net cash used in financing activities   (160)   (86)
Net change in cash   326    970 
Cash at beginning of period   2,638    1,482 
Cash at end of period  $2,964   $2,452 

 

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

 

5

 

 

Where Food Comes From, Inc.

Consolidated Statement of Equity

(Unaudited)

 

           Additional             
   Common Stock   Paid-in   Treasury   Retained     
(Amounts in thousands)  Shares   Amount   Capital   Stock   Earnings   Total 
                         
Balance at December 31, 2018   24,968   $25   $11,031   $(1,109)  $818   $10,765 
                               
Stock-based compensation expense   -    -    45    -    -    45 
Repurchase of common shares under Stock Buyback Plan   (47)   -    -    (83)   -    (83)
Net loss attributable to Where Food Comes From, Inc.   -    -    -    -    (143)   (143)
Balance at March 31, 2019   24,921   $25   $11,076   $(1,192)  $675   $10,584 
                               
Balance at December 31, 2019   24,977   $26   $11,425   $(1,665)  $2,163   $11,949 
Stock-based compensation expense   -    -    31    -    -    31 
Repurchase of common shares under Stock Buyback Plan   (84)   -    -    (158)   -    (158)
Net loss attributable to Where Food Comes From, Inc.   -    -    -    -    (241)   (241)
Balance at March 31, 2020   24,893   $26   $11,456   $(1,823)  $1,922   $11,581 

 

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

 

6

 

 

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, JVF Consulting and Postelsia Holdings, Ltd. (“Postelsia”) (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, 2019, included in our Form 10-K filed on March 5, 2020. 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 loss 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 months ended March 31, 2020 are not necessarily indicative of the results to be expected for any other interim period of any future year.

 

7

 

 

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

 

On January 1, 2020 we adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. The adoption of this update did not have a material impact on our Consolidated Financial Statements.

 

On January 1, 2020 we adopted 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 adoption of this update did not have a material impact on our Consolidated Financial Statements.

 

On January 1, 2020 we adopted 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 adoption of this update did not have a material impact on our Consolidated Financial Statements.

 

Note 2 – Business Acquisitions

 

On February 21, 2020 the Company acquired all of the stock of privately held Postelsia Holdings, Ltd. (“Postelsia”) for $250,000 in cash at the acquisition closing date, with an additional $50,000 in cash being held in escrow for six months following the closing date. The escrowed funds are to support any claims by the Company for breaches of representation and warranties.

 

Postelsia, based in Victoria, British Columbia, is a leader in the emerging field of environmental and social sustainability programs for the seafood industry. Postelsia provides a range of programs and consulting services designed to improve and promote sustainable practices, including environmental conservation, worker care, and food safety compliance. Postelsia will operate as a wholly owned subsidiary of the Company.

 

We believe the total consideration paid approximates the fair value of the assets acquired. We have allocated the total consideration to our identifiable intangible assets (customer relationships) to be amortized over an estimated useful life of 8 years.

 

8

 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 3 – Basic and Diluted Net Loss 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 loss per share computations (amounts in thousands):

 

   Three months ended March 31, 
   2020   2019 
Basic:        
Weighted average shares outstanding   24,947    24,957 
           
Diluted:          
Weighted average shares outstanding   24,947    24,957 
Weighted average effects of dilutive securities   -    - 
Total    24,947    24,957 
           
Antidilutive securities:   206    266 

 

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

 

For the three months ended March 31, 2020 and March 31, 2019, the Company received dividend income from Progressive Beef of $30,000 representing a distribution of their earnings. The income is reflected within the “other (expense) income” section of the Company’s Consolidated Statement of Income for the three months ended March 31, 2020 and March 31, 2019. The Company completed a qualitative assessment and determined that there were no impairment indicators as of March 31, 2020.

 

9

 

 

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 (amounts in thousands, except useful life):

 

   March 31,   December 31,   Estimated
   2020   2019   Useful Life
Intangible assets subject to amortization:             
Tradenames and trademarks  $417   $417   2.5  - 8.0 years
Accreditations   85    85   5.0 years
Customer relationships   3,664    3,351   3.0 - 15.0 years
Patents   970    970   4.0 years
Non-compete agreements   121    121   5.0 years
    5,257    4,944    
Less accumulated amortization   2,333    2,182    
    2,924    2,762    
Tradenames/trademarks (not subject to amortization)   465    465    
    3,389    3,227    
Other assets   21    21    
    Intangible and other assets:  $3,410   $3,248    

 

Note 6 – Accrued Expenses and Other Current Liabilities

 

The following table summarizes our accrued expenses and other current liabilities as of (amounts in thousands):

 

   March 31,   December 31, 
   2020   2019 
         
Income and sales taxes payable  $97   $171 
Payroll related accruals   218    201 
Customer deposits   90    62 
Professional fees and other expenses   178    240 
   $583   $674 

 

Note 7 – Notes Payable

 

Unison Revolving Line of Credit

 

The Company has a revolving line of credit (“LOC”) agreement which matures April 12, 2022. The LOC provides for $75,080 in working capital. The interest rate is at the Wall Street Journal prime rate plus 1.50% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due on maturity. As of March 31, 2020 and December 31, 2019, the effective interest rate was 4.75% and 6.25%, respectively. The LOC is collateralized by all the business assets of ICS. As of March 31, 2020, and December 31, 2019, there were no amounts outstanding under this LOC.

 

10

 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

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 (amounts in thousands):

 

   Three months ended March 31, 
   2020   2019 
Stock options   $30   $39 
Restricted stock awards   1    6 
Total   $31   $45 

 

During the three months ended March 31, 2020, the Company awarded stock options to purchase 20,000 shares of the Company’s common stock at an exercise price of $1.81 per share to employees of the Company. No stock options were awarded during the three months ended March 31, 2019.

 

The Company estimated the fair value of stock options using the Black-Scholes-Merton option pricing model with the following assumptions:

 

   Three months ended March 31, 
   2020   2019 
Number of options awarded to purchase common shares   20,000     None  
Risk-free interest rate        1.56%   N/A 
Expected volatility          97.0%   N/A 
Assumed dividend yield        N/A    N/A 
Expected life of options from the date of grant    9.9 years    N/A 

 

The estimated unrecognized compensation cost from unvested awards which will be recognized ratably over the remaining vesting phase is as follows (amounts in thousands):

 

Years ended December 31st:  Unvested stock options   Unvested restricted stock awards   Total unrecognized compensation expense 
2020 (remaining nine months)  $94   $3   $97 
2021   83    1    84 
2022   16    -    16 
2023   1    -    1 
   $194   $4   $198 

 

11

 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

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, 2019   437,126   $1.46   $1.49    5.97   $150,417 
 Granted   20,000   $1.81   $2.05    9.90      
 Exercised   -   $-   $-    -      
 Expired/Forfeited   -   $-   $-    -      
Outstanding, March 31, 2020   457,126   $1.48   $1.52    5.82   $178,795 
Exercisable, March 31, 2020   318,812   $1.34   $1.36    4.67   $172,704 
Unvested, March 31, 2020   138,314   $1.78   $1.88    8.76   $6,091 

 

The aggregate intrinsic value represents the total pre-tax intrinsic value (the aggregate difference between the closing price of our common stock on March 31, 2020 and the exercise price for the in-the-money options) that would have been received by the option holders if all the in-the-money options had been exercised on March 31, 2020.

 

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, 2019   5,000   $2.55 
Granted   -   $- 
Vested   -   $- 
Forfeited   -   $- 
Non-vested restricted shares, March 31, 2020   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.

 

12

 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The provision or benefit for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the three months ended March 31, 2020 we recorded an income tax benefit of approximately $80,000, compared to income tax benefit of $83,000 for the same 2019 period.

 

Note 10 - Revenue Recognition

 

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 (amounts in thousands).

 

   Three months ended March 31, 2020   Three months ended March 31, 2019 
   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  $2,803   $-   $-   $2,803   $2,812   $-   $-   $2,812 
Product sales   725    -    -    725    641    -    -    641 
Software license, maintenance and support services revenue   -    233    (90)   143    -    344    (49)   295 
Software-related consulting service revenue   -    265    (24)   241    -    221    (14)   207 
Total revenues  $3,528   $498   $(114)  $3,912   $3,453   $565   $(63)  $3,955 

 

Contract Balances

 

As of March 31, 2020, and December 31, 2019, accounts receivable from contracts with customers, net of allowance for doubtful accounts, were approximately $2.0 and $2.5 million, respectively.

 

As of March 31, 2020, and December 31, 2019, deferred revenue from contracts with customers was approximately $1.4 and $0.8 million, respectively. The balance of the contract liabilities at March 31, 2020 and December 31, 2019 are expected to be recognized as revenue within one year or less of the invoice date.

 

The following table reflects the changes in our contract liabilities during the three month period ended March 31, 2020 (amounts in thousands):

 

Deferred revenue:     
Unearned revenue January 1, 2020  $797 
Unearned billings   1,235 
Revenue recognized   (619)
Unearned revenue March 31, 2020  $1,413 

 

13

 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 11 – Leases

 

The components of lease expense were as follows (amounts in thousands):

 

   Three months ended 
   March 31, 2020   March 31, 2019 
Operating lease cost  $116   $120 
Finance lease cost          
Amortization of assets   2    2 
Interest on finance lease obligations   1    2 
Total net lease cost  $119   $124 

 

Included in the table above, is $92,000 for the three months ended March 31, 2020, 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.

 

Supplemental balance sheet information related to leases was as follows (amounts in thousands):

 

   March 31, 2020   December 31, 2019 
Operating leases:  Related Party   Other   Total   Related Party   Other   Total 
Operating lease ROU assets  $2,889   $296   $3,185   $2,933   $314   $3,247 
                               
Current operating lease liabilities  $164   $83   $247   $158   $81   $239 
Noncurrent operating lease liabilities   3,216    244    3,460    3,260    266    3,526 
Total operating lease liabilities  $3,380   $327   $3,707   $3,418   $347   $3,765 

 

  

March 31, 2020

  

December 31, 2019

 
Finance leases:          
Property and equipment, at cost  $43   $43 
Accumulated amortization   (24)   (22)
Property and equipment, net  $19   $21 
           
Current obligations of finance leases  $9   $8 
Finance leases, net of current obligations   19    21 
Total finance lease liabilities  $28   $29 
           
Weighted average remaining lease term (in years):          
Operating leases   10.7    11.0 
Finance leases   2.8    3.0 
           
Weighted average discount rate:          
Operating leases   5.8%   5.8%
Finance leases   20.9%   20.8%

 

Supplemental cash flow and other information related to leases was as follows (amounts in thousands):

 

   Three months ended 
   March 31, 2020   March 31, 2019 
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash flows from operating leases  $111   $100 
Operating cash flows from finance leases  $1   $2 
Financing cash flows from finance leases  $2   $1 
           
ROU assets obtained in exchange for lease liabilities:          
Operating leases  $3,507   $3,513 

 

14

 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Maturities of lease liabilities were as follows (amounts in thousands):

 

Years Ending December 31st, 

Operating

Leases

  

Finance

Leases

 
2020 (nine remaining months)  $338   $10 
2021   462    12 
2022   466    10 
2023   461    5 
2024   407    - 
Thereafter   2,901    - 
Total lease payments   5,035    37 
Less amount representing interest   (1,328)   (9)
Total lease obligations   3,707    28 
Less current portion   (247)   (9)
Long-term lease obligations  $3,460   $19 

 

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.

 

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.

 

15

 

 

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 (amounts in thousands):

 

   Three months ended March 31, 2020   Three months ended March 31, 2019 
   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  $1,266   $2,144   $-   $3,410   $1,425   $2,273   $-   $3,698 
Goodwill   1,133    1,813    -    2,946    1,133    2,011    -    3,144 
Total assets   16,999    5,524    (4,530)   17,993    13,031    5,518    -    18,549 
                                         
Revenues:                                        
Verification and certification service revenue  $2,803   $-   $-   $2,803   $2,812   $-   $-   $2,812 
Product sales   725    -    -    725    641    -    -    641 
Software license, maintenance and support services revenue   -    233    (90)   143    -    344    (49)   295 
Software-related consulting service revenue   -    265    (24)   241    -    221    (14)   207 
Total revenues  $3,528   $498   $(114)  $3,912   $3,453   $565   $(63)  $3,955 
Costs of revenues:                                        
Costs of verification and certification services   1,624    -    (90)   1,534    1,595    -    (33)   1,562 
Costs of products   502    -    -    502    443    -    -    443 
Costs of software license, maintenance and support services   -    146    -    146    -    154    -    154 
Costs of software-related consulting services   -    120    -    120    -    130    -    130 
Total costs of revenues   2,126    266    (90)   2,302    2,038    284    (33)   2,289 
Gross profit   1,402    232    (24)   1,610    1,415    281    (30)   1,666 
Depreciation & amortization   88    146    -    234    82    178    -    260 
Other operating expenses   1,537    217    (24)   1,730    1,511    226    (30)   1,707 
 Segment operating (loss)/income  $(223)  $(131)  $-   $(354)  $(178)  $(123)  $-   $(301)
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:                                        
Other expense (income)   (30)   (3)   -    (33)   -    -    (31)   (31)
Income tax (benefit)/expense   -    -    (80)   (80)   -    -    (83)   (83)
Net loss attributable to non-controlling interest   -    -    -    -    -    44    -    44 
Net (loss)/income attributable to WFCF  $(193)  $(128)  $80   $(241)  $(178)  $(79)  $114   $(143)

 

Note 14 – Supplemental Cash Flow Information

 

   Three months ended March 31, 
(Amounts in thousands)  2020   2019 
Cash paid during the year:          
Interest expense  $2   $3 
Income taxes  $-   $- 

 

Note 15 – Subsequent Events

 

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program (“PPP”), the initiative provides federally guaranteed loans to small businesses. These loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward. On April 17, 2020, the Company received a $1.0 million loan under the PPP with a maturity date of April 17, 2022 and an annual interest rate of 1.00%. The loan will be repaid in 17 monthly consecutive interest and principal payments of approximately $57,876, commencing December 1, 2020. The Company has not received any notification if any of the loan amount will be forgiven.

 

16

 


 

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, 2019. 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; JVF Consulting, LLC; and Postelsia Holdings, Ltd. (“Postelsia”) 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.

 

Coronavirus Pandemic (COVID-19)

 

In March 2020, the World Health Organization declared the outbreak of novel coronavirus disease (“COVID-19”) as a pandemic. The recent global outbreak of COVID-19 and the resulting government-mandated closures and social distancing measures have disrupted economic markets, potentially triggering a global recession. Continued closures and social distancing measures could have a detrimental effect in which the prolonged economic impact is uncertain. This could result in a variety of risks to our business including the inability to perform audits at our customers locations due to social distancing, supplier disruptions as a result of business closures, food systems that are in disarray resulting in global food shortages, euthanasia of animals and dumping of dairy products because farmers have no distribution channel, all of which could negatively influence our revenue and costs. The government may introduce healthcare reform measures for which we cannot predict the financial implication of on our business. A weak or declining economy could cause our customers to delay purchases or payments for our services and products. Additionally, COVID-19 may introduce additional challenges including our ability to produce sufficient cash flows from operations or to raise capital when needed at acceptable terms, if at all.

 

All of our locations have been affected. We have adjusted certain aspects of our operations to protect our employees while avoiding business interruption. As an essential business to the food and agriculture industries, we have maintained standard business operations while under stay at home (and similar) guidelines from various states, by working remotely. Company management continues to evaluate when employees will return to their respective offices, on a state by state and department by department basis. The health of our employees is a key concern for the Company. The Company will continue to maintain standard business operations by having a majority of its employees work remotely until government mandates allow for normal business operations. Employees essential to operations, management and the accounting function remain on-site at our corporate headquarters. Internal controls over financial reporting have not been impacted by employees working remotely. Management is continuously monitoring to ensure controls are effective and properly maintained.

 

The Company generally performs onsite audits in connection with its verification and certification activity. Due to safety and social distancing reasons, some customers have requested postponement of onsite visits. At this time, we are uncertain of the material impact that continued social distancing measures will have upon our business. We continue to work with standard setting bodies and identify innovative solutions to offer our customers. We believe that our transformative approach will help further differentiate us from competitors. Additionally, we believe third party verification is an essential component to the food and agricultural supply chain and ensures our future as a high quality provider of assurance services, thereby increasing the value of products in the food supply chain.

 

We will continue to monitor the situation closely and react accordingly to any future restrictions or limitations, while keeping the interest of our customers and business in mind. Due to the uncertainty in the severity and duration of the pandemic, the impact on our revenues, profitability and statement of financial position is uncertain at this time.

 

17

 

 

Seasonality

 

Our business is subject to seasonal fluctuations. Significant portions of our verification and certification service revenue are typically realized during late May through early October when the calf marketings and the growing seasons are at their peak. Because of the seasonality of the business and our industry, results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

 

Liquidity and Capital Resources

 

At March 31, 2020, we had cash, cash equivalents and certificates of deposits (classified as short-term and long-term investments) of approximately $3.2 million compared to approximately $2.9 million at December 31, 2019. Our working capital at March 31, 2020 was approximately $2.6 million compared to $3.1 million at December 31, 2019.

 

Net cash provided by operating activities for the three months ended March 31, 2020 was approximately $0.9 million compared to net cash provided of $1.3 million during the same period in 2019. Net cash provided by operating activities is driven by our net loss and adjusted by non-cash items. Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock-based compensation expense, and deferred taxes. The decrease in cash provided by operating activities was primarily driven by a change in accounts receivable and accounts payable as of March 31, 2020 compared to the same period in 2019. The Company has evaluated their customer receivables in relation to the current economic impact due to the coronavirus pandemic and does not feel any of the receivables are impaired at this time, but will keep actively monitoring the customer receivables.

 

Net cash used in investing activities for the three months ended March 31, 2020, was approximately $0.4 million compared to cash used in investing activities of $0.2 million used in the 2019 period. Net cash used in the March 31, 2020 period was primarily attributable to acquisition of Postelsia Holdings, Ltd for $0.3 million.

 

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, and our ability to obtain additional financing, are adequate to finance current operations as well as the repayment of current debt obligations. We are actively monitoring the economic effect of the coronavirus pandemic on our liquidity. In the event a negative trend develops over the long term, we have several options available to us, including various forms of downsizing, company-wide pay decreases, as well as, other forms of financing and our internal cash-generating capabilities to adequately manage our ongoing business.

 

The culmination of all our efforts has brought significant opportunities to us, including increased investor confidence and renewed interest in our company, as well as the potential to develop business relationships with long-term strategic partners. In keeping with our core business, we will continue to review our business model with a focus on profitability, long-term capital solutions and the potential impact of acquisitions or divestitures, if such an opportunity arises. Additionally, we continually evaluate all funding options, including additional offerings of our securities to private, public and institutional investors and other credit facilities as they become available.

 

Our plan for continued growth is primarily based upon continued expansion of verification bundling opportunities, as well as acquisitions in national and international markets. We believe that there are significant growth opportunities available to us because often the only way to differentiate a product or brand, or overcome import/export restrictions is via a quality verification program.

 

Debt Facility

 

The Company has a revolving line of credit (“LOC”) agreement which matures April 12, 2022. The LOC provides for $75,080 in working capital. The interest rate is at the Wall Street Journal prime rate plus 1.50% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due upon maturity. As of March 31, 2020, and December 31, 2019, the effective interest rate was 4.75% and 6.25%, respectively. The LOC is collateralized by all the business assets of International Certification Services, Inc. (“ICS”). As of March 31, 2020, and December 31, 2019, there were no amounts outstanding under this LOC.

 

On April 17, 2020, the Company received a $1.0 million loan under the PPP with a maturity date of April 17, 2022 and an annual interest rate of 1.00%. The loan will be repaid in 17 monthly consecutive interest and principal payments of approximately $57,876, commencing December 1, 2020. The Company has not received any notification if any of the loan amount will be forgiven.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2020, we had no off-balance sheet arrangements of any type.

 

18

 

 

RESULTS OF OPERATIONS

 

Three months ended March 31, 2020 compared to the same period in fiscal year 2019

 

The following table shows information for reportable operating segments (amounts in thousands):

 

   Three months ended March 31, 2020   Three months ended March 31, 2019 
     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  $1,266   $2,144   $-   $3,410   $1,425   $2,273   $-   $3,698 
Goodwill   1,133    1,813    -    2,946    1,133    2,011    -    3,144 
Total assets   16,999    5,524    (4,530)   17,993    13,031    5,518    -    18,549 
                                         
Revenues:                                        
Verification and certification service revenue  $2,803   $-   $-   $2,803   $2,812   $-   $-   $2,812 
Product sales   725    -    -    725    641    -    -    641 
Software license, maintenance and support services revenue   -    233    (90)   143    -    344    (49)   295 
Software-related consulting service revenue   -    265    (24)   241    -    221    (14)   207 
Total revenues  $3,528   $498   $(114)  $3,912   $3,453   $565   $(63)  $3,955 
Costs of revenues:                                        
Costs of verification and certification services   1,624    -    (90)   1,534    1,595    -    (33)   1,562 
Costs of products   502    -    -    502    443    -    -    443 
Costs of software license, maintenance and support services   -    146    -    146    -    154    -    154 
Costs of software-related consulting services   -    120    -    120    -    130    -    130 
Total costs of revenues   2,126    266    (90)   2,302    2,038    284    (33)   2,289 
Gross profit   1,402    232    (24)   1,610    1,415    281    (30)   1,666 
Depreciation & amortization   88    146    -    234    82    178    -    260 
Other operating expenses   1,537    217    (24)   1,730    1,511    226    (30)   1,707 
Segment operating (loss)/income  $(223)  $(131)  $-   $(354)  $(178)  $(123)  $-   $(301)
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:                                        
Other expense (income)   (30)   (3)   -    (33)   -    -    (31)   (31)
Income tax (benefit)/expense   -    -    (80)   (80)   -    -    (83)   (83)
Net loss attributable to non-controlling interest   -    -    -    -    -    44    -    44 
Net (loss)/income attributable to WFCF  $(193)  $(128)  $80   $(241)  $(178)  $(79)  $114   $(143)

 

19

 

 

Verification and Certification Segment

 

Verification and certification service revenues consist of fees charged for verification audits and other verification and certification related services that the Company performs for customers. Fees earned from our WFCF labeling program are also included in our verification and certification revenues as it represents a value-added extension of our source verification. Verification and certification service revenue for the three months ended March 31, 2020 decreased less than 0.4% compared to 2019.

 

Our product sales are an ancillary part of our verification and certification services and represent sales of cattle identification ear tags. Product sales for the three months ended March 31, 2020 increased approximately $0.1 million, or 13.1% compared to the same period in 2019. Overall, our product sales have increased primarily in response to the requirement for source and age verification using an identification tag at birth for cattle.

 

Costs of revenues for our verification and certification segment for the three months ended March 31, 2020 were approximately $1.5 million compared to approximately $1.6 million for the same period in 2019. Gross margin for the three months ended March 31, 2020 decreased to 39.7% compared to 41.0% in 2019 primarily due to competitive pricing offered to dairy calf ranches for significantly higher purchase volumes of cattle identification ear tags. Our margins are generally impacted by various costs such as cost of products, salaries and benefits, insurance, and taxes.

 

Other operating expenses for the three months ended March 31, 2020 increased approximately 1.7% compared to the same three month period in 2019.

 

Software Sales and Related Consulting Segment

 

Software license, maintenance and support services revenue is a revenue stream specific to our acquisitions of SureHarvest, Sow Organic, JVF Consulting and Postelsia. We employ a SaaS revenue model that bundles annual software licenses with ongoing software enhancements and upgrades and a wide range of professional services that generate incremental revenue specific to the food and agricultural industry. For the three months ended March 31, 2020, software license, maintenance and support services revenue decreased approximately 32.3% over 2019 predominately due to a significant decrease in the number of billable hours of staff focused on software enhancements and upgrades.

 

Software-related consulting service revenue primarily represents fees earned from professional consulting, customer education and training related services. Software-related consulting service revenue for the three months ended March 31, 2020 increased approximately 19.9% compared to the same period in 2019. The three month increase is due to fluctuations in customer demand for consulting services.

 

Costs of revenues for our software sales and related consulting segment for the three months ended March 31, 2020 and March 31, 2019 was approximately $0.3 million. Gross margin for the three months ended March 31, 2020 declined to 46.6% compared to 49.7% for the same period in 2019. The three month decrease in gross margin is due to the decrease in billable hours of staff focused on software enhancements and upgrades.

 

Other operating expenses for the three months ended March 31, 2020 decreased approximately 4.0% compared to the same period in 2019. The decrease is predominately due to managing general expenses.

 

As with all of our acquisitions, we continue to identify synergies and implement best practices. We focus our efforts to create value in various ways such as improving the performance of our acquired businesses, removing excess capacity, creating market access for products, acquiring skills and technologies more quickly or at a lower cost than we can build in-house, exploiting our industry-specific scalability and bundling opportunities, and picking winners early and helping them develop their businesses. Achieving any or all of these strategies take time to implement. We have learned that it can take two to three years after an acquisition to fully understand the complexities, at which time, we have seen solid improvements in revenues and/or costs.

 

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Dividend Income from Progressive Beef

 

For the three months ended March 31, 2020 and March 31, 2019, the Company received dividend income of $30,000 from Progressive Beef representing a distribution of their earnings.

 

Income Tax Expense

 

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the three months ended March 31, 2020, we recorded income tax benefit of approximately $80,000 compared to income tax benefit of $83,000 for the same period in 2019.

 

Net Income and Per Share Information

 

As a result of the foregoing, net loss attributable to WFCF shareholders for the three months ended March 31, 2020 was approximately $0.2 million and less than a penny per basic and diluted common share, respectively, compared to net loss of approximately $0.1 million and less than a penny per basic and diluted common share for the same period in 2019.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, including our principal executive and financial officers, have conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures,” as such term is defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act, to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive and financial officers concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. We believe that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and can only provide reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

There have not been any other changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various legal actions, administrative proceedings and claims in the ordinary course of business. We generally record losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable. We are not aware of any significant legal actions at this time.

 

ITEM 1A. RISK FACTORS

 

Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 2019 Annual Report on Form 10−K, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. As of March 31, 2020, the Company recognizes the coronavirus pandemic may have an economic impact on the Company, but management does not know and cannot estimate what the financial impact may be. We may also disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer Purchases of Equity Securities

 

On September 30, 2019, our Board of Directors approved a new plan to buyback up to ten million additional shares of our common stock from the open market (“Stock Buyback Plan”). Activity for the three months ended March 31, 2020 is as follows:

 

   Number of Shares   Cost of Shares   Average Cost per Share 
             
Shares purchased - January 2020   19,295   $36,382   $1.89 
Shares purchased - February 2020   7,890    15,226   $1.93 
Shares purchased - March 2020   57,040    107,085   $1.88 
 Total   84,225   $158,693   $1.88 

 

ITEM 6. EXHIBITS

 

(a) Exhibits

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 14, 2020 Where Food Comes From, Inc.
   
  By: /s/ John K. Saunders
    Chief Executive Officer
     
  By: /s/ Dannette Henning
    Chief Financial Officer

 

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