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EX-31.2 - SECTION 302 CERTIFICATION OF CFO - Where Food Comes From, Inc.ex31-2.htm
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EX-32.2 - SECTION 906 CERTIFICATION OF CFO - Where Food Comes From, Inc.ex32-2.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CEO - Where Food Comes From, Inc.ex32-1.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - Where Food Comes From, Inc.ex31-1.htm
 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly period ended March 31, 2014
  
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.)

 

221 Wilcox, Suite A

Castle Rock, CO 80104

(Address of principal executive offices, including zip code)

 

Issuer’s telephone number, including area code:

(303) 895-3002

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No 

 

The number of shares of the registrant’s common stock, $.001 par value per share, outstanding as of April 23, 2014, was 22,693,452.

 

 
 

 

Where Food Comes From, Inc.

Table of Contents

March 31, 2014

 

Part 1 - Financial Information
       
Item 1. Financial Statements   3
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   15
       
Item 4. Controls and Procedures   21
       
Part II - Other Information
       
Item 1. Legal Proceedings   22
       
Item 1A. Risk Factors   22
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   22
       
Item 6. Exhibits   22

 

2
 

 

Where Food Comes From, Inc.

Condensed Consolidated Balance Sheets

 

   March 31,
2014
   December 31,
2013
 
         
Assets  (unaudited)       
Current assets:          
Cash and cash equivalents  $876,601   $1,067,537 
Accounts receivable, net of $22,004 and $20,667 of allowance   570,680    683,800 
Prepaid expenses and other current assets   123,108    143,576 
Deferred tax assets   190,184    190,184 
Total current assets   1,760,573    2,085,097 
Property and equipment, net   244,671    253,206 
Intangible and other assets, net   1,751,074    1,716,115 
Goodwill   1,279,762    1,279,762 
Long-term deferred tax assets   558,662    480,294 
Total assets  $5,594,742   $5,814,474 
           
Liabilities and Equity          
Current liabilities:          
Accounts payable  $285,399   $277,633 
Accrued expenses and other current liabilities   47,385    56,091 
Customer deposits   53,686    39,134 
Deferred revenue   290,280    149,660 
Short-term debt and current portion of notes payable   25,132    24,782 
Current portion of capital lease obligations   4,228    4,173 
Total current liabilities   706,110    551,473 
Capital lease obligations, net of current portion   9,730    10,808 
Notes payable and other long-term debt, net of current portion   159,302    165,755 
Total liabilities   875,142    728,036 
           
Commitments and contingencies          
           
Contingently redeemable non-controlling interest   942,222    1,018,396 
           
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; 23,240,149 (2014) and 23,233,483 (2013) shares issued, and 22,693,452 (2014) and 22,686,786 (2013) shares outstanding   23,240    23,233 
Additional paid-in-capital   5,359,715    5,216,327 
Treasury stock of 546,697 shares   (150,849)   (150,849)
Accumulated deficit   (1,454,728)   (1,321,100)
Total Where Food Comes From, Inc. equity   3,777,378    3,767,611 
Non-controlling interest       300,431 
Total equity   3,777,378    4,068,042 
Total liabilities and equity  $5,594,742   $5,814,474 

 

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

 

3
 

 

Where Food Comes From, Inc.

Condensed Consolidated Statements of Loss

(Unaudited)

 

   Quarter ended 
   March 31,   March 31, 
   2014   2013 
Revenues:          
Service revenues  $1,205,173   $853,606 
Product sales   135,420    129,009 
Other revenue   35,833    42,888 
Total revenues   1,376,426    1,025,503 
           
Costs of revenues:          
Labor and other costs of services   717,171    405,792 
Costs of products   101,709    85,889 
Total costs of revenues   818,880    491,681 
           
Gross profit   557,546    533,822 
Selling, general and administrative expenses    831,154    625,515 
           
Loss from operations   (273,608)   (91,693)
Other expense (income):          
Interest expense   2,823    6,779 
Other income, net   (778)   (447)
           
Loss before income taxes   (275,653)   (98,025)
Income tax benefit   (78,368)   (34,288)
Net loss   (197,285)   (63,737)
Net loss attributable to non-controlling interests   63,657    5,354 
Net loss attributable to Where Food Comes From, Inc.  $(133,628)  $(58,383)
           
Net loss per share:          
Basic  $(0.01)  $* 
Diluted  $(0.01)  $* 
           
Weighted average number of common shares outstanding:          
Basic   22,692,859    21,439,355 
Diluted   22,692,859    21,439,355 
           
* less than a penny ($0.01) per share          

 

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

 

4
 

 

Where Food Comes From, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Quarter ended March 31, 
   2014   2013 
         
Net cash provided by operating activities  $89,098   $83,455 
           
Investing activities:          
Acquisition of International Certification Services, Inc., remaining interest   (195,926)    
Purchase of other intangible assets   (65,000)    
Purchases of property and equipment   (13,582)   (4,520)
Net cash used in investing activities   (274,508)   (4,520)
           
Financing activities:          
Repayments of notes payable   (6,103)   (5,769)
Repayments of capital lease obligations   (1,023)   (2,517)
Proceeds from stock option exercise   1,600    31,500 
Net cash (used in) provided by financing activities   (5,526)   23,214 
Net change in cash and cash equivalents   (190,936)   102,149 
Cash and cash equivalents at beginning of period   1,067,537    1,403,489 
Cash and cash equivalents at end of period  $876,601   $1,505,638 

 

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

 

5
 

 

Where Food Comes From, Inc.

Condensed Consolidated Statement of Equity

Quarter ended March 31, 2014

(Unaudited)

 

   Where Food Comes From, Inc.         
   Common Stock    Additional Paid-in   Treasury   Accumulated   Non-controlling       
   Shares    Amount    Capital    Stock    Deficit    Interest    Total  
Balance at December 31, 2013   22,686,786   $23,233   $5,216,327   $(150,849)  $(1,321,100)  $300,431   $4,068,042 
Stock-based compensation expense           24,773                24,773 
Issuance of common shares upon exercise of options   6,666    7    1,593                1,600 
Acquisition of non-controlling interest of ICS           117,022            (312,948)   (195,926)
Net (loss) income                   (133,628)   12,517    (121,111)
Balance at March 31, 2014   22,693,452   $23,240   $5,359,715   $(150,849)  $(1,454,728)  $   $3,777,378 

 

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

 

6
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

 

Note 1 - The Company and Basis of Presentation

 

Business Overview

 

Where Food Comes From, Inc. is a Colorado corporation based in Castle Rock, Colorado (the “Company,” “our,” “we,” or “us”). We provide verification and certification solutions for the agriculture, livestock and food industry. Most of our customers are located throughout the United States.

 

On February 29, 2012, we completed an acquisition of a 60% ownership investment in a North Dakota company, International Certification Services, Inc. (“ICS”). On March 1, 2014, the Company exercised its call option to purchase the remaining 40% interest of the stock of ICS (Note 2).

 

On September 16, 2013, we acquired the auditing business of Praedium Ventures, LLC, previously known as Validus Ventures, LLC (“Validus”) (Note 2). This acquisition has been accounted for using the acquisition method of accounting and, accordingly, its results are included in the Company’s consolidated financial statements from the date of acquisition.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the results of operations, financial position and cash flows of Where Food Comes From, Inc. and its majority-owned subsidiaries, ICS and Validus (collectively referred to as “we,” “us,” and “our” throughout this Form 10-Q). All intercompany balances have been eliminated.

 

The condensed 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, 2013, included in our Form 10-K filed on March 4, 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. The financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations. The consolidated operating results for the first quarter ended March 31, 2014 are not necessarily indicative of the results to be expected for any other interim period of any future year.

 

Seasonality

 

Our business is subject to seasonal fluctuations. Significant portions of our revenues are typically realized during the second and third quarters of the fiscal year 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

 

We have considered all recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.

 

7
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

 

Note 2 – Business Acquisitions

 

Validus Acquisition

 

On September 16, 2013, we entered into an Asset Purchase and Contribution Agreement (the “Purchase Agreement”), by and among the Company, Validus Verification Services LLC (the “Buyer” or “Validus”), and Praedium Ventures, LLC (the “Seller”).

 

Pursuant to the Purchase Agreement, WFCF caused Validus to be organized to purchase and acquire certain audit, assessment and verification business assets of the Seller. Such assets acquired included, but were not limited to, verification tools used in the acquired business, including the processes, procedures, systems and documents, intellectual property, a database, contracts and licenses and accounts receivable. Validus acquired such assets in exchange for aggregate consideration of approximately $1.5 million, which included $565,000 in cash and 708,681 shares (the “Shares”) of common stock of WFCF valued at approximately $940,000, based upon the closing price of our common stock on September 16, 2013, of $1.32 per share. In connection with this transaction, the Seller was also issued a 40% interest in Validus, with the Company holding a 60% interest. The Company has the first right of refusal on the remaining 40% of the outstanding stock.

 

At any time following the thirty-month anniversary of the effective date of the Purchase Agreement, the Company shall have the option, but not the obligation, to purchase all the units (the 40% interest) of Validus held by Praedium, and Praedium shall have the option, but not the obligation, to require the Company to purchase all the units of Validus held by Praedium.

 

Because Praedium, at its option, can require the Company to purchase its 40% interest in Validus, the Validus noncontrolling interest meets the definition of a contingently redeemable non-controlling interest (Note 11).

 

The following unaudited pro forma information presents the results of operations for the three months ended March 31, 2013, as if the acquisition of Validus had occurred on January 1, 2013:

 

Total revenue  $1,293,773 
Net loss  $(158,856)
Basic and diluted loss per share  $(0.01)

 

ICS Acquisition

 

On February 29, 2012, we entered into a Purchase and Exchange Agreement (the “Purchase Agreement”), by and among the Company and ICS, and other shareholders as individually named in the Agreement (collectively the “Sellers”).

 

On March 1, 2014, the Company exercised its call option to purchase the remaining 40% interest of the stock of ICS in exchange for cash consideration of approximately $196,000, pursuant to the Purchase Agreement, dated February 29, 2012. The carrying amount of the non-controlling interest was adjusted to $0 to reflect the change in the Company’s ownership interest up to 100%. The difference between the fair value of the consideration paid and the carrying value of the non-controlling interest on the date of the transaction was adjusted to equity.

 

8
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

 

Note 3 - Basic and Diluted Net Income (Loss) per Share

 

Basic net income (loss) per share was computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) 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 warrants 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 schedule is a reconciliation of the share data used in the basic and diluted net income (loss) per share computations:

 

   Quarter ended 
   March 31,   March 31, 
   2014   2013 
Basic:          
Weighted average shares outstanding   22,692,859    21,439,355 
           
Diluted:          
Weighted average shares outstanding   22,692,859    21,439,355 
Weighted average effects of dilutive securities        
Total   22,692,859    21,439,355 
           
Antidilutive securities:   195,811    665,800 

 

The effect of the inclusion of the antidilutive shares would have resulted in a decrease in loss per share during the quarters ended March 31, 2014 and 2013. Accordingly, the weighted average shares outstanding have not been adjusted for antidilutive shares.

 

Note 4 – Intangible Assets

 

The following table summarizes our intangible assets:

 

   March 31,   December 31,   Estimated
   2014   2013   useful life
              
Intangible assets subject to amortization:             
Tradenames/ Trademarks  $64,307   $64,307   2.5 - 8.0 years
Accreditations   88,663    88,663   5.0 years
Customer Relationships   1,150,300    1,085,300   8.0 - 15.0 years
Beneficial Lease Arrangement   120,200    120,200   11.0 years
    1,423,470    1,358,470    
Less accumulated amortization   137,396    107,355    
    1,286,074    1,251,115    
Tradenames/ trademarks (not subject to amortization)   465,000    465,000   indefinite
   $1,751,074   $1,716,115    

 

9
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

 

On February 28, 2014, we acquired customer relationships from a third party for $65,000 cash. This asset is being amortized from the date of acquisition on a straight-line basis over 8 years.

 

Note 5 - Stock-Based Compensation

 

Our stock-based award plans (collectively referred to as the “Plans”) provide for the issuance of stock-based awards to employees, officers, directors and consultants. The Plans permit the granting of stock awards and stock options. The vesting of stock-based awards is generally subject to meeting certain performance-based objectives, the passage of time or a combination of both, and continued employment through the vesting period.

 

The fair value of stock options is estimated using the Black-Scholes option-pricing model, which incorporates ranges of assumptions for inputs. Our assumptions are as follows:

 

·Dividend yield is based on our historical and anticipated policy of not paying cash dividends.
·Expected volatility assumptions were derived from our actual volatilities.
·The risk-free interest rate is based on the US Treasury yield curve in effect at the date of grant with maturity dates approximately equal to the expected term at the grant date.
·The expected term of options represents the period of time that options granted are expected to be outstanding giving consideration to vesting schedules, based on historical exercise patterns, which we believe are representative of future behavior.

 

For the quarter ended March 31, 2014, options to purchase 25,000 shares of common stock were granted to employees. These options vest over three years and have a ten year term\. No options were granted during the first quarter ended March 31, 2013. Stock-based compensation expense for the first quarters ended March 31, 2014 and 2013 was $24,773 and $13,208, respectively. Stock-based compensation expense has been included in general and administrative expenses.

 

Note 6 - Stock Option Plan Activity

 

Stock option activity under our Plans is summarized as follows:

 

   Number of Options/Warrants   Weighted Avg. Exercise Price per Share   Weighted Avg. Fair Value per Share   Weighted Avg. Remaining Contractual
Life (in years)
   Aggregate Intrinsic Value 
                          
Outstanding, December 31, 2013   418,334   $0.66   $0.24    7.49   $560,443 
Granted   25,000   $1.85   $1.85    9.80      
Exercised   (6,666)  $0.24   $1.85    7.01      
Canceled      $   $          
Outstanding, March 31, 2014   436,668   $0.73   $0.70    7.40   $683,461 
Exercisable, March 31, 2014   195,811   $0.46   $0.35    6.08   $360,688 

 

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, 2014 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, 2014.

 

10
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

 

       Weighted Avg 
   Number of    Grant Date  
   Options    Fair Value 
Non-vested options outstanding at beginning of period   215,857   $0.88 
Granted   25,000   $1.85 
Vested      $ 
Forfeited      $ 
Non-vested options outstanding at end of period   240,857   $0.96 

 

Unrecognized compensation expense at March 31, 2014, was approximately $194,000.

 

Note 7 - Stock Buyback Plan

 

On January 7, 2008, we announced our intention to buy back up to one million shares of our common stock from the open market. Since our January 2008 announcement, we have repurchased 546,697 shares under the Stock Buyback Plan for a total cost of $150, 849.

 

The repurchased shares are recorded as part of treasury stock and are accounted for under the cost method.

 

Our stock buyback plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. In the future, we may consider additional share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, and planned investment and financing needs.

 

Note 8 – Income Taxes

 

Deferred tax assets and liabilities have been determined based upon the differences between the financial statement amounts and the tax bases of assets and liabilities as measured by enacted tax rates expected to be in effect when these differences are expected to reverse. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our net operating loss (“NOL”) carry forwards are the most significant component of our deferred tax assets; however, the ultimate realization of our deferred tax assets is dependent upon generation of future taxable income. We consider past history, the scheduled reversal of taxable temporary differences, projected future taxable income, and tax planning strategies in making this assessment. Utilization of our NOL carry forwards reduces our federal and state income tax liability incurred.

 

The Company’s subsidiary, Validus, is a Colorado limited liability company (LLC). As an LLC, management believes Validus is not subject to income taxes, and such taxes are the responsibility of the respective members.

 

11
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

 

The provision (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 first quarters ended March 31, 2014 and 2013, we recorded an income tax benefit of $78,368 and $34,288, respectively. The difference between the expected tax benefit and the effective tax benefit is due to the tax effects of the 40% non-controlling interest in Validus, as an LLC, passing to the non controlling interest holders.

 

Note 9 - Notes Payable

 

Notes payable consist of the following:

 

   March 31,   December 31, 
   2014   2013 
           
Equipment Note Payable  $29,000   $30,729 
Great Western Bank SBA Loan   155,434    159,808 
    184,434    190,537 
Less current portion of notes payable and other long-term debt   25,132    24,782 
Notes payable and other long-term debt  $159,302   $165,755 

 

Equipment Note Payable

 

In December 2012, we entered into a note payable of $37,407 for the purchase of a vehicle. Interest and principal payments are due in equal monthly installments of $715 over five years beginning January 2013. This note bears an interest rate of 5.5% per annum and is collateralized by the vehicle.

 

Great Western Bank SBA Loan

 

On April 22, 2011, we entered into a U.S. Small Business Administration (“SBA”) Note with Great Western Bank. This note, which matures on May 1, 2021, provides for $200,000 in additional working capital. The interest rate is at prime plus 2.5% and is adjusted quarterly. Principal and interest are payable monthly. As of March 31, 2014, the effective interest rate is 5.75%. The note can be prepaid without penalties and contains certain customary affirmative and negative covenants.

 

The loan agreement is collateralized by the accounts receivable, property and equipment, and intangible assets of the Company. The note is further guaranteed by John and Leann Saunders, significant shareholders, officers and members of the Company’s Board of Directors, with a security interest in 3,000,000 shares of the Company’s common stock, which are personally owned by the Saunders.

 

ICS Revolving Line of Credit

 

ICS has a revolving line of credit (LOC) agreement which was renewed on April 1, 2014 and matures April 1, 2017. The LOC provides for $70,050 in working capital. The interest rate is at the New York prime rate plus 2.250% 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, 2014, the effective interest rate was 6.25%. The LOC is collateralized by all the business assets of ICS. As of March 31, 2014, ICS had no amounts outstanding under this LOC.

 

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Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

 

Note 10 - Commitments and Contingencies

 

Operating Leases

 

We lease the building for our headquarters in Castle Rock, Colorado. The lease is for a period of three years with an expiration date of June 15, 2015. In addition to the primary rent, the lease requires additional payments for operating costs and other common area maintenance costs.

 

We also own approximately ¾ acre on which a 2,300 square foot building leased by our ICS office is located in Medina, North Dakota. The North Dakota office is leased for a period of five years with an expiration date of March 1, 2018. One additional option to renew for a five-year term exists and is deemed to automatically renew unless written notice is provided 60 days before the end of the term. Rent for this location consists of a minimum monthly rental rate of approximately $150 plus all utilities, taxes and other expenses based on actual expenses to maintain the building.

 

In September 2013, as part of the Validus acquisition (see Note 2), Validus entered into a sub-lease agreement for its office space with Praedium. The lease is for a period of three years, expiring October 31, 2016. There is no renewal feature. In addition to primary rent, the lease requires additional payments for operating costs and other common area maintenance costs.

 

As of March 31, 2014, future minimum lease payments are as follows:

 

2014 (remaining nine months)  $79,007 
2015   63,071 
2016   27,598 
2017   1,818 
2018   303 
Total lease commitments  $171,797 

 

Sub-lease Agreement

 

ICS sub-leases approximately 300 square feet of space located within its corporate office to a third party on a month-to-month basis. Monthly rent of $302 includes utilities and other common area maintenance. The sub-lease agreement provides for 30 days’ notice to terminate the agreement.

 

Capital Leases

 

We lease certain office equipment under a capital lease with a base rent of $405 per month. This 63-month lease expires April 2017. Approximately $22,300 in asset cost has been included in property and equipment and is being amortized over 63 months. Imputed interest of 5.25% was used in determining the minimum lease payments.

 

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Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

 

As of March 31, 2014, future minimum lease payments for capital leases are as follows:

 

2014 (remaining nine months)  $3,645 
2015   4,860 
2016   4,860 
2017   1,797 
Future minimum lease payments   15,162 
Less amount representing interest   (1,204)
Present value of net minimum lease payments   13,958 
Less current portion   (4,228)
Capital lease obligations  $9,730 

 

Legal proceedings

 

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

 

Note 11 – Contingently Redeemable Noncontrolling Interest

 

Contingently redeemable noncontrolling interest on our condensed consolidated balance sheet represents the noncontrolling interest related to the Validus acquisition, in which the noncontrolling interest, at its election, can require the Company to purchase its 40% investment in Validus. Below is a table reflecting the activity of the contingently redeemable noncontrolling interest at March 31, 2014:

 

Balance, December 31, 2013  $1,018,396 
Net loss for quarter ended March 31, 2014   (76,174)
Balance, March 31, 2014  $942,222 

 

The contingently redeemable noncontrolling interest is adjusted to the greater of the carrying value or redemption value as of each period end.

 

Note 12 – Supplemental Cash Flow Information

 

   Quarter ended March 31, 
   2014   2013 
Cash paid during the year:          
Interest on Lapaseotes Notes - related party  $   $5,918 
Other interest  $2,631   $3,152 
Income taxes  $   $ 

 

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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 condensed 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, 2013. The following discussion and analysis includes historical and certain forward−looking information that should be read together with the accompanying condensed 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. is a leading provider of verification and communication solutions for the agriculture, livestock and food industry. We provide our owned and operated online products and services which specialize in identification and traceability, process/production-practice/supply verification, document control for the United States Department of Agriculture (“USDA”) and other verification programs and third party auditing services. Our services ensure compliance with governmental and private standards by providing transparency and value in food products for both producers and consumers world-wide.

 

In late 2012, we changed our corporate name from Integrated Management Information, Inc. (“IMI”) to Where Food Comes From, Inc. to better reflect our brand strategy and to raise awareness in the investor community. We are listed on the over-the-counter electronic bulletin board (“OTC:BB”) under the stock ticker symbol “WFCF.”

 

Management’s Strategy

 

For several years, management focused its efforts on building a strong foundation to enhance profitability for the long term. Initially our efforts focused on our age and source verification services. Throughout 2009, we introduced a more robust offering of verification services. We also internally developed automated processes which improved our efficiency and reduced our employee headcount. As a direct result, total verification sales and hardware sales improved. We were able to provide more verification certifications (a multiple service offering) in a single audit. Interestingly enough, because our customers were seeing more profit per head from multiple verifications at a minimal increase in cost per verification service, they increased the number of cattle within each group audited.

 

In early 2009, we understood that all this work was necessary to build a solid foundation but we also recognized we needed to be on the cutting edge of this industry and that the most significant person to influence the food industry was the consumer. We were concerned about various food claims that the industry made without any third party verification. In response, we identified opportunities for horizontal and vertical integration and focused on developing a self-sustaining revenue stream with minimal management and labor costs, while simultaneously addressing food concerns near to our heart.

 

In early 2010, we began to see some of the fruits of our labor. We were able to connect food processors and packers to those suppliers that provided product verified for the specific credence attributes demanded, thereby generating a new revenue stream based upon coordination within the food supply chain. We also introduced the WhereFoodComesFrom® brand. Revenue generated from this program is based upon a similar supply chain sales model. Many long hours of research went into this project and currently we are working hard to market this program to the consumer. Research indicates that transparency in food production is becoming more and more important to consumers. We believe that the future growth of verification services will be achieved only through consumer awareness and demand. The WhereFoodComesFrom® brand is a labeling program that reconnects the consumer to the farmers and ranchers that produce the food. For the consumer, it is a seal of approval on a package or an individual product that provides assurance that those marketing claims are authentic and have been verified by an accredited, unbiased third party.

 

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During 2010, we made the decision to invest heavily in marketing our services and our WhereFoodComesFrom® labeling program to build consumer awareness and demand. These efforts continue today through the use of videos, television exposure, word-of-mouth and the internet. We believe we are positioning ourselves to benefit significantly in 2014 and beyond, but, of course, no assurance can be given that this investment will generate future revenue nor can we determine for how long, if at all.

 

Beginning in 2011, we began evaluating objectives to grow revenue through acquisitions and strategic investments to gain entry into other commodity markets. The acquisition of ICS in February 2012 represented an opportunity to extend the range of our existing programs and establish our capabilities in other major food groups, including grain, fruits and vegetables, organic and gluten-free. Our acquisition of Validus in September 2013 further diversified our business and extended our reach into the pork, poultry and dairy industries. We regularly evaluate acquisition and investment opportunities that complement our long-term strategic objectives.

 

Acquisition of Validus Verification Services LLC

 

On September 16, 2013, we entered into an Asset Purchase and Contribution Agreement (the “Asset Purchase Agreement”), by and among the Company, Validus Verification Services LLC (the “Buyer” or “Validus”), and Praedium Ventures, LLC, formerly known as Validus Ventures LLC (the “Seller”).

 

Pursuant to the Purchase Agreement, WFCF caused Validus to be organized to purchase and acquire certain audit, assessment and verification business assets of the Seller. The Company acquired a 60% interest in Validus in exchange for aggregate consideration of approximately $1.5 million, which included $565,000 in cash and 708,681 shares (the “Shares”) of common stock of WFCF valued at approximately $940,000 based upon the closing price of our stock on September 16, 2013, of $1.32 per share. The Company has the first right of refusal on the remaining 40% of the outstanding stock.

 

We believe that Validus is the leading dairy, pork and poultry certifier in the United States and represents an opportunity to extend the range of our existing programs and establish our capabilities in other major food groups. As a result of this acquisition, we believe we are now positioned to offer our customers new solutions across the verification and certification spectrum. We also believe it provides diversification for our company, enables us to better serve our customers, and provides another avenue for our WFCF program.

 

Current Marketplace Opportunities

 

We believe the following marketplace opportunities will drive our business forward effectively increasing consumer demand for third party verification services:

 

U.S. beef has been largely absent from the EU for the past 20+ years due to an EU ban on hormone-treated meat and meat products. In late 2009, the EU announced an annual duty-free quota of 20,000 metric tons for high-quality beef from cattle not treated with growth hormones (“NHTC”). In March 2012, the EU expanded the annual duty-free quota from 20,000 metric tons to 48,200 metric tons. In October 2013, the U.S. signed a two-year extension to the existing trade agreement with the European Union regarding zero-tariffs for beef from non-hormone treated cattle, which means that demand for NHTC will continue. NHTC requires third party verification, but with duty-free access lowering the cost of doing business in Europe, we believe that it offers significantly more potential for third party NHTC verification services and our product line, High Quality Beef verification services.

 

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One-fourth of the world’s beef and nearly one-fifth of the world’s grain, milk and eggs are produced in the United States. With increased consumer consciousness, Americans are demanding to know where their food comes from and how they can support development of local and regional food systems. We believe that as consumers become better educated they will have more confidence in their food purchase decisions. As of early 2014, we have a major retailer, a very well-known restaurant, five major meat packers and a food service distributor utilizing the Where Food Comes From® label. Consumer demand continues to promote growth of our “Where Food Comes From®” labeling program.

 

According to the Organic Monitor, the worldwide market for certified organic products was estimated at $59.4 billion in 2010. The U.S. market was estimated at $28.5 billion in 2010 and is expected to reach $42.5 billion by 2015. Increasing consumer demand for healthy, better-for-you products produced with sustainable agricultural practices is driving growth in the organic market. Additionally, specialty food-store chains, conventional grocery store chains and big box retailers are allocating more shelf space to organic products in order to meet the growing demand. Our acquisition of ICS in February 2012 created a strategic transaction offering major participants in the food and agriculture industries a comprehensive range of verification services for the major food groups through a single platform.

 

In January 2013, the Food Safety Modernization Act (FSMA) issued two major proposed rules regarding preventive controls in human food and produce safety. The most anticipated element of FSMA was the requirement that all Food and Drug Administration (FDA) regulated food companies develop and implement written food safety plans. The proposed rule on preventive controls for human food (i.e., requiring written food safety plans) would apply to all facilities that manufacture, process, pack or hold human food. The rules for animal food controls call on the industry to enact many of the practices that are required of producers and processers of human food. Most notably is the requirement for conducting a Hazard Analysis, establishing controls for identified hazards and enacting monitoring, verification and record keeping protocols. To many, this brings to mind a Hazard Analysis and Critical Control Point or HACCP Plan. As a result of our acquisition of Validus auditing business in September 2013, we believe we are now positioned to offer our customers new solutions across the verification and certification spectrum, especially in the realm of animal food and HACCP Plans.

 

In March 2013, the USDA mandated the Animal Disease Traceability Rule primarily covering cattle 18 months of age or less. This ruling solidified the need for beef producers to participate in a national animal identification program. In December 2013, the USDA announced a final rule establishing general regulations for improving the traceability of U.S. livestock moving interstate. Under the final rule, unless specifically exempted, livestock moved interstate would have to be officially identified and accompanied by an interstate certificate of veterinary inspection or other documentation, such as owner-shipper statements or brand certificates. This ruling solidifies the need for beef producers to participate in a national animal identification program. This presents a significant opportunity for our business. As a result, we have been participating in an industry-led coalition to offer private industry solutions for this ruling.

 

In July 2013, the FDA issued rules on importer foreign supplier verification and accreditation of third-party auditors. The first rule establishes the Foreign Supplier Verification Program (FSVP), which requires importers of food to analyze any hazards related to the imported food. If hazards exist, the importer must verify that the hazards are controlled through a third party audit. The second rule establishes an accreditation program for third party certification bodies to conduct food safety audits of foreign facilities. The accredited third parties will verify the safety of imports with FDA oversight. These new rules will help to ensure that imported foods meet the same safety standards that domestic foods do. Food safety is extremely important to all of us. It seems that the timing of our acquisition of the Validus auditing business in September 2013 couldn’t be better. Validus is in the final stages of receiving the ISO 65 accreditation to provide Safe Quality Food certifications to specific segments of the food industry.

 

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In October 2013, the FDA released its proposed rules for preventative controls for animal food. The rules take animal feed and pet food regulation a step closer to human food regulations. Over the past few years food related illness were not unique to humans with listeria or salmonella outbreaks. At the same time, there were issues with arsenic in dog food, and most recently death from jerky treats. It has made the FSMA proposed rules much more recognizably important. We believe that in connection with the acquisition of the Validus auditing business in September 2013, we are in a dominant market position. Validus provides audits and assessments to producers in order to verify responsible animal welfare, environmental, on-farm security, and worker care production practices. Additionally, Validus owns the Facility Certification Institute and their extensive work and wide range of experience in the animal feed and pet food arena is well recognized.

 

Current Concerns in our Industry

 

We are currently assessing the risk of Porcine Epidemic Diarrhea Virus (PEDv) on the pork/sow industry. The total number of known positive PEDv laboratory swine accessions is growing rapidly each week and currently there are no vaccines against the virus. Furthermore, cold weather greatly enhances the spread of the virus. Positive identification of this virus creates increased bio-exclusion considerations in our business. At worse, the virus has the potential to significantly reduce the number of on-site verifications or at best, it would shift the timing of on-site verifications further impacting seasonality in our business.

 

In February 2014, in order to prevent the spread of PEDv, the USDA published a request that pig farmers submit accurate on farm inventory, birth, and death rates in an effort to minimize persons sent to farms to collect data. The impact of this news significantly delayed the number of onsite pork verifications scheduled in first quarter 2014. We also believe in light of this information that the number of onsite pork verifications may continue to be delayed through second quarter 2014, and possibly continuing through the remainder of 2014.

 

While we attempt to mitigate these risks by creating innovative solutions that mitigate the risk of transferring disease, we can give no assurance that we will be successful in overcoming the potential negative impact to the results our operations.

 

Seasonality

 

Our business is subject to seasonal fluctuations. Significant portions of our revenues are typically realized during the second and third quarters of the fiscal year 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, 2014, we had cash and cash equivalents of $876,601 compared to $1,067,537 of cash and cash equivalents at December 31, 2013. Our working capital at March 31, 2014 was $1,054,463 compared to $1,533,624 at December 31, 2013.

 

Net cash provided by operating activities for the quarter ended March 31, 2014 was approximately $89,100 compared to net cash provided of approximately $83,500 during the same period in 2013. Net cash provided by operating activities is driven by our net income (loss) and adjusted by non-cash items. Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock based compensation expense and deferred taxes.

 

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Net cash used in investing activities for the quarter ended March 31, 2014 was approximately $274,500 compared to approximately $4,500 used in the 2013 period. Net cash used in the first quarter of 2014 was primarily attributable to the acquisition of the remaining 40% interest in ICS in which we paid $195,900 in cash as well as acquiring certain intangible assets of Global Animal Management, Inc. for cash of $65,000. Net cash used in the 2013 period was directly related to purchases of property and equipment.

 

Net cash used in financing activities for the year to date period ended March 31, 2014 was approximately $5,500 compared to cash provided of $23,200 in the 2013 period. Net cash used in the first quarter of 2014 was due to repayments of debt and lease obligations of approximately $7,100 offset slightly by $1,600 in proceeds from stock option exercises. Net cash provided in the 2013 period was due to proceeds from stock option exercises of $31,500 offset by repayments of debt and lease obligations of approximately $8,300.

 

Historically, our growth has been funded through a combination of convertible debt from private investors and private placement offerings. We continually evaluate all funding options including additional offerings of our securities to private, public and institutional investors and other credit facilities as they become available.

 

The primary driver of our operating cash flow is our third-party verification solutions, specifically the gross margin generated from services provided. Therefore we focus on the elements of those operations including revenue growth and long term projects that ensure a steady stream of operating profits to enable us to meet our cash obligations. On a weekly basis we review the performance of each of our revenue streams focusing on third party verification solutions compared with prior periods and our operating plan. We believe that our various sources of capital, including cash flow from operating activities, overall improvement in our performance, and our ability to obtain additional financing are adequate to finance current operations as well as the repayment of current debt obligations. We are not aware of any other event or trend that would negatively affect our liquidity. In the event such a trend develops, we believe that there are sufficient financing avenues available to us and from our internal cash generating capabilities to adequately manage our ongoing business.

 

The culmination of all our efforts toward net income has brought opportunities to us including: increased investor confidence and renewed interest in our company, third-party interest in our expertise to develop and enhance websites, as well as the potential to develop business relationships with long term strategic partners. In keeping with our core business, we will continue to review our business model with a focus on profitability, long term capital solutions and the potential impact of acquisitions or divestitures, if such an opportunity arises.

 

Our plan for continued growth is primarily based upon acquisitions as well as intensifying our focus on international markets. We believe that there are significant growth opportunities available to us because often the only means to entry as imposed on international market imports/exports is via a quality verification program.

 

Debt Facility

 

On April 22, 2011, we entered into a U.S. Small Business Administration Note with Great Western Bank. The Note which matures on May 1, 2021 provides for $200,000 in additional working capital. The interest rate on the Note is at prime plus 2.5% and is adjusted quarterly. Principal and interest are payable monthly. The note can be prepaid without penalties and contains certain customary affirmative and negative covenants.

 

The loan agreement is secured by the accounts receivable, property and equipment, and intangible assets of the Company. The Note is further guaranteed by John and Leann Saunders, founders of the Company, with a security interest in 3,000,000 shares of the Company’s common stock, which are personally owned by the Saunders.

 

ICS has a revolving line of credit (LOC) agreement which was renewed on April 1, 2014 and matures April 1, 2017. The LOC provides for $70,050 in working capital. The interest rate is at the New York prime rate plus 2.250% 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. The LOC is collateralized by all the business assets of ICS.

 

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Off Balance Sheet Arrangements

 

As of March 31, 2014, we had no off-balance sheet arrangements of any type.

 

RESULTS OF OPERATIONS

 

Both the ICS and Validus acquisitions (as further described in Note 2 to the financial statements) have been accounted for using the acquisition method of accounting and accordingly, results are included in the following discussion from the date of acquisition. 

 

First quarter ended March 31, 2014 compared to the Same Period in Fiscal Year 2013

 

Revenues

 

Total revenues for the first quarter ended March 31, 2014 increased 34.2% compared to the same period in 2013.

 

Service revenues include sales of our USVerified solutions and related consulting, program development and web-based development services. Service revenues of approximately $1,205,200 for the first quarter ended March 31, 2014 increased approximately $351,600, or 41.2% compared to the same period in 2013. Overall, the increase is due to both an increase in new verification customers, as well as the inclusion of a full quarter of Validus operations in 2014.

 

Product sales represent sales of cattle identification ear tags. Product sales of approximately $135,400 for the first quarter ended March 31, 2014 slightly increased approximately $6,400, or 5.0%, compared to the same period in 2013.

 

Other revenue primarily represents the fees earned from our WFCF labeling program. Other revenue of approximately $35,800 for the first quarter ended March 31, 2014, decreased $7,100 or 16.4% compared to the same period in 2013. This revenue source is still in its infancy and we anticipate growth in the future as more and more food producers continue to show interest in this product offering.

 

Cost of Revenues and Gross Margin

 

Cost of revenues for the first quarter ended March 31, 2014 was approximately $818,900 compared to approximately $491,700 during the first quarter 2013. Gross margin for the first quarter 2014 decreased to 40.1% of revenues compared to 52.1% for the first quarter 2013. Overall the increase in costs are due to seasonality and the inclusion of a full quarter of Validus operations in 2014.

 

Our margins are impacted by various costs such as cost of products, salaries and benefits, insurance, and taxes. Because certain elements of our cost of revenues are fixed in nature, incremental sales positively impact our margins. Conversely, our gross margins for first quarter 2014 declined compared to 2013, predominately due to the absorption of certain fixed costs incurred by Validus, whose onsite pork verification revenue was delayed due to PEDv. We believe that the number of onsite pork verifications will continue to be delayed through second quarter 2014, and possibly continuing through the remainder of 2014, thereby decreasing our gross margins.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the first quarter 2014 were approximately $831,100, an increase of $205,600, or 32.9% over the first quarter 2013. Overall, the increase in our selling, general and administrative expenses is due to the inclusion of a full quarter of Validus operations in 2014.

 

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Income Tax Benefit/Expense

 

The provision (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 first quarters ended March 31, 2014 and 2013, we recorded an income tax benefit of $78,368 and $34,288, respectively. The difference between the expected tax benefit and the effective tax benefit is due to the tax effects of the non-controlling interest.

 

Net Income (Loss) and Per Share Information

 

As a result of the foregoing, net loss attributable to WFCF shareholders for the first quarter ended March 31, 2014 was approximately $133,600, or a penny per basic and diluted common share, compared to a net loss of $58,400, or less than a penny per basic and diluted common share for the first quarter ended March 31, 2013.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective based on our evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

 

Internal Control Over Financial Reporting

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-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.

 

ITEM 1A. RISK FACTORS

 

Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 2013 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, 2014, there have been no material changes to the risks disclosed in our most recent Annual Report on Form 10−K. We may also disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

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

 

In connection with the Validus acquisition (see Note 2 to the accompanying condensed consolidated financial statements), we issued 708,681 shares of common stock of Where Food Comes From, Inc. valued at approximately $935,500 based upon the closing price of our stock on September 16, 2013, of $1.32 per share.

 

For services rendered by our advisors in connection with the Validus acquisition (see Note 2 to the accompanying condensed consolidated financial statements), we issued 56,818 shares of common stock of WFCF valued at approximately $75,000 based upon the closing price of our stock on September 16, 2013, of $1.32 per share.

 

In connection with the settlement of a $200,000 unsecured note with a related party, we issued 175,972 shares of common stock of WFCF valued at approximately $214,700 based upon the market price at the date of the agreement of $1.22 per share.

 

The aforementioned shares were issued pursuant to the exemption from registration provided by Section 4 (2) of the Securities Act of 1933. The shares bear a legend restricting the sale, transfer or exchange, and may only be sold, transferred or exchanged pursuant to a registration of such shares or a valid exemption therefrom.

 

ITEM 6. EXHIBITS

 

(a) Exhibits

 

  Number   Description
  31.1   Section 302 Certification of CEO
  31.2   Section 302 Certification of CFO
  32.1   Section 906 Certification of CEO
  32.2   Section 906 Certification of CFO

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: May 5, 2014 Where Food Comes From, Inc.
   
  By: /s/ John K. Saunders
    Chief Executive Officer
     
  By: /s/ Dannette Henning
    Chief Financial Officer

 

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