Attached files

file filename
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Where Food Comes From, Inc.ex32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Where Food Comes From, Inc.ex31-2.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Where Food Comes From, Inc.ex32-2.htm
EXCEL - IDEA: XBRL DOCUMENT - Where Food Comes From, Inc.Financial_Report.xls
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - 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 September 30, 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)

 

Registrant’s telephone number, including area code:

 (303) 895-3002

 

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

 

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

 

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

 

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

 

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

 

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of October 28, 2014, was 23,701,798.

 

 
 

 

Where Food Comes From, Inc.

Table of Contents

September 30, 2014

 

Part 1 - Financial Information
         
Item 1.   Financial Statements   3
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   18
         
Item 4.   Controls and Procedures   25
         
Part II - Other Information
         
Item 1.   Legal Proceedings   25
         
Item 1A.   Risk Factors   25
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   26
         
Item 6.   Exhibits   26

 

2
 

 

Where Food Comes From, Inc.

Condensed Consolidated Balance Sheets

 

   September 30,   December 31, 
   2014   2013 
Assets  (unaudited)     
Current assets:        
Cash and cash equivalents  $2,638,572   $1,067,537 
Restricted cash   250,000     
Accounts receivable, net   955,379    683,800 
Prepaid expenses and other current assets   169,430    143,576 
Deferred tax assets   152,631    190,184 
Total current assets   4,166,012    2,085,097 
Property and equipment, net   245,234    253,206 
Intangible assets, net   1,688,276    1,716,115 
Other long-term assets   16,000     
Goodwill   1,279,762    1,279,762 
Long-term deferred tax assets   420,716    480,294 
Total assets  $7,816,000   $5,814,474 
           
Liabilities and Equity          
Current liabilities:          
Accounts payable  $541,125   $277,633 
Accrued expenses and other current liabilities   73,921    56,091 
Customer deposits   38,495    39,134 
Deferred revenue   243,518    149,660 
Short-term debt and current portion of notes payable   7,323    24,782 
Current portion of capital lease obligations   4,340    4,173 
Total current liabilities   908,722    551,473 
Capital lease obligations, net of current portion   7,531    10,808 
Notes payable and other long-term debt, net of current portion   18,148    165,755 
Total liabilities   934,401    728,036 
           
Commitments and contingencies          
           
Contingently redeemable non-controlling interest   953,534    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; 24,249,896 (2014) and 23,233,483 (2013) shares issued, and 23,616,786 (2014) and 22,686,786 (2013) shares outstanding   24,163    23,233 
Additional paid-in-capital   7,210,953    5,216,327 
Treasury stock of 546,697 shares (2014 and 2013)   (150,849)   (150,849)
Accumulated deficit   (1,156,202)   (1,321,100)
Total Where Food Comes From, Inc. equity   5,928,065    3,767,611 
Non-controlling interest       300,431 
Total equity   5,928,065    4,068,042 
Total liabilities and stockholders’ equity  $7,816,000   $5,814,474 

 

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

 

3
 

 

Where Food Comes From, Inc.

Condensed Consolidated Statements of Income (Loss)

(Unaudited)

 

   Quarter ended 
   September 30,   September 30, 
   2014   2013 
Revenues:        
Service revenues  $2,046,550   $1,181,777 
Product sales   414,515    263,344 
Other revenue   25,580    25,041 
Total revenues   2,486,645    1,470,162 
Costs of revenues:          
Labor and other costs of services   1,041,263    563,392 
Costs of products   265,740    192,086 
Total costs of revenues   1,307,003    755,478 
Gross profit   1,179,642    714,684 
Selling, general and administrative expenses    775,020    715,652 
Income (loss) from operations   404,622    (968)
Other expense (income):          
Interest expense   3,705    17,803 
Other income, net   (932)   (381)
Income before income taxes   401,849    (18,390)
Income tax expense (benefit)   143,940    (11,019)
Net income   257,909    (7,371)
Net income loss attributable to non-controlling interests   (12,823)   (11,408)
Net income (loss) attributable to Where Food Comes From, Inc.  $245,086   $(18,779)
           
Net income (loss) per share:          
Basic  $0.01   $*  
Diluted  $0.01   $*  
           
Weighted average number of common shares outstanding:          
Basic   23,590,662    21,879,648 
Diluted   23,813,108    21,879,648 

 

* 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 Income (Loss)

(Unaudited)

 

   Year to date ended 
   September 30,   September 30, 
   2014   2013 
Revenues:        
Service revenues  $4,840,703   $3,098,976 
Product sales   786,009    544,212 
Other revenue   107,487    93,234 
Total revenues   5,734,199    3,736,422 
Costs of revenues:          
Labor and other costs of services   2,584,689    1,432,278 
Costs of products   527,702    396,164 
Total costs of revenues   3,112,391    1,828,442 
Gross profit   2,621,808    1,907,980 
Selling, general and administrative expenses    2,404,776    1,905,933 
Income from operations   217,032    2,047 
Other expense (income):          
Interest expense   9,325    29,872 
Other income, net   (1,982)   (1,115)
Income (loss) before income taxes   209,689    (26,710)
Income tax expense (benefit)   97,131    (12,229)
Net income (loss)   112,558    (14,481)
Net loss (income) attributable to non-controlling interest   52,340    (7,763)
Net loss (income) attributable to Where Food Comes From, Inc.  $164,898   $(22,244)
           
Net income (loss) per share:          
Basic  $0.01   $*  
Diluted  $0.01   $*  
           
Weighted average number of common shares outstanding:          
Basic   22,996,399    21,626,558 
Diluted   23,224,678    21,626,558 

 

* less than a penny ($0.01) per share

 

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

 

5
 

 

Where Food Comes From, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Year to date periods ended September 30, 
   2014   2013 
         
Net cash provided by operating activities  $521,041   $174,994 
           
Investing activities:          
Acquisition of International Certification Services, Inc., remaining interest   (195,926)    
Acquisition of Validus Verification Services       (565,000)
Purchase of other intangible assets   (81,000)    
Purchases of property and equipment   (62,104)   (28,920)
Net cash used in investing activities   (339,030)   (593,920)
           
Financing activities:          
Repayments of notes payable   (165,066)   (18,219)
Repayments of capital lease obligations   (3,110)   (4,497)
Restricted cash for line of credit collateral   (250,000)    
Proceeds from stock option exercise   7,200    105,292 
Proceeds from issuance of stock   1,800,000     
Stock repurchase under Buyback Program       (29,555)
Net cash provided by financing activities   1,389,024    53,021 
Net change in cash and cash equivalents   1,571,035    (365,905)
Cash and cash equivalents at beginning of period   1,067,537    1,403,489 
Cash and cash equivalents at end of period  $2,638,572   $1,037,584 

 

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

 

6
 

 

Where Food Comes From, Inc.

Condensed Consolidated Statement of Equity

Year to date period ended September 30, 2014

(Unaudited)

 

   Where Food Comes From, Inc.         
           Additional                 
   Common Stock   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           71,334                71,334 
Issuance of common shares upon exercise of options   30,000    30    7,170                7,200 
Acquisition of non-controlling interest of ICS           117,022            (312,948)   (195,926)
Private placement of shares of common stock   900,000    900    1,799,100                 1,800,000 
Net income                   164,898    12,517    177,415 
Balance at September 30, 2014   23,616,786   $24,163   $7,210,953   $(150,849)  $(1,156,202)  $   $5,928,065 

 

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

 

7
 

 

Where Food Comes From, Inc.

Notes to the Condensed 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 (the “Company,” “WFCF”, “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 third quarter and year to date period ended September 30, 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

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts from Customers, which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early adoption not permitted. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.

 

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.

 

8
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

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 nine months ended September 30, 2013, as if the acquisition of Validus had occurred on January 1, 2013:

 

   September 30, 
   2013 
     
Total revenue  $5,115,234 
Net loss available to WFCF shareholders  $(126,484)
Basic and diluted loss per share  $(0.01)

 

9
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited) 

 

Note 2 – Business Acquisitions (continued)

 

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.

 

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   Year to Date ended 
   September 30,   September 30,   September 30,   September 30, 
   2014   2013   2014   2013 
Basic:                
Weighted average shares outstanding   23,590,662    21,879,648    22,996,399    21,626,558 
                     
Diluted:                    
Weighted average shares outstanding   23,590,662    21,879,648    22,996,399    21,626,558 
Weighted average effects of dilutive securities   222,446        228,279     
Total   23,813,108    21,879,648    23,224,678    21,626,558 
                     
Antidilutive securities:   22,500    418,334    22,500    418,334 

 

The effect of the inclusion of the antidilutive shares would have resulted in a decrease in (loss), or increase in earnings, per share during the year to date periods ended September 30, 2014 and 2013. Accordingly, the weighted average shares outstanding have not been adjusted for antidilutive shares.

 

10
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited) 

 

Note 4 – Intangible Assets

 

The following table summarizes our intangible assets:

 

   September 30,   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   200,194    107,355    
    1,223,276    1,251,115    
Tradenames/ trademarks (not subject to amortization)   465,000    465,000   indefinite
   $1,688,276   $1,716,115    

 

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 U.S. 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 and year to date periods ended September 30, 2014, options to purchase 3,334 and 30,334 shares of common stock were granted, respectively. During the third quarter and year to date periods ended September 30, 2013, options to purchase 35,000 and 82,500 shares of common stock were granted, respectively. Stock-based compensation expense for the third quarters ended September 30, 2014 and 2013 was approximately $25,900 and $21,300, respectively. Stock-based compensation expense for the year to date periods ended September 30, 2014 and 2013, was approximately $71,300 and $49,300, respectively. Stock-based compensation expense has been included in general and administrative expenses.

 

11
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited) 

 

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    30,334   $1.68   $1.85    8.30      
Exercised    (30,000)  $0.24   $0.41    5.78      
Canceled    (27,835)  $0.73   $0.72    7.34      
Outstanding, September 30, 2014    390,833   $0.77   $0.73    6.90   $544,416 
Exercisable, September 30, 2014    284,990   $0.57   $0.50    6.24   $453,549 

 

The aggregate intrinsic value represents the total pre-tax intrinsic value (the aggregate difference between the closing price of our common stock on September 30, 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 September 30, 2014.

 

    Number of Options   Weighted Avg
Grant Date
Fair Value
 
Non-vested options, December 31, 2013    215,857   $0.88 
Granted    30,334   $1.85 
Vested    (130,847)  $0.69 
Forfeited    (9,501)  $1.50 
Non-vested options, September 30, 2014    105,843   $1.33 

 

Unrecognized compensation expense at September 30, 2014, was approximately $118,600.

 

Note 7 – Private Placement of Equity Securities

 

On July 1, 2014, the Company completed the sale of 900,000 shares of its common stock (“Shares”) to two investors for aggregate gross proceeds to the Company of $1,800,000. The sale was exempt under Rule 506 of Regulation D, promulgated under the Securities Act of 1933, as amended, on the basis that the offering was limited to accredited investors and involved no general solicitation or advertising. No fees were paid in connection with the transaction, as it was a non-brokered placement and no registration rights were granted to the investors.

 

12
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited) 

 

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.

 

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 third quarters ended September 30, 2014 and 2013, we recorded income tax expense of $143,940 and income tax benefit of $11,019, respectively. For the year to date periods ended September 30, 2014 and 2013, we recorded an income tax expense of $97,131 and income tax benefit of $12,229, respectively. The difference between the expected tax expense/benefit and the effective tax expense/benefit is due to the tax effects of the non-controlling interest.

 

Note 9 - Notes Payable

 

Notes payable consist of the following:

 

   September 30,   December 31, 
   2014   2013 
           
Equipment Note Payable  $25,471   $30,729 
Great Western Bank SBA Loan       159,808 
    25,471    190,537 
Less current portion of notes payable and other long-term debt   7,323    24,782 
Notes payable and other long-term debt  $18,148   $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.

 

13
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited) 

 

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 was to mature on May 1, 2021, provided for $200,000 in additional working capital. The interest rate was at prime plus 2.5% and was adjusted quarterly. Principal and interest were payable monthly. The note was paid in full during the third quarter 2014. No prepayment penalties applied.

 

WFCF Revolving Line of Credit

 

On September 2, 2014, WFCF entered into a Business Loan Agreement (the “Agreement”) and a related promissory note (the “Note”) for a revolving line of credit with Castle Rock Bank. The term of the Agreement is until September 2, 2015, and it provides for advances up to $500,000. The interest rate on any amounts borrowed under the Agreement is 3.750% per annum, payable monthly. All amounts borrowed under the Agreement and the Note must be repaid by September 2, 2015 and can be prepaid without penalties. The Agreement contains certain customary affirmative and negative covenants. There were no amounts borrowed under this line of credit through September 30, 2014. Prior to entering into the Agreement with Castle Rock Bank, the Company paid the outstanding principal balance of its existing loan with Great Western Bank in the amount of approximately $150,000.

 

The Note is secured by a certificate of deposit in the amount of $250,000 and a security interest in 500,000 shares of Where Food Comes From, Inc. common stock. The 500,000 shares are personally owned by John and Leann Saunders, significant shareholders, officers and members of the Company’s Board of Directors.

 

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 September 30, 2014, the effective interest rate was 6.25%. The LOC is collateralized by all the business assets of ICS. As of September 30, 2014, ICS had no amounts outstanding under this LOC.

 

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.

 

14
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited) 

 

Note 10 - Commitments and Contingencies (continued)

 

Operating Leases (continued)

 

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 September 30, 2014, future minimum lease payments are as follows:

 

Years ending December 31,   Amount 
2014 (remaining three months)   $26,379 
2015    63,071 
2016    27,598 
2017    1,818 
2018    303 
Total lease commitments   $119,169 

 

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.

 

15
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited) 

 

As of September 30, 2014, future minimum lease payments for capital leases are as follows:

 

Years Ending December 31,  Amount 
2014 (remaining three months)  $1,215 
2015   4,860 
2016   4,860 
2017   1,797 
Future minimum lease payments   12,732 
Less amount representing interest   (861)
Present value of net minimum lease payments   11,871 
Less current portion   (4,340)
Capital lease obligations  $7,531 

 

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 holder, 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 September 30, 2014:

  

Balance, December 31, 2013   $1,018,396 
Net loss for nine month period ended September 30, 2014    (64,862)
Balance, September 30, 2014   $953,534 

 

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

 

16
 

 

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited) 

 

Note 12 – Supplemental Cash Flow Information

 

   Quarter ended September 30, 
   2014   2013 
Cash paid during the year:          
Interest on Lapaseotes Notes - related party  $   $5,918 
Other interest  $5,592   $8,918 
           
Common stock issued in connection with Validus acquisition  $   $1,010,459 
Common stock issued in connection with Lapaseotes debt settlement  $   $214,686 

 

Note 13 – Subsequent Event

 

On October 24, 2014, an Asset Purchase Agreement (the “Asset Purchase Agreement”) was entered into by and among WFCF and Sterling Solutions, LLC (Sterling, Seller), an Oregon limited liability company, and each of the members of the Seller (Seller Members).

 

Pursuant to the Asset Purchase Agreement, WFCF purchased and acquired certain audit, assessment and verification business assets of the Seller for aggregate consideration of $251,000, which includes $150,000 in cash and 42,096 shares (the “Shares”) of common stock of WFCF valued at approximately $101,000 based upon the closing price of our stock on October 24, 2014, of $2.40 per share.

 

17
 

 

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 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 worldwide.

 

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.

 

18
 

 

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 “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 certifiers 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.

 

19
 

 

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.

 

20
 

 

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 illnesses, such as listeria and salmonella, were not unique to humans. 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

 

In early 2014, Porcine Epidemic Diarrhea Virus (PEDv) negatively impacted the pork/sow industry. The total number of known positive PEDv laboratory swine accessions grew rapidly each week. Currently there are no vaccines against the virus. 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 and second quarters 2014, which we have started to see comeback slightly during the third quarter 2014.

 

Cold weather greatly enhances the spread of the virus. Positive identification of this virus creates increased bio-exclusion considerations in our business. At worst, 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. 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 on 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 September 30, 2014, we had cash and cash equivalents of $2,638,572 compared to $1,067,537 of cash and cash equivalents at December 31, 2013. Our working capital at September 30, 2014 was $3,257,290 compared to $1,533,624 at December 31, 2013.

 

Net cash provided by operating activities for the year to date period ended September 30, 2014 was approximately $521,000 compared to net cash provided of approximately $174,994 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.

 

Net cash used in investing activities for the year to date period ended September 30, 2014 was approximately $339,000 compared to approximately $593,900 used in the 2013 period. Net cash used in 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 the acquisition of Validus as well as purchases of property and equipment.

 

21
 

 

Net cash provided by financing activities for the year to date period ended September 30, 2014 was approximately $1,389,000 compared to cash provided of $53,000 in the 2013 period. Net cash provided in 2014 was due to the private placement of 900,000 shares of common stock for $1,800,000 in cash and $7,200 in proceeds from stock option exercises offset by repayments of debt and lease obligations of approximately $168,200. Net cash provided in the 2013 period was due to proceeds from stock option exercises of $105,300 offset by stock repurchased of approximately $29,600 and repayments of debt and lease obligations of approximately $22,700.

 

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. On July 1, 2014, we completed the sale of 900,000 shares of our common stock to two investors which resulted in approximately $1,800,000 in cash proceeds.

 

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 September 2, 2014, WFCF entered into a Business Loan Agreement (the “Agreement”) and a related promissory note (the “Note”) for a revolving line of credit with Castle Rock Bank. The term of the Agreement is until September 2, 2015, and it provides for advances up to $500,000. The interest rate on any amounts borrowed under the Agreement is 3.750% per annum, payable monthly. All amounts borrowed under the Agreement and the Note must be repaid by September 2, 2015 and can be prepaid without penalties. The Agreement contains certain customary affirmative and negative covenants.

 

The Note is secured by a certificate of deposit in the amount of $250,000 and a security interest in 500,000 shares of Where Food Comes From, Inc. common stock. The 500,000 shares are personally owned by John and Leann Saunders, significant shareholders, officers and members of the Company’s Board of Directors.

 

Prior to entering into the Agreement with Castle Rock Bank, the Company paid the outstanding principal balance of its existing loan with Great Western Bank in the amount of approximately $150,000.

 

22
 

 

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.

 

Off Balance Sheet Arrangements

 

As of September 30, 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. 

 

Third Quarter and Year to Date Period Ended September 30, 2014 Compared to the Same Periods in Fiscal Year 2013

 

Revenues

 

Total revenues for the third quarter and year to date periods ended September 30, 2014 increased 69.1% and 53.5%, respectively, compared to the same periods in 2013.

 

Service revenues include sales of our USVerified solutions and related consulting, program development and web-based development services. Service revenues of approximately $2,046,600 and $4,840,700, respectively, for the third quarter and year to date periods ended September 30, 2014 increased approximately $864,800 or 73.2% and $1,741,700 or 56.2%, respectively, compared to the same periods in 2013. Overall, the increase is due to both an increase in new verification customers, as well as the inclusion of Validus operations in 2014.

 

Product sales represent sales of cattle identification ear tags. Product sales of approximately $414,500 and $786,000 for the third quarter and year to date period ended September 30, 2014 increased approximately $151,200, or 57.4%, and $241,800 or 44.4%, respectively, compared to the same periods in 2013 due to increase in number of customers.

 

Other revenue primarily represents the fees earned from our WFCF labeling program. Other revenue of approximately $25,600 and $107,500 for the third quarter and year to date period ended September 30, 2014, respectively, increased $500 or 2.2% and $14,300 or 15.3%, respectively, compared to the same periods 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 third quarter and year to date period ended September 30, 2014 was approximately $1,307,000 and $3,112,400, respectively, compared to approximately $755,500 and $1,828,400, respectively, during the same periods in 2013. Gross margin for the third quarter and year to date period ended 2014 decreased to 47.4% and 45.7%, of revenues respectively, compared to 48.6% and 51.1% of revenues, respectively, for the third quarter and year to date period 2013. Overall the increase in costs are due to change in product mix coupled with bundling opportunities offset by the inclusion of a full quarter of Validus operations in 2014.

 

23
 

 

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 third quarter and year to date 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 the remainder of 2014, thereby decreasing our gross margins.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the third quarter and year to date periods 2014 were approximately $775,000 and $2,404,800, respectively, an increase of approximately $59,400, or 8.3% and $498,800, or 26.2% over the third quarter and year to date periods 2013, respectively. Overall, the increase in our selling, general and administrative expenses is due to the inclusion of Validus operations in 2014.

 

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 third quarters and year to date periods ended September 30, 2014 and 2013, we recorded income tax expense of $143,900 and $97,100, respectively and an income tax benefit of $11,000 and $12,200, 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 income attributable to WFCF shareholders for the third quarter ended September 30, 2014 was approximately $245,100, or $0.01 per basic and diluted common share, compared to net loss of $18,800, or less than a penny per basic and diluted common share for the third quarter ended September 30, 2013. Net income attributable to WFCF shareholders for the year to date period ended September 30, 2014 was approximately $164,900, or $0.01 per basic and diluted common share, compared to a net loss of $22,200, or less than a penny per basic and diluted common share for the year to date period ended September 30, 2013.

 

24
 

 

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) Rule 13a-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 Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various legal actions, administrative proceedings and claims in the ordinary course of business. We generally record losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable.

 

ITEM 1A. RISK FACTORS

 

Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 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 September 30, 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.

 

25
 

 

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

 

On July 1, 2014, the Company completed the sale of 900,000 shares of its common stock (“Shares”) to two investors for aggregate gross proceeds to the Company of $1,800,000. The sale was exempt under Rule 506 of Regulation D, promulgated under the Securities Act of 1933, as amended, on the basis that the offering was limited to accredited investors and involves no general solicitation or advertising. No fees were paid in connection with the transaction, as it was a non-brokered placement and no registration rights were granted to the investors.

 

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
10.1     Business Loan Agreement and Promissory Note by and between Castle Rock Bank, as Lender, and Where Food Comes From, Inc., as Borrower, dated September 2, 2014 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on September 5, 2014)
31.1   Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
32.2   Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

 

26
 

 

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: November 3, 2014 Where Food Comes From, Inc.
   
  By: /s/ John K. Saunders
    Chief Executive Officer
     
  By: /s/ Dannette Henning
    Chief Financial Officer

 

 27