Where Food Comes From, Inc. - Quarter Report: 2012 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File No. 333-133624

INTEGRATED MANAGEMENT INFORMATION, INC.

(Name of Small Business Issuer in its charter)

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 S     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 S      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.

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

Yes £     No S   

The number of shares of the registrant’s common stock, $.001 par value per share, outstanding as of October 26, 2012 was 21,173,799.

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

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

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

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

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

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

Integrated Management Information, Inc.

Notes to the Condensed Consolidated Financial Statements

Note 1 - The Company and Basis of Presentation

Business Overview

Integrated Management Information, Inc., is a Colorado corporation based in Castle Rock, Colorado, (“IMI Global,” “IMI,” the “Company,” “our,” “we,” or “us,”). We provide verification and certification solutions for the agriculture, livestock and food industry. 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”) (Note 2). This acquisition has been accounted for using the acquisition method of accounting and, accordingly, its results are included in the Company’s condensed consolidated financial statements from the date of acquisition.

With the acquisition of ICS, we began aggregating ICS and IMI operations into one reportable segment: Certification and Verification Services. The factors considered in determining this aggregated reporting segment include the economic similarity of the businesses, the nature of services provided, production processes, types of customers and distribution methods. The Company’s chief operating decision maker (the Company’s CEO) allocates resources and assesses the performance of its Certification and Verification Services activities as one segment. The Company also has an operating segment: WFCF Licensing, which does not currently meet the quantitative threshold to be considered a reporting segment.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the results of operations, financial position and cash flows of Integrated Management Information, Inc. and its majority-owned subsidiary, ICS (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, 2011, included in our Form 10-K filed on March 26, 2012. 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, 2012 are not necessarily indicative of the results to be expected for any other interim period of any future year.

Certain reclassifications to the 2011 condensed consolidated statement of operations have been made to conform to the 2012 presentation, none of which had any effect on total revenue, gross profit, income from operations, or net income.

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.

Integrated Management Information, Inc.

Notes to the Condensed Consolidated Financial Statements

Note 2 - Acquisition of 60% of outstanding shares of ICS

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

Pursuant to the Purchase Agreement, on February 29, 2012 (the “Closing”) the Company acquired 60% of the issued and outstanding common stock of ICS in exchange for aggregate consideration of approximately $427,800, which included $350,000 in cash and 172,840 shares of common stock of IMI valued at approximately $77,800 based upon the closing price of our common stock on February 29, 2012, of $0.45 per share. The Purchase Agreement provides for 50% of the Shares to be held in escrow for a period of eighteen months to support any indemnification claims by us for breach of ICS representations, warranties and covenants under the Purchase Agreement. The Purchase Agreement also includes non-dilution provisions, and we have right of first refusal on the remaining 40% of the outstanding stock. The transaction was accounted for using the acquisition method of accounting.

We believe that ICS is one of the leading organic 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, including poultry, grains, fruits and vegetables, dairy, packaged and processed goods. 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 “Where Food Comes From” (WFCF) labeling program.

The purchase price allocation is preliminary and subject to change, as an analysis has not been completed as of the date of this report as we are still reviewing all of the underlying assumptions and calculations used in the allocation. However, the table below summarizes the provisional fair values assigned to the assets and liabilities acquired in addition to the excess of the purchase price over the net assets acquired:

Integrated Management Information, Inc.

Notes to the Condensed Consolidated Financial Statements

On the acquisition date, the provisional fair value of the non-controlling interest was estimated to be $285,200. This amount was based upon the gross consideration that would have been paid assuming 100% of the outstanding stock had been acquired. Excess attributable to intangible assets reflects the excess over the identifiable assets acquired, net of liabilities assumed, to intangible assets based on the preliminary provisional allocation of the purchase price. The provisional amounts of the components of intangible assets have been estimated as $355,000 for customer lists and $378,000 for goodwill.

From the February 29, 2012 acquisition date through September 30, 2012, ICS revenues and net income were approximately $714,500 and $7,700, respectively. The following unaudited pro forma information presents the results of operations for the year to date period ended September 30, 2012 and 2011, as if the acquisition of ICS had occurred on January 1, 2012 and 2011.

Included in the pro forma information for the year to date period ended September 30, 2012, is approximately $50,500 in accounting, advisory and legal fees incurred related to the acquisition of ICS.   

As of September 30, 2012, we have recorded approximately $30,700 in accounting, advisory and legal fees related to the acquisition of ICS. Additionally, we have recorded approximately $41,400 in amortization expense based on the provisional amount of the component of intangible assets of $355,000 for customer lists, using an estimated five year useful life. These amounts are reported within selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the year to date period ended September 30, 2012.

Note 3 - Basic and Diluted Income per Share

Basic income per share was computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and 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.

Integrated Management Information, Inc.

Notes to the Condensed Consolidated Financial Statements

The following schedule is a reconciliation of the share data used in the basic and diluted income per share computations:

Note 4 - 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:

For the year to date period ended September 30, 2012 and 2011, stock options to purchase 100,000 and 220,000 shares of common stock were granted, respectively. The fair value of stock options granted was estimated using the following assumptions:

Stock-based compensation expense for the third quarter ended September 30, 2012 and 2011 was $7,335 and $4,394, respectively. Stock-based compensation expense for the year to date period ended September 30, 2012 and 2011 was $16,117 and $8,782, respectively. Stock-based compensation expense has been included in general and administrative expenses.

Integrated Management Information, Inc.

Notes to the Condensed Consolidated Financial Statements

Stock Option Plan Activity

Stock option activity under our Plans is summarized as follows:

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, 2012 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, 2012.

Note 5 - 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. Repurchased shares under the Stock Buyback Plan by year are as follows:

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.

Integrated Management Information, Inc.

Notes to the Condensed Consolidated Financial Statements

Note 6 – 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 reliability 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.

As of December 31, 2011, our net operating loss carry forwards for U.S. federal income tax purposes were $1.8 million, and were subject to the following expiration schedule:

Our unused net operating loss carry forwards may be applied against future taxable income.

During the third quarter and year to date periods ended September 30, 2012 and 2011, utilization of NOL carry forwards reduced our effective tax rate. For the third quarter and year to date period ended September 30, 2012, we recorded income tax expense of approximately $46,500 and an income tax benefit of approximately $363,000, respectively. The income tax benefit for the nine months ended September 30, 2012 included the effect of reversing the remainder of our valuation allowance that existed as of December 31, 2011 after concluding the likelihood for a full realization of the benefits of our deferred tax assets is more likely than not.

Note 7 – Investments in Marketable Securities

The following table summarizes our investments in marketable securities.

Fair value accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements, for both financial and non-financial assets. It also establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.

Integrated Management Information, Inc.

Notes to the Condensed Consolidated Financial Statements

The fair value hierarchy consists of three broad levels, which are described below:

Our investments in available-for-sale marketable securities include individual corporate equity securities. For these securities, we use quoted prices in active markets for identical assets to determine their fair value, thus they are considered to be Level 1 instruments under the fair value hierarchy. The method described may produce a fair value calculation that may not be indicative of net realizable value of future fair values. Although we believe our valuation method is appropriate, the use of a different methodology or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

During the third quarter ended September 30, 2012, we sold a significant portion of our marketable securities and reinvested the cash in money market accounts to be used for operations and potential acquisitions. A gain from the sale of marketable securities of $9,581 and $12,155 was recognized for the third quarter and year to date period ended September 30, 2012, respectively. The gain has been recorded in other income on the statement of operations.

Note 8 - Notes Payable

Notes payable consist of the following:

Equipment Note Payable

In 2009, we issued a note payable in the amount of $35,963 for the purchase of a vehicle. Interest and principal payments are due in equal monthly installments of $870 over four years beginning March 17, 2009. This note bears an interest rate of 7.4% per annum and is collateralized by the vehicle.

Integrated Management Information, Inc.

Notes to the Condensed Consolidated Financial Statements

Lapaseotes Note Payable – Related Party

In September 2007, we obtained $300,000 in unsecured debt financing. The notes are held by a major shareholder who is related to Mr. Lapaseotes, a member of our Board of Directors. In April 2011, modifications to the terms of the existing agreement were completed. Such modifications included a reduction in the interest rate from 9% to 6% annually, as well as an extension of the maturity date from September 12, 2012 to March 31, 2014. Principal is due in full upon the maturity date; interest is payable quarterly. In April 2012, we paid an additional $50,000 towards the principal.

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 September 30, 2012, 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 matures on April 4, 2014, and provides for $70,050 in working capital. The interest rate is at the bank index rate less 0.5% and is adjusted daily. Interest is calculated using a 360 day year. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only is due, with the principal balance due on maturity. As of September 30, 2012, the effective interest rate is 5.75%. The LOC is collateralized by all the business assets of ICS. As of the date of acquisition and through September 30, 2012, ICS had no amounts outstanding under this LOC.

Note 9 - Commitments and Contingencies

Operating Leases

In June 2012, we amended the building lease 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.

ICS owns approximately ¾ acre on which its corporate office is located in Medina, North Dakota. Currently, the ICS corporate office is leased for a period of 10 years with an initial expiration date of March 1, 2013. Two additional options to renew for 5-year terms exist and are deemed to automatically renew unless written notice is provided 60 days before the end of the term. Under the lease agreement, ICS pays a minimum monthly rental rate of approximately $150 plus all utilities, taxes and other expenses based on actual expenses to maintain the building.

Integrated Management Information, Inc.

Notes to the Condensed Consolidated Financial Statements

As of September 30, 2012, future minimum lease payments are as follows:

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

During the first quarter ended March 31, 2012, we entered into a capital lease for certain office equipment 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.

ICS leases certain office equipment under a capital lease with a base rent of $521 per month. The lease expires in April 2013. Included in property and equipment is $7,100 in asset cost. Imputed interest of 6.25% was used in determining the minimum lease payments.

As of September 30, 2012, future minimum lease payments for capital leases are as follows:

Integrated Management Information, Inc.

Notes to the Condensed Consolidated Financial Statements

Employment Agreements

In January 2006, we entered into employment agreements with John Saunders, our Chief Executive Officer, and with Leann Saunders, our President. The agreements automatically renew annually unless a 60-day notice of non-renewal is provided by either the Company or the employee.

Effective January 1, 2012, ICS entered into an employment agreement with Christina Dockter as its Chief Executive Officer, for a period of 2 years. The agreement automatically renews annually unless a 60-day notice of non-renewal is provided by either the Company or the employee.

Legal proceedings

From time to time, we may become involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of business. Although it is not possible to predict with certainty the outcome of these unresolved actions, we do not believe, based on current knowledge, that any legal proceeding or claim is likely to have a material effect on our financial position, results of operations or cash flows. We are not aware of any such legal actions, proceedings or claims as of September 30, 2012.

Note 10 - Recent Accounting Pronouncements

In 2011, the Financial Accounting Standards Board (“FASB”) issued two Accounting Standards Updates (“ASU”) which amend guidance for the presentation of comprehensive income. The amended guidance requires an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The previous option to report other comprehensive income and its components in the statement of shareholders’ equity was eliminated. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under existing guidance. We elected to report other comprehensive income and its components in a separate statement of comprehensive income for the quarter and year to date period ended September 30, 2012 and 2011. The adoption of these ASU’s did not have a material impact on our financial statements.

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

Note 11 – Supplemental Cash Flow Information

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 condensed 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, 2011. 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

Integrated Management Information, Inc. (“IMI Global,” “IMI,” the “Company,” “our,” “we,” or “us,”) provides verification and certification solutions for the agriculture, livestock and food industry. We view our business as a single segment with a focus on verification and certification services. Our product sales and other revenue streams are either ancillary or supportive to our main business focus.

We were incorporated in 1998 as a Missouri corporation. In March, 2005, we reincorporated in Delaware, and in March 2006, we changed our domicile from Delaware to Colorado. Until December 31, 2004, we were structured as a Subchapter S corporation and on January 1, 2005, we converted to a Subchapter C corporation.

We provide our owned and operated online products and services which specialize in identification and traceability, process/production-practice/supply verification, document control for USDA verification programs and third party auditing services. We apply information technology to the agriculture, livestock and food industry by addressing the growing importance of marketing claims such as: source of origin information, genetic background, animal treatment, animal health history, animal age, animal movements, nutrition, carbon credits and other credence attributes. Our solutions provide assurance regarding those claims made that cannot be confirmed by visual inspection once the product reaches the retail food case and is marketed to the consumer. We have developed a range of proprietary web-based applications, consulting methodologies, auditing processes, and other services to allow the livestock and food industry to record, manage, report, and audit this information. Our solutions help our customers establish their own systems, meet government regulations, create their own premium brand identity, gain cost efficiencies and command a higher price for their product.

We stand at the forefront of a rapidly evolving movement to track livestock and verify sources of meat and other livestock products. In the aftermath of the discovery of the first case of mad cow disease in the United States (US) in December, 2003, many of the largest US beef and other livestock export markets were closed resulting in significant losses to the industry. In response to the crisis, several initiatives were enacted to facilitate the reopening of key export markets. Most notably, US suppliers seeking to sell beef and other livestock products to other countries must participate in a pre-approved Quality System Assessment Program so as to have an approved means of verifying specific product requirements. In response, we were the first to develop a USDA Quality System Assessment document management system for auditing the tracking systems used by beef and other livestock producers to verify source and age. We introduced our USVerified Source and Age Verification system in 2005, and over the years we have continued to enhance and further develop programs to address other verification needs including, but not limited to, non-hormone treated cattle (NHTC) and humane handling marketing claims.

In 2009, we worked with compliance programs, and marketing approaches which required meat retailers to display the country of origin labels (COOL) on their meat and produce. Also in 2009, we introduced our VerifiedGreen™ Verification program. This program caters to producers and consumers who are committed to reducing their carbon footprint. Then in March 2010, in response to consumers’ demand of increased transparency

regarding the origins and safety of their food, we introduced our “Where Food Comes From” (WFCF) consumer labeling program. This program is a rigorous qualification protocol under which only those farmers, ranchers and processors who meet strict third-party verification requirements may display the distinctive WFCF brand. It is the first of its kind that directly connects the consumer with the food supply chain in a way that fosters confidence at the point of purchase. We believe that as consumers become better educated, they will have more confidence in their food purchase decisions. In addition to building consumer confidence, the WFCF label gives producers and processors a way to enhance, differentiate and even protect their valuable brands.

Most recently, in June 2012, we changed our stock ticker symbol to “WFCF” to better reflect our brand strategy and to raise awareness in the investor community.

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 but this type of service has marginal increases in revenue with declining profit margins as compared to our single service offerings. 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. We benefitted from increased hardware sales which has higher profit margins due to our process automation.

In early 2009, we understood that all this work was necessary to build a solid foundation but we also recognized a “potential market saturation and decreasing profits dilemma” early on and began working toward a solution. Through our research and development, we learned that 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. In addition to our current business structure, we knew we needed to develop a self-sustaining revenue stream with minimal management and labor costs, while simultaneously addressing food concerns near to our heart. We had built a company with strong credibility in the industry and we had the technical expertise to make our processes operate very efficiently. The opportunities that we identified in early 2009 are built upon the verification services we provide and the solid reputation we have built.

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 WFCF brand. Revenue generated from WFCF 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. WFCF 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.

During 2010, management, along with the assistance of industry consulting experts, intentionally made the decision to invest heavily in marketing our services and our WFCF labeling program to build consumer awareness. Today, we still continue to invest heavily in marketing our verification services and our WFCF brand to build consumer awareness and demand through the use of videos, television exposure, word-of-mouth and the internet. We believe we are positioning ourselves to benefit significantly in 2012 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.

Acquisition of 60% of outstanding shares of ICS

As part of our business strategy, we regularly evaluate acquisition opportunities as a means of accelerating our growth and achieving our long-term strategic objectives. On February 29, 2012, we entered into a Purchase and Exchange Agreement (the “Purchase Agreement”), by and among IMI and International Certification Services, Inc. (ICS), and other shareholders as individually named in the Agreement (collectively the “Sellers”).

Pursuant to the Purchase Agreement, on February 29, 2012 (the “Closing”) the Company acquired 60% of the issued and outstanding common stock of ICS in exchange for aggregate consideration of approximately $427,800, which included $350,000 in cash and 172,840 shares of common stock of IMI valued at approximately $77,800, based upon the closing price of our stock on February 29, 2012, of $0.45 per share. The Purchase Agreement provides for 50% of the Shares to be held in escrow for a period of eighteen months to support any indemnification claims by us for breach of ICS representations, warranties and covenants under the Purchase Agreement. The Purchase Agreement also includes non-dilution provisions, and we have right of first refusal on the remaining 40% of the outstanding stock.

ICS is a premier provider of organic accreditation services and has a strong reputation in the organic market segment. They have a large and growing customer base that includes food retailers as well as producers and processors of fruits, vegetables, dairy, livestock and honey. Their flagship certification program is Farm Verified Organic® – an ISO Guide 65 and IFOAM accredited program that meets the requirements of the USDA National Organic Program – that is designed for organic producers selling to the US and international markets. ICS also offers USDA National Organic Program, Canadian Organic Regime (COR) and Food Alliance sustainability certification as well as facilitation and compliancy of European Union (EU), Japan and Bio Suisse standards. It is estimated that the total organic market segment in the US and EU is more than $50 billion annually.

ICS represents an opportunity to extend the range of our existing programs and establish our capabilities in other major food groups, including poultry, grain, fruits and vegetables and dairy when sold as fresh, processed or packaged goods. We believe this acquisition has tremendous synergies for both IMI and ICS. As industry leaders in our respective product and service offerings, 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 in the produce, grain and dairy industries. It should enable us to better serve our customers, as well as accelerate our revenue growth, be accretive to earnings and provide another avenue for our WFCF program.

Current Marketplace Opportunities

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

Current Business Speculation

In 2003, the Japanese government imposed age restrictions on US beef imports to cattle aged below 21 months. Recently, Japanese sources are suggesting that the government may raise the cattle age limit for US beef exported to Japan from below 21 months of age to 30 months or younger. For many years, the US government has called for all age restrictions on beef imports to be abolished. Any agreement reached between Japan and the US would still have to be passed by Japan’s Diet, however. Historically, these discussions have not budged Japan’s strong food safety-minded approach to the issue.

Currently, age verification is conducted under a beef export verification system that uses two criteria: animal production records or physiological age. Traditional physiological methods of age verification, such as dentition, are not valid because of their inaccuracy at the 20-month age level. However, as the age of cattle progress beyond 20 months, and deciduous teeth are replaced by permanent teeth, general reliance upon cattle dentition increases because of the simplicity of the technique, record-keeping and costs involved.

All this speculation has negatively impacted our source and age verification business. However, our business is experiencing growth in our NHTC and Verified Natural Beef (VNB) programs as we see our domestic customers shift from source and age verification to NHTC and VNB. We are also seeing an increase in the number of “source verifications” requested in international markets. Although we cannot forecast the impact of the aforementioned speculation upon “age verifications,” we also cannot assume that Japan will change its requirement for source verification from US beef producers, especially considering that Japan has domestic traceability laws. Additionally, movement within the US for a regulatory program to address Animal Disease Traceability domestically may prove to be a significant opportunity for our business.

In summary, we know the inherent value of source and age verifications and the resulting peace of mind that is provided at the consumer level. We believe that the demand for verification, whether at the base level (source and age verification) or at a level that incorporates multiple credence factors (source and age with NHTC and VNB), will continue to grow as more consumers demand to know where their food comes from, and that is something that cattle dentition cannot provide.

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, 2012, we had cash and cash equivalents of $1,349,740 compared to $969,020 of cash and cash equivalents at December 31, 2011. Our working capital at September 30, 2012 was $1,564,361 compared to $1,523,429 at December 31, 2011.

Net cash provided by operating activities during the year to date period ended September 30, 2012 was $317,877 compared to cash provided of $639,803 during the same period in 2011. Cash provided by operating activities is driven by our net income and adjusted by non-cash items. Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock based compensation expense, a deferred tax benefit resulting from the reversal of the valuation allowance and recognition of our deferred tax assets. Fluctuations are primarily due to the timing of cash receipts and cash disbursements offset by operating performance.

Net cash provided by investing activities during the year to date period ended September 30, 2012 was $31,789 compared to net cash used of $7,155 in the 2011 period. Net cash provided in 2012 was due to proceeds of $282,756 from the sale of marketable securities partially offset by the acquisition of 60% of the outstanding stock of ICS in which we paid $350,000 in cash less approximately $135,200 in cash acquired. Additionally, we spent $22,529 towards property and equipment and $13,664 to renew our USDA Accreditation.

Net cash provided by financing activities during the year to date period ended September 30, 2012 was $31,054 compared to $71,645 in the 2011 period. Net cash provided in 2012 was due to proceeds of $106,098 from stock option exercises offset by repayments towards notes payable and capital lease obligations of approximately $73,000. During the 2011 period, we received $200,000 under our new SBA loan agreement offset by repayments of approximately $82,787 towards our notes payable and approximately $47,368 in repurchases under our Stock Buyback program.

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 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, like our USVerified™ product line.

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.

Simultaneous with the closing of the new loan agreement with Great Western Bank, we amended the terms of our existing $300,000 in unsecured debt. The note is held by a major shareholder who is related to Pete Lapaseotes, a director of the Company. Modifications to the terms of the existing agreement include a reduction in the interest rate from 9% to 6% annually, as well as an extension of the maturity date from September 12, 2012 to March 31, 2014. Principal is due in full upon the maturity date; interest is payable quarterly.

ICS has a revolving line of credit (LOC) agreement which matures on April 4, 2014, and provides for $70,050 in working capital. The interest rate is at the bank index rate less 0.5% and is adjusted daily. Interest is calculated using a 360 day year. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only is 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, 2012, we had no off-balance sheet arrangements of any type.   

RESULTS OF OPERATIONS

Third Quarter and Year to Date Period ended September 30, 2012 compared to the Same Period in Fiscal Year 2011

Revenues

Total revenues for the third quarter and year to date period ended September 30, 2012 increased 23.6% and 24.2%, respectively, compared to the third quarter and year to date period ended September 30, 2011. On a consolidated basis, we still continue to experience double-digit sales growth from quarter over comparable quarter and we believe this is significant performance in light of the current economic conditions severely impacting the food industry.

Service revenues include sales of our USVerified solutions and related consulting, program development and web-based development services. Service revenues for the third quarter ended September 30, 2012 increased approximately $344,900, or 38.6%, compared to the third quarter ended September 30, 2011. Included in our service revenues is approximately $369,900 attributable to ICS.

Speculation regarding Japanese government imposed age restrictions on US beef imports has negatively impacted our source and age verification business by approximately 18% for the third quarter ended September 30, 2012 compared to the 2011 period. However, our business is experiencing approximately 15% growth in our NHTC, Verified Natural Beef (VNB), and other verification programs. We are seeing our domestic customers shift from source and age verification to NHTC and VNB. We are also seeing an increase in the number of “source verifications” requested in international markets. Although we cannot forecast the impact of the aforementioned speculation upon “age verifications,” we also cannot assume that Japan will change its requirement for source verification from US beef producers, especially considering that Japan has domestic traceability laws. Additionally, movement within the US for a regulatory program to address Animal Disease Traceability domestically may prove to be a significant opportunity for our business.

Service revenues for the year to date period ended September 30, 2012 increased approximately $743,000, or 29.6%, compared to 2011. Included in our service revenues is approximately $714,000 attributable to ICS. Overall, the improvement is due in large part to demand from retailers, offset by speculation over the Japanese markets. Concerns about animal welfare continue to drive retailers to make program decisions based on animal handling, care, well-being and welfare programs. In late 2010, we introduced a revenue stream specific to conducting animal welfare audits on pork, beef and chicken farmers and ranchers that supply specialty retailers.

Product sales are primarily sales of cattle identification ear tags. Product sales for the third quarter and year to date period ended September 30, 2012 decreased 18.8% and 4.3%, respectively, compared to the third quarter and year to date period ended September 30, 2011. The decrease was due to decreased volume in the quantity of tags sold in connection with our Source and Age verification programs.

Other revenue primarily represents the fees earned from our WFCF labeling program. Other revenue for the third quarter and year to date period ended September 30, 2012 increased 46.8% and 194.3% compared to the third quarter and year to date period ended September 30, 2011, respectively. This revenue source is still in its infancy and we anticipate exponential growth in the future as more and more food producers continue to show interest in this product offering.

Cost of Sales and Gross Margin

Cost of sales for the third quarter ended September 30, 2012 were approximately $742,200 compared to $578,900 during the third quarter 2011. Included in our cost of sales is approximately $202,300 attributable to ICS. Gross margin for the third quarter 2012 decreased to 52.0% of revenues compared to 53.7% for the third quarter ended September 30, 2011.

Cost of sales for the year to date period ended September 30, 2012 were approximately $1,841,800 compared to $1,396,900 during 2011. Included in our cost of sales is approximately $375,900 attributable to ICS. Gross margin for the year to date period ended September 30, 2012 decreased to 53.6% of revenues compared to 56.3% for the year to date period ended September 30, 2011.

Our gross margins for 2012 are slightly declining compared to 2011, partially because ICS currently operates at a lower gross margin and due to shifts in our sales mix. Many of our customers are transitioning from verification of a single attribute to verification of multiple attributes performed in a single audit. A multiple attribute type of audit provides a slight increase in revenue but costs us more time to complete the audit, thereby resulting in lower gross margins as compared to our single service offerings. For a more detailed discussion regarding profitability, read “Management’s Strategy” above.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the third quarter 2012 were approximately $686,500, an increase of $226,200, or 49.1% over the third quarter 2011. Included in our selling, general and administrative expenses is approximately $141,700 attributable to ICS.

Excluding ICS expenses, our selling, general and administrative expenses for the third quarter 2012 increased approximately $83,000 over the third quarter 2011. The increase was partly due to $17,750 recorded as amortization expense based on the provisional amount of the component of intangible assets of $355,000 for customer lists, using an estimated five year useful life. Approximately $21,000 was predominately attributable to an increase in salaries associated with two additional employees. One of these employees is dedicated solely to promoting WFCF and IMI via various marketing channels and social media sites, including Facebook and Twitter. The other employee is specifically dedicated to marketing our products within retail sales channels, and for building brand awareness. Additionally, we accrued $60,000 in contract settlement expenses associated with the termination of a joint venture agreement established in 2010. The purpose of the joint venture was to conduct business in Guatemala, Latin America, South America and Mexico. After two years, the joint venture failed at its attempts to develop the business. The settlement releases us from any further obligations under the agreement.

Selling, general and administrative expenses for the year to date period ended September 30, 2012 were approximately $1,755,900, an increase of $535,000, or 43.8% over 2011. Included in our selling, general and administrative expenses is approximately $330,600 attributable to ICS.

Excluding ICS expenses, our selling, general and administrative expenses for the year to date period ended September 30, 2012 increased approximately $202,700 over 2011. Approximately $41,400 was recorded as amortization expense based on the provisional amount of the component of intangible assets of $355,000 for customer lists, using an estimated five year useful life. Another $45,000 of the increase was in salaries associated with two additional employees. One of these employees is dedicated solely to promoting WFCF and IMI via various marketing channels and social media sites, including Facebook and Twitter. The other employee is specifically dedicated to marketing our products within retail sales channels, and for building brand awareness. Also included in selling, general and administrative expenses for 2012, is approximately $15,000 in additional spending for consulting, marketing and advertising WFCF, $29,000 in accounting, advisory and legal fees specifically related to the acquisition of ICS, $60,000 in contract settlement expense related to the joint venture previously discussed and approximately $11,000 in additional costs related to various mandates required of public companies.

Income Tax Benefit

During the third quarter and year to date periods ended September 30, 2012 and 2011, utilization of NOL carry forwards reduced our effective tax rate. For the third quarter and year to date period ended September 30, 2012, we recorded income tax expense of approximately $46,500 and an income tax benefit of approximately $363,000, respectively. The income tax benefit for the nine months ended September 30, 2012 included the effect of reversing the remainder of our valuation allowance that existed as of December 31, 2011 after concluding the likelihood for a full realization of the benefits of our deferred tax assets is more likely than not.

Net Income and Per Share Information

As a result of the foregoing, net income attributable to IMI shareholders for the third quarter ended September 30, 2012 was approximately $63,600 or less than a penny per basic and diluted common share, compared to net income of $203,950 or $0.01 per basic and diluted common share for the third quarter ended September 30, 2011.

Net income attributable to IMI shareholders for the year to date period ended September 30, 2012 was approximately $730,200, or $0.03 and $0.04 per basic and diluted common share, respectively, compared to net income of approximately $558,300 or $0.03 per basic and diluted common share for the year to date period ended September 30, 2011. The benefit from income taxes that we recorded related to the reversal of our valuation allowance on our deferred tax assets had an impact of approximately $0.02 per share on a dilutive basis for the year to date period ended September 30, 2012.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Compliance 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

Except as described below, 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.

On February 29, 2012, we completed our acquisition of 60% of the issued and outstanding common stock of ICS. We are in the process of integrating ICS into our overall internal control over financial reporting process. See Note 2 to the accompanying condensed consolidated financial statements for additional information on the ICS acquisition.

PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

We are and may be involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of business. Although it is not possible to predict with certainty the outcome of these unresolved actions, we do not believe, based on current knowledge, that any legal proceeding or claim is likely to have a material adverse effect on our condensed consolidated financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 2011 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, 2012, 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 acquisition of 60% of the issued and outstanding stock of ICS, we issued 172,840 shares of common stock of IMI valued at approximately $77,800 based upon the closing price of our stock on February 29, 2012, of $0.45 per share. These 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.

On January 7, 2008, we announced our intention to buy back up to one million shares of our common stock from the open market. Repurchased shares under the Stock Buyback Plan by year are as follows:

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.

ITEM 6. EXHIBITS

(a) Exhibits

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.

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