Where Food Comes From, Inc. - Annual Report: 2014 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended December 31, 2014

☐ TRANSITION REPORT PURSUANT TO 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)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a 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 February 6, 2015, was 23,735,139. The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2014, the last business day of our most recently completed second fiscal quarter was $32,270,971.

DOCUMENTS INCORPORATED BY REFERENCE: Part III is incorporated by reference from the registrant’s Definitive Proxy Statement for its 2015 Annual Meeting of Stockholders to be filed, pursuant to Regulation 14A, within 120 days after the close of the registrant’s 2014 fiscal year.

PART I

ITEM 1. BUSINESS

GENERAL

Where Food Comes From, Inc. and its subsidiaries (“WFCF,” the “Company,” “our,” “we,” or “us,”) provide verification and certification 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 world-wide.

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.

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.”

OUR BUSINESS

What We Do

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 and nutrition
• carbon credits
• organic and other sustainable practices
• other credence attributes

Our solutions ensure compliance with governmental and private standards related to food production. We 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 agriculture, 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.

Business Acquisitions

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.

Acquisition of Validus Verification Services, LLC

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

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

We believe that Validus is the leading egg, 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.

ICS Acquisition

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 included non-dilution provisions, and we had right of first refusal on the remaining 40% of the outstanding stock.

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.

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 International Organization for Standardization (“ISO”) Guide 65 and International Federation of Organic Agriculture Movements (“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 has allowed us the 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. As industry leaders in our respective product and service offerings, we are positioned to offer our customers solutions across the verification and certification spectrum. We also believe it provides diversification for our company in the produce, grain and dairy industries.

Sterling Asset Acquisition

On October 24, 2014, an Asset Purchase Agreement (the “Purchase Agreement”) was entered into by and among Where Food Comes From, Inc. (“WFCF” or the “Company”), Sterling Solutions, LLC (“Sterling” or the “Seller”), and certain affiliates of the Seller.

Pursuant to the Purchase Agreement, WFCF purchased and acquired certain audit, assessment and verification business assets of Sterling as of October 24, 2014 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.

Based in Vale, OR, Sterling Solutions specializes in verification programs for the beef industry and has some of the leading calf ranch and feed yard customers in the western U.S., including a very strong presence in the Pacific Northwest. The Seller’s licenses and accreditations include Source and Age, Non-Hormone Treated Cattle (NHTC), Animal Care and Well-being, Sterling Natural, High Quality Beef (HQB), Never Ever 3 (NE3), and other programs. The Seller serves large dairies, calf ranches and cattle operations, and has more than 10 years of on-farm auditing experience.

INDUSTRY BACKGROUND

The value-added food industry has been growing rapidly for the past several years in response to increased consumer interest about food production. Per the 2010 U.S. Census, less than 1% of United States citizens are involved in producing food; thus there is a growing interest from consumers regarding how their food is produced. We are also in an increasingly global food market with food products traveling around the world, and brands differentiating themselves in the market. These key drivers are increasing the number of food labeling claims made on food products. As consumers want more assurance about the trustworthiness of the labeling claims, there is a growing trend for the verification of raising practices. Organic is one example of a well recognized labeling program that indicates that the food or other agricultural product has been produced a certain way based on a detailed National Organics Program (NOP). This program has been very successful and organic food sales continue to grow and gain consumer recognition as a result.

Organic sales are only part of the story of how consumers look for the verification of practices tied to food labeling claims. Other factors are also becoming increasingly more important to consumers, evidenced on menus and product labels. While not an exhaustive list, some of the issues that farms/ ranches, brands and large and small food businesses are addressing include: how animals are cared for and handled, how a product’s production impacts the environment, how a product’s production impacts societies, the products used in the production of food items (like antibiotics).

As the agriculture, livestock and food industry continues to mature and expand internationally, there is an increasing need to record, manage, report and audit information regarding the source, age, genetic background, animal treatment, nutrition, and other credence attributes for the benefit of producers, processors, distributors, retailers, consumers, and regulators. New governmental regulations and industry requirements are changing rapidly. Technology, including radio frequency ID tags for livestock, and web-based systems facilitate the need for real-time data entry, reporting, and auditing.

Many of the world's largest agriculture, beef and other livestock exporting countries, including Brazil, Argentina, and Australia, have established mandatory traceability and verification standards. Other countries have issued voluntary traceability and verification standards. Historically, the United States government had not established mandatory traceability standards until January 2011 when the Food Safety Modernization Act (FSMA) was signed into law. FSMA represents the most sweeping reform of our food safety laws in more than 70 years. FSMA aims to ensure the U.S. food supply is safe by shifting the focus from responding to contamination of the food supply to preventing it. The law applies to human food as well as to food for animals, including pets. In connection with FSMA, new requirements for animal identification and traceability became effective on March 11, 2013. Animal disease traceability, or knowing where diseased and at-risk animals are, where they've been, and when, is very important to ensure a rapid response when animal disease events take place. An efficient and accurate animal disease traceability system helps reduce the number of animals involved in an investigation, reduces the time needed to respond, and decreases the cost to producers and the government.

Trade arrangements under the United States Department of Agriculture

The United States has trade arrangements with several nations to facilitate the exchange of agriculture, livestock and food products. USDA programs provide guidelines and structure to enable suppliers of agricultural products and services to assure customers of their ability to provide consistent quality products or services by having their processes audited by independent, third-party auditors using USDA approved methodologies and programs.

The USDA’s programs are applicable to a company's entire program or certain portions of its programs where specified producer or product requirements are supported by a documented quality management system and the documented delivery processes are verified through an independent, third party audit. To operate an approved program, suppliers must submit a documented quality management system to the USDA and successfully pass a document review and an on-site audit.

Within the United States, these USDA programs are mostly voluntary. These programs are primarily useful in providing the industry with a process for demonstrating source, age, and other quality attributes as the product moves through the supply chain.

Current Marketplace Opportunities

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

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 with 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. While the impact of this news significantly delayed the number of onsite pork verifications scheduled in 2014, we believe that we have diversified our product offerings such that the impact was not catastrophic to our annual consolidated results. We believe that the bio-security considerations and core competency needed to deal with infectious diseases gives us a competitive advantage creating a barrier to entry for less sophisticated third-party verification companies.

SALES

Our revenues are generated from sales of our identification, verification and certification solutions, consulting services, web-based development and hardware sales. We sell our products and services directly to customers at various levels in the agriculture, food and livestock supply chain. Our customers include some of the largest U.S. beef and pork packers, organic producers and processors, and specialty retail chains. No single customer generated more than 10% of total net revenue in 2014 or 2013.

Third Party Verification Services

Most of our service offerings can be bundled to provide a “one-stop shop” for customers that have multiple levels of verification and certification needs, such as source verification and food safety certification.

We also offer consulting, program development and web-based development services on a customized basis to meet special customer requirements. For the years ended December 31, 2014 and 2013, our third party verification programs provided 86.3% and 85.3% of our total revenue, respectively.

Hardware Sales

In support of our third party verification service offerings, we offer hardware products (primarily identification cattle ear tags) to our customers. While these hardware products have lower profit margins than our proprietary offerings, they allow us to offer our customers a comprehensive solution. Approximately 12.4% and 12.5% of our total revenue was provided by the sale of hardware during the years ended December 31, 2014 and 2013, respectively.

Other Revenue – WhereFoodComesFrom®

In March 2010, in response to consumers’ demand for increased transparency regarding the origins and safety of their food, we introduced our “WhereFoodComesFrom®” 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 our distinctive 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.

All of our verification products that are source-verified qualify for our WhereFoodComesFrom® verification seal of approval. As a third-party verification service provider, we must review each individual producer’s or food company's claim and system to ensure that 100 percent of the supply is managed through a third party verification program recognized by the USDA, ISO and/or another internationally recognized standards. In addition to building consumer confidence, our WhereFoodComesFrom® label gives producers and processors a way to enhance, differentiate and even protect their valuable brands.

This revenue stream primarily represents the licensing fees earned from our labeling program. This revenue source is still in its infancy. We continue to increase consumer recognition with our WFCF label while offering incentives to select producers and processors who exclusively use our verification and certification services in connection with our distinctive brand.

MARKETING

Our marketing strategy includes direct marketing, advertising, event sponsorship, and trade show participation. From a public relations perspective, our staff is frequently quoted in industry trade journals and requested as speakers at various industry events as subject matter experts on the topics of animal identification, traceability, branding, third party verification and certification, and the USDA verification programs.

In order to reach additional customers, we continually develop strategic marketing partnerships with leading companies in the industry with complementary abilities and products. We do not currently rely on any third party contracts with distributors, licenses or manufacturers in conducting our business.

We also use social media sites such as Facebook and Twitter to help promote our business, market our product offerings, and connect consumers with current topics in the agriculture, livestock and food industry.

COMPETITION

Of the approximately 775,000 independent suppliers of cattle in the United States, we estimate that only approximately 40,000 use some form of verification program. We currently provide tracking information for approximately 10,000 of the most significant independent suppliers which we believe supply greater than 50% of the beef and other livestock products available for export markets. Our key competitors for our SupplyVerified Program are: Scientific Certification Systems, and Quality Assurance International. We believe we differentiate ourselves from our competitors by providing better, more flexible solutions to all segments of the supply chain. We are also the market leader in the area of diversifying to the Non-Hormone Treated Cattle Verification Program and the USDA’s Never Ever 3 Verification Program.

In the organic market, we believe our key competitors are: Quality Assurance International, California Certified Organic Farmers, Oregon Tilth, and Organic Crop Improvement Association. We believe we differentiate ourselves in the marketplace by offering a cost effective bundled service package of valuable and unique solutions, such as Food Alliance, the Non-GMO Project, and Gluten Free certification.

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 crop production 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.

INTELLECTUAL PROPERTY

We create, own and maintain a variety of intellectual property assets that we believe are among our most valuable assets. Our intellectual property assets include patents and patent applications related to our innovations, products and services, trademarks related to our brands, products and services, and other property rights. We also have licensing arrangements when features from our programs are desirable to incorporate into either a new or an existing technology we offer. We seek to protect our intellectual property right assets through patent, copyright, trade secret, trademark and other laws of the United States and other countries, and through contractual provisions. Additional information regarding certain risks related to our intellectual property is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K.

EMPLOYEES

As of December 31, 2014, we had 46 employees. Our future success is substantially dependent upon the performance of our key senior management personnel, as well as our ability to attract and retain highly qualified technical personnel. Additional information regarding certain risks related to our employees is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K.

AVAILABLE INFORMATION

Our corporate website is located at www.wherefoodcomesfrom.com. We make available free of charge on our investor relations website under “SEC Filings” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (SEC). Further, a copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth the name, age, and position of each of the persons who was serving as an executive officer of the Company as of December 31, 2014:

John Saunders, founder of the company has served as the Chief Executive Officer and Chairman of the Board since 1998. Previously, Mr. Saunders was a partner and consultant for Pathfinder Consulting Services, Inc. in Parker, Colorado. An expert in both technology and the livestock industry, Mr. Saunders is a graduate of Yale University.

Leann Saunders joined the Company in 2003. She has served as the President since 2008 and as a director of the Company since January 2012. She manages all company operations. Prior to 2003, Mrs. Saunders worked for PM Beef Holdings (“PM”), an integrated beef company, and developed a supply system for PM's Ranch to Retail product line and managed PM's USDA Process Verified program. She then served as the company's Vice President of Marketing and Communications. Prior to joining PM in 1996, Mrs. Saunders worked for McDonald's Corporation as a Purchasing Specialist, and Hudson Foods Corporation. Mrs. Saunders graduated with a BS in Agriculture Business and an MS in Beef Industry Leadership from Colorado State University. Leann also sits on the Board of Directors for the International Stockmen’s Education Foundation, and is the current chair-elect for the United States Meat Export Federation for the 2014-2015 year.

Dannette Henning was engaged as a consultant beginning in November 2007 and was appointed as the Chief Financial Officer in February 2008. From 2004 to 2007, Ms. Henning was the Controller for Einstein Noah Restaurant Group. From 2001 to 2003, she served as the Controller for Vari-L Company. Mrs. Henning’s previous experience includes financial management positions with KPMG Peat Marwick, DF&R Restaurant Company, and CSI/CDC Company. Mrs. Henning is a CPA with more than 20 years of professional experience. She received a BBA degree in Accounting from the University of Texas at Arlington.

Family Relationships

John Saunders, our CEO and Chairman of the Board, is married to Leann Saunders, our President. Both Mr. and Mrs. Saunders serve on our Board of Directors.

ITEM 1A. RISK FACTORS

In addition to the other information included in this report and our other public filings and releases, the following factors should be considered when evaluating our business, financial condition, results of operations and prospects:

We operate in a highly competitive industry with a limited market characterized by changing technology, frequent introductions of new products, product enhancements, and evolving industry standards.

We compete with many other vendors of products and services designed for tracking cattle and other livestock and for herd management and crop production practices. Our competitors range from small start-up companies to multi-national firms. Our competitors may have significantly greater financial, technical and marketing resources. Competition is likely to intensify as current competitors expand their product offerings and as new companies enter the market. Increasing competition may result in reduced margins and the loss of market share. Our competitors may offer broader service offerings or technologies that are more commercially attractive and gain greater market acceptance than our current or future products. Additionally, new technology may render our products obsolete.

The success of our business model depends on the broad acceptance of our technologies into markets that are continuing to develop as a result of the increasing focus on food safety and assurance.

We are currently benefiting from a slow but growing movement among the agriculture, livestock and food industry to source and/or age verify products. This emerging trend is fueled in part by consumers focus on food safety and assurance. However, we can offer no assurances that there will be market acceptance of our technologies. Furthermore, some of our primary target segments within the agriculture, livestock and food industry are experiencing unpredictable economic conditions and are expected to continue to struggle with supply, trade and profitability issues in the near term. Although we believe that our products, if adopted on a wide-scale basis, would have a significant impact on improving the safety, quality and confidence in the world’s food supply, our customers for these products historically have been very slow to change and reluctant to adopt new technologies and business practices.

Our business may be negatively impacted by international export market activities, including trade barriers to US beef and other livestock exports and customer acceptance of US beef and other livestock products.

In prior years, the Japanese and Korean beef and other livestock markets were closed to the U.S. as a result of mad cow disease in at least one animal in the United States. Currently, the Japanese and Korean markets are the largest beef and other livestock export markets for U.S. producers. Both markets require verification, which is important to the sale of our products. Because the U.S. market does not mandate verification, there is limited incentive for beef and other livestock producers in the U.S. to purchase our products. Therefore, international trade barriers and limited consumer acceptance of U.S. beef and other livestock products in foreign markets can significantly impair our sales and profitability.

We face risks of rapidly changing regulations which may negatively impact our programs.

Regulations and standards are continually evolving and present a challenging risk. For example, in January 2013, the Japanese government announced a change to its import requirements on US beef. Because the change enabled a significant increase in the amount of product qualifying for export to Japan, it negatively impacted the premiums typically seen in the marketplace for source and age verified cattle. As a result, it negatively impacted our source and age verification business by approximately 68% from 2012 to 2013. Due to the diversification of our product offerings and our strategy of managing to profitability, we were able to quickly minimize the impact of these adverse changes.

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

We face risks that highly contagious diseases or viral outbreaks may negatively impact the source of product we are able to verify.

Today infectious disease and viral outbreaks appear to be emerging more quickly than ever. For example, Porcine Epidemic Diarrhea Virus (PEDv) negatively impacted the pork/sow industry in 2014. Additionally, contagious disease or viral outbreaks create increased bio-exclusion considerations 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 of our operations.

In the event that market demand for third party verified products declines, our customers may not be able to generate sufficient revenues to justify purchase of our verification solutions and consulting services.

Public attitudes towards food production practices may be influenced by claims that these products are unsafe for consumption or pose unknown health risks. For example, decreased demand for beef and other livestock products could have a material adverse effect on the operating results and financial condition of our existing or prospective customers. If operating results of our customers are impaired, the resources that our customers can devote to building information systems for tracking cattle and other livestock and herd management would be reduced which in turn would limit purchases of our verification solutions and consulting services. Therefore, our ability to generate revenue is subject to the risks and uncertainties relating to the financial condition of our customers.

We look for opportunities to expand our presence in international markets in which we may have limited experience and inherently international operations are subject to increased risks which could harm our business, operating results and financial condition.

We continually seek to expand our product and service offerings in international markets. As we expand into new international markets, we will have only limited experience in marketing and operating our products and services in such markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets. Certain international markets may develop more slowly than domestic markets and our operations in international markets may not develop at a rate that supports our level of investment.

In addition to uncertainty about our ability to expand into international markets, there are certain risks inherent in doing business internationally, including:

• trade barriers and changes in trade regulations;
• difficulties in developing, staffing and simultaneously managing a large number of varying foreign operations as a result of distance, language and cultural differences;
• stringent local labor laws and regulations;
• longer payment cycles;
• currency exchange rate fluctuations;
• political or social unrest or economic instability;
• import or export restrictions;
• seasonal volatility in business activity;
• risks related to government regulation or required compliance with local laws in certain jurisdictions, including those more fully described above; and
• potentially adverse tax consequences.

One or more of these factors could harm our future international operations and consequently, could harm our brand, business, operating results and financial condition.

We face risks associated with growth and acquisitions.

As part of our business strategy, we regularly evaluate acquisition opportunities as a means of diversifying our business, accelerating our growth and achieving our long-term strategic objectives the expansion of our operations, whether through acquisitions, development or internal growth, could divert management's attention and could also cause us to incur substantial costs, including legal, professional and consulting fees. There can be no assurance that we will be able to identify, acquire, develop or profitably manage additional companies or operations or successfully integrate such companies or operations into our existing operations without substantial costs, delays or other problems.

If our goodwill or intangible assets become impaired we may be required to record a significant charge to earnings.    

We acquire other companies and may not realize all the economic benefit from those acquisitions, which could result in an impairment of goodwill or intangibles. Under accounting principles generally accepted in the United States (“U.S. GAAP”), we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill and indefinite life intangible assets for impairment at least annually. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or intangible assets is determined, negatively impacting our results of operations.

Our future success depends upon our ability to obtain and enforce patents; prevent others from infringing on our patents, trademarks and other intellectual property rights; and operate without infringing upon the patents and proprietary rights of others.

We will be able to protect our intellectual property from unauthorized use of third parties only to the extent that it is covered by valid and enforceable patents and trademarks. Patent protection generally involves complex legal and factual issues and, therefore, the enforceability of patent rights cannot be predicted with certainty. Moreover, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. In the event that patents owned by us do not provide adequate protection, we may not be able to prevent competitors from offering substantially similar products and services.

Failure to protect our proprietary rights could seriously impair our competitive position.

In the event that third parties claim that our current or future products or services infringe upon their intellectual property, we may face litigation and be prevented from selling the products and services at issue. Infringement or other claims could be asserted or prosecuted against us in the future, and it is possible that past or future assertion or prosecutions could harm our business. Litigation either in defense of our intellectual property rights or in response to infringement claims made by others may be, both expensive and time consuming, which in turn would adversely affect our business.

Our future success depends to a significant degree upon the continued service of key senior management personnel, in particular, John and Leann Saunders.

Both John and Leann Saunders' reputation and prominence in the field provide us with a strong competitive advantage. While they are currently bound by employment agreements, we can offer no assurance that John and or Leann Saunders will be able to continue to work for us in the event of an unforeseen accident, severe injury or major disease, or on a long-term basis. The loss of key personnel could have a material adverse effect on our business and operating results.

Directors, executive officers, principal stockholders and affiliated entities beneficially own or control a significant amount of our outstanding common stock and together meaningfully influence our activities.

As of February 6, 2015, John Saunders, our Chairman and CEO, and Leann Saunders, our President, beneficially owned in the aggregate approximately 33% of our common stock. These officers, if they determine to vote in the same manner, would have a significant impact on the outcome of any matter requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions or terms of any liquidation. This concentration of ownership may have the effect of delaying or preventing a change in control of our company that may be favored by other stockholders. This could prevent transactions in which stockholders might otherwise recover a premium for their shares over current market prices.

Because we are not presently subject to the same corporate governance standards as companies listed on registered stock exchanges or NASDAQ, our officers and Directors may have interests adverse to those of the Shareholders.

Registered stock exchanges and NASDAQ have enhanced corporate governance requirements that apply to issuers that list their securities on those exchanges. For example, we are not required to have any independent directors or to adopt a code of ethics. In certain circumstances, management may not have the same interests as the shareholders and conflicts of interest may arise. Notwithstanding the exercise of their fiduciary duties as directors and executive officers and any other duties that they may have to us or our shareholders in general, these persons may have interests different than yours which could adversely affect your investment.

We do not currently intend to pay cash dividends.

We have not declared or paid any cash dividends on our common stock since our incorporation and do not anticipate that we will do so in the foreseeable future. Our present policy is to retain all available funds for use in our business development, operations and expansion. Payment of future cash dividends, if any, will be at the discretion of the Board of Directors and will depend on our financial condition, results of operations, contractual restrictions, business prospects and other factors that the Board of Directors considers relevant. In the absence of dividends, investors will only see a return on their investment if the value of our common stock appreciates.

Future sales of our securities in the public or private markets could adversely affect the trading price of our common stock and our ability to continue to raise funds in new stock offerings.

It is likely that we will sell common stock or securities exercisable or convertible into common stock in order to finance our future growth plans. Future sales of substantial amounts of our securities in the public or private markets would dilute our existing shareholders and potentially adversely affect the trading prices of our common stock and could impair our ability to raise capital through future offerings of securities. Alternatively, we may rely on debt financing and assume debt obligations that require us to make substantial interest and principal payments that could adversely affect our business and future growth potential.

Price volatility of our publicly traded securities could adversely affect investors’ portfolios.

In recent years, the securities markets in the United States have experienced high levels of price and volume volatility, and the market prices of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operating performance or prospects of such companies. It is likely that continual fluctuations in price will occur. We are listed on the over-the-counter electronic bulletin board, which may not provide as much liquidity for shares of our common stock as would a registered stock exchange. The price of our common stock has been subject to price and volume volatility in the past and will likely continue to be subject to such volatility in the future.

Because our common stock is deemed a “penny stock”, an investment in our common stock should be considered high risk and subject to marketability restrictions.

Since our common stock is a penny stock, as defined in Rule 3a51-1 under the Securities Exchange Act, it will be more difficult for investors to liquidate their investment even if and when a market develops for the common stock. Until the trading price of the common stock rises above $5.00 per share, if ever, trading in the common stock is subject to the penny stock rules of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) specified in Rules 15g-1 through 15g-10. Those rules require broker-dealers, before effecting transactions in any penny stock, to:

• Deliver to the customer, and obtain a written receipt for, a disclosure document;
• Disclose certain price information about the stock;
• Disclose the amount of competition received by the broker-dealer or any associated person of the broker-dealer;
• Send monthly statements to customers with market and price information about the penny stock; and
• In some circumstances, approve the purchaser’s account under certain standards and deliver written statements to the customer with information specified in the rules.

Consequently, the penny stock rules may restrict the ability or willingness of broker-dealers to sell the common stock and may affect the ability of holders to sell their common stock in the secondary market and the price at which such holders can sell any such securities. These additional procedures could also limit our ability to raise additional capital in the future.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

We lease approximately 3,100 square feet of office space in a one story office facility in Castle Rock, Colorado which is used as our corporate headquarters. Our lease expires in June 2015. Our rent for the facility in Castle Rock, Colorado is approximately $6,000 per month, which includes common area maintenance (CAM) charges.

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 5 years with an expiration date of March 1, 2018. One additional option to renew for a 5-year term exists and is deemed to automatically renew unless written notice is provided 60 days before the end of the term. This location pays a minimum monthly rental rate of approximately $150 plus all utilities, taxes and other expenses based on actual expenses to maintain the building.

In September 2013, as part of the Validus acquisition, Validus entered into a lease agreement with Praedium in which Validus is leasing office space. The lease is for a period of three years, expiring October 31, 2016, and requires rental payments of approximately $2,600 per month. There is no renewal feature. In addition to primary rent, the lease requires additional payments for operating costs and other common area maintenance costs.

ITEM 3.  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.

There are currently no ongoing proceedings against the Company.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable

PART II

ITEM 5. MARKET FOR COMMON EQUITY RELATED STOCKHOLDER MATTERS AND REGISTRANT’S PURCHASES OF EQUITY SECURITIES

Market Information for Common Stock

Since the inception of the public trading of our securities in November 2006 until June 2012, our common stock has been listed on the over-the-counter electronic bulletin board (“OTC:BB”) under the symbol “INMG.” 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. The following table sets forth the range of high and low bid prices over the past two years. The quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions.

Stockholders

As of February 6, 2015, we estimate that there were 105 record holders of our common stock. A significant number of the outstanding shares of common stock which are beneficially owned by individuals and entities are registered in the name of Cede & Co. A nominee of The Depository Trust Company, Cede & Co. is a securities depository for banks and brokerage firms.

Dividends

We have not declared or paid any cash dividends on our common stock. We presently do not have plans to pay any cash dividends in the future.

Recent Sales of Unregistered Securities

In connection with the Sterling acquisition (see Note 3 to the accompanying consolidated financial statements), we issued 42,096 shares of WFCF common stock valued at approximately $101,000 based upon the closing price of our stock on October 24, 2014, of $2.40 per share.

For services rendered by our advisors in connection with the Sterling acquisition (see Note 3 to the accompanying consolidated financial statements), we issued 31,250 shares of common stock of WFCF valued at approximately $75,000 based upon the closing price of our stock on October 24, 2014, of $2.40 per share.

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. 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.

In connection with the Validus acquisition (see Note 3 to the accompanying consolidated financial statements), we issued 708,681 shares of WFCF common stock valued at approximately $935,500 based upon the closing price of our stock on September 16, 2013, of $1.32 per share.

For services rendered by our advisors in connection with the Validus acquisition (see Note 3 to the accompanying consolidated financial statements), we issued 56,818 shares of common stock of WFCF valued at approximately $75,000 based upon the closing price of our stock on September 16, 2013, of $1.32 per share.

In September 2013, in connection with the settlement of a $200,000 unsecured note with a related party, we issued 175,972 shares of WFCF common stock valued at approximately $214,700 based upon the market price at the date of the agreement of $1.22 per share.

The issuance of these shares of our common stock described above was pursuant to the exemption from registration provided by Section 4(2)(2) of the Securities Act of 1933, as amended and related state private offering exemptions.

Issuer Purchases of Equity Securities

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:

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 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This annual report on Form 10-K and other publicly available documents, including the documents incorporated herein and therein by reference, contain, and our officers and representatives may from time to time make, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding:

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

• Changing technology and evolving standards in the livestock and food industry;
• Consumer focus on food safety and assurance;
• Economic and financial conditions in the livestock and food industry;
• International export market activities, including trade barriers to certain beef and other livestock exports;
• Market demand for beef and other livestock products;
• Seasonal volatility in business activity;
• Developments and changes in laws and regulations, including increased regulation of the livestock and food industry through legislative action and revised rules and standards;
• Strategic actions, including acquisitions and our success in integrating acquired businesses;
• Enforceability of our patents, trademarks and other intellectual property rights;
• Continued service of key senior management personnel; and
• Such other factors as discussed throughout Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Part I, Item 1A. Risk Factors.

Any forward-looking statement made by us in this annual report on Form 10-K is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

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 world-wide.

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

Management’s Strategy

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

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

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

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.

Sterling Acquisition

On October 24, 2014, an Asset Purchase Agreement (the “Purchase Agreement”) was entered into by and among Where Food Comes From, Inc. (“WFCF” or the “Company”), Sterling Solutions, LLC (“Seller”), and certain affiliates of the Seller.

Pursuant to the Purchase Agreement, WFCF purchased and acquired certain audit, assessment and verification business assets of the Seller as of October 24, 2014 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.

Based in Vale, OR, Sterling Solutions specializes in verification programs for the beef industry and has some of the leading calf ranch and feed yard customers in the western U.S., including a very strong presence in the Pacific Northwest. The Company’s licenses and accreditations include Source and Age, Non-Hormone Treated Cattle (NHTC), Animal Care and Well-being, Sterling Natural, High Quality Beef (HQB), Never Ever 3 (NE3), and other programs. The Company serves large dairies, calf ranches and cattle operations, and has more than 10 years of on-farm auditing experience.

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. The purchase price for the units shall be equal to the amount the selling holders of the units would be entitled to receive upon a liquidation of the Validus assuming all of the assets of Validus are sold for a purchase price equal to the product of eight and half times trailing twelve-month earnings before income taxes, depreciation and amortization, as defined.

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 noncontrolling interest.

Redeemable noncontrolling interests are presented at the greater of their carrying amount or redemption value at the end of each reporting period and are shown as a separate caption between liabilities and equity (mezzanine section) in the accompanying balance sheet.

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

ICS Acquisition

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. The Company exercised its right and purchased the remaining 40% interest for cash of approximately $196,000 on March 1, 2014.

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 WhereFoodComesFrom® labeling program.

RESULTS OF OPERATIONS

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Revenues

Total revenues for the year ended December 31, 2014 increased 51.2% over the year ended December 31, 2013.

Service revenues include sales of our USVerified solutions and related consulting, program development and web-based development services. Service revenues for the year ended December 31, 2014 increased 52.9% compared to the year ended December 31, 2013. Overall, this increase is due to both an increase in new verification customers, as well as the inclusion of Validus operations for a full year in 2014 and Sterling for two months of 2014.

Product sales are primarily sales of cattle identification ear tags. Product sales for the year ended December 31, 2014 increased 50.1% compared to the year ended December 31, 2013. The increase is due simply to an increase in number of customers and the impact of the December 2013 ADT ruling for traceability of livestock moving interstate.

Other revenue primarily represents the fees earned from our WhereFoodComesFrom® labeling program. Other revenue for the year ended December 31, 2014 decreased 9.9% compared to the year ended December 31, 2013. The decrease is due to a change in beef suppliers at one of our major customers. Congruent with the integrity reflected in all of our programs, this customer made the decision to pull the WFCF label from its beef products until an acceptable alternate verified beef supplier can be found. This customer’s licensing revenue from beef alone made up nearly half of our licensing revenue historically. The decrease was nearly absorbed entirely by the addition of significant new customers and new product lines for existing customers.

Cost of Revenues and Gross Margin

Cost of sales for the year ended December 31, 2014 were approximately $5,001,600 compared to approximately $3,091,800 for the year ended December 31, 2013. Gross margin for 2014 decreased to 42.9% of revenues compared to 46.7% for 2013. Overall the increase in costs are due to change in product mix coupled with bundling opportunities offset by the inclusion of a full year of Validus operations in 2014.

Our margins are impacted by various costs such as cost of products, salaries and benefits, insurance, and taxes. Because certain elements of our cost of revenues are fixed in nature, incremental sales positively impact our margins. Conversely, our gross margins for the year ended 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.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2014 were approximately $3,418,600, an increase of approximately $739,500, or 27.6% over the year ended December 31, 2013.

Overall, the increase in our selling, general and administrative expenses is due to the inclusion of Validus operations in 2014.

Income Tax Benefit

During the years ended December 31, 2014 and 2013, utilization of NOL carry forwards reduced our effective tax rate. For the year ended December 31, 2014 and 2013, we recorded income tax expense and an income tax benefit of approximately $140,900 and $1,800, respectively.

Net Income and Per Share Information

As a result of the foregoing, net income attributable to WFCF shareholders for the year ended December 31, 2014 was approximately $229,100 or $0.01 per basic and diluted common share, compared to net loss of approximately $33,600 or less than a penny per basic and diluted common share for the year ended December 31, 2013. 

Liquidity and Capital Resources

At December 31, 2014, we had cash and cash equivalents of approximately $2,583,100 compared to approximately $1,067,500 of cash and cash equivalents at December 31, 2013. Our working capital at December 31, 2014 was approximately $3,380,700 compared to approximately $1,533,600 at December 31, 2013.

Net cash provided by operating activities during 2014 was approximately $590,000 compared to net cash provided by operating activities of $216,900 during the same period in 2013. Cash provided by operating activities is driven by our net income and adjusted by non-cash items. Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock based compensation expense, and deferred taxes. Fluctuations are primarily due to the timing of cash receipts and cash disbursements offset by operating performance.

Net cash used in investing activities during 2014 was approximately $485,800 compared to net cash used in investing activities of $599,600 during 2013. Net cash used in 2014 was primarily attributable to the acquisition of the remaining 40% interest in ICS for which we paid $195,000 in cash as well as acquiring certain intangible assets of Global Animal Management, Inc. for cash of $65,000 and certain audit, assessment and verification business assets of Sterling Solutions, LLC for cash of $150,000. Additionally, we spent approximately $74,900 towards property and equipment. Net cash used in 2013 was directly related to the acquisition of Validus as well as purchases of property and equipment.

Net cash provided by financing activities during 2014 was approximately $1,411,300 compared to $46,800 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 $32,300 in proceeds from stock option exercises offset by repayments of debt and lease obligations of approximately $171,000. Net cash provided in 2013 period was due to proceeds from stock option exercises of $105,300 offset by repurchases of our common stock under the Buyback Program of approximately $29,600 and repayments of debt and lease obligations of approximately $28,900.

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 has brought significant opportunities to us including: increased investor confidence and renewed interest in our company, as well as the potential to develop business relationships with long term strategic partners. In keeping with our core business, we will continue to review our business model with a focus on profitability, long term capital solutions and the potential impact of acquisitions or divestitures, if such an opportunity arises.

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 way to access various restrictions 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. There were no amounts borrowed under this line of credit through December 31, 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.

On April 22, 2011, we entered into a U.S. Small Business Administration Note with Great Western Bank. The Note which was to mature on May 1, 2021 provided for $200,000 in additional working capital. The interest rate on the Note was at prime plus 2.5% and was adjusted quarterly. The note was paid in full during 2014.

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. As of December 31, 2014, ICS had no amounts outstanding on this LOC.

Off Balance Sheet Arrangements

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are discussed in Note 2 to our financial statements as set forth in Item 8 of this Form 10-K.

Revenue Recognition

We offer a range of products and services to deploy and maintain identification, traceability, and verification systems and to facilitate customers’ participation in and compliance with USDA’s Quality System Assessment, Process Verification and Export Verification Programs. We generate revenue primarily from the sale of our verification solutions, consulting services and hardware sales. We sell our products and services directly to customers at various levels in the livestock supply chain.

Revenue is recognized when persuasive evidence of an agreement with the customer exists, delivery has occurred or services have been provided, the sales price is fixed or determinable, collectability is reasonably assured, and risk of loss and title have transferred to the customer.

Service revenues primarily consist of fees charged for verification audits and other verification services that the Company performs for customers. Revenue from verification audits is recognized upon completion of the audits. Contracts for these services are cancelable only for non-performance.

In connection with certain arrangements, reimbursable expenses are incurred and billed to customers and such amounts are recognized as both revenue and cost of revenue.

Deferred revenue represents payments received in advance from our customers for annual customer support services not yet performed as of December 31, and revenue is recognized as services are performed, generally over the one year contract term.

Customer deposits represent down-payments made in advance of a verification audit to be performed for a customer and deposits are applied to the customer’s accounts when invoiced.

Revenues under contracts for consulting services are recognized when completed (for short-term projects). On occasion, we may enter into long-term projects, for which we use the percentage of completion method. No such long-term projects occurred during 2014 and 2013.

Product sales are primarily generated from the sale of cattle identification ear tags. Revenue is recognized when goods are shipped and after title has transferred to the customer.

Other revenue primarily represents the fees earned from our “WhereFoodComesFrom®” labeling program. Revenue is recognized when our customer, who has been granted a right to use our WhereFoodComesFrom® label, places this label on their product and ships their product. Revenue is billed based on pounds of product shipped.

Generally, we do not provide right of return or warranty on product sales or services performed.

Stock-Based Compensation Expense

Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and the pre-vesting option forfeiture rate. We utilize the Black-Scholes option-pricing model to estimate the fair value of stock options. Under this 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 life 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.

The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment.

There is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may differ from the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee

stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of our share-based awards is determined in accordance with U.S. GAAP and the SEC's Staff Accounting Bulletin No. 107 using an option-pricing model, the value calculated may not be indicative of the fair value observed in a willing buyer / willing seller market transaction.

Estimates of share-based compensation expenses do have an impact on our financial statements, but these expenses are based on the aforementioned option valuation model and will never result in the payment of cash by us. For this reason, and because we do not view share-based compensation as being related to our operational performance, we exclude estimated share-based compensation expense when internally evaluating our performance.

Income Taxes and Realization of Deferred Tax Assets

We compute income taxes using the asset and liability method. Under this method, deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income statement purposes using the enacted statutory rate in effect for the year these differences are expected to be taxable or deductible. Deferred income tax expense or benefit is based on the changes in the net deferred tax asset or liability from period to period. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. If we determine that a deferred tax asset could be realized in a greater or lesser amount than recorded, the asset's recorded amount is adjusted and the income statement is either credited or charged, respectively, in the period during which the determination is made.

We reduce our deferred tax assets by a valuation allowance if we determine that it is more likely than not that some portion or all of these tax assets will not be realized. In making this determination, we consider various qualitative and quantitative factors, such as:

The recognition of our net deferred income tax assets requires significant management judgment regarding the interpretation of applicable statutes, the status of various income tax audits, and our particular facts and circumstances.

We recognize the tax benefit from an uncertain tax position when we determine that it is more-likely-than-not that the position would be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If we derecognize an uncertain tax position, our policy is to record any applicable interest and penalties within the provision for income tax. Management believes there are no current uncertain tax positions that would result in an asset or liability being recognized in the accompanying financial statements. Interest and penalties on unrecognized tax benefits, if any, are recognized as a component of income tax expense.

Business Combinations

A component of our growth strategy has been to acquire businesses that complement our existing operations. We account for business combinations in accordance with the guidance for business combinations and related literature. Accordingly, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the date of purchase. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill.

In determining the fair values of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods including present value modeling and referenced market values (where available). Further, we make assumptions within certain valuation techniques including discount rates and timing of future cash flows. Valuations are performed by management or independent valuation specialists under management’s supervision, where appropriate. We believe that the estimated fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates.

Intangible Assets

Our intangible assets consist of customer lists, accreditations, beneficial lease arrangement and trade name related to our acquisitions, recorded at estimated fair value. It also consists of our trademark rights and the related costs incurred to obtain the trademark rights recorded at cost. These assets are subject to amortization using the straight-line method over the estimated useful lives of the respective assets, which range from two to fifteen years. We review our intangible assets for impairment at least annually or whenever impairment indicators are determined to be present. If an impairment exists, the amount of impairment is measured as the excess of the carrying amount of the asset over its fair value as determined utilizing the estimated discounted future cash flows, or some other fair value measure, or the expected proceeds, net of costs to sell, upon sale of the asset. During 2013 and 2014, we completed an impairment analysis, and based upon the work performed, we concluded that no impairment existed.

Goodwill and Other Non-Amortizable Intangible Asset

Goodwill relates to our acquisitions of ICS and Validus. Both ICS and Validus are reporting units one level below our Certification and Verification Services segment. All other non-amortizable intangible assets relate to the trademarks/trade name acquired in the Validus acquisition and have an indefinite life.  We review goodwill and non-amortizable intangible assets for impairment annually in the fourth quarter, or more frequently if impairment indicators arise. Impairment indicators include (i) a significant decrease in the market value of an asset (ii) a significant change in the extent or manner in which an asset is used or a significant physical change in an asset, (iii) a significant adverse change in legal factors or in the business climate that could affect the value of an asset or an adverse action by a regulator, and (iv) a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing revenue.

We estimate a reporting unit’s fair value using a 6-year projection of discounted cash flows which incorporates planned growth rates, market-based discount rates and estimates of residual value. Additionally, we used a market-based, weighted-average cost of capital of 15% to discount the projected cash flows of those operations. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, industry and economic conditions and our actual results and conditions may differ over time. If the carrying value of a reporting unit’s net assets exceeds its fair value, the second step is applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied fair value.

In 2014 and 2013, there were no impairments of goodwill. In connection with our 2014 annual impairment testing, we noted one reporting unit which was more sensitive to near-term changes in discounted cash flow assumptions: Validus with approximately $747,000 of goodwill as of December 31, 2014 and fair value in excess of its carrying value of net assets of 3.9%. While the reporting unit passed the first step of the impairment test, if operating income or another valuation assumption were to deteriorate significantly in the future, it could adversely affect the estimated fair value. If we are unsuccessful in our plans to increase the profitability of the Validus reporting unit, the estimated fair value could decline and lead to a potential goodwill impairment in the future.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to our financial statements set forth in Item 8 of this Form 10-K for a detailed description of recent accounting pronouncements. We do not expect these recently issued accounting pronouncements to have a material impact on our results of operations, financial condition, or liquidity in future periods.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Where Food Comes From, Inc.:

We have audited the accompanying consolidated balance sheets of Where Food Comes From, Inc. and its subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income (loss), equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 3 to the consolidated financial statements, in September 2013, the Company acquired a 60% interest in Validus Verification Services, LLC; in March 2014, the Company acquired the remaining 40% interest of International Certification Services, Inc., and in October 2014 the Company acquired assets of Sterling Solutions, LLC.

/s/ GHP Horwath, P.C.

Denver, Colorado

February 17, 2015

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.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Note 1 - The Company and Basis of Presentation

Business Overview

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

On February 29, 2012, we completed an acquisition of a 60% ownership investment in a North Dakota company, International Certification Services, Inc. (“ICS”). On March 1, 2014, the Company exercised its call option to purchase the remaining 40% interest of the stock of ICS in exchange for cash consideration (Note 3).

On September 16, 2013, we acquired the auditing business of Praedium Ventures, LLC, (“Praedium”) previously known as Validus Ventures, LLC (Note 3). 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.

On October 24, 2014, we acquired certain audit, assessment and verification business assets of Sterling Solutions, LLC (“Sterling”) (Note 3).

We operate in one segment.

Basis of Presentation

Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues, costs and expenses during the reporting period. Actual results could differ from the estimates.

The accompanying consolidated financial statements include the results of operations, financial position and cash flows of the Company and its subsidiaries. At December 31, 2014, our 100%-owned subsidiaries include ICS and our 60%-owned subsidiary is Validus Ventures, LLC. All intercompany balances have been eliminated in consolidation.

Note 2 - Summary of Significant Accounting Policies

Cash and Cash Equivalents

We place our cash with high quality financial institutions. At times, cash balances may exceed the FDIC insurance limit; however, we have not experienced any losses related to balances that exceed such FDIC insurance limits, and we believe our credit risk is minimal. At times, we may also invest in short-term investments with original maturities of three months or less, which we consider to be cash and cash equivalents, since they are readily convertible to cash.

Restricted cash of $250,000 at December 31 2014 represents a certificate of deposit with a financial institution that is required as collateral under a revolving line of credit (Note 6).

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Revenue Recognition

We offer a range of products and services to deploy and maintain identification, traceability, and verification systems and to facilitate customers’ participation in and compliance with the USDA’s Quality System Assessment, Process Verification and Export Verification Programs. We generate revenue primarily from the sale of our verification solutions, consulting services and hardware sales. We sell our products and services directly to customers at various levels in the livestock supply chain.

Revenue is recognized when persuasive evidence of an agreement with the customer exists, delivery has occurred or services have been provided, the sales price is fixed or determinable, collectability is reasonably assured, and risk of loss and title have transferred to the customer.

No single customer generated more than 10% of total net revenue in 2014 or 2013.

Service revenues primarily consist of fees charged for verification audits and other verification services that the Company performs for customers. Revenue from verification audits is recognized upon completion of the audits. Contracts for these services are cancelable only for non-performance.

In connection with certain arrangements, reimbursable expenses are incurred and billed to customers and such amounts are recognized as both revenue and cost of revenue.

Deferred revenue represents payments received in advance from our customers for annual customer support services not yet performed as of December 31, and revenue is recognized as services are performed, generally over the one year contract term.

Customer deposits represent down-payments made in advance of a verification audit to be performed for a customer and deposits are applied to the customer’s accounts when invoiced.

Revenues under contracts for consulting services are recognized when completed (for short-term projects). On occasion, we may enter into long-term projects, for which we use the percentage of completion method. No such long-term projects occurred during 2014 and 2013.

Product sales are primarily generated from the sale of cattle identification ear tags. Revenue is recognized when goods are shipped and after title has transferred to the customer.

Other revenue primarily represents the fees earned from our “WhereFoodComesFrom®” labeling program. Revenue is recognized when our customer, who has been granted a right to use our WhereFoodComesFrom® label, places this label on their product and ships their product. Revenue is billed based on pounds of product shipped.

Generally, we do not provide right of return or warranty on product sales or services performed.

Accounts Receivable and Allowance for Doubtful Accounts

Our receivables are generally due from trade customers. Credit is extended based on our evaluation of the customer’s financial condition and generally, collateral is not required. Accounts receivable are generally due approximately 30 days from the invoice date and are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts receivable that are outstanding longer than the contractual payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss and payment history, the customer’s current ability to pay its obligations to us and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The allowance for doubtful accounts was approximately $25,800 and $20,700, at December 31, 2014 and 2013, respectively.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

No single customer accounted for greater than 10% of our accounts receivable balances at December 31, 2013 and 2014.

Cost of Revenues

Cost of revenues includes the cost of products sold, which consists of livestock ear tags used in connection with the US Verified Source and Age Verification programs. Salaries and related fringe benefits directly associated with our verification services are allocated to cost of revenues.

Livestock identification ear tags sold in connection with our verification offerings are purchased primarily from one supplier. However, there are numerous other companies which manufacture and market such ear tags.

Fair Value Measurements

The carrying value of cash and restricted cash, accounts receivable, and accounts payable approximate fair value due to their short maturities. The amounts shown for debt and notes payable also approximate fair value because current interest rates and terms offered to us for similar debt are substantially the same.

Fair value accounting guidance defines fair value, establishes a framework for measuring fair value under GAAP 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. The fair value hierarchy consists of three broad levels, which are described below:

Property and Equipment

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets. Land is not depreciated. Buildings are depreciated over 20 years. All other property and equipment have depreciable lives which range from one to seven years.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Intangible Assets

Our intangible assets consist of customer relationships, accreditations, a beneficial lease arrangement and tradename/trademarks related to our acquisitions, recorded at estimated fair value. Intangible assets also include certain trademark rights and the related costs incurred to obtain the trademark rights recorded at cost. Certain of these assets are subject to amortization using the straight-line method over the estimated useful lives of the respective assets (Note 5).

In connection with the Validus acquisition, the Company allocated a portion of the purchase price to tradenames/trademarks. These tradenames/trademarks were determined to have an indefinite useful life and are not currently amortized. Authoritative guidance requires that intangible assets not subject to amortization (indefinite-lived assets) be tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired.  

Impairment of Long-Lived Assets

We review all of our long-lived assets (including intangible assets) for impairment at least annually or whenever impairment indicators are determined to be present. If an impairment exists, the amount of impairment is measured as the excess of the carrying amount of the asset over its fair value as determined utilizing estimated discounted future cash flows, or some other fair value measure, or the expected proceeds, net of costs to sell, upon sale of the asset.

Significant judgments are required to estimate the fair value of intangible assets including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or impairment at future reporting dates.  No impairment was identified on the Company’s long-lived assets through December 31, 2014.

Goodwill and Other Non-Amortizable Intangible Assets

Goodwill relates to our acquisitions of ICS and Validus. Both ICS and Validus are reporting units one level below our Certification and Verification Services segment. All other non-amortizable intangible assets relate to the trademarks/trade name acquired in the Validus acquisition and have an indefinite life.  We review goodwill and non-amortizable intangible assets for impairment annually in the fourth quarter, or more frequently if impairment indicators arise. Impairment indicators include (i) a significant decrease in the market value of an asset (ii) a significant change in the extent or manner in which an asset is used or a significant physical change in an asset, (iii) a significant adverse change in legal factors or in the business climate that could affect the value of an asset or an adverse action by a regulator, and (iv) a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing revenue.

We estimate a reporting unit’s fair value using a 6-year projection of discounted cash flows which incorporates planned growth rates, market-based discount rates and estimates of residual value. Additionally, we used a market-based, weighted-average cost of capital of approximately 15% to discount the projected cash flows of those operations. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, industry and economic conditions and our actual results and conditions may differ over time. If the carrying value of a reporting unit’s net assets exceeds its fair value, the second step is applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied fair value.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

In 2014 and 2013, there were no impairments of goodwill. In connection with our 2014 annual impairment testing, we noted that our Validus reporting unit was more sensitive to near-term changes in discounted cash flow assumptions: approximately $747,000 of goodwill is attributable to the Validus reporting unit as of December 31, 2014, and fair value in excess of its carrying value of net assets by approximately 4.0%. While the reporting unit passed the first step of the impairment test, if operating income or another valuation assumption were to deteriorate significantly in the future, it could adversely affect the estimated fair value. If we are unsuccessful in our plans to increase the profitability of the Validus reporting unit, the estimated fair value could decline and lead to potential goodwill impairment in the future.

Research and Development, Software Development Costs, and Internal Use Software Development Costs

Research and development costs are charged to operations as incurred. We did not incur any research and development expense in 2014 and 2013.

Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable. For products where proven technology exists, this may occur very early in the development cycle. Factors we consider in determining when technological feasibility has been established include (i) whether a proven technology exists; (ii) the quality and experience levels of the individuals developing the software; (iii) whether the software is similar to previously developed software which has used the same or similar technology; and (iv) whether the software is being developed with a proven underlying engine. Technological feasibility is evaluated on a product-by-product basis. Capitalized costs for those products that are cancelled or abandoned are charged immediately to cost of sales. The recoverability of capitalized software development costs is evaluated on the expected performance of the specific products for which the costs relate.

Internal use software development costs represent the capitalization of certain external and internal computer software costs incurred during the application development stage. The application development stage is characterized by software design and configuration activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality.

Website software development costs related to certain planning and training costs incurred in the development of website software are expensed as incurred, while application development stage costs are capitalized.

Prior to 2011, we capitalized certain external and internal use software and website development costs totaling $183,385. The estimated useful lives of these pre-2011 costs capitalized was evaluated for each specific project and ranges from one to three years. In 2013, we acquired certain assets of Validus, which included internally- developed software with an estimated fair value of $129,000. During 2014 and 2013, the amortization of capitalized costs totaled approximately $43,000 and $12,800, respectively. Capitalized costs are included in property and equipment.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Advertising Expenses

Advertising costs are expensed as incurred. Total advertising expense for the years ended December 31, 2014 and 2013, were approximately $59,500 and $59,700, respectively.

Income Taxes

We compute income taxes using the asset and liability method. Under this method, deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income statement purposes using the enacted statutory rate in effect for the year these differences are expected to be taxable or deductible. Deferred income tax expense or benefit is based on the changes in the net deferred tax asset or liability from period to period. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. If we determine that a deferred tax asset could be realized in a greater or lesser amount than recorded, the asset's recorded amount is adjusted and the income statement is either credited or charged, respectively, in the period during which the determination is made.

We reduce our deferred tax assets by a valuation allowance if we determine that it is more likely than not that some portion or all of these tax assets will not be realized. In making this determination, we consider various qualitative and quantitative factors, such as:

The recognition of our net deferred income tax assets requires significant management judgment regarding the interpretation of applicable statutes, the status of various income tax audits, and our particular facts and circumstances.

We recognize the tax benefit from an uncertain tax position when we determine that it is more-likely-than-not that the position would be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If we derecognize an uncertain tax position, our policy is to record any applicable interest and penalties within the provision for income tax. Management believes there are no current uncertain tax positions that would result in an asset or liability being recognized in the accompanying financial statements. Interest and penalties on unrecognized tax benefits, if any, are recognized as a component of income tax expense.

We file income tax returns in the US federal jurisdiction and various state jurisdictions. We are no longer subject to US federal tax examination for years beginning before January 1, 2011, and the state tax returns that remain subject to examination include those for the years ended December 31, 2012 through the years ended December 31, 2014.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Stock-Based Compensation

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 life 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.

Our stock-based compensation cost for the years ended December 31, 2014 and 2013, was approximately $88,100 and $70,200, respectively, and has been included in income from operations.

The fair value of stock options granted during 2014 and 2013 (Note 9) was estimated using the following assumptions:

Recently Issued Accounting Standards

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. We do not expect this to have a material impact on our results of operations, financial condition, or liquidity in future periods.

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 consolidated financial statements.

Reclassifications 

Certain prior year amounts have been reclassified to conform to the current year presentation. Net income and shareholders' equity were not affected by these reclassifications.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Note 3 – Business Acquisitions

Sterling Acquisition

On October 24, 2014, an Asset Purchase Agreement (the “Purchase Agreement”) was entered into by and among Where Food Comes From, Inc. (“WFCF” or the “Company”), Sterling Solutions, LLC (“Sterling” or “the Seller”), and certain affiliates of the Seller.

Pursuant to the Purchase Agreement, WFCF purchased and acquired customer relationships and trademarks of the Seller as of October 24, 2014 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. This transaction was accounted for under the acquisition method of accounting and the purchase price has been allocated (on a provisional basis) primarily all to customer relationships, based on estimated fair value. This purchase price allocation is preliminary and subject to change, as we are still reviewing all of the underlying assumptions and calculations used in the allocation.

Based in Vale, OR, Sterling Solutions specializes in verification programs for the beef industry and has some of the leading calf ranch and feed yard customers in the western U.S., including a very strong presence in the Pacific Northwest. The Seller’s licenses and accreditations include Source and Age, Non-Hormone Treated Cattle (NHTC), Animal Well-being, Sterling Natural, High Quality Beef (HQB), Never Ever 3 (NE3), and other programs. The Seller serves large dairies, calf ranches and cattle operations, and has more than 10 years of on-farm auditing experience.

The pro forma effects of Sterling on the Company's consolidated results of operations for 2014 and 2013, as if the acquisition had occurred on January 1, 2013 and 2014 are not material. 

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. The purchase price for the units shall be equal to the amount the selling holders of the units would be entitled to receive upon a liquidation of the Validus assuming all of the assets of Validus are sold for a purchase price equal to the product of eight and half times trailing twelve-month earnings before income taxes, depreciation and amortization, as defined.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

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 noncontrolling interest.

Redeemable noncontrolling interests are presented at the greater of their carrying amount or redemption value at the end of each reporting period and are shown as a separate caption between liabilities and equity (mezzanine section) in the accompanying balance sheet.

We believe that Validus is the leading egg, 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.

The following table summarizes the estimated fair values assigned to the assets and liabilities acquired in addition to the excess of the purchase price over the net assets acquired at the Validus acquisition date:

The fair value of the non-controlling interest 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 to intangible assets based on the allocation of the purchase price. The fair value amounts of the components of intangible assets are as follows:

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

The following unaudited pro forma information presents the results of operations for the year ended December 31, 2013, as if the acquisition of Validus had occurred on January 1, 2013.

In December 31, 2013, we incurred a total of approximately $269,000 in advisory and legal fees related to the acquisition of Validus, of which, approximately $219,000 is reported in selling, general and administrative expenses in the accompanying consolidated statement of loss for the year ended December 31, 2013.

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”).

Pursuant to the Purchase Agreement, on February 29, 2012 (the “Acquisition Date”), the Company acquired 60% of the issued and outstanding common stock of ICS. The Purchase Agreement also includes non-dilution provisions, and we had a right of first refusal on the remaining 40% of the outstanding stock. The transaction was accounted for using the acquisition method of accounting.

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. 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.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Note 4 - Property and Equipment

The major categories of property and equipment are as follows as of December 31:

Depreciation expense for the years ended December 31, 2014 and 2013 was approximately $96,200 and $57,000, respectively.

Note 5 – Intangible and Other Assets

The following table summarizes our intangible assets as of December 31:

The deposit represents an advance payment to a third-party institution for laboratory verification and testing services.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Amortization expense for the years ended December 31, 2014 and 2013 was approximately $129,500 and $62,700, respectively. Future scheduled amortization of intangible assets is as follows:

Note 6 - Notes Payable

Notes payable consist of the following:

Equipment Note Payable

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

Great Western Bank SBA Loan

In April 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 loan balance was paid in full during 2014.

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 (5.5% at December 31, 2014). 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. As of December 31, 2014, ICS had no amounts outstanding under this LOC.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

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 December 31, 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 WFCF 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.

Scheduled maturities under notes payable for the next five years and thereafter, as of December 31, 2014, are as follows:

Note 7 - Income Taxes

The reconciliation of income taxes calculated at the statutory rates to our effective tax rate is as follows:

Deferred federal tax expense for 2014 was $136,650. Deferred federal tax benefit for 2013 was $1,678. Deferred state tax expense for 2014 was $4,226. Deferred state tax benefit for 2013 was $100.

At December 31, 2014, we had a charitable contribution carryforward of approximately $37,600, which will expire between 2017 and 2018.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

The income tax effects of temporary differences that give rise to significant portions of deferred tax assets as of December 31, 2014 and 2013 are as follows:

As of December 31, 2014, our net operating loss carryforwards for U.S. federal income tax purposes were approximately $1.66 million, and were subject to the following expiration schedule:

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

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements