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Where Food Comes From, Inc. - Quarter Report: 2021 June (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly period ended June 30, 2021

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to _____________

 

Commission File No. 001-40314

 

WHERE FOOD COMES FROM, INC.

(exact name of registrant as specified in its charter)

 

Colorado   43-1802805

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

202 6th Street, Suite 400

Castle Rock, CO 80104

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code:

(303) 895-3002

 

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

 

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

 

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

 

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

 

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

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, $0.001 par value   WFCF   The NASDAQ Stock Market LLC

 

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of July 30, 2021, was 6,115,394.

 

 

 

 
 

 

Where Food Comes From, Inc.

Table of Contents

June 30, 2021

 

Part 1 - Financial Information
     
Item 1. Financial Statements 3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
   
Item 4. Controls and Procedures 26
     
Part II - Other Information
     
Item 1. Legal Proceedings 27
     
Item 1A. Risk Factors 27
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
     
Item 6. Exhibits 27

 

2
 

 

Where Food Comes From, Inc.

Consolidated Balance Sheets

 

   June 30,   December 31, 
   2021   2020 
(Amounts in thousands, except per share amounts)  (Unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $5,297   $4,374 
Accounts receivable, net of allowance   1,991    2,508 
Inventory   885    - 
Prepaid expenses and other current assets   486    592 
Total current assets   8,659    7,474 
Property and equipment, net   1,542    1,616 
Operating lease right-of-use assets, net   2,918    3,030 
Investment in Progressive Beef   991    991 
Intangible and other assets, net   2,766    2,948 
Goodwill   2,946    2,946 
Deferred tax assets, net   440    443 
Total assets  $20,262   $19,448 
           
Liabilities and Equity          
Current liabilities:          
Accounts payable  $722   $649 
Accrued expenses and other current liabilities   1,118    599 
Deferred revenue   1,653    1,132 
Current portion of long term debt   -    463 
Current portion of finance lease obligations   11    13 
Current portion of operating lease obligations   297    268 
Total current liabilities   3,801    3,124 
Long term debt, net of current portion   -    572 
Finance lease obligations, net of current portion   26    31 
Operating lease obligation, net of current portion   3,127    3,257 
Total liabilities   6,954    6,984 
           
Commitments and contingencies          
           
Equity:          
Preferred stock, $0.001 par value; 5,000 shares authorized; none issued or outstanding  -     -  
Common stock, $0.001 par value; 95,000 shares authorized; 6,475 (2021) and 6,456 (2020) shares issued, and 6,095 (2021) and 6,118 (2020) shares outstanding   6     6  
Additional paid-in-capital   11,710    11,612 
Treasury stock of 380 (2021) and 338 (2020) shares   (3,308)   (2,702)
Retained earnings   4,900    3,548 
Total equity   13,308    12,464 
Total liabilities and stockholders’ equity  $20,262   $19,448 

 

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

 

3
 

 

Where Food Comes From, Inc.

 Consolidated Statements of Operations

(Unaudited)

 

           
   Three months ended June 30, 
(Amounts in thousands, except per share amounts)  2021   2020 
Revenues:        
Verification and certification service revenue  $3,695   $3,108 
Product sales   964    796 
Software and related consulting revenue   482    512 
Total revenues   5,141    4,416 
Costs of revenues:          
Costs of verification and certification services   2,132    1,516 
Costs of products   648    501 
Costs of software and related consulting   352    299 
Total costs of revenues   3,132    2,316 
Gross profit   2,009    2,100 
Selling, general and administrative expenses   1,727    1,631 
Income from operations   282    469 
Other income/(expense):          
Dividend income from Progressive Beef   30    30 
Other income, net   -    2 
Loan forgiveness from Paycheck Protection Program   -    - 
Gain on sale of assets   -    - 
Loss on foreign currency exchange   (5)   (2)
Interest expense   (1)   (3)
Income before income taxes   306    496 
Income tax expense   104    145 
Net income  $202   $351 
           
Per share - net income:          
Basic  $0.03   $0.06 
Diluted  $0.03   $0.06 
           
Weighted average number of common shares outstanding:          
Basic   6,100    6,219 
Diluted   6,186    6,258 

 

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

 

4
 

 

Where Food Comes From, Inc.

 Consolidated Statements of Operations

(Unaudited)

 

           
   Six months ended June 30, 
(Amounts in thousands, except per share amounts)  2021   2020 
Revenues:        
Verification and certification service revenue  $6,958   $5,911 
Product sales   1,688    1,521 
Software and related consulting revenue   935    896 
Total revenues   9,581    8,328 
Costs of revenues:          
Costs of verification and certification services   3,925    3,050 
Costs of products   1,105    1,003 
Costs of software and related consulting   680    565 
Total costs of revenues   5,710    4,618 
Gross profit   3,871    3,710 
Selling, general and administrative expenses   3,500    3,595 
Income from operations   371    115 
Other income/(expense):          
Dividend income from Progressive Beef   60    60 
Other income, net   1    4 
Loan forgiveness from Paycheck Protection Program   1,037    - 
(Loss)/gain on foreign currency exchange   (7)   1 
Gain on sale of assets   9    - 
Interest expense   (4)   (5)
Income before income taxes   1,467   175 
Income tax expense   115    65 
Net income  $1,352   $110 
           
Per share - net income:          
Basic  $0.22   $0.02 
Diluted  $0.22   $0.02 
           
Weighted average number of common shares outstanding:          
Basic   6,151    6,228 
Diluted   6,241    6,271 

 

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

 

5
 

 

Where Food Comes From, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

           
   Six months ended June 30, 
(Amounts in thousands)  2021   2020 
Operating activities:          
Net income  $1,352   $110 
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation and amortization   401    478 
Gain on sale of assets   (9)   - 
Stock-based compensation expense   54    55 
Deferred tax expense   3    29 
Bad debt expense   40    - 
Forgiveness of note payable from Paycheck Protection Program   (1,037)   - 
Changes in operating assets and liabilities, net of effect from acquisitions:          
Accounts receivable   477    745 
Short-term investments   -    (3)
Inventory   (885)   - 
Prepaid expenses and other assets   106    99 
Accounts payable   73    (243)
Accrued expenses and other current liabilities   519    66 
Deferred revenue   521    409 
Right of use assets and liabilities, net   5    3 
Net cash provided by operating activities   1,620    1,748 
           
Investing activities:          
Acquisition of Postelsia Holdings, Ltd.   -    (300)
Purchases of property, equipment and software development costs   (128)   (329)
Net cash used in investing activities   (128)   (629)
           
Financing activities:          
Proceeds from long term debt   -    1,030 
Repayments of finance lease obligations   (7)   (4)
Proceeds from stock option exercise   44    3 
Stock repurchase under Stock Buyback Plan   (606)   (269)
Net cash (used in) / provided by financing activities   (569)   760 
Net change in cash   923    1,879 
Cash at beginning of period   4,374    2,638 
Cash at end of period  $5,297   $4,517 

 

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

 

6
 

 

Where Food Comes From, Inc.

Consolidated Statement of Equity

(Unaudited)

 

           Additional             
   Common Stock   Paid-in   Treasury   Retained     
(Amounts in thousands)  Shares   Amount   Capital   Stock   Earnings   Total 
Balance at December 31, 2020   6,118   $      6   $11,612   $(2,702)  $3,548   $12,464 
Stock-based compensation expense   -    -    25    -    -    25 
Stock options exercised   18    -    40    -    -    40 
Repurchase of common shares under Stock Buyback Plan   (29)   -    -    (411)   -    (411)
Net income   -    -    -    -    1,150    1,150 
Balance at March 31, 2021   6,107   $6   $11,677   $(3,113)  $4,698   $13,268 
                               
Stock-based compensation expense   -    -    29    -    -    29 
Stock options exercised   1    -    4    -    -    4 
Repurchase of common shares under Stock Buyback Plan   (13)   -    -    (195)   -    (195)
Net income   -    -    -    -    202    202 
Balance at June 30, 2021   6,095   $6   $11,710   $(3,308)  $4,900   $13,308 

 

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

 

7
 

 

Where Food Comes From, Inc.

Consolidated Statement of Equity

(Unaudited)

 

       Additional             
   Common Stock   Paid-in   Treasury   Retained     
(Amounts in thousands)  Shares   Amount   Capital   Stock   Earnings   Total 
Balance at December 31, 2019 (1)   6,245   $      6   $11,445   $(1,665)  $2,163   $11,949 
Stock-based compensation expense   -    -    31    -    -    31 
Stock options exercised                              
Stock options exercised, shares                              
Repurchase of common shares under Stock Buyback Plan   (21)   -    -    (158)   -    (158)
Net loss   -    -    -    -    (241)   (241)
Balance at March 31, 2020   6,224   $6   $11,476   $(1,823)  $1,922   $11,581 
                               
Stock-based compensation expense   -    -    24    -    -    24 
Stock options exercised   3    -    3    -    -    3 
Repurchase of common shares under Stock Buyback Plan   (16)   -    -    (111)   -    (111)
Net income   -    -    -    -    351    351 
Balance at June 30, 2020   6,211   $6   $11,503   $(1,934)  $2,273   $11,848 

 

(1)The balance at December 31, 2019 has been updated to reflect the impact of the 1-for-4 reverse stock split effective December 1, 2020.

 

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

 

8
 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 1 - The Company and Basis of Presentation

 

Business Overview

 

Where Food Comes From, Inc. is a Colorado corporation based in Castle Rock, Colorado (“WFCF”, the “Company,” “our,” “we,” or “us”). We are an independent, third-party food verification company conducting both on-site and desk audits to verify that claims being made about livestock, food, other high-value specialty crops and agricultural products are accurate. We care about food and other agricultural products, how it is grown and raised, the quality of what we eat, what farmers and ranchers do, and authentically telling that story to the consumer. Our team visits farms and ranches and looks at their plants, animals, and records, and compares the information we collect to specific standards or claims that farms and ranches want to make about how they are producing food. We strive to ensure that everyone involved in the food business - from growers and farmers to retailers and shoppers – can count on WFCF to provide authentic and transparent information about the food we eat and how, where, and by whom it is produced.

 

We also provide sustainability programs, compliance management and farming information management solutions to drive sustainable value creation. We employ a software-as-a-service (“SaaS”) revenue model that bundles annual software licenses with ongoing software enhancements and upgrades and a wide range of professional services that support our verification business and generate incremental revenue specific to the food and agricultural industry. Finally, the Company’s Where Food Comes From Source Verified® retail and restaurant labeling program utilizes the verification of product attributes to connect consumers directly to the source of the food they purchase through product labeling and web-based information sharing and education.

 

Most of our customers are located throughout the United States.

 

Basis of Presentation

 

Our unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the results of operations, financial position and cash flows of Where Food Comes From, Inc. and its subsidiaries, Where Food Comes From Organic, Inc. (“WFCFO”), Validus Verifications Services, LLC (“Validus”), Sterling Solutions (“Sterling”), SureHarvest Services, Inc. (“SureHarvest”), A Bee Organic, Sow Organic, JVF Consulting and Postelsia Holdings, Ltd. (“Postelsia”) (collectively referred to as “we,” “us,” and “our” throughout this Form 10-Q). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues, costs and expenses during the reporting period. All significant intercompany transactions and amounts have been eliminated. The results of businesses acquired are included in the consolidated financial statements from the date of the acquisition. Actual results could differ from the estimates.

 

The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements and footnotes thereto for the year ended December 31, 2020, included in our Form 10-K filed on February 18, 2021. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. Certain prior year amounts have been reclassified to conform to current year presentation. Net income and shareholders’ equity were not affected by these reclassifications. The financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations. The consolidated operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for any other interim period of any future year.

 

9
 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Except as specifically indicated, all information in this Quarterly Report on Form 10-Q has been retroactively adjusted to give effect to a 1-for-4 reverse stock split that was effective on December 1, 2020.

 

Seasonality

 

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

 

Recent Accounting Pronouncements

 

The Financial Accounting Standards Board (FASB) Accounting Standards Codification is the sole source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standards Update (ASU) to communicate changes to the codification. The Company considers the applicability and impact of all ASU’s. ASU’s were assessed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements.

 

Note 2 – Basic and Diluted Net Income / (Loss) per Share

 

Basic net income / (loss) per share was computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and restricted stock awards are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

 

The following is a reconciliation of the share data used in the basic and diluted income / (loss) per share computations (amounts in thousands):

 

                     
   Three months ended June 30,   Six months ended June 30, 
(in thousands)  2021   2020   2021   2020 
Basic:                
Weighted average shares outstanding   6,100    6,219    6,151    6,228 
                     
Diluted:                    
Weighted average shares outstanding   6,100    6,219    6,151    6,228 
Weighted average effects of dilutive securities   86    39    90    43 
Total   6,186    6,258    6,241    6,271 
                     
Antidilutive securities:   17    70    17    66 

 

The effect of the inclusion of the antidilutive shares would have resulted in an increase in earnings per share. Accordingly, the weighted average shares outstanding have not been adjusted for antidilutive shares.

 

10
 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 3 - Investment in Progressive Beef, LLC

 

For the three months ended June 30, 2021 and 2020, the Company received dividend income from Progressive Beef of $30,000, respectively, representing a distribution of their earnings. For the six months ended June 30, 2021 and 2020, the Company received dividend income totaling $60,000, respectively. The income is reflected within the “Other income/(expense)” section of the Company’s Consolidated Statement of Income for the three and six months ended June 30, 2021 and 2020.

 

Note 4 – Intangible and Other Assets

 

The following table summarizes our intangible and other assets (amounts in thousands, except useful life):

 

   June 30,   December 31,   Estimated 
   2021   2020   Useful Life 
Intangible assets subject to amortization:            
Tradenames and trademarks  $417   $417    2.5 - 8.0 years 
Accreditations   75    85    5.0 years 
Customer relationships   3,664    3,664    3.0 - 15.0 years 
Patents   970    970    4.0 years 
Non-compete agreements   121    121    5.0 years 
    5,247    5,257      
Less accumulated amortization   2,969    2,795      
    2,278    2,462      
Tradenames/trademarks (not subject to amortization)   465    465      
    2,743    2,927      
Other assets   23    21      
Intangible and other assets:  $2,766   $2,948      

 

Note 5 – Accrued Expenses and Other Current Liabilities

 

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

 

   June 30,   December 31, 
   2021   2020 
         
Income and sales taxes payable  $32   $168 
Payroll related accruals   709    271 
Customer deposits   28    31 
Professional fees and other expenses   349    129 
Accrued expenses and other current liabilities   $1,118   $599 

 

11
 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 6 – Notes Payable

 

Long Term Debt

 

   June 30,   December 31, 
   2021   2020 
(In thousands)          
Paycheck Protection Program Loan  $-   $1,035 
Less current portion of notes payable and other long-term debt   -    (463)
Notes payable and other long-term debt  $-   $572 

 

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program (“PPP”), the initiative provides federally guaranteed loans to small businesses. These loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward. The Company received notification the loan and accrued interest was forgiven on March 4, 2021.

 

Unison Revolving Line of Credit

 

The Company has a revolving line of credit (“LOC”) agreement which matures April 12, 2022. The LOC provides for $75,080 in working capital. The interest rate is at the Wall Street Journal prime rate plus 1.50% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due on maturity. As of June 30, 2021 and December 31, 2020, the effective interest rate for both periods was 4.75%. The LOC is collateralized by all the business assets of ICS. As of June 30, 2021, and December 31, 2020, there were no amounts outstanding under this LOC.

 

Note 7 – Stock-Based Compensation

 

In addition to cash compensation, the Company may compensate certain service providers, including employees, directors, consultants, and other advisors, with equity-based compensation in the form of stock options and restricted stock awards. The Company recognizes all equity-based compensation as stock-based compensation expense based on the fair value of the compensation measured at the grant date. For stock options, fair value is calculated at the date of grant using the Black-Scholes-Merton option pricing model. For restricted stock awards, fair value is the closing stock price for the Company’s common stock on the grant date. The expense is recognized over the vesting period of the grant. For the periods presented, all stock-based compensation expense was classified as a component within selling, general and administrative expense in the Company’s consolidated statements of operations.

 

The amount of stock-based compensation expense is as follows (amounts in thousands):

 

   Three months ended June 30,   Six months ended June 30, 
   2021   2020   2021   2020 
Stock options  $29   $23   $53   $53 
Restricted stock awards   -    1    1    2 
Total  $29   $24   $54   $55 

 

During the three months ended June 30, 2021, the Company awarded stock options to purchase 17,000 shares of the Company’s common stock at an exercise price of $14.77 per share to employees of the Company. No other stock options were awarded during the six months ended June 30, 2021. No stock options were awarded during the three months ended June 30, 2020. During the six months ended June 30, 2020, the Company awarded stock options to purchase 5,000 shares of the Company’s common stock at an exercise price of $7.24 per share to employees of the Company (all share and dollar amounts have been adjusted to reflect the 1-for-4 reverse split that occurred in December 2020).

 

12
 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The Company estimated the fair value of stock options using the Black-Scholes-Merton option pricing model with the following assumptions (all share amounts have been adjusted to reflect the 1-for-4 reverse split that occurred in December 2020):

 

   Six months ended June 30, 
   2021   2020 
Number of options awarded to purchase common shares   17,000    5,000 
Risk-free interest rate   0.82%   1.56%
Expected volatility   70.10%   97.3%
Assumed dividend yield   N/A    N/A 
Assumed dividend yield   -    - 
Expected life of options from the date of grant   9.8 years    9.8 years 

 

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

 

Years ended December 31st:  Unvested stock options   Unvested restricted stock awards   Total unrecognized compensation expense 
2021 (remaining six months)  $79   $-   $79 
2022   98    -    98 
2023   40    -    40 
2024   11    -    11 
   $228   $-   $228 

 

Equity Incentive Plans

 

Our 2006 Equity Incentive Plan (the “2006 Plan”) and 2016 Equity Incentive Plan (the “2016 Plan,” and together with the 2006 Plan, the “Plans”) provide for the issuance of stock-based awards to employees, officers, directors and consultants. The Plans permit the granting of stock awards and stock options. The vesting of stock-based awards is generally subject to the passage of time and continued employment through the vesting period.

 

13
 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Stock Option Activity

 

Stock option activity under our Equity Incentive Plans is summarized as follows (all share and dollar amounts have been adjusted to reflect the 1-for-4 reverse split that occurred in December 2020):

 

               Weighted avg.     
       Weighted avg.   Weighted avg.   remaining     
   Number of   exercise price   grant date fair   contractual life   Aggregate 
   awards   per share   value per share   (in years)   intrinsic value 
                     
Outstanding, December 31, 2020   105,086   $6.25   $6.06    5.38   $814,090 
Granted   17,000   $14.77   $10.90    10.00      
Exercised   (17,763)  $2.30   $2.92    1.74      
Expired/Forfeited   (1,988)  $7.17   $6.82    7.28      
Outstanding, June 30, 2021   102,335   $8.31   $7.49    6.33   $732,909 
Exercisable, June 30, 2021   68,657   $6.93   $6.80    5.04   $586,568 
Unvested, June 30, 2021   33,678   $11.12   $8.89    8.95   $146,341 

 

The aggregate intrinsic value represents the total pre-tax intrinsic value (the aggregate difference between the closing price of our common stock on June 30, 2021 and the exercise price for the in-the-money options) that would have been received by the option holders if all the in-the-money options had been exercised on June 30, 2021.

 

Restricted Stock Activity

 

Restricted stock activity under our Equity Incentive Plans is summarized as follows (all share and dollar amounts have been adjusted to reflect the 1-for-4 reverse split that occurred in December 2020):

 

       Weighted avg. 
   Number of   grant date 
   options   fair value 
Non-vested restricted shares, December 31, 2020   1,250   $10.20 
Granted   -   $- 
Vested   (1,250)  $10.20 
Forfeited   -   $- 
Non-vested restricted shares, June 30, 2021   -   $- 

 

Note 8 – Income Taxes

 

Deferred tax assets and liabilities have been determined based upon the differences between the financial statement amounts and the tax bases of assets and liabilities as measured by enacted tax rates expected to be in effect when these differences are expected to reverse. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

The provision or benefit for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the three and six months ended June 30, 2021 we recorded an income tax expense of approximately $104,000 and $115,000, respectively, compared to income tax expense of $145,000 and $65,000 for the same 2020 periods. The effective tax rate for the six months ended June 30, 2021 is favorably impacted by the non-taxability of the PPP loan forgiveness income.

 

14
 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 9 - Revenue Recognition

 

Disaggregation of Revenue

 

We have identified three material revenue categories in our business: (i) verification and certification service revenue, (ii) product sales, (iii) software and related consulting revenue.

 

Revenue attributable to each of our identified revenue categories is disaggregated in the table below (amounts in thousands).

 

   Three months ended June 30, 2021   Three months ended June 30, 2020 
   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated 
Verification and certification service revenue  $3,695   $-   $-   $3,695   $3,108   $-   $-   $3,108 
Product sales   964    -    -    964    796    -    -    796 
Software and related consulting revenue   -    482    -    482    -    512    -    512 
Total revenues  $4,659   $482   $-   $5,141   $3,904   $512   $-   $4,416 

 

   Six months ended June 30, 2021   Six months ended June 30, 2020 
   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated 
Verification and certification service revenue  $6,958   $-   $-   $6,958   $5,911   $-   $-   $5,911 
Product sales   1,688    -    -    1,688    1,521    -    -    1,521 
Software and related consulting revenue   -    935    -    935    -    1,010    (114)   896 
Total revenues  $8,646   $935   $-   $9,581   $7,432   $1,010   $(114)  $8,328 

 

Contract Balances

 

As of June 30, 2021, and December 31, 2020, accounts receivable from contracts with customers, net of allowance for doubtful accounts, were approximately $2.0 and $2.5 million, respectively.

 

As of June 30, 2021, and December 31, 2020, deferred revenue from contracts with customers was approximately $1.7 and $1.1 million, respectively. The balance of the contract liabilities at June 30, 2021 and December 31, 2020 are expected to be recognized as revenue within one year or less of the invoice date.

 

The following table reflects the changes in our contract liabilities during the six month period ended June 30, 2021 (amounts in thousands):

 

      
Deferred revenue:    
Unearned revenue January 1, 2021  $1,132 
Unearned billings   2,581 
Revenue recognized   (2,060)
Unearned revenue June 30, 2021  $1,653 

 

15
 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 10 – Leases

 

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

 

                     
   Three months ended   Six months ended 
   June 30, 2021   June 30, 2020   June 30, 2021   June 30, 2020 
Operating lease cost  $116   $116   $233   $232 
Finance lease cost                    
Amortization of assets   3    2    5    4 
Interest on finance lease obligations   1    2    2    3 
Total net lease cost  $120   $120   $240   $239 

 

Included in the table above, for the three and six months ended June 30, 2021, is $0.1 and $0.2 million, respectively, of operating lease cost for our corporate headquarters. This space is being leased from The Move, LLC. Our CEO and President, each a related party to WFCF, have a 24.3% jointly-held ownership interest in The Move, LLC.

 

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

 

   June 30, 2021   December 31, 2020 
  Related Party   Other   Total   Related Party   Other   Total 
Operating leases:                        
Operating lease ROU assets  $2,662   $226   $2,888   $2,755   $238   $2,993 
                               
Current operating lease liabilities  $190   $107   $297   $179   $89   $268 
Noncurrent operating lease liabilities   2,983    144    3,127    3,079    178    3,257 
Total operating lease liabilities  $3,173   $251   $3,424   $3,258   $267   $3,525 

 

  June 30, 2021   December 31, 2020 
Finance leases:        
Property and equipment, at cost  $51   $67 
Accumulated amortization   (21)   (30)
Property and equipment, net  $30   $37 
           
Current obligations of finance leases  $11   $13 
Finance leases, net of current obligations   26    31 
Total finance lease liabilities  $37   $44 
           
Weighted average remaining lease term (in years):          
Operating leases   9.5    10.0 
Finance leases   3.5    3.7 
           
Weighted average discount rate:          
Operating leases   5.8%   5.8%
Finance leases   12.1%   13.0%

 

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

 

                     
   Three months ended   Six months ended 
   June 30, 2021   June 30, 2020   June 30, 2021   June 30, 2020 
Cash paid for amounts included in the measurement of lease liabilities:                    
Operating cash flows from operating leases  $116   $111   $230   $222 
Operating cash flows from finance leases  $1   $2   $2   $3 
Financing cash flows from finance leases  $2   $2   $5   $4 
                     
ROU assets obtained in exchange for lease liabilities:                    
Operating leases  $3,057   $3,507   $3,057   $3,507 

 

16
 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

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

 

Years Ending December 31st,  Operating Leases   Finance Leases 
2021 (six remaining months)  $         241   $            7 
2022   482    15 
2023   468    10 
2024   407    5 
2025   405    5 
Thereafter   2,496    - 
Total lease payments   4,499    42 
Less amount representing interest   (1,075)   (5)
Total lease obligations   3,424    37 
Less current portion   (297)   (11)
Long-term lease obligations  $3,127   $26 

 

Note 11 – Commitments and Contingencies

 

Legal proceedings

 

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

 

Note 12 - Segments

 

With each acquisition, we assess the need to disclose discrete information related to our operating segments. Because of the similarities of certain of our acquisitions that provide certification and verification services, we aggregate operations into one verification and certification reportable segment. The operating segments included in the aggregated verification and certification segment include IMI Global, WFCFO and Validus. The factors considered in determining this aggregated reporting segment include the economic similarity of the businesses, the nature of services provided, production processes, types of customers and distribution methods.

 

The Company also determined that it has a software and related consulting reportable segment. SureHarvest, which includes Postelsia, is the sole operating segment under the software and related consulting reportable segment. This segment includes software license, maintenance, support and software-related consulting service revenues.

 

The Company’s chief operating decision maker (the Company’s CEO) allocates resources and assesses the performance of its operating segments. Segment management makes decisions, measures performance, and manages the business utilizing internal reporting operating segment information. Performance of operating segments are based on net sales, gross profit, selling, general and administrative expenses and most importantly, operating income.

 

17
 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The Company eliminates intercompany transfers between segments for management reporting purposes. The following table shows information for reportable operating segments (amounts in thousands):

 

   Three months ended June 30, 2021   Three months ended June 30, 2020 
   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated Totals   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated Totals 
Assets:                                        
Goodwill  $1,947   $999   $-   $2,946   $1,133   $1,813   $-   $2,946 
All other assets, net   17,327    3,082    (3,093)   17,316    17,463    3,474    (4,604)   16,333 
Total assets  $19,274   $4,081   $(3,093)  $20,262   $18,596   $5,287   $(4,604)  $19,279 
                                         
Revenues:                                        
Verification and certification service revenue  $3,695   $-   $-   $3,695   $3,108   $-   $-   $3,108 
Product sales   964    -    -    964    796    -    -    796 
Software and related consulting revenue   -    482    -    482    -    512    -    512 
Total revenues  $4,659   $482   $-   $5,141   $3,904   $512   $-   $4,416 
Costs of revenues:                                        
Costs of verification and certification services   2,132    -    -    2,132    1,516    -    -    1,516 
Costs of products   648    -    -    648    501    -    -    501 
Costs of software and related consulting   -    352    -    352    -    299    -    299 
Total costs of revenues   2,780    352    -    3,132    2,017    299    -    2,316 
Gross profit   1,879    130    -    2,009    1,887    213    -    2,100 
Depreciation & amortization   148    51    -    199    112    132    -    244 
Other operating expenses   1,442    86    -    1,528    1,266    121    -    1,387 
Segment operating income/(loss)  $289   $(7)  $-   $282   $509   $(40)  $-   $469 
Other items to reconcile segment operating income (loss) to net income/(loss):                                        
Other income   29    (5)   -    24    29    (2)   -    27 
Income tax (expense)/benefit   -    (5)   (99)   (104)   -    -    (145)   (145)
Net income/(loss)  $318   $(17)  $(99)  $202   $538   $(42)  $(145)  $351 

 

   Six months ended June 30, 2021   Six months ended June 30, 2020 
   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated Totals   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated Totals 
Assets:                                        
Goodwill  $1,947   $999   $-   $2,946   $1,133   $1,813   $-   $2,946 
All other assets, net   17,327    3,082    (3,093)   17,316    17,463    3,474    (4,604)   16,333 
Total assets   19,274    4,081    (3,093)   20,262    18,596    5,287    (4,604)   19,279 
                                         
Revenues:                                        
Verification and certification service revenue  $6,958   $-   $-   $6,958   $5,911   $-   $-   $5,911 
Product sales   1,688    -    -    1,688    1,521    -    -    1,521 
Software and related consulting revenue   -    935    -    935    -    1,010    (114)   896 
Total revenues  $8,646   $935   $-   $9,581   $7,432   $1,010   $(114)  $8,328 
Costs of revenues:                                        
Costs of verification and certification services   3,925    -    -    3,925    3,140    -    (90)   3,050 
Costs of products   1,105    -    -    1,105    1,003    -    -    1,003 
Costs of software and related consulting   -    680    -    680    -    565    -    565 
Total costs of revenues   5,030    680    -    5,710    4,143    565    (90)   4,618 
Gross profit   3,616    255    -    3,871    3,289    445    (24)   3,710 
Depreciation & amortization   300    101    -    401    200    278    -    478 
Other operating expenses   2,920    179    -    3,099    2,803    338    (24)   3,117 
Segment operating income/(loss)  $396   $(25)  $-   $371   $286   $(171)  $-   $115 
Other items to reconcile segment operating income (loss) to net income/(loss):                                        
Other income   66    (7)   1,037    1,096    59    1    -    60 
Income tax (expense)/benefit   -    (5)   (110)   (115)   -    -    (65)   (65)
Net income/(loss)  $462   $(37)  $927   $1,352   $345   $(170)  $(65)  $110 

 

18
 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 13 – Supplemental Cash Flow Information

 

           
   Six months ended June 30, 
(Amounts in thousands)  2021   2020 
Cash paid during the year:          
Interest expense  $1   $5 
Income taxes  $345   $10 

 

Note 14 – Subsequent Events

 

Where Food Comes From, Inc. announced on July 1, 2021, its Board of Directors declared a special cash dividend totaling $0.15 per common share. This one-time special dividend will be paid to stockholders of record as of the close of business on July 27, 2021, with a payment date of August 16, 2021.

 

The Company has had no other material, significant or unusual transactions or events from the financial statement date through the issuance of the financial statements.

 

19
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Form 10−K for the fiscal year ended December 31, 2020. The following discussion and analysis includes historical and certain forward−looking information that should be read together with the accompanying consolidated financial statements, related footnotes and the discussion below of certain risks and uncertainties that could cause future operating results to differ materially from historical results or from the expected results indicated by forward−looking statements.

 

Business Overview

 

Where Food Comes From, Inc. and its subsidiaries (“WFCF,” the “Company,” “our,” “we,” or “us”) is a leading trusted resource for third-party verification of food production practices in North America. The Company supports more than 15,000 farmers, ranchers, vineyards, wineries, processors, retailers, distributors, trade associations, consumer brands and restaurants with a wide variety of value-added services provided through its family of verifiers, including IMI Global, WFCFO, Validus Verification Services, Sterling Solutions, and A Bee Organic. In order to have credibility, product claims such as gluten-free, non-GMO, non-hormone treated, humane handling, and others require verification by an independent third-party such as WFCF. The Company’s principal business is conducting both on-site and desk audits to verify that claims being made about livestock, crops and other food products are accurate.

 

Through our more recent acquisitions, including SureHarvest Services LLC; Sow Organic, LLC; and Postelsia Holdings, Ltd. (“Postelsia”), we provide sustainability programs, compliance management and farming information management solutions to drive sustainable value creation. We employ a software-as-a-service (“SaaS”) revenue model that bundles annual software licenses with ongoing software enhancements and upgrades and a wide range of professional services that support our verification business and generate incremental revenue specific to the food and agricultural industry.

 

Finally, the Company’s Where Food Comes From Source Verified® retail and restaurant labeling program utilizes the verification of product attributes to connect consumers directly to the source of the food they purchase through product labeling and web-based information sharing and education. With the use of Quick Response Code (“QR”) technology, consumers can instantly access information about the producers behind their food.

 

WFCF was founded in 1996 and incorporated in the state of Colorado as a subchapter C corporation in 2006. The Company’s shares of common stock trade on the NASDAQ Capital Market under the stock ticker symbol, “WFCF.”

 

The Company’s original name – Integrated Management Information, Inc. (d.b.a. IMI Global) – was changed to Where Food Comes From, Inc. in 2012 to better reflect the Company’s mission. Early growth was attributable to source and age verification services for beef producers that wanted access to markets overseas following the discovery of “mad cow” disease in the U.S. Over the years, WFCF has expanded its portfolio to include verification and software services for most food groups and over 50 programs and organizations. This growth has been achieved both organically and through the acquisition of other companies.

 

Coronavirus Pandemic (COVID-19)

 

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

 

20
 

 

All of our locations have been affected. We have adjusted certain aspects of our operations to protect our employees while avoiding business interruption. As an essential business to the food and agriculture industries, we have maintained standard business operations while under stay at home (and similar) guidelines from various states, by allowing a majority of employees to work remotely until government mandates allow for normal business operations. Employees essential to operations, management and the accounting function remain on-site at our corporate headquarters. Internal controls over financial reporting have not been impacted by employees working remotely. Management is continuously monitoring to ensure controls are effective and properly maintained.

 

The Company generally performs onsite audits in connection with its verification and certification activity. We continue to work with standard setting bodies and identify innovative solutions to offer our customers. We believe that our transformative approach will help further differentiate us from competitors. Additionally, we believe third party verification is an essential component to the food and agricultural supply chain and ensures our future as a high quality provider of assurance services, thereby increasing the value of products in the food supply chain.

 

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

 

Seasonality

 

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

 

Liquidity and Capital Resources

 

At June 30, 2021, we had cash, cash equivalents of approximately $5.3 million compared to approximately $4.4 million at December 31, 2020. Our working capital at June 30, 2021 was approximately $4.9 million compared to $4.4 million at December 31, 2020.

 

Net cash provided by operating activities for the six months ended June 30, 2021 was approximately $1.6 million compared to $1.7 million during the same period in 2020. Net 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, forgiveness of Paycheck Protection Program loan, and deferred taxes. Fluctuations are primarily due to operating performance offset by the timing of cash receipts and cash disbursements. The increase in cash provided by operating activities for the periods ending June 30, 2021 and 2020 was primarily driven by a change in accounts receivable, accounts payable, inventory and deferred revenue.

 

Net cash used in investing activities for the six months ended June 30, 2021, was approximately $0.1 million compared to $0.6 million in the 2020 period. Net cash used in the period ending June 30, 2021 was primarily for the purchase of a vehicle and equipment. Net cash used in the June 30, 2020 period was attributable to the acquisition of Postelsia Holdings, Ltd for $0.3 million and investment in software of $0.3 million.

 

Net cash used in financing activities for the six months ended June 30, 2021 was approximately $0.6 million compared to net cash provided by financing activities of $0.8 million in the 2020 period. Cash used for the period ending June 30, 2021, was primarily due to the repurchase of common shares under the Stock Buyback Plan. Cash provided for the period ending June 30, 2020, was primarily from proceeds from the PPP loan of $1.0 million, offset by $0.3 million for the repurchase of common shares under the Stock Buyback Plan.

 

21
 

 

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 on diversification in our product offerings within national and international markets, as well as, potential acquisitions. We believe that there are significant growth opportunities available to us because of growing consumer awareness and demand on a national level. Internationally, a quality verification program is often the only way to overcome import or export restrictions.

 

Debt Facility

 

The Company has a revolving line of credit (“LOC”) agreement which matures April 12, 2022. The LOC provides for $75,080 in working capital. The interest rate is at the Wall Street Journal prime rate plus 1.50% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due upon maturity. As of June 30, 2021, and December 31, 2020, the effective interest rate was 4.75%, respectively. The LOC is collateralized by all the business assets of Where Food Comes From Organic, Inc. (“WFCFO”). As of June 30, 2021, and December 31, 2020, there were no amounts outstanding under this LOC.

 

On April 17, 2020, the Company received a $1.0 million loan under the PPP with a maturity date of April 17, 2022 and an annual interest rate of 1.00%. The Company received notification the loan and accrued interest amount was forgiven on March 4, 2021.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2021, we had no off-balance sheet arrangements of any type.

 

22
 

 

RESULTS OF OPERATIONS

 

Three and six months ended June 30, 2021 compared to the same periods in fiscal year 2020

 

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

 

   Three months ended June 30, 2021   Three months ended June 30, 2020 
   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated Totals   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated Totals 
Assets:                                        
Goodwill  $1,947   $999   $-   $2,946   $1,133   $1,813   $-   $2,946 
All other assets, net   17,327    3,082    (3,093)   17,316    17,463    3,474    (4,604)   16,333 
Total assets  $19,274   $4,081   $(3,093)  $20,262   $18,596   $5,287   $(4,604)  $19,279 
                                         
Revenues:                                        
Verification and certification service revenue  $3,695   $-   $-   $3,695   $3,108   $-   $-   $3,108 
Product sales   964    -    -    964    796    -    -    796 
Software and related consulting revenue   -    482    -    482    -    512    -    512 
Total revenues  $4,659   $482   $-   $5,141   $3,904   $512   $-   $4,416 
Costs of revenues:                                        
Costs of verification and certification services   2,132    -    -    2,132    1,516    -    -    1,516 
Costs of products   648    -    -    648    501    -    -    501 
Costs of software and related consulting   -    352    -    352    -    299    -    299 
Total costs of revenues   2,780    352    -    3,132    2,017    299    -    2,316 
Gross profit   1,879    130    -    2,009    1,887    213    -    2,100 
Depreciation & amortization   148    51    -    199    112    132    -    244 
Other operating expenses   1,442    86    -    1,528    1,266    121    -    1,387 
Segment operating income/(loss)  $289   $(7)  $-   $282   $509   $(40)  $-   $469 
Other items to reconcile segment operating income (loss) to net income/(loss):                                        
Other income   29    (5)   -    24    29    (2)   -    27 
Income tax (expense)/benefit   -    (5)   (99)   (104)   -    -    (145)   (145)
Net income/(loss)  $318   $(17)  $(99)  $202   $538   $(42)  $(145)  $351 

 

   Six months ended June 30, 2021   Six months ended June 30, 2020 
   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated Totals   Verification and Certification Segment   Software and Related Consulting Segment   Eliminations and Other   Consolidated Totals 
Assets:                                        
Goodwill  $1,947   $999   $-   $2,946   $1,133   $1,813   $-   $2,946 
All other assets, net   17,327    3,082    (3,093)   17,316    17,463    3,474    (4,604)   16,333 
Total assets   19,274    4,081    (3,093)   20,262    18,596    5,287    (4,604)   19,279 
                                         
Revenues:                                        
Verification and certification service revenue  $6,958   $-   $-   $6,958   $5,911   $-   $-   $5,911 
Product sales   1,688    -    -    1,688    1,521    -    -    1,521 
Software and related consulting revenue   -    935    -    935    -    1,010    (114)   896 
Total revenues  $8,646   $935   $-   $9,581   $7,432   $1,010   $(114)  $8,328 
Costs of revenues:                                        
Costs of verification and certification services   3,925    -    -    3,925    3,140    -    (90)   3,050 
Costs of products   1,105    -    -    1,105    1,003    -    -    1,003 
Costs of software and related consulting   -    680    -    680    -    565    -    565 
Total costs of revenues   5,030    680    -    5,710    4,143    565    (90)   4,618 
Gross profit   3,616    255    -    3,871    3,289    445    (24)   3,710 
Depreciation & amortization   300    101    -    401    200    278    -    478 
Other operating expenses   2,920    179    -    3,099    2,803    338    (24)   3,117 
Segment operating income/(loss)  $396   $(25)  $-   $371   $286   $(171)  $-   $115 
Other items to reconcile segment operating income (loss) to net income/(loss):                                        
Other income   66    (7)   1,037    1,096    59    1    -    60 
Income tax (expense)/benefit   -    (5)   (110)   (115)   -    -    (65)   (65)
Net income/(loss)  $462   $(37)  $927   $1,352   $345   $(170)  $(65)  $110 

 

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Verification and Certification Segment

 

Verification and certification service revenues consist of fees charged for verification audits and other verification and certification related services that the Company performs for customers. Fees earned from our WFCF labeling program are also included in our verification and certification revenues as it represents a value-added extension of our source verification. Verification and certification service revenue for the three and six months ended June 30, 2021 increased 18.9% and 17.7%, respectively, compared to 2020, primarily due to increased customer demand for our product offerings.

 

Our product sales are an ancillary part of our verification and certification services and represent sales of cattle identification ear tags. Product sales for the three and six months ended June 30, 2021 increased 21.1% and 11.0%, respectively. Overall, our product sales have increased primarily in response to the requirement for source and age verification using an identification tag at birth for cattle.

 

Costs of revenues for our verification and certification segment for the three and six months ended June 30, 2021 were approximately $2.8 million and $5.0 million, respectively, compared to approximately $2.0 million and $4.1 million (including eliminations), respectively, for the same periods in 2020. Gross margin for the three and six months ended June 30, 2021 decreased to 40.3% and 41.9%, respectively, compared to 48.3% and 43.0% (including eliminations), respectively, in 2020 primarily due to change in product mix of our offerings which included new customers, new offerings, returned demand for audits that were delayed in 2020 due to COVID-19 social distancing measures and additional compensation expense incurred to support the increased activity. Our margins are generally impacted by various costs such as cost of products, salaries and benefits, insurance, and taxes.

 

Other operating expenses for the three and six months ended June 30, 2021 increased by approximately 13.9% and 5.0%, respectively, compared to the same three and six month periods in 2020 due to increased travel, discretionary compensation expense and public listing costs not incurred during the same periods in 2020. Depreciation and amortization for the three and six months ended June 30, 2021 increased 32.1% and 50.0%, respectively, compared to the same three and six month periods in 2020. The increase in depreciation and amortization is predominately from shifting certain assets and personnel from SureHarvest to WFCF in 2020 to better support the entire Company.

 

Software and Related Consulting Segment

 

Software and related consulting revenue is a revenue stream specific to our acquisitions of SureHarvest and Postelsia. We employ a SaaS revenue model that bundles annual software licenses with ongoing software enhancements and upgrades and a wide range of professional services, such as professional appearances, customer education and training, that support our verification business and generate incremental revenue specific to the food and agricultural industry. For the three and six months ended June 30, 2021, software and related consulting revenue was relatively flat compared to 2020 (including eliminations).

 

Costs of revenues for our software and related consulting segment for the three and six months ended June 30, 2021 and June 30, 2020 was approximately $0.4 and $0.7 million, respectively. Gross margin for the three and six months ended June 30, 2021 decreased to 27.0% and 27.3%, respectively, compared to 41.6% and 49.7% (including eliminations) for the same period in 2020. The three and six month decrease in gross margin is due primarily to increased cost of labor to support our enhancements to our customer’s technology.

 

Other operating expenses for the three and six months ended June 30, 2021 decreased approximately 28.9% and 47.0%, respectively, compared to the same period in 2020 (including eliminations). Depreciation and amortization for the three and six months ended June 30, 2021 decreased 61.4% and 63.7%, respectively, compared to the same three and six month periods in 2020. The decrease is predominately due to the decrease in depreciation, amortization and personnel costs from shifting certain assets and personnel from SureHarvest to WFCF in 2020 to better support the entire Company.

 

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As with all of our acquisitions, we continue to identify synergies and implement best practices. We focus our efforts to create value in various ways such as improving the performance of our acquired businesses, removing excess capacity, creating market access for products, acquiring skills and technologies more quickly or at a lower cost than we can build in-house, exploiting our industry-specific scalability and bundling opportunities, and picking winners early and helping them develop their businesses. Achieving any or all of these strategies take time to implement. With our more recent acquisition in the software and related consulting segment, we now believe it is far more beneficial to the long term growth of the company to maintain our own proprietary software. We are less focused on licensing the software to others and are able to use our knowledge and expertise, based on the data we own, to make us more competitive in the verification market. Accordingly, we believe that our software and related consulting segment should viewed as an ancillary activity to our overall business.

 

Dividend Income from Progressive Beef

 

For the three and six months ended June 30, 2021 and 2020, the Company received dividend income of $30,000 and $60,000, respectively, from Progressive Beef representing a distribution of their earnings.

 

Income Tax Expense

 

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the three and six months ended June 30, 2021, we recorded income tax expense of approximately $104,000 and $115,000, respectively, compared to income tax expense of $145,000 and $65,000, respectively, for the same periods in 2020. The effective tax rate for the six months ended June 30, 2021 is favorably impacted by the non-taxability of the PPP loan forgiveness income.

 

Net Income and Per Share Information

 

As a result of the foregoing, net income attributable to WFCF shareholders for the three and six months ended June 30, 2021 was approximately $0.2 million and $1.4 million, respectively, and $0.03 and $0.22, respectively, per basic and diluted common share, respectively, compared to net income of approximately $0.4 million and $0.1 million, respectively, or $0.06 and $0.02 per basic and diluted common share for the same periods in 2020.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Internal Control Over Financial Reporting

 

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

 

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

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 2020 Annual Report on Form 10−K, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. As of June 30, 2021, the Company recognizes the coronavirus pandemic may have an economic impact on the Company, but management does not know and cannot estimate what the financial impact may be. We may also disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

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

 

Issuer Purchases of Equity Securities

 

On September 30, 2019, our Board of Directors approved a new plan to buyback up to ten million additional shares of our common stock from the open market (“Stock Buyback Plan”). Activity for the three months ended June 30, 2021 is as follows:

 

  

Number of Shares

(in thousands)

  

Cost of Shares

(in thousands)

  

Average Cost

per Share

 
             
Shares purchased - April 2021   6   $87   $14.56 
Shares purchased - May 2021   3    48   $14.27 
Shares purchased - June 2021   4    60   $15.00 
Total   13   $195   $15.00 

 

ITEM 6. EXHIBITS

 

(a) Exhibits

 

  Number   Description
 

31.1

  Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2   Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1   Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
  32.2   Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

 

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

 

Date: August 5, 2021 Where Food Comes From, Inc.
   
  By: /s/ John K. Saunders
    Chief Executive Officer

 

  By: /s/ Dannette Henning
    Chief Financial Officer

 

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