UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]☒QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 20202021
[  ]☐TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________

Commission File No. 333-133624001-40314

WHERE FOOD COMES FROM, INC.

(exact name of registrant as specified in its charter)

Colorado43-1802805

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

202 6th6th Street, Suite 400

Castle Rock, CO80104

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code:

(303) (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 [X] ☒ 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 [X] ☒ 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:filer:[  ]☐Smaller reporting company:[X]☒
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 [X] ☒

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 OTC Markets GroupThe NASDAQ Stock Market LLC

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of October 30, 2020,29, 2021, was 24,685,704.6,109,844.

 

 

 

Where Food Comes From, Inc.

Table of Contents

September 30, 20202021

Part 1 - Financial Information
Item 1.Financial Statements3
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2120
Item 4.Controls and Procedures2726
Part II - Other Information
Item 1.Legal Proceedings2827
Item 1A.Risk Factors2827
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2827
Item 6.Exhibits27

  2 
Item 6.Exhibits28

Part 1 - Financial Information

Item 1. Financial Statements

Where Food Comes From, Inc.

Consolidated Balance Sheets

  September 30,  December 31, 
(Amounts in thousands, except per share amounts) 2020  2019 
 (Unaudited)    
Assets      
Current assets:        
Cash and cash equivalents $4,625  $2,638 
Accounts receivable, net of allowance  2,523   2,515 
Short-term investments in certificates of deposit  262   258 
Prepaid expenses and other current assets  717   450 
Total current assets  8,127   5,861 
Property and equipment, net  1,669   1,545 
Operating lease right-of-use assets  3,073   3,268 
Investment in Progressive Beef  991   991 
Intangible and other assets, net  3,105   3,248 
Goodwill  2,946   2,946 
Deferred tax assets, net  350   378 
Total assets $20,261  $18,237 
         
Liabilities and Equity        
Current liabilities:        
Accounts payable $953  $1,023 
Accrued expenses and other current liabilities  1,179   674 
Deferred revenue  1,148   797 
Current portion of long term debt  641   - 
Current portion of finance lease obligations  9   8 
Current portion of operating lease obligations  260   239 
Total current liabilities  4,190   2,741 
Long term debt, net of current portion  391   - 
Finance lease obligations, net of current portion  14   21 
Operating lease obligation, net of current portion  3,328   3,526 
Total liabilities  7,923   6,288 
         
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; 25,812 (2020) and 25,802 (2019) shares issued, and 24,677 (2020) and 24,977 (2019) shares outstanding  26   26 
Additional paid-in-capital  11,508   11,425 
Treasury stock of 1,135 (2020) and 825 (2019) shares  (2,199)  (1,665)
Retained earnings  3,003   2,163 
Total equity  12,338   11,949 
Total liabilities and stockholders’ equity $20,261  $18,237 

  September 30,  December 31, 
(Amounts in thousands, except per share amounts) 2021  2020 
Assets  (Unaudited)     
Current assets:        
Cash and cash equivalents $5,642  $4,374 
Accounts receivable, net of allowance  2,328   2,508 
Inventory  870   - 
Prepaid expenses and other current assets  284   592 
Total current assets  9,124   7,474 
Property and equipment, net  1,484   1,616 
Operating lease right-of-use assets, net  2,844   3,030 
Investment in Progressive Beef  991   991 
Intangible and other assets, net  2,675   2,948 
Goodwill  2,946   2,946 
Deferred tax assets, net  451   443 
Total assets $20,515  $19,448 
         
Liabilities and Equity        
Current liabilities:        
Accounts payable $896  $649 
Accrued expenses and other current liabilities  1,346   599 
Deferred revenue  1,564   1,132 
Current portion of long term debt  -   463 
Current portion of finance lease obligations  12   13 
Current portion of operating lease obligations  302   268 
Total current liabilities  4,120   3,124 
Long term debt, net of current portion  -   572 
Finance lease obligations, net of current portion  22   31 
Operating lease obligation, net of current portion  3,050   3,257 
Total liabilities  7,192   6,984 
         
Commitments and contingencies  -   - 
         
Equity:        
Preferred stock, $0.001 par value; 5,000 shares authorized; NaN issued or outstanding  -   - 
Common stock, $0.001 par value; 95,000 shares authorized; 6,485 (2021) and 6,456 (2020) shares issued, and 6,097 (2021) and 6,118 (2020) shares outstanding  6   6 
Additional paid-in-capital  11,879   11,612 
Treasury stock of 389 (2021) and 338 (2020) shares  (3,415)  (2,702)
Retained earnings  4,853   3,548 
Total equity  13,323   12,464 
Total liabilities and stockholders’ equity $20,515  $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 September 30,  Three months ended September 30, 
(Amounts in thousands, except per share amounts) 2020 2019  2021  2020 
Revenues:             
Verification and certification service revenue $4,307  $4,759  $4,701  $4,307 
Product sales  1,362   1,086   1,383   1,362 
Software license, maintenance and support services revenue  245   227 
Software-related consulting service revenue  283   160 
Software and related consulting revenue  461   528 
Total revenues  6,197   6,232   6,545   6,197 
Costs of revenues:                
Costs of verification and certification services  2,233   2,673   2,438   2,233 
Costs of products  866   697   864   866 
Costs of software license, maintenance and support services  138   153 
Costs of software-related consulting services  198   122 
Costs of software and related consulting  315   336 
Total costs of revenues  3,435   3,645   3,617   3,435 
Gross profit  2,762   2,587   2,928   2,762 
Selling, general and administrative expenses  1,806   1,973   1,790   1,806 
Income from operations  956   614   1,138   956 
Other expense (income):        
Other income/(expense):        
Dividend income from Progressive Beef  (30)  (30)  30   30 
Gain on sale of assets  -   19 
Other income, net  (2)  (2)  -   2 
Gain on sale of assets  (19)  - 
Loan forgiveness from Paycheck Protection Program        
Loss on foreign currency exchange  2   -   (2)  (2)
Interest expense  4   2   (1)  (4)
Income before income taxes  1,001   644   1,165   1,001 
Income tax expense  271   184   298   271 
Net income  730   460  $867  $730 
Net loss attributable to non-controlling interest  -   81 
Net income attributable to Where Food Comes From, Inc. $730  $541 
                
Per share - net income attributable to Where Food Comes From, Inc.:        
Per share - net income:        
Basic $0.03  $0.02  $0.14  $0.12 
Diluted $0.03  $0.02  $0.14  $0.12 
                
Weighted average number of common shares outstanding:                
Basic  24,745   24,792   6,094   6,187 
Diluted  24,894   24,972   6,157   6,224 

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

 4

Where Food Comes From, Inc.

Consolidated Statements of Operations

(Unaudited)

        
 Nine months ended September 30,  Nine months ended September 30, 
(Amounts in thousands, except per share amounts) 2020 2019  2021  2020 
Revenues:             
Verification and certification service revenue $10,218  $11,314  $11,659  $10,218 
Product sales  2,883   2,363   3,071   2,883 
Software license, maintenance and support services revenue  625   822 
Software-related consulting service revenue  799   576 
Software and related consulting revenue  1,396   1,424 
Total revenues  14,525   15,075   16,126   14,525 
Costs of revenues:                
Costs of verification and certification services  5,283   6,332   6,363   5,283 
Costs of products  1,869   1,538   1,969   1,869 
Costs of software license, maintenance and support services  393   469 
Costs of software-related consulting services  508   395 
Costs of software and related consulting  995   901 
Total costs of revenues  8,053   8,734   9,327   8,053 
Gross profit  6,472   6,341   6,799   6,472 
Selling, general and administrative expenses  5,401   5,624   5,290   5,401 
Income from operations  1,071   717   1,509   1,071 
Other expense (income):        
Other income/(expense):        
Dividend income from Progressive Beef  (90)  (90)  90   90 
Other income, net  (6)  (7)  1   6 
Gain on foreign currency exchange  1   - 
Loan forgiveness from Paycheck Protection Program  1,037   - 
(Loss)/gain on foreign currency exchange  (9)  (1)
Gain on sale of assets  (19)  (1)  9   19 
Interest expense  9   8   (5)  (9)
Income before income taxes  1,176   807   2,632   1,176
Income tax expense  336   230   413   336 
Net income  840   577  $2,219  $840 
Net loss attributable to non-controlling interest  -   182 
Net income attributable to Where Food Comes From, Inc. $840  $759 
                
Per share - net income attributable to Where Food Comes From, Inc.:        
Per share - net income:        
Basic $0.03  $0.03  $0.36  $0.14 
Diluted $0.03  $0.03  $0.36  $0.13 
                
Weighted average number of common shares outstanding:                
Basic  24,857   24,879   6,146   6,215 
Diluted  25,011   25,062   6,207   6,254 

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

 5

Where Food Comes From, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

   1 
 Nine months ended September 30,  Nine months ended September 30, 
(Amounts in thousands) 2020  2019  2021  2020 
          
Operating activities:                
Net income $840  $577  $2,219  $840 
Adjustments to reconcile net income to net cash provided by operating activities:        
Adjustments to reconcile net loss to net cash        
provided by operating activities:        
Depreciation and amortization  736   802   601   736 
Gain on sale of assets  (19)  (1)  (9)  (19)
Stock-based compensation expense  80   129   222   80 
Deferred tax benefit  28   (73)
Deferred tax expense  (8)  28 
Bad debt expense  49   27   45   49 
Forgiveness of note payable from Paycheck Protection Program  (1,037)  - 
Changes in operating assets and liabilities, net of effect from acquisitions:                
Accounts receivable  (57)  (794)  135   (57)
Short-term investments  (4)  (11)  -   (4)
Inventory  (870)  - 
Prepaid expenses and other assets  (267)  233   308   (267)
Accounts payable  (70)  481   247   (70)
Accrued expenses and other current liabilities  505   641   747   505 
Deferred revenue  351   297   429   351 
Right of use assets and liabilities, net  4   27   4   4 
Net cash provided by operating activities  2,176   2,335   3,033   2,176 
                
Investing activities:                
Acquisition of Postelsia Holdings, Ltd.  (300)  -   -   (300)
Proceeds from sale of assets  34   1   -   34 
Purchases of property, equipment and software development costs  (416)  (268)  (176)  (416)
Proceeds from maturity of short-term investments  -   253 
Net cash used in by investing activities  (682)  (14)
Net cash used in investing activities  (176)  (682)
                
Financing activities:                
Repayments of notes payable  -   (7)
Proceeds from long term debt  1,030   -   -   1,030 
Repayments of finance lease obligations  (6)  (5)  (7)  (6)
Proceeds from stock option exercise  3   -   45   3 
Dividends paid to shareholders  (914)  - 
Stock repurchase under Stock Buyback Plan  (534)  (371)  (713)  (534)
Net provided by (cash used) in financing activities  493   (383)
Net cash (used in) / provided by financing activities  (1,589)  493 
Net change in cash  1,987   1,938   1,268   1,987 
Cash at beginning of period  2,638   1,482   4,374   2,638 
Cash at end of period $4,625  $3,420  $5,642  $4,625 

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 January 1, 2019  24,968  $25  $11,031  $(1,109) $818  $10,765 
Stock-based compensation expense  -   -   45   -   -   45 
Repurchase of common shares under Stock Buyback Plan  (47)  -   -   (83)  -   (83)
Net income attributable to Where Food Comes From, Inc.  -   -   -   -   (143)  (143)
Balance at March 31, 2019  24,921  $    25  $11,076  $(1,192) $675  $10,584 
                         
Stock-based compensation expense  -   -   47   -   -   47 
Repurchase of common shares under Stock Buyback Plan  (95)  -   -   (169)  -   (169)
Net income attributable to Where Food Comes From, Inc.  -   -   -   -   361   361 
Balance at June 30, 2019  24,826  $25  $11,123  $(1,361) $1,036  $10,823 
                         
Stock-based compensation expense  -   -   37   -   -   37 
Vesting of restricted shares to Employees  25   -   -           - 
Repurchase of common shares under Stock Buyback Plan  (67)  -   -   (119)  -   (119)
Net income attributable to Where Food Comes From, Inc.  -   -   -   -   541   541 
Balance at September 30, 2019  24,784  $25  $11,160  $(1,480) $1,577  $11,282 
                         
     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-based compensation expense, shares                        
Stock options exercised  18   -   40   -   -   40 
Repurchase of common shares under Stock Buyback Plan  (29)  -   -   (411)  -   (411)
Dividends paid                        
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 
                         
Stock-based compensation expense  10   -   168   -   -   168 
Stock options exercised  -   -   1   -   -   1 
Repurchase of common shares under Stock Buyback Plan  (8)  -   -   (107)  -   (107)
Dividends paid  -   -   -   -   (914)  (914)
Net income  -   -   -   -   867   867 
Balance at September 30, 2021  6,097  $6  $11,879  $(3,415) $4,853  $13,323 

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

 7

Where Food Comes From, Inc.

Consolidated Statement of Equity

(Unaudited)

      Additional            Additional        
 Common Stock Paid-in Treasury Retained     Common Stock Paid-in Treasury Retained    
(Amounts in thousands) Shares Amount Capital Stock Earnings Total  Shares Amount Capital Stock Earnings Total 
                          
Balance at December 31, 2019(1)  24,977  $    26  $11,425  $(1,665) $2,163  $11,949   6,245  $6  $11,445  $(1,665) $2,163  $11,949 
                        
Stock-based compensation expense  -   -   31   -   -   31   -   -   31   -   -   31 
Repurchase of common shares under Stock Buyback Plan  (84)  -   -   (158)  -   (158)  (21)  -   -   (158)  -   (158)
Net loss attributable to Where Food Comes From, Inc.  -   -   -   -   (241)  (241)
Net loss  -   -   -   -   (241)  (241)
Balance at March 31, 2020  24,893  $26  $11,456  $(1,823) $1,922  $11,581   6,224  $6  $11,476  $(1,823) $1,922  $11,581 
                                                
Stock-based compensation expense  -   -   24   -   -   24   -   -   24   -   -   24 
Stock options exercised  10   -   3   -   -   3   3   -   3   -   -   3 
Repurchase of common shares under Stock Buyback Plan  (64)  -   -   (111)  -   (111)  (16)  -   -   (111)  -   (111)
Net income attributable to Where Food Comes From, Inc.  -   -   -   -   351   351 
Net income  -   -   -   -   351   351 
Balance at June 30, 2020  24,839  $26  $11,483  $(1,934) $2,273  $11,848   6,211  $6  $11,503  $(1,934) $2,273  $11,848 
                                                
Stock-based compensation expense  -   -   25   -   -   25   -   -   25   -   -   25 
Repurchase of common shares under Stock Buyback Plan  (162)  -   -   (265)  -   (265)  (41)  -   -   (265)  -   (265)
Net income attributable to Where Food Comes From, Inc.  -   -   -   -   730   730   -   -   -   -   730   730 

Net income (loss)

  -   -   -   -   730   730 
Balance at September 30, 2020  24,677  $26  $11,508  $(2,199) $3,003  $12,338   6,170  $6  $11,528  $(2,199) $3,003  $12,338 

(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, International Certification Services,Where Food Comes From Organic, Inc. (“ICS”WFCFO”), Validus VerificationVerifications Services, LLC (“Validus”), Sterling Solutions (“Sterling”), SureHarvest Services, LLC.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, 2019,2020, included in our Form 10-K filed on March 5, 2020.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 nine months ended September 30, 20202021 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)

SeasonalityExcept 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 not listed below were assessed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements.

Recently Adopted Accounting Pronouncements

On January 1, 2020 we adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. The adoption of this update did not have a material impact on our Consolidated Financial Statements.

On January 1, 2020 we adopted ASU 2018-13, Fair Value Measurement (Topic 8420): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the requirements associated with the hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The adoption of this update did not have a material impact on our Consolidated Financial Statements.

On January 1, 2020 we adopted ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract to align with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The adoption of this update did not have a material impact on our Consolidated Financial Statements.

Note 2 – Business Acquisitions

On February 21, 2020 the Company acquired all of the stock of privately held Postelsia Holdings, Ltd. (“Postelsia”) for $250,000 in cash at the acquisition closing date, with an additional $50,000 in cash being held in escrow and paid in September 2020. The escrowed funds were to support any claims by the Company for breaches of representation and warranties, of which there were none.

Postelsia, based in Victoria, British Columbia, is a leader in the emerging field of environmental and social sustainability programs for the seafood industry. Postelsia provides a range of programs and consulting services designed to improve and promote sustainable practices, including environmental conservation, worker care, and food safety compliance. Postelsia operates as a wholly owned subsidiary of the Company.

We believe the total consideration paid approximates the fair value of the assets acquired. We have allocated the total consideration to our identifiable intangible assets (customer relationships) to be amortized over an estimated useful life of 8 years.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Note 3 – 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):

 Schedule of Reconciliation of Basic and Diluted Income Per Share Computations

(in thousands) 2021 2020 2021 2020 
 

Three months ended

September 30,

 

Nine months ended

September 30,

  Three months ended
September 30,		 

Nine months ended

September 30,

 
 2020 2019 2020 2019 
(in thousands) 2021 2020 2021 2020 
Basic:                  
Weighted average shares outstanding  24,745   24,792   24,857   24,879   6,094   6,187   6,146   6,215 
                                
Diluted:                                
Weighted average shares outstanding  24,745   24,792   24,857   24,879   6,094   6,187   6,146   6,215 
Weighted average effects of dilutive securities  149   180   154   183   63   37   61   39 
Total  24,894   24,972   25,011   25,062   6,157   6,224   6,207   6,254 
                                
Antidilutive securities:  286   283   286   283   17   72   17   72 

Note 43 - Investment in Progressive Beef, LLC

For the three months ended September 30, 20202021 and September 30, 2019,2020, the Company received dividend income from Progressive Beef of $30,000$30,000, respectively, representing a distribution of their earnings. For the nine months ended September 30, 20202021 and September 30, 2019,2020, the Company received dividend income totaling $90,000,$90,000, respectively. The income is reflected within the “other expense (income)“Other income/(expense)” section of the Company’s Consolidated StatementsStatement of Income for the three and nine months ended September 30, 20202021 and September 30, 2019. The Company completed a qualitative assessment and determined that there were no impairment indicators as of September 30, 2020.

11 10
 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Note 54 – Intangible and Other Assets

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

Schedule of Intangible and Other Assets

 September 30, December 31, Estimated September 30, December 31, Estimated
 2020 2019 Useful Life 2021 2020 Useful Life
Intangible assets subject to amortization:               
Tradenames and trademarks $417  $417  2.5 - 8.0 years $417  $417  2.5 - 8.0 years
Accreditations  85   85  5.0 years  75   85  5.0 years
Customer relationships  3,664   3,351  3.0 - 15.0 years  3,664   3,664  3.0 - 15.0 years
Patents  970   970  4.0 years  970   970  4.0 years
Non-compete agreements  121   121  5.0 years  121   121  5.0 years
  5,257   4,944  
Intangible and other assets, gross  5,247   5,257   
Less accumulated amortization  2,631   2,182    3,062   2,795   
  2,626   2,762  
Intangible and other assets, net  2,185   2,462   
Tradenames/trademarks (not subject to amortization)  465   465    465   465   
  3,091   3,227  
Intangible assets  2,650   2,927   
Other assets  14   21    25   21   
Intangible and other assets: $3,105  $3,248   $2,675  $2,948   

Note 65 – Accrued Expenses and Other Current Liabilities

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

Schedule of Accrued Expenses and Other Current Liabilities

 September 30, December 31,  September 30, December 31, 
 2020 2019  2021 2020 
          
Income and sales taxes payable $483  $171  $155  $168 
Payroll related accruals  398   201   925   271 
Customer deposits  93   62   101   31 
Professional fees and other expenses  205   240   165   129 
 $1,179  $674 
Accrued expenses and other current liabilities  $1,346  $599 

Note 76 – Notes Payable

Unison Revolving LineLong Term Debt

 Schedule of CreditLong Term Debt

  September 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 

 11

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 September 30, 2020 and December 31, 2019, the effective interest rate was 4.75% and 6.25%, respectively. The LOC is collateralized by all the business assets of ICS. As of September 30, 2020, and December 31, 2019, there were no amounts outstanding under this LOC.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Long Term Debt

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allocated $350$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. On 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 17,12, 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 September 30, 2021 and December 31, 2020, the Company received a $1.0 million loan under the PPP with a maturity date of April 17, 2022 and an annualeffective interest rate of 1.00%for both periods was 4.75%. The loan will be repaid in 17 monthly consecutive interestLOC is collateralized by all the business assets of ICS. As of September 30, 2021, and principal payments of approximately $57,876, commencing December 1, 2020. See Note 15 for change in terms agreement effective October 6, 2020. While the Company believes a significant portion of the loan will be forgiven, the Company has not received any notification if any of the loan amount will be forgiven.31, 2020, there were no amounts outstanding under this LOC.

Note 87 – 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):

Schedule of Stock-based Compensation Expense

 Three months ended September 30, Nine months ended September 30,  Three months ended September 30, Nine months ended September 30, 
 2020 2019 2020 2019  2021 2020 2021 2020 
Stock options $24  $34  $77  $114  $42  $24  $96  $77 
Restricted stock awards  1   3   3   15 
Stock awards  126   1   126   3 
Total $25  $37  $80  $129  $168  $25  $222  $80 

During the three months ended September 30, 2019,2021, 0 stock options were awarded. During the nine months ended September 30, 2021, the Company awarded stock options to purchase 10,00017,000 shares of the Company’s common stock at an exercise price of $1.71$14.77 to employees of the Company.

During the three months ended September 30, 2021, the Company awarded 10,000 shares of the Company’s common stock at a fair market value price of $12.62 per share to an employee of the members on the Company’s Board of Directors. No other stock optionsCompany. NaN additional shares were awarded during the nine months ended September 30, 2019.2021.

During the three months ended September 30, 2020, the Company awarded stock options to purchase 8,000 2,000 shares of the Company’s common stock at an exercise price of $1.80 $7.20 per sharesshare to the members of the Company’s Board of Directors. During the nine months ended September 30, 2020, the Company awarded stock options to purchase 20,000 7,000 shares of the Company’s common stock at an exercise price of $2.05 $7.20 to $8.20 per share to employees of the Company.Company (all share and dollar amounts have been adjusted to reflect the 1-for-4 reverse splitthat 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:assumptions (all share amounts have been adjusted to reflect the 1-for-4 reverse split that occurred in December 2020):

  Nine months ended September 30, 
  2020  2019 
Number of options awarded to purchase common shares  28,000   10,000 
Risk-free interest rate  1.19%  1.50%
Expected volatility  94.7%  100.30%
Assumed dividend yield  N/A   N/A 
Expected life of options from the date of grant  9.8 years   9.8 years 

Schedule of Estimated Fair Value of Stock Options

  Nine months ended September 30, 
  2021  2020 
Number of options awarded to purchase common shares  17,000   7,000 
Risk-free interest rate  0.82%  1.19%
Expected volatility  70.06%  94.7%
Assumed dividend yield  N/A   N/A 
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):

Schedule of Unrecognized Compensation Cost from Unvested Awards

Years ended December 31st: Unvested stock options 

Unvested restricted

stock awards

 

Total unrecognized

compensation expense

  Total unrecognized compensation expense 
2020 (remaining three months) $      30  $      1  $       31 
2021  83   1   84 
2021 (remaining three months) $      37 
2022  20   -   20   98 
2023  4   -   4   40 
2024  11 
 $137  $2  $139  $186 

Equity Incentive Plans

 

Our 2006 Equity Incentive Plan (the “2006 Plan”) and 2016 Equity Incentive Plan (the “Equity Incentive Plan”“2016 Plan,” and together with the 2006 Plan, the “Plans”) providesprovide for the issuance of stock-based awards to employees, officers, directors and consultants. The Plan permitsPlans 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 PlanPlans is summarized as follows:follows (all share and dollar amounts have been adjusted to reflect the 1-for-4 reverse split that occurred in December 2020):

Schedule of Stock Option Activity

   Number of awards  

Weighted avg. exercise price

per share

  Weighted avg. grant date fair value per share  

Weighted avg.

remaining contractual

life (in years)

  

Aggregate

 intrinsic value

 
                 
Outstanding, December 31, 2019   437,126  $1.46  $1.49   5.97  $150,417 
Granted   28,000  $1.72  $1.98   9.57     
Exercised   (10,000) $0.24  $0.24   0.50     
Expired/Forfeited   (25,325) $-  $1.84   6.98     
Outstanding, September 30, 2020   429,801  $1.49  $1.53   5.51  $147,950 
Exercisable, September 30, 2020   315,686  $1.38  $1.40   4.44  $147,350 
Unvested, September 30, 2020   114,115  $1.77  $1.90   8.47  $600 
           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  (18,045) $2.54  $13.39   1.40     
Expired/Forfeited  (2,556) $7.18  $6.88   6.98     
Outstanding, September 30, 2021  101,485  $8.31  $7.49   6.07  $547,544 
Exercisable, September 30, 2021  73,513  $6.95  $6.81   4.95  $481,516 
Unvested, September 30, 2021  27,972  $11.91  $9.29   9.00  $66,028 

The aggregate intrinsic value represents the total pre-tax intrinsic value (the aggregate difference between the closing price of our common stock on September 30, 20202021 and the exercise price for the in-the-money options) that would have been received by the option holders if all the in-the-money options had been exercised on September 30, 2020.2021.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Restricted Stock Activity

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

 Schedule of Restricted Stock Activity Under Equity Incentive Plan

   Weighted avg.    Weighted avg. 
 Number of grant date  Number of grant date 
 options fair value  options fair value 
Non-vested restricted shares, December 31, 2019  5,000  $2.55 
Non-vested restricted shares, December 31, 2020  1,250  $10.20 
Granted  -  $-   -  $- 
Vested  -  $-   (1,250) $10.20 
Forfeited  -  $-   -  $- 
Non-vested restricted shares, September 30, 2020  5,000  $2.55 
Non-vested restricted shares, September 30, 2021  -  $- 

Note 98 – 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 nine months ended September 30, 20202021 we recorded an income tax expense of approximately $271,000$298,000 and $336,000,$413,000, respectively, compared to income tax expense of $184,000$271,000 and $230,000$336,000 for the same 20192020 periods. The effective tax rate for the nine months ended September 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 109 - Revenue Recognition

 

Disaggregation of Revenue

We have identified fourthree material revenue categories in our business: (i) verification and certification service revenue, (ii) product sales, (iii) software license, maintenance and support services revenue and (iv) software-relatedrelated consulting service revenue.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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

Schedule of Revenues Disaggregated by Revenue

 Three months ended September 30, 2020 Three months ended September 30, 2019  Three months ended September 30, 2021 Three months ended September 30, 2020 
 Verification
and
Certification
Segment		 Software
Sales and
Related
Consulting
Segment		 Eliminations
and Other		 Consolidated Verification
and Certification
Segment		 Software
Sales and
Related
Consulting
Segment		 Eliminations
and Other		 Consolidated  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 $  4,307  $           -  $-  $     4,307  $4,759  $-  $          -  $4,759  $4,701  $-  $-  $4,701  $4,307  $-  $-  $4,307 
Product sales  1,362   -   -   1,362   1,086   -   -   1,086   1,383   -   -   1,383   1,362   -   -   1,362 
Software license, maintenance and support services revenue  -   245   -   245   -   287   (60)  227 
Software-related consulting service revenue  -   283   -   283   -   197   (37)  160 
Software and related consulting revenue  -   461   -   461   -   528   -   528 
Total revenues $5,669  $528  $        -  $6,197  $5,845  $   484  $(97) $       6,232  $6,084  $461  $-  $6,545  $5,669  $528  $-  $6,197 

 Nine months ended September 30, 2020 Nine months ended September 30, 2019  Nine months ended September 30, 2021 Nine months ended September 30, 2020 
 Verification
and
Certification
Segment		 Software
Sales and
Related
Consulting
Segment		 Eliminations
and Other		 Consolidated Verification
and
Certification
Segment		 Software
Sales and
Related
Consulting
Segment		 Eliminations
and Other		 Consolidated  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 $10,218  $          -  $            -  $10,218  $11,314  $        -  $          -  $11,314  $11,659  $-  $-  $11,659  $10,218  $-  $-  $10,218 
Product sales  2,883   -   -   2,883   2,363   -   -   2,363   3,071   -   -   3,071   2,883   -   -   2,883 
Software license, maintenance and support services revenue  -   715   (90)  625   -   969   (147)  822 
Software-related consulting service revenue  -   823   (24)  799   -   661   (85)  576 
Software and related consulting revenue  -   1,396   -   1,396   -   1,538   (114)  1,424 
Total revenues $13,101  $1,538  $(114) $14,525  $13,677  $1,630  $(232) $15,075  $14,730  $1,396  $-  $16,126  $13,101  $1,538  $(114) $14,525 

Contract Balances

As of September 30, 2020,2021, and December 31, 2019,2020, accounts receivable from contracts with customers, net of allowance for doubtful accounts, were approximately $2.5 million.$2.3 and $2.5 million, respectively.

As of September 30, 2020,2021, and December 31, 2019,2020, deferred revenue from contracts with customers was approximately $1.1$1.6 and $0.8$1.1 million, respectively. The balance of the contract liabilities at September 30, 20202021 and December 31, 20192020 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 three month period ended September 30, 2020:

Deferred revenue (in thousands):   
Unearned revenue June 30, 2020 $1,206 
Unearned billings  671 
Revenue recognized  (729)
Unearned revenue September 30, 2020 $1,148 

The following table reflects the changes in our contract liabilities during the nine month period ended September 30, 2020:2021

Schedule of Changes in Contract Liabilities

Deferred revenue (in thousands):   
Unearned revenue January 1, 2020 $797 
Unearned billings  2,408 
Revenue recognized  (2,057)
Unearned revenue September 30, 2020 $1,148 
(amounts in thousands):   
    
Deferred revenue:    
Unearned revenue January 1, 2021 $1,132 
Unearned billings  3,320 
Revenue recognized  (2,888)
Unearned revenue September 30, 2021 $1,564 

16 15
 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Note 1110 – Leases

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

Schedule of Lease Expense

 2021 2020 2021 2020 
 Three months ended Nine months ended  Three months ended September 30, Nine months ended September 30, 
 

September 30,

2020

 

September 30,

2019

 

September 30,

2020

 

September 30,

2019

  2021 2020 2021 2020 
Operating lease cost $116  $115  $348  $353  $121  $116  $353  $348 
Finance lease cost                                
Amortization of assets  2   2   6   6   2   2   7   6 
Interest on finance lease obligations  1   2   4   6   1   1   3   4 
Variable lease cost  -   -   -   - 
Total net lease cost $119  $119  $358  $365  $124  $119  $363  $358 

Included in the table above, for the three and nine months ended September 30, 2020,2021, is $92,000$0.1 and $276,000,$0.3 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%24.3% jointly-held ownership interest in The Move, LLC.

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

Schedule of Supplemental Balance Sheet Information Related to Leases

 September 30, 2021 December 31, 2020 
 September 30, 2020 December 31, 2019  Related Party Other Total Related Party Other Total 
Operating leases: Related Party Other Total Related Party Other Total              
Operating lease ROU assets $2,800  $257  $3,057  $2,933  $314  $3,247  $2,615  $201  $2,816  $2,755  $238  $2,993 
                                                
Current operating lease liabilities  174   86   260  $158  $81  $239  $195  $107  $302  $179  $89  $268 
Noncurrent operating lease liabilities  3,127   201   3,328   3,260   266   3,526   2,932   118   3,050   3,079   178   3,257 
Total operating lease liabilities $3,301  $287  $3,588  $3,418  $347  $3,765  $3,127  $225  $3,352  $3,258  $267  $3,525 

 September 30, 2021 December 31, 2020 
Finance leases: September 30, 2020 December 31, 2019      
Right of use asset, at cost $43  $43 
Property and equipment, at cost $51  $67 
Accumulated amortization  (27)  (22)  (23)  (30)
Right of use asset, net $16  $21 
Property and equipment, net $28  $37 
                
Current obligations of finance leases $9  $8  $12  $13 
Finance leases, net of current obligations  14   21   22   31 
Total finance lease liabilities $23  $29  $34  $44 
                
Weighted average remaining lease term (in years):                
Operating leases  10.2   11.0   9.4   10.0 
Finance leases  2.4   3.0   3.3   3.7 
                
Weighted average discount rate:                
Operating leases  5.8%  5.8%  5.8%  5.8%
Finance leases  20.9%  20.8%  11.9%  13.0%

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

Schedule of Supplemental Cash Flow Information Related to Leases

 2021 2020 2021 2020 
 Three months ended Nine months ended  Three months ended September 30, Nine months ended September 30, 
 September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019  2021 2020 2021 2020 
Cash paid for amounts included in the measurement of lease liabilities:                  
Operating cash flows from operating leases $113  $109  $335  $320  $120  $113  $350  $335 
Operating cash flows from finance leases $1  $2  $4  $6  $1  $1  $3  $4 
Financing cash flows from finance leases $2  $2  $6  $5  $2  $2  $7  $6 
                                
ROU assets obtained in exchange for lease liabilities:                                
Operating leases $3,507  $3,513  $3,507  $3,513  $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):

Schedule of Maturities of Operating Lease and Finance Lease Liabilities

Years Ending December 31st, Operating Leases Finance Leases  Operating Leases Finance Leases 
2020 (remaining three months) $114  $3 
2021  462   12 
2021 (three remaining months) $121  $4 
2022  466   10   481   15 
2023  461   5   468   10 
2024  407   -   407   5 
2025  405   5 
Thereafter  2,901   -   2,496   - 
Total lease payments  4,811   30   4,378   39 
Less amount representing interest  (1,223)  (7)  (1,026)  (5)
Total lease obligations  3,588   23   3,352   34 
Less current portion  (260)  (9)  (302)  (12)
Long-term lease obligations $3,328  $14  $3,050  $22 

Note 1211 – 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 1312 - 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 one1 verification and certification reportable segment. The operating segments included in the aggregated verification and certification segment include IMI Global, ICS, JVF Consulting,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 sales and related consulting reportable segment. SureHarvest, which includes Sow Organic and 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):

Schedule of Operating Segments

 Three months ended September 30, 2020 Three months ended September 30, 2019  Three months ended September 30, 2021 Three months ended September 30, 2020 
 Verification and Certification Segment Software Sales and Related Consulting Segment Eliminations and Other Consolidated Totals Verification and Certification Segment Software Sales and Related Consulting Segment Eliminations and Other Consolidated Totals   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:                                                                
Intangible and other assets, net $7,079  $3,856  $(7,830) $3,105  $1,344  $2,054  $-  $3,398 
Goodwill  2,946   -   -   2,946   1,133   2,011   -   3,144  $1,947  $999  $-  $2,946  $2,946  $-  $-  $2,946 
All other assets, net  17,036   3,311   (2,778)  17,569   16,548   5,379   (4,612)  17,315 
Total assets  19,494   5,379   (4,612)  20,261   14,214   5,324   -   19,538  $18,983  $4,310  $(2,778) $20,515  $19,494  $5,379  $(4,612) $20,261 
                                                                
Revenues:                                                                
Verification and certification service revenue $4,307  $-  $-  $4,307  $4,759  $-  $-  $4,759  $4,701  $-  $-  $4,701  $4,307  $-  $-  $4,307 
Product sales  1,362   -   -   1,362   1,086   -   -   1,086   1,383   -   -   1,383   1,362   -   -   1,362 
Software license, maintenance and support services revenue  -   245   -   245   -   287   (60)  227 
Software-related consulting service revenue  -   283   -   283   -   197   (37)  160 
Software and related consulting revenue  -   461   -   461   -   528   -   528 
Total revenues $5,669  $528  $-  $6,197  $5,845  $484  $(97) $6,232  $6,084  $461  $-  $6,545  $5,669  $528  $-  $6,197 
Costs of revenues:                                                                
Costs of verification and certification services $2,233  $-  $-  $2,233  $2,733  $-  $(60) $2,673   2,438   -   -   2,438   2,233   -   -   2,233 
Costs of products  866   -   -   866   697   -   -   697   864   -   -   864   866   -   -   866 
Costs of software license, maintenance and support services  -   138   -   138   -   153   -   153 
Costs of software-related consulting services  -   198   -   198   -   122   -   122 
Costs of software and related consulting  -   315   -   315   -   336   -   336 
Total costs of revenues  3,099   336   -   3,435   3,430   275   (60)  3,645   3,302   315   -   3,617   3,099   336   -   3,435 
Gross profit  2,570   192   -   2,762   2,415   209   (37)  2,587   2,782   146   -   2,928   2,570   192   -   2,762 
Depreciation & amortization  112   145   -   257   78   179   -   257   149   51   -   200   112   145   -   257 
Other operating expenses  1,404   145   -   1,549   1,520   233   (37)  1,716   1,542   48   -   1,590   1,404   145   -   1,549 
Segment operating (loss)/income $1,054  $(98) $-  $956  $817  $(203) $-  $614 
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:                                
Other expense (income)  (47)  2   -   (45)  (30)  -   -   (30)
Segment operating income/(loss) $1,091  $47  $-  $1,138  $1,054  $(98) $-  $956 
Other items to reconcile segment operating income/(loss) to net income/(loss):                                
Other income/(expense)  29   (2)  -   27   47   (2)  -   45 
Income tax expense  -   8   263   271   -   -   184   184   -   -   (298)  (298)  -   (8)  (263)  (271)
Net loss attributable to non-controlling interest  -   -   -   -   -   81   -   81 
Net (loss)/income attributable to WFCF $1,101  $(108) $(263) $730  $847  $(122) $(184) $541 
Net income/(loss) $1,120  $45  $(298) $867  $1,101  $(108) $(263) $730 

  Nine months ended September 30, 2020  Nine months ended September 30, 2019 
  Verification and Certification Segment  Software Sales and Related Consulting Segment  Eliminations and Other  Consolidated Totals  Verification and Certification Segment  Software Sales and Related Consulting Segment  Eliminations and Other  Consolidated Totals 
Assets:                                
Intangible and other assets, net $7,079  $3,856  $(7,830) $3,105  $1,344  $2,054  $-  $3,398 
Goodwill  2,946   -   -   2,946   1,133   2,011   -   3,144 
Total assets  19,494   5,379   (4,612)  20,261   14,214   5,324   -   19,538 
                                 
Revenues:                                
Verification and certification service revenue $10,218  $-  $-  $10,218  $11,314  $-  $-  $11,314 
Product sales  2,883   -   -   2,883   2,362   -   -   2,362 
Software license, maintenance and support services revenue  -   715   (90)  625   -   969   (147)  822 
Software-related consulting service revenue  -   823   (24)  799   -   661   (85)  576 
Total revenues $13,101  $1,538  $(114) $14,525  $13,676  $1,630  $(232) $15,074 
Costs of revenues:                                
Costs of verification and certification services $5,373  $-  $(90) $5,283  $6,455  $-  $(123) $6,332 
Costs of products  1,869   -   -   1,869   1,538   -   -   1,538 
Costs of software license, maintenance and support services  -   393   -   393   -   469   -   469 
Costs of software-related consulting services  -   508   -   508   -   395   -   395 
Total costs of revenues  7,242   901   (90)  8,053   7,993   864   (123)  8,734 
Gross profit  5,859   637   (24)  6,472   5,683   766   (109)  6,340 
Depreciation & amortization  313   423   -   736   263   539   -   802 
Other operating expenses  4,206   483   (24)  4,665   4,230   701   (109)  4,822 
Segment operating (loss)/income $1,340  $(269) $- ��$1,071  $1,190  $(474) $-  $716 
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:                                
Other expense (income)  (107)  2   -   (105)  (90)  (1)  -   (91)
Income tax expense  -   8   328   336   -   -   230   230 
Net loss attributable to non-controlling interest  -   -   -   -   -   182   -   182 
Net (loss)/income attributable to WFCF $1,447  $(279) $(328) $840  $1,280  $(291) $(230) $759 

  Nine months ended September 30, 2021  Nine months ended September 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  $2,946  $-  $-  $2,946 
All other assets, net  17,036   3,311   (2,778)  17,569   16,548   5,379   (4,612)  17,315 
Total assets  18,983   4,310   (2,778)  20,515   19,494   5,379   (4,612)  20,261 
                                 
Revenues:                                
Verification and certification service revenue $11,659  $-  $-  $11,659  $10,218  $-  $-  $10,218 
Product sales  3,071   -   -   3,071   2,883   -   -   2,883 
Software and related consulting revenue  -   1,396   -   1,396   -   1,538   (114)  1,424 
Total revenues $14,730  $1,396  $-  $16,126  $13,101  $1,538  $(114) $14,525 
Costs of revenues:                                
Costs of verification and certification services  6,363   -   -   6,363   5,373   -   (90)  5,283 
Costs of products  1,969   -   -   1,969   1,869   -   -   1,869 
Costs of software and related consulting  -   995   -   995   -   901   -   901 
Total costs of revenues  8,332   995   -   9,327   7,242   901   (90)  8,053 
Gross profit  6,398   401   -   6,799   5,859   637   (24)  6,472 
Depreciation & amortization  448   153   -   601   313   423   -   736 
Other operating expenses  4,463   226   -   4,689   4,206   483   (24)  4,665 
Segment operating income/(loss) $1,487  $22  $-  $1,509  $1,340  $(269) $-  $1,071 
Other items to reconcile segment operating income/(loss) to net income/(loss):                                
Other income/(expense)  95   (9)  1,037   1,123   107   (2)  -   105 
Income tax expense  -   (5)  (408)  (413)  -   (8)  (328)  (336)
Net income/(loss) $1,582  $8  $629  $2,219  $1,447  $(279) $(328) $840 

19 18
 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Note 1413 – Supplemental Cash Flow Information

Schedule of Supplemental Cash Flow Information

(Amounts in thousands) 2021 2020 
 

Nine months ended

September 30,

  Nine months ended September 30, 
 2020 2019 
(Amounts in thousands) 2021 2020 
Cash paid during the year:                
Interest expense $5  $8  $5  $5 
Income taxes $362  $131  $595  $362 

Note 1514 – Subsequent Events

On October 1, 2020The Company has had no material, significant or unusual transactions or events from the Paycheck Protection Program (“PPP”) loan had a change in terms agreement modifyingfinancial statement date through the beginning dateissuance of the principal and interest payments from December 1, 2020 to May 1, 2021. No other terms of the loan were modified, including the maturity date, interest rate or amount of the loan.financial statements.

20 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, 2019.2020. 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, International Certification Services,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 (“SureHarvest”);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 OTCQB marketplaceNASDAQ 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 40 standards.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. The recent global outbreak of COVID-19 and the resulting government-mandated closures and social distancing measures have disrupted economic markets, potentially triggering a global recession. Continued closures and social distancing measures could have a detrimental effect in which the prolonged economic impact is uncertain. 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. Due to safety and social distancing reasons, some customers have requested postponement of onsite visits. At this time, we are uncertain of the material impact that continued social distancing measures will have upon our business. 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 September 30, 2020,2021, we had cash, cash equivalents and certificates of deposits (classified as short-term investments) of approximately $4.9$5.6 million compared to approximately $2.9$4.4 million at December 31, 2019.2020. Our working capital at September 30, 20202021 was approximately $3.9$5.0 million compared to $3.1$4.4 million at December 31, 2019.2020.

Net cash provided by operating activities for the nine months ended September 30, 20202021 was approximately $2.2$3.0 million compared to net cash provided of $2.3$2.2 million during the same period in 2019.2020. 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 decreaseincrease in cash provided by operating activities for the periods ending September 30, 2021 and 2020 was primarily driven by a change in accounts receivable, accounts payable and prepaidaccrued expenses and other assets as of September 30, 2020 compared to the same period in 2019. The Company has evaluated their customer receivables in relation to the current economic impact due to the coronavirus pandemic and does not feel any of the receivables are materially impaired at this time, but will keep actively monitoring the customer receivables.deferred revenue, offset by cash used for inventory.

Net cash used in investing activities for the nine months ended September 30, 2020,2021, was approximately $0.7$0.2 million compared to $0.7 million in the 2020 period. Net cash used by investing activities of $14,000 in the 2019 period.period ending September 30, 2021 was primarily for the purchase of a vehicle and equipment. Net cash used in the September 30, 2020 period was primarily attributable to the acquisition of Postelsia Holdings, Ltd for $0.3 million and investment in software of $0.4 million.

Net cash provided byused in financing activities for the nine months ended September 30, 2020,2021 was approximately $0.5$1.6 million compared to net cash usedprovided by financing activities of $0.4$0.5 million in the 20192020 period. Net cash provided inCash used for the 2020 period was from $1.0 million in loan proceeds offset primarily by $0.5 million to repurchase common shares under the Stock Buyback Plan. Net cash used in the 2019 periodending September 30, 2021, was primarily due to the repurchase of common shares under the Stock Buyback Plan and dividends paid to shareholders. Cash provided for the period ending September 30, 2020, was primarily from proceeds from the PPP loan of $1.0 million, offset by $0.5 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 actively monitoring the economic effectnot aware of the coronavirus pandemic onany other event or trend that would negatively affect our liquidity. In the event such a negative trend develops, over the long term, we have several optionsbelieve that there are sufficient financing avenues available to us including various forms of downsizing, company-wide pay decreases, as well as, other forms of financing 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. Additionally, 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.

Our plan for continued growth is primarily based upon continued expansion of verification bundling opportunities,on diversification in our product offerings within national and international markets, as well as, acquisitions in national and international markets.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 differentiate a productovercome import or brand, or overcome import/export restrictions is via a quality verification program.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 September 30, 2020,2021, and December 31, 2019,2020, the effective interest rate was 4.75% and 6.25%, respectively. The LOC is collateralized by all the business assets of International Certification Services,Where Food Comes From Organic, Inc. (“ICS”WFCFO”). As of September 30, 2020,2021, and December 31, 2019,2020, 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 loan will be repaid in 17 monthly consecutive interest and principal payments of approximately $57,876, commencing December 1, 2020. See Note 15 for change in terms agreement effective October 6, 2020. The Company has not received any notification if any of the loan and accrued interest amount will be forgiven.was forgiven on March 4, 2021.

Off-Balance Sheet Arrangements

As of September 30, 2020,2021, we had no off-balance sheet arrangements of any type.

23 22
 

RESULTS OF OPERATIONS

Three and nine months ended September 30, 20202021 compared to the same periods in fiscal year 20192020

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

  Three months ended September 30, 2020  Three months ended September 30, 2019 
  Verification and Certification Segment  Software Sales and Related Consulting Segment  Eliminations and Other  Consolidated Totals  Verification and Certification Segment  Software Sales and Related Consulting Segment  Eliminations and Other  Consolidated Totals 
Assets:                                
Intangible and other assets, net $7,079  $3,856  $(7,830) $3,105  $1,344  $2,054  $-  $3,398 
Goodwill  2,946   -   -   2,946   1,133   2,011   -   3,144 
Total assets  19,494   5,379   (4,612)  20,261   14,214   5,324   -   19,538 
                                 
Revenues:                                
Verification and certification service revenue $4,307  $-  $-  $4,307  $4,759  $-  $-  $4,759 
Product sales  1,362   -   -   1,362   1,086   -   -   1,086 
Software license, maintenance and support services revenue  -   245   -   245   -   287   (60)  227 
Software-related consulting service revenue  -   283   -   283   -   197   (37)  160 
Total revenues $5,669  $528  $-  $6,197  $5,845  $484  $(97) $6,232 
Costs of revenues:                                
Costs of verification and certification services $2,233  $-  $-  $2,233  $2,733  $-  $(60) $2,673 
Costs of products  866   -   -   866   697   -   -   697 
Costs of software license, maintenance and support services  -   138   -   138   -   153   -   153 
Costs of software-related consulting services  -   198   -   198   -   122   -   122 
Total costs of revenues  3,099   336   -   3,435   3,430   275   (60)  3,645 
Gross profit  2,570   192   -   2,762   2,415   209   (37)  2,587 
Depreciation & amortization  112   145   -   257   78   179   -   257 
Other operating expenses  1,404   145   -   1,549   1,520   233   (37)  1,716 
Segment operating (loss)/income $1,054  $(98) $-  $956  $817  $(203) $-  $614 
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:                                
Other expense (income)  (47)  2   -   (45)  (30)  -   -   (30)
Income tax expense  -   8   263   271   -   -   184   184 
Net loss attributable to non-controlling interest  -   -   -   -   -   81   -   81 
Net (loss)/income attributable to WFCF $1,101  $(108) $(263) $730  $847  $(122) $(184) $541 

  Nine months ended September 30, 2020  Nine months ended September 30, 2019 
  Verification and Certification Segment  Software Sales and Related Consulting Segment  Eliminations and Other  Consolidated Totals  Verification and Certification Segment  Software Sales and Related Consulting Segment  Eliminations and Other  Consolidated Totals 
Assets:                                
Intangible and other assets, net $7,079  $3,856  $(7,830) $3,105  $1,344  $2,054  $-  $3,398 
Goodwill  2,946   -   -   2,946   1,133   2,011   -   3,144 
Total assets  19,494   5,379   (4,612)  20,261   14,214   5,324   -   19,538 
                                 
Revenues:                                
Verification and certification service revenue $10,218  $-  $-  $10,218  $11,314  $-  $-  $11,314 
Product sales  2,883   -   -   2,883   2,362   -   -   2,362 
Software license, maintenance and support services revenue  -   715   (90)  625   -   969   (147)  822 
Software-related consulting service revenue  -   823   (24)  799   -   661   (85)  576 
Total revenues $13,101  $1,538  $(114) $14,525  $13,676  $1,630  $(232) $15,074 
Costs of revenues:                                
Costs of verification and certification services $5,373  $-  $(90) $5,283  $6,455  $-  $(123) $6,332 
Costs of products  1,869   -   -   1,869   1,538   -   -   1,538 
Costs of software license, maintenance and support services  -   393   -   393   -   469   -   469 
Costs of software-related consulting services  -   508   -   508   -   395   -   395 
Total costs of revenues  7,242   901   (90)  8,053   7,993   864   (123)  8,734 
Gross profit  5,859   637   (24)  6,472   5,683   766   (109)  6,340 
Depreciation & amortization  313   423   -   736   263   539   -   802 
Other operating expenses  4,206   483   (24)  4,665   4,230   701   (109)  4,822 
Segment operating (loss)/income $1,340  $(269) $-  $1,071  $1,190  $(474) $-  $716 
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:                                
Other expense (income)  (107)  2   -   (105)  (90)  (1)  -   (91)
Income tax expense  -   8   328   336   -   -   230   230 
Net loss attributable to non-controlling interest  -   -   -   -   -   182   -   182 
Net (loss)/income attributable to WFCF $1,447  $(279) $(328) $840  $1,280  $(291) $(230) $759 

  Three months ended September 30, 2021  Three months ended September 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  $2,946  $-  $-  $2,946 
All other assets, net  17,036   3,311   (2,778)  17,569   16,548   5,379   (4,612)  17,315 
Total assets $18,983  $4,310  $(2,778) $20,515  $19,494  $5,379  $(4,612) $20,261 
                                 
Revenues:                                
Verification and certification service revenue $4,701  $-  $-  $4,701  $4,307  $-  $-  $4,307 
Product sales  1,383   -   -   1,383   1,362   -   -   1,362 
Software and related consulting revenue  -   461   -   461   -   528   -   528 
Total revenues $6,084  $461  $-  $6,545  $5,669  $528  $-  $6,197 
Costs of revenues:                                
Costs of verification and certification services  2,438   -   -   2,438   2,233   -   -   2,233 
Costs of products  864   -   -   864   866   -   -   866 
Costs of software and related consulting  -   315   -   315   -   336   -   336 
Total costs of revenues  3,302   315   -   3,617   3,099   336   -   3,435 
Gross profit  2,782   146   -   2,928   2,570   192   -   2,762 
Depreciation & amortization  149   51   -   200   112   145   -   257 
Other operating expenses  1,542   48   -   1,590   1,404   145   -   1,549 
Segment operating income/(loss) $1,091  $47  $-  $1,138  $1,054  $(98) $-  $956 
Other items to reconcile segment operating income/(loss) to net income/(loss):                                
Other income/(expense)  29   (2)  -   27   47   (2)  -   45 
Income tax expense  -   -   (298)  (298)  -   (8)  (263)  (271)
Net income/(loss) $1,120  $45  $(298) $867  $1,101  $(108) $(263) $730 

  Nine months ended September 30, 2021  Nine months ended September 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  $2,946  $-  $-  $2,946 
All other assets, net  17,036   3,311   (2,778)  17,569   16,548   5,379   (4,612)  17,315 
Total assets  18,983   4,310   (2,778)  20,515   19,494   5,379   (4,612)  20,261 
                                 
Revenues:                                
Verification and certification service revenue $11,659  $-  $-  $11,659  $10,218  $-  $-  $10,218 
Product sales  3,071   -   -   3,071   2,883   -   -   2,883 
Software and related consulting revenue  -   1,396   -   1,396   -   1,538   (114)  1,424 
Total revenues $14,730  $1,396  $-  $16,126  $13,101  $1,538  $(114) $14,525 
Costs of revenues:                                
Costs of verification and certification services  6,363   -   -   6,363   5,373   -   (90)  5,283 
Costs of products  1,969   -   -   1,969   1,869   -   -   1,869 
Costs of software and related consulting  -   995   -   995   -   901   -   901 
Total costs of revenues  8,332   995   -   9,327   7,242   901   (90)  8,053 
Gross profit  6,398   401   -   6,799   5,859   637   (24)  6,472 
Depreciation & amortization  448   153   -   601   313   423   -   736 
Other operating expenses  4,463   226   -   4,689   4,206   483   (24)  4,665 
Segment operating income/(loss) $1,487  $22  $-  $1,509  $1,340  $(269) $-  $1,071 
Other items to reconcile segment operating income/(loss) to net income/(loss):                                
Other income/(expense)  95   (9)  1,037   1,123   107   (2)  -   105 
Income tax expense  -   (5)  (408)  (413)  -   (8)  (328)  (336)
Net income/(loss) $1,582  $8  $629  $2,219  $1,447  $(279) $(328) $840 

24 23
 

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 nine months ended September 30, 2020 decreased 9.5%2021 increased 9.2% and 9.7%14.1%, respectively, compared to 2019,2020, primarily due to audit delays as a result of COVID-19.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 nine months ended September 30, 20202021 increased approximately $0.21.5% and $0.5 million, respectively, or 25.4% and 22.1%6.5%, respectively, compared to the same period in 2019.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 nine months ended September 30, 20202021 were approximately $3.1$2.4 million and $7.2$6.4 million, respectively, compared to approximately $3.4$2.2 million and $8.0$5.3 million (including eliminations), respectively, for the same periods in 2019.2020. Gross margin for the three andmonths ended September 30, 2021 increased to 45.7% compared to 45.3% (including eliminations) for the same period ended September 30, 2020. Gross margin for the nine months ended September 30, 2020 increased2021 decreased to 45.3% and 44.7%, respectively,43.4% compared to 41.3% and 41.6%, respectively, in 201944.0% (including eliminations) for the same period ended September 30, 2020. The changes are primarily due to shifting some verification activity to a desk audit performed by internal staff resulting from COVID-19 on farm biosecurity restrictions and due to introductionchange in product mix of our offerings which included new CARE verification program.customers, new offerings. 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 nine months ended September 30, 2020 decreased2021 increased by approximately 7.6%9.8% and 0.6%6.6%, respectively, compared to the same three and nine month periods in 2019.2020 due to increased discretionary compensation expense and public listing costs not incurred during the same periods in 2020. Depreciation and amortization for the three and nine months ended September 30, 2021 increased 33.0% and 43.1%, respectively, compared to the same three and nine month periods in 2020. The decreaseincrease in depreciation and amortization is predominately duefrom shifting certain assets and personnel from SureHarvest to reduced travel, decreaseWFCF in market spend and public company expenses.2020 to better support the entire Company.

Software Sales and Related Consulting Segment

Software license, maintenance and support servicesrelated consulting revenue is a revenue stream specific to our acquisitions of SureHarvest Sow Organic, 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 months ended September 30, 2021, software and related consulting revenue was decreased $0.1 million compared to 2020 (including eliminations). For the nine months ended September 30, 2020,2021, software license, maintenance and support servicesrelated consulting revenue decreased approximately 14.6% and 26.2%, respectively, over the same 2019 periods, predominately due customer-related budget delays for significant software enhancements because of COVID-19 concerns which results in a decrease in the number of billable hours of staff focused on software enhancements and upgrades.

Software-related consulting service revenue primarily represents fees earned from professional consulting, customer education and training related services. Software-related consulting service revenue for the three and nine months ended September 30, 2020 increased approximately 43.7% and 24.5%, respectively,was relatively flat compared to the same periods in 2019. The three and nine month increases are due to fluctuations in customer demand for consulting services.2020 (including eliminations).

Costs of revenues for our software sales and related consulting segment for the three months ended September 30, 2021 and September 30, 2020 was approximately $0.3 million. The cost of revenues for the nine months ended September 30, 20202021 and September 30, 20192020 was approximately $0.3$1.0 million and $0.9 million, respectively. Gross margin for the three and nine months ended September 30, 2020 declined2021 decreased to 36.4%31.7% and 41.4%28.7%, respectively, compared to 43.2%36.4% and 47.0%, respectively,44.7% (including eliminations) for the same periodsperiod in 2019.2020. The three and nine month decrease in gross margin is due primarily to the decrease in billable hoursincreased cost of staff focused on softwarelabor to support our enhancements and upgrades.to our customer’s technology.

Other operating expenses for the three and nine months ended September 30, 20202021 decreased approximately 37.8%66.9% and 31.1%53.2%, respectively, compared to the same period in 2019.2020 (including eliminations). Depreciation and amortization for the three and nine months ended September 30, 2021 decreased 64.8% and 63.8%, respectively, compared to the same three and nine month periods in 2020. The decrease is predominately due to the decrease in depreciation, amortization and personnel costs from shifting certain assets becoming fully depreciatedand personnel from SureHarvest to WFCF in 2019, resulting in less depreciation and amortization in 2020.2020 to better support the entire Company.

 24

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 have learnedare 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 it can take twoour software and related consulting segment should viewed as an ancillary activity to three years after an acquisition to fully understand the complexities, at which time, we have seen solid improvements in revenues and/or costs.our overall business.

Dividend Income from Progressive Beef

For the three and nine months ended September 30, 20202021 and September 30, 2019,2020, the Company received dividend income of $30,000 and $90,000, 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 nine months ended September 30, 2020,2021, we recorded income tax expense of approximately $271,000$298,000 and $336,000,$413,000, respectively, compared to income tax expense of $184,000$271,000 and $230,000$336,000, respectively, for the same periods in 2019.2020. The effective tax rate for the nine months ended September 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 nine months ended September 30, 20202021 was approximately $0.9 million and $2.2 million, respectively, and $0.14 and $0.36, respectively, per basic and diluted common share, respectively, compared to net income of approximately $0.7 million and $0.8 million, respectively, $0.03or $0.12 per basic and diluted common shares for the three months ended September 30, 2020 and $0.14 and $0.13 per basic and diluted common share for both periods, compared to net income of approximately $0.5 million and $0.8 million, respectively, or $0.02 and $0.03the nine months ended September 30, 2020.

On August 16, 2021, the Company paid a one-time special cash dividend totaling $0.15 per basic and diluted common share respectively, for the same periods in 2019.to shareholders of record as of July 27, 2021.

26 25
 

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.

27 26
 

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 20192020 Annual Report on Form 10−K, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. As of September 30, 2020,2021, 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 September 30, 20202021 is as follows:

  Number of Shares  Cost of Shares  Average Cost per Share 
          
Shares purchased - July 2020  55,665  $85,778  $1.54 
Shares purchased - August 2020  74,742   119,840  $1.60 
Shares purchased - September 2020  31,112   59,699  $1.92 
Total  161,519  $265,317  $1.64 
  Number of Shares (in thousands)  Cost of Shares (in thousands)  Average Cost per Share 
          
Shares purchased - July 2021  1  $16  $15.59 
Shares purchased - August 2021  -   -  $- 
Shares purchased - September 2021      7        91  $12.60 
Total  8  $107  $12.96 

ITEM 6. EXHIBITS

(a) Exhibits

 NumberDescription
 

31.1

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

28 27
 

SIGNATURES

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

Date: November 5, 20204, 2021Where Food Comes From, Inc.
By:/s/ John K. Saunders
Chief Executive Officer
By:/s/ Dannette Henning
Chief Financial Officer

  28Chief Financial Officer

29