UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

☒QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 For the Quarterly period ended September 30, 20212022
  
☐TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 For the transition period from ____________ to _____________

Commission File No. 001-40314

WHERE FOOD COMES FROM, INC.

(exact name of registrant as specified in its charter)

 

Colorado 43-1802805

(State or other jurisdiction
of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

202 6th6th Street, Suite 400

Castle Rock, CO 80104

(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 ☒ No ☐

 

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

 

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

 

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

 

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

 

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

 

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueWFCFThe NASDAQ Stock Market LLC

 

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of October 29, 2021,31, 2022, was 6,109,8445,832,108.

 

 

 

 

 

 

Where Food Comes From, Inc.

Table of Contents

September 30, 20212022

 

Part 1 - Financial Information
   
Item 1.Financial Statements3
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations20
   
Item 4.Controls and Procedures26
   
Part II - Other Information
   
Item 1.Legal Proceedings27
   
Item 1A.Risk Factors27
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds27
   
Item 6.Exhibits27

 

2

 

Where Food Comes From, Inc.

Consolidated Balance Sheets

 September 30, December 31,   September 30,  December 31, 
(Amounts in thousands, except per share amounts) 2021  2020  2022  2021 
 (Unaudited)    
Assets  (Unaudited)             
Current assets:                
Cash and cash equivalents $5,642  $4,374  $6,006  $5,414 
Accounts receivable, net of allowance  2,328   2,508   2,851   2,178 
Inventory  870   -   874   767 
Prepaid expenses and other current assets  284   592   1,007   325 
Total current assets  9,124   7,474   10,738   8,684 
Property and equipment, net  1,484   1,616   1,032   1,295 
Operating lease right-of-use assets, net  2,844   3,030 
Right-of-use assets, net  2,656   2,823 
Investment in Progressive Beef  991   991   991   991 
Intangible and other assets, net  2,675   2,948   2,446   2,581 
Goodwill  2,946   2,946   2,946   2,946 
Deferred tax assets, net  451   443   523   464 
Total assets $20,515  $19,448  $21,332  $19,784 
                
Liabilities and Equity                
Current liabilities:                
Accounts payable $896  $649  $950  $447 
Accrued expenses and other current liabilities  1,346   599   2,273   710 
Deferred revenue  1,564   1,132   1,753   1,513 
Current portion of long term debt  -   463 
Current portion of finance lease obligations  12   13   10   13 
Current portion of operating lease obligations  302   268   335   313 
Total current liabilities  4,120   3,124   5,321   2,996 
Long term debt, net of current portion  -   572 
Finance lease obligations, net of current portion  22   31   12   19 
Operating lease obligation, net of current portion  3,050   3,257   2,832   3,020 
Total liabilities  7,192   6,984   8,165   6,035 
                
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 
Preferred stock, $0.001 par value; 5,000 shares authorized; none issued or outstanding  -   - 
Common stock, $0.001 par value; 95,000 shares authorized; 6,495 (2022) and 6,489 (2021) shares issued, and 5,873 (2022) and 6,071 (2021) shares outstanding  6   6 
Additional paid-in-capital  11,879   11,612   12,076   11,955 
Treasury stock of 389 (2021) and 338 (2020) shares  (3,415)  (2,702)
Treasury stock of 621 (2022) and 419 (2021) shares  (6,014)  (3,807)
Retained earnings  4,853   3,548   7,099   5,595 
Total equity  13,323   12,464   13,167   13,749 
Total liabilities and stockholders’ equity $20,515  $19,448  $21,332  $19,784 

 

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

 

3

 

Where Food Comes From, Inc.

Consolidated Statements of Operations

(Unaudited)

 

        
(Amounts in thousands, except per share amounts)  2022   2021 
 Three months ended September 30,  Three months ended September 30, 
(Amounts in thousands, except per share amounts) 2021  2020  2022  2021 
Revenues:             
Verification and certification service revenue $4,701  $4,307  $5,169  $4,701 
Product sales  1,383   1,362   1,588   1,383 
Software and related consulting revenue  461   528   508   461 
Total revenues  6,545   6,197   7,265   6,545 
Costs of revenues:                
Costs of verification and certification services  2,438   2,233   2,900   2,438 
Costs of products  864   866   826   864 
Costs of software and related consulting  315   336   359   315 
Total costs of revenues  3,617   3,435   4,085   3,617 
Gross profit  2,928   2,762   3,180   2,928 
Selling, general and administrative expenses  1,790   1,806   2,106   1,790 
Income from operations  1,138   956   1,074   1,138 
Other income/(expense):                
Dividend income from Progressive Beef  30   30   50   30 
Gain on sale of assets  -   19 
Other income, net  -   2   1   - 
Loan forgiveness from Paycheck Protection Program              
Gain on sale of assets      
Impairment of digital assets  (42)  - 
Loss on foreign currency exchange  (2)  (2)  -   (2)
Interest expense  (1)  (4)  -   (1)
Income before income taxes  1,165   1,001   1,083   1,165 
Income tax expense  298   271   298   298 
Net income $867  $730  $785  $867 
                
Per share - net income:                
Basic $0.14  $0.12  $0.13  $0.14 
Diluted $0.14  $0.12  $0.13  $0.14 
                
Weighted average number of common shares outstanding:                
Basic  6,094   6,187   5,936   6,094 
Diluted  6,157   6,224   6,016   6,157 

 

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

 

4

 

Where Food Comes From, Inc.

Consolidated Statements of Operations

(Unaudited)

 

        
(Amounts in thousands, except per share amounts)  2022   2021 
 Nine months ended September 30,  Nine months ended September 30, 
(Amounts in thousands, except per share amounts) 2021  2020  2022  2021 
Revenues:                
Verification and certification service revenue $11,659  $10,218  $12,917  $11,659 
Product sales  3,071   2,883   3,473   3,071 
Software and related consulting revenue  1,396   1,424   2,362   1,396 
Total revenues  16,126   14,525   18,752   16,126 
Costs of revenues:                
Costs of verification and certification services  6,363   5,283   7,261   6,363 
Costs of products  1,969   1,869   1,885   1,969 
Costs of software and related consulting  995   901   1,899   995 
Total costs of revenues  9,327   8,053   11,045   9,327 
Gross profit  6,799   6,472   7,707   6,799 
Selling, general and administrative expenses  5,290   5,401   5,697   5,290 
Income from operations  1,509   1,071   2,010   1,509 
Other income/(expense):                
Dividend income from Progressive Beef  90   90   150   90 
Other income, net  1   6   2   1 
Loan forgiveness from Paycheck Protection Program  1,037   -   -   1,037 
(Loss)/gain on foreign currency exchange  (9)  (1)
Gain on sale of assets  9   19   -   9 
Impairment of digital assets  (42)  - 
Loss on foreign currency exchange  (35)  (9)
Interest expense  (5)  (9)  (2)  (5)
Income before income taxes  2,632   1,176  2,083   2,632 
Income tax expense  413   336   579   413 
Net income $2,219  $840  $1,504  $2,219 
                
Per share - net income:                
Basic $0.36  $0.14  $0.25  $0.36 
Diluted $0.36  $0.13  $0.25  $0.36 
                
Weighted average number of common shares outstanding:                
Basic  6,146   6,215   6,019   6,146 
Diluted  6,207   6,254   6,101   6,207 

 

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 
(Amounts in thousands)  2022   2021 
 Nine months ended September 30,  Nine months ended September 30, 
(Amounts in thousands) 2021  2020  2022  2021 
          
Operating activities:                
Net income $2,219  $840  $1,504  $2,219 
Adjustments to reconcile net loss to net cash        
provided by operating activities:        
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  601   736   583   601 
Impairment of digital assets  42   - 
Gain on sale of assets  (9)  (19)  -   (9)
Stock-based compensation expense  222   80   102   222 
Deferred tax expense  (8)  28 
Deferred tax benefit  (59)  (8)
Bad debt expense  45   49   40   45 
Forgiveness of note payable from Paycheck Protection Program  (1,037)  -   -   (1,037)
Changes in operating assets and liabilities, net of effect from acquisitions:        
Changes in operating assets and liabilities:        
Accounts receivable  135   (57)  (713)  135 
Short-term investments  -   (4)
Inventory  (870)  -   (107)  (870)
Prepaid expenses and other assets  308   (267)  (682)  308 
Accounts payable  247   (70)  503   247 
Accrued expenses and other current liabilities  747   505   1,560   747 
Deferred revenue  429   351   240   429 
Right of use assets and liabilities, net  4   4   (7)  4 
Net cash provided by operating activities  3,033   2,176   3,006   3,033 
                
Investing activities:                
Acquisition of Postelsia Holdings, Ltd.  -   (300)
Proceeds from sale of assets  -   34 
Purchase of digital assets  (178)  - 
Purchases of property, equipment and software development costs  (176)  (416)  (41)  (176)
Net cash used in investing activities  (176)  (682)  (219)  (176)
                
Financing activities:                
Proceeds from long term debt  -   1,030 
Repayments of finance lease obligations  (7)  (6)  (7)  (7)
Proceeds from stock option exercise  45   3   19   45 
Dividends paid to shareholders  (914)  -   -   (914)
Stock repurchase under Stock Buyback Plan  (713)  (534)  (2,207)  (713)
Net cash (used in) / provided by financing activities  (1,589)  493 
Net cash used in financing activities  (2,195)  (1,589)
Net change in cash  1,268   1,987   592   1,268 
Cash at beginning of period  4,374   2,638   5,414   4,374 
Cash at end of period $5,642  $4,625  $6,006  $5,642 

 

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

 

6

Where Food Comes From, Inc.

Consolidated Statement of Equity

(Unaudited)

 

                        
(Amounts in thousands) Shares Amount Capital Stock Earnings Total 
    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, 2020  6,118  $6  $11,612  $(2,702) $3,548  $12,464   6,118  $6  $11,612  $(2,702) $3,548  $12,464 
Stock-based compensation expense  -   -   25   -   -   25   -   -   25   -   -   25 
Stock-based compensation expense, shares                        
Stock options exercised  18   -   40   -   -   40   18   -   40   -   -   40 
Repurchase of common shares under Stock Buyback Plan  (29)  -   -   (411)  -   (411)  (29)  -   -   (411)  -   (411)
Dividends paid                        
Net income  -   -   -   -   1,150   1,150 
Net loss  -   -   -   -   1,150   1,150 
Balance at March 31, 2021  6,107  $6  $11,677  $(3,113) $4,698  $13,268   6,107  $6  $11,677  $(3,113) $4,698  $13,268 
                                                
Stock-based compensation expense  -   -   29   -   -   29   -   -   29   -   -   29 
Stock options exercised  1   -   4   -   -   4   1   -   4   -   -   4 
Repurchase of common shares under Stock Buyback Plan  (13)  -   -   (195)  -   (195)  (13)  -   -   (195)  -   (195)
Net income  -   -   -   -   202   202   -   -   -   -   202   202 
Balance at June 30, 2021  6,095  $6  $11,710  $(3,308) $4,900  $13,308   6,095  $6  $11,710  $(3,308) $4,900  $13,308 
                                                
Stock-based compensation expense  10   -   168   -   -   168   10   -   168   -   -   168 
Stock options exercised  -   -   1   -   -   1   -   -   1   -   -   1 
Repurchase of common shares under Stock Buyback Plan  (8)  -   -   (107)  -   (107)  (8)        -   -   (107)  -   (107)
Dividends paid  -   -   -   -   (914)  (914)  -   -   -   -   (914)  (914)
Net income  -   -   -   -   867   867   -   -   -   -   867   867 
Balance at September 30, 2021  6,097  $6  $11,879  $(3,415) $4,853  $13,323   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          
  Common Stock  Paid-in  Treasury  Retained    
(Amounts in thousands) Shares  Amount  Capital  Stock  Earnings  Total 
                   
Balance at December 31, 2019 (1)  6,245  $6  $11,445  $(1,665) $2,163  $11,949 
Stock-based compensation expense  -   -   31   -   -   31 
Repurchase of common shares under Stock Buyback Plan  (21)  -   -   (158)  -   (158)
Net loss  -   -   -   -   (241)  (241)
Balance at March 31, 2020  6,224  $6  $11,476  $(1,823) $1,922  $11,581 
                         
Stock-based compensation expense  -   -   24   -   -   24 
Stock options exercised  3   -   3   -   -   3 
Repurchase of common shares under Stock Buyback Plan  (16)  -   -   (111)  -   (111)
Net income  -   -   -   -   351   351 
Balance at June 30, 2020  6,211  $6  $11,503  $(1,934) $2,273  $11,848 
                         
Stock-based compensation expense  -   -   25   -   -   25 
Repurchase of common shares under Stock Buyback Plan  (41)  -   -   (265)  -   (265)
Net income attributable to Where Food Comes From, Inc.  -   -   -   -   730   730 

Net income (loss)

  -   -   -   -   730   730 
Balance at September 30, 2020  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.
        Additional          
  Common Stock  Paid-in  Treasury  Retained    
(Amounts in thousands) Shares  Amount  Capital  Stock  Earnings  Total 
                   
Balance at December 31, 2021  6,071  $6  $11,955  $(3,807) $5,595  $13,749 
Stock-based compensation expense  2          -   51   -   -   51 
Repurchase of common shares under Stock Buyback Plan  (34)  -   -   (422)  -   (422)
Net income  -   -   -   -   497   497 
Balance at March 31, 2022  6,039  $6  $12,006  $(4,229) $6,092  $13,875 
                         
Stock-based compensation expense  -   -   32   -   -   32 
Stock options exercised  1   -   7   -   -   7 
Repurchase of common shares under Stock Buyback Plan  (61)  -   -   (648)  -   (648)
Net income  -   -   -   -   222   222 
Balance at June 30, 2022  5,979  $6  $12,045  $(4,877) $6,314  $13,488 
Beginning balance, value  5,979  $6  $12,045  $(4,877) $6,314  $13,488 
                         
Stock-based compensation expense  -   -   19   -   -   19 
Stock options exercised  3   -   12   -   -   12 
Repurchase of common shares under Stock Buyback Plan  (109)  -   -   (1,137)  -   (1,137)
Net income  -   -   -   -   785   785 
Net income (loss)  -   -   -   -   785   785 
Balance at September 30, 2022  5,873  $6  $12,076  $(6,014) $7,099  $13,167 
Ending balance, value  5,873  $6  $12,076  $(6,014) $7,099  $13,167 

 

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, agricultural and agriculturalaquaculture products are accurate. We care about food, agricultural and other agriculturalaquaculture 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 and technology solutions that support our verification business and generate incremental revenue specific to the food and agricultural industry.industry and drive sustainable value creation. Finally, the Company’s Where Food Comes From Source Verified® retail and restaurant labeling program utilizes the verification of product attributes to connect consumers directly to the source of the food they purchase through product labeling and web-based information sharing and education.

 

Most of our customers are located throughout the United States.

 

Basis of Presentation

 

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

 

The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements and footnotes thereto for the year ended December 31, 2020,2021, included in our Form 10-K filed on February 18, 2021.28, 2022. 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, 20212022 are not necessarily indicative of the results to be expected for any other interim period of any future year.

9

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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

Seasonality

 

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

 

Recent Accounting Pronouncements

 

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

 

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

 

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

 

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

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,

   2022  2021  2022  2021 
(in thousands) 2021 2020 2021 2020 
 Three months ended
September 30,		 

Nine months ended
September 30,

 
 2022 2021 2022 2021 
Basic:                  
Weighted average shares outstanding  6,094   6,187   6,146   6,215   5,936   6,094   6,019   6,146 
                                
Diluted:                                
Weighted average shares outstanding  6,094   6,187   6,146   6,215   5,936   6,094   6,019   6,146 
Weighted average effects of dilutive securities  63   37   61   39   80   63   82   61 
Total  6,157   6,224   6,207   6,254   6,016   6,157   6,101   6,207 
                                
Antidilutive securities:  17   72   17   72   17   17   17   17 

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

10

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Note 3 - Investment in Progressive Beef, LLC

 

For the three months ended September 30, 20212022 and 2020,2021, the Company received dividend income from Progressive Beef of $50,000 and $30,000, respectively, representing a distribution of their earnings. For the nine months ended September 30, 20212022 and 2020,2021, the Company received dividend income totaling $150,000 and $90,000, respectively. The income is reflected within the “Other income/(expense)” section of the Company’s Consolidated Statement of IncomeOperations for the three and nine months ended September 30, 20212022 and 2020.2021.

 10

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 4 – 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
 2021 2020 Useful Life 2022 2021 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  75   85  5.0 years  75   75  5.0 years
Customer relationships  3,664   3,664  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
Intangible and other assets, gross  5,247   5,257     5,247   5,247  
Less accumulated amortization  3,062   2,795     3,426   3,154  
Intangible and other assets, net  2,185   2,462   
Intangible and other assets, Net  1,821   2,093  
Cryptocurrency (not subject to amortization)  136   -  
Tradenames/trademarks (not subject to amortization)  465   465     465   465  
Intangible assets  2,650   2,927     2,422��  2,558  
Other assets  25   21     24   23  
Intangible and other assets: $2,675  $2,948    $2,446  $2,581  

In June 2022, we purchased an aggregate of $178,000 in Bitcoin (a “cryptocurrency” or “digital asset”) and currently account for all digital assets held as indefinite-lived intangible assets in accordance with ASC 350, Intangibles-Goodwill and Other. We have ownership of and control over our digital assets and may use a third-party custodial service to secure it. The digital assets are initially recorded at cost and are subsequently remeasured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition, if applicable.

We determine the fair value of our digital assets on a quarterly basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that we have determined is the principal market for such assets (Level 1 inputs). We perform an analysis each quarter to identify whether significant events or changes in circumstances, indicate that it is more likely than not that our digital assets are permanently impaired. In determining if an impairment has occurred, we consider the lowest market price of one unit of digital asset quoted on an active exchange since acquiring the digital asset. If the current carrying value of a digital asset significantly exceeds the fair value so determined, a permanent impairment loss has occurred with respect to the digital assets in the amount equal to the difference between their carrying values and the price determined.

Impairment losses are recognized within the Other income / (expense) section in the consolidated statements of operations in the period in which the impairment is identified. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale(s), at which point they are presented net of any impairment losses for the same digital assets held within Other income / (expense). In determining the gain to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale.

11

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

For the three and nine months ended September 30, 2022, we have not sold any digital assets and have recognized an impairment loss of $42,000. As of September 30, 2022, the carrying value of our digital assets held was $136,000.

 

Note 5 – 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, 
 2021 2020  2022 2021 
          
Income and sales taxes payable $155  $168  $838  $185 
Payroll related accruals  925   271   1,133   288 
Customer deposits  101   31   71   76 
Professional fees and other expenses  165   129   231   161 
Accrued expenses and other current liabilities  $1,346  $599  $2,273  $710 

 

Note 6 – Notes Payable

 

Long Term Debt

 Schedule of Long 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

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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

Unison Revolving Line of Credit

 

The Company has a revolving line of credit (“LOC”) agreement which matures April 12, 20222025. 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, 20212022 and December 31, 2020,2021, the effective interest rate for both periods was 7.75% and 4.75%., respectively. The LOC is collateralized by all the business assets of ICS.Where Food Comes From Organic, Inc. (“WFCFO”). As of September 30, 2021,2022, and December 31, 2020,2021, there were no amounts outstanding under this LOC.

 

Note 7 – Stock-Based Compensation

 

In addition to cash compensation, the Company may compensate certain service providers, including employees, directors, consultants, and other advisors, with equity-based compensation in the form of stock options, stock awards 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 stock awards and 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.

 

12

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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

 

Schedule of Stock-based Compensation Expense

 2022 2021 2022 2021 
 Three months ended September 30, Nine months ended September 30,  Three months ended September 30, Nine months ended September 30, 
 2021 2020 2021 2020  2022 2021 2022 2021 
Stock options $42  $24  $96  $77  $19  $42  $82  $95 
Stock awards  126   1   126   3   -   126   20   126 
Restricted stock awards  -   -   -   1 
Total $168  $25  $222  $80  $19  $168  $102  $222 

 

During the three and nine months ended September 30, 2022, no stock options were awarded. During the three months ended September 30, 2021, 0no stock options were awarded. During the nine months ended September 30, 2021, the Company awarded stock options to purchase 17,000 shares of the Company’s common stock at an exercise price of $14.77 to employees of the Company. No other stock awards or options were granted during the nine months ended September 30, 2021.

During the three months ended September 30, 2022, no shares of the Company’s common stock were awarded to employees. During the nine months ended September 30, 2022, the Company awarded 1,500 shares of the Company’s common stock at a fair market value price of $13.45 per share to an employee 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 Company. NaNNo additional shares were awarded during the nine months ended September 30, 2021.

 

During the three months ended September 30, 2020, the Company awarded stock options to purchase 2,000 shares of the Company’s common stock at an exercise price of $7.20 per share 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 7,000 shares of the Company’s common stock at an exercise price of $7.20 to $8.20 per share to employees of the 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 (all share amounts have been adjusted to reflect the 1-for-4 reverse split that occurred in December 2020):

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: Total unrecognized compensation expense  Unvested stock options Unvested restricted stock awards Total unrecognized compensation expense 
2021 (remaining three months) $      37 
2022  98 
2022 (remaining three months) $      16  $      -  $      16 
2023  40   40   -   40 
2024  11   11   -   11 
2025  -   -   - 
 $186  $67  $-  $67 

 

Equity Incentive Plans

 

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

 

13

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Stock Option Activity

 

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

 

Schedule of Stock Option Activity

           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 
 
 
 		 
 
 		 
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, 2021  100,235  $8.36  $7.53   5.88  $620,445 
Granted  -  $-  $-   -     
Exercised  (4,000) $4.85  $4.84   0.09     
Expired/Forfeited  -  $-  $-   -     
Outstanding, September 30, 2022  96,235  $8.67  $7.64   5.56  $178,195 
Exercisable, September 30, 2022  82,578  $7.82  $7.22   5.04  $174,268 
Unvested, September 30, 2022  13,657  $13.61  $10.22   8.55  $3,927 

 

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, 20212022 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, 2021.2022.

 

Restricted Stock Activity

 

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

Schedule of RestrictedNon Vested Stock Award Activity Under Equity Incentive Plan

   Weighted avg.    Weighted avg. 
 Number of grant date  Number of grant date 
 options fair value  shares fair value 
Non-vested restricted shares, December 31, 2020  1,250  $10.20 
Non-vested shares, December 31, 2021  -  $- 
Granted  -  $-   1,500  $13.45 
Vested  (1,250) $10.20   (1,500) $13.45 
Forfeited  -  $-   -  $- 
Non-vested restricted shares, September 30, 2021  -  $- 
Non-vested shares, September 30, 2022  -  $- 

 

Note 8 –Income Taxes

 

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

 

The provision or benefit for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the three and nine months ended September 30, 20212022 we recorded an income tax expense of approximately $298,000 and $413,000579,000, respectively, compared to income tax expense of $271,000298,000 and $336,000413,000 for the same 20202021 periods. The effective tax rate for the nine months ended September 30, 2021 iswas favorably impacted by the non-taxability of the PPP loan forgiveness income.

 

14

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Note 9 - Revenue Recognition

 

Disaggregation of Revenue

 

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

 

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

Schedule of Revenues Disaggregated by Revenue

  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  Verification and Certification Segment  Software and Related Consulting Segment  Eliminations and Other  Consolidated 
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 

 

 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 Verification and Certification Segment Software and Related Consulting Segment Eliminations and Other Consolidated  Three months ended September 30, 2022 Three months ended September 30, 2021 
 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 
Revenues:                                
Verification and certification service revenue $11,659  $-  $-  $11,659  $10,218  $-  $-  $10,218  $5,169  $-  $        -  $5,169  $4,701  $-  $       -  $4,701 
Product sales  3,071   -   -   3,071   2,883   -   -   2,883   1,588   -   -   1,588   1,383   -   -   1,383 
Software and related consulting revenue  -   1,396   -   1,396   -   1,538   (114)  1,424   -   508   -   508   -   461   -   461 
Total revenues $14,730  $1,396  $-  $16,126  $13,101  $1,538  $(114) $14,525  $6,757  $508  $-  $7,265  $6,084  $461  $-  $6,545 

                                 
  Nine months ended September 30, 2022  Nine months ended September 30, 2021 
  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 
Revenues:                                
Verification and certification service revenue $12,917  $-  $         -  $12,917  $11,659  $-  $      -  $11,659 
Product sales  3,473   -   -   3,473   3,071   -   -   3,071 
Software and related consulting revenue  -   2,362   -   2,362   -   1,396   -   1,396 
Total revenues $16,390  $2,362  $-  $18,752  $14,730  $1,396  $-  $16,126 

 

Contract Balances

 

As of September 30, 2021,2022 and December 31, 2020,2021, accounts receivable from contracts with customers, net of allowance for doubtful accounts, werewas approximately $2.32.9 and $2.52.2 million, respectively.

 

As of September 30, 2021,2022 and December 31, 2020,2021, deferred revenue from contracts with customers was approximately $1.61.8 and $1.11.5 million, respectively. The balance of the contract liabilities at September 30, 20212022 and December 31, 20202021 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 nine month period ended September 30, 20212022 (amounts in thousands):

 

Schedule of Changes in Contract with Customer Liabilities

(amounts in thousands):   
       
Deferred revenue:        
Unearned revenue January 1, 2021 $1,132 
Unearned revenue December 31, 2021 $1,513 
Unearned billings  3,320   4,440 
Revenue recognized  (2,888)  (4,200)
Unearned revenue September 30, 2021 $1,564 
Unearned revenue September 30, 2022 $1,753 

15

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 10 – Leases

 

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

Schedule of Lease Expense

 2021 2020 2021 2020  2022 2021 2022 2021 
 Three months ended September 30, Nine months ended September 30,  

Three months ended

September 30,

 Nine months ended
September 30,		 
 2021 2020 2021 2020  2022 2021 2022 2021 
Operating lease cost $121  $116  $353  $348  $122  $121  $368  $353 
Finance lease cost                                
Amortization of assets  2   2   7   6   2   2   7   7 
Interest on finance lease obligations  1   1   3   4   1   1   2   3 
Variable lease cost  -   -   -   - 
Total net lease cost $124  $119  $363  $358  $125  $124  $377  $363 

 

Included in the table above, for the three and nine months ended September 30, 2022, is $0.1 million and $0.3 million, respectively, of operating lease cost for our corporate headquarters. For the three and nine months ended September 30, 2021, is $0.1 and $0.3 million, respectively, of operating lease costcosts for our corporate headquarters. This space is being leased from The Move, LLC. Our CEO and President, each a related party to WFCF, have a 24.3% jointly-held ownership interest in The Move, LLC.

 

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

 

Schedule of Supplemental Balance Sheet Information Related to Leases

 September 30, 2021 December 31, 2020 
Operating leases: Related Party Other Total Related Party Other Total 
 Related Party Other Total Related Party Other Total  September 30, 2022 December 31, 2021 
Operating leases:              Related Party Other Total Related Party Other Total 
Operating lease ROU assets $2,615  $201  $2,816  $2,755  $238  $2,993  $              2,419  $219  $2,638  $             2,568  $230  $2,798 
                                                
Current operating lease liabilities $195  $107  $302  $179  $89  $268  $218  $117  $335  $201  $112  $313 
Noncurrent operating lease liabilities  2,932   118   3,050   3,079   178   3,257   2,714   118   2,832   2,880   140   3,020 
Total operating lease liabilities $3,127  $225  $3,352  $3,258  $267  $3,525  $2,932  $235  $3,167  $3,081  $252  $3,333 

 

 September 30, 2021 December 31, 2020 
Finance leases:      September 30, 2022 December 31, 2021 
Property and equipment, at cost $51  $67  $51  $51 
Accumulated amortization  (23)  (30)  (33)  (26)
Property and equipment, net $28  $37  $18  $25 
                
Current obligations of finance leases $12  $13  $10  $13 
Finance leases, net of current obligations  22   31   12   19 
Total finance lease liabilities $34  $44  $22  $32 
                
Weighted average remaining lease term (in years):                
Operating leases  9.4   10.0   8.4   9.1 
Finance leases  3.3   3.7   2.6   3.1 
                
Weighted average discount rate:                
Operating leases  5.8%  5.8%  5.8%  5.7%
Finance leases  11.9%  13.0%  9.9%  11.5%

 

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  2022 2021 2022 2021 
 Three months ended September 30, Nine months ended September 30,  Three months ended
September 30,		 Nine months ended
September 30,		 
 2021 2020 2021 2020  2022 2021 2022 2021 
Cash paid for amounts included in the measurement of lease liabilities:                         
Operating cash flows from operating leases $120  $113  $350  $335  $127  $120  $378  $350 
Operating cash flows from finance leases $1  $1  $3  $4  $1  $1  $2  $3 
Financing cash flows from finance leases $2  $2  $7  $6  $3  $2  $9  $7 
                                
ROU assets obtained in exchange for lease liabilities:                                
Operating leases $3,057  $3,507  $3,057  $3,507  $3,108  $3,057  $3,108  $3,057 

 

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 
2021 (three remaining months) $121  $4 
2022  481   15 
2022 (three remaining months) $126  $4 
2023  468   10   507   10 
2024  407   5   446   5 
2025  405   5   435   5 
2026  430   - 
Thereafter  2,496   -   2,078   - 
Total lease payments  4,378   39   4,022   24 
Less amount representing interest  (1,026)  (5)  (855)  (2)
Total lease obligations  3,352   34   3,167   22 
Less current portion  (302)  (12)  (335)  (10)
Long-term lease obligations $3,050  $22  $2,832  $12 

Note 11 – Commitments and Contingencies

 

Legal proceedings

 

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

 

Note 12 - Segments

 

With each acquisition, we assess the need to disclose discrete information related to our operating segments. Because of the similarities of certain of our acquisitions that provide certification and verification services, we aggregate operations into 1one verification and certification reportable segment. The operating segments included in the aggregated verification and certification segment include IMI Global, WFCFO and Validus. The factors considered in determining this aggregated reporting segment include the economic similarity of the businesses, the nature of services provided, production processes, types of customers and distribution methods.

 

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

 

                                 
  Three months ended September 30, 2022  Three months ended September 30, 2021 
  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:                                
Goodwill $1,947  $999  $-  $2,946  $1,947  $999  $-  $2,946 
All other assets, net  14,134   3,367   885   18,386   17,036   3,311   (2,778)  17,569 
Total assets $16,081  $4,366  $885  $21,332  $18,983  $4,310  $(2,778) $20,515 
                                 
Revenues:                                
Verification and certification service revenue $5,169  $-  $-  $5,169  $4,701  $-  $-  $4,701 
Product sales  1,588   -   -   1,588   1,383   -   -   1,383 
Software and related consulting revenue  -   508   -   508   -   461   -   461 
Total revenues $6,757  $508  $-  $7,265  $6,084  $461  $-  $6,545 
Costs of revenues:                                
Costs of verification and certification services  2,900   -   -   2,900   2,438   -   -   2,438 
Costs of products  826   -   -   826   864   -   -   864 
Costs of software and related consulting  -   359   -   359   -   315   -   315 
Total costs of revenues  3,726   359   -   4,085   3,302   315   -   3,617 
Gross profit  3,031   149   -   3,180   2,782   146   -   2,928 
Depreciation & amortization  149   42   -   191   149   51   -   200 
Other operating expenses   1,855   60   -   1,915   1,542   48   -   1,590 
Segment operating income/(loss) $1,027  $47  $-  $1,074  $1,091  $47  $-  $1,138 
Other items to reconcile segment operating income (loss) to net income/(loss):                                
Other income / (expense)  9       -   9   29   (2)  -   27 
Income tax expense  -   -   (298)  (298)  -   -   (298)  (298)
Net income/(loss) $1,036  $47  $(298) $785  $1,120  $45  $(298) $867 

  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 

 

Assets:                                
  Nine months ended September 30, 2022  Nine months ended September 30, 2021 
  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:                                
Goodwill $1,947  $999  $-  $2,946  $1,947  $999  $-  $2,946 
All other assets, net  14,134   3,367   885   18,386   17,036   3,311   (2,778)  17,569 
Total assets $16,081  $4,366  $885  $21,332  $18,983  $4,310  $(2,778) $20,515 
                                 
Revenues:                                
Verification and certification service revenue $12,917  $-  $-  $12,917  $11,659  $-  $-  $11,659 
Product sales  3,473   -   -   3,473   3,071   -   -   3,071 
Software and related consulting revenue  -   2,362   -   2,362   -   1,396   -   1,396 
Total revenues $16,390  $2,362  $-  $18,752  $14,730  $1,396  $-  $16,126 
Costs of revenues:                                
Costs of verification and certification services  7,261   -   -   7,261   6,363   -   -   6,363 
Costs of products  1,885   -   -   1,885   1,969   -   -   1,969 
Costs of software and related consulting  -   1,899   -   1,899   -   995   -   995 
Total costs of revenues  9,146   1,899   -   11,045   8,332   995   -   9,327 
Gross profit  7,244   463   -   7,707   6,398   401   -   6,799 
Depreciation & amortization  443   140   -   583   448   153   -   601 
Other operating expenses  4,929   185   -   5,114   4,463   226   -   4,689 
Segment operating income/(loss) $1,872  $138  $-  $2,010  $1,487  $22  $-  $1,509 
Other items to reconcile segment operating income (loss) to net income/(loss):                                
Other income / (expense)  108   (35)  -   73   95   (9)  1,037   1,123 
Income tax expense  -   -   (579)  (579)  -   (5)  (408)  (413)
Net income/(loss) $1,980  $103  $(579) $1,504  $1,582  $8  $629  $2,219 

18

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 13 – Supplemental Cash Flow Information

Schedule of Supplemental Cash Flow Information

(Amounts in thousands) 2021 2020  2022 2021 
 Nine months ended September 30,  Nine months ended September 30, 
(Amounts in thousands) 2021 2020  2022 2021 
Cash paid during the year:                
Interest expense $5  $5  $-  $5 
Income taxes $595  $362  $648  $595 

 

Note 14 – Subsequent Events

 

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

 

19

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

 

General

 

This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Form 10−K for the fiscal year ended December 31, 2020.2021. 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 estimates that it supports more than 15,000approximately 17,500 farmers, ranchers, vineyards, wineries, processors, retailers, distributors, trade associations, consumer brands, chefs, and restaurants with a wide variety of value-added services provided through its family of verifiers, including IMI Global WFCFO,(“IMI”), Where Food Comes From Organic (“WFCFO” - previously International Certification Services and A Bee Organic), Validus Verification Services (“Validus”), and Sterling Solutions, and A Bee Organic.Solutions. 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, aquaculture, crops and other food products are accurate.

Through our more recent acquisitions, including SureHarvest Services LLC; Sow Organic, LLC;LLC (“SureHarvest”) and Postelsia Holdings, Ltd. (“Postelsia”), we primarily 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 and technology solutions that support our verification business and generate incremental revenue specific to the food and agricultural industry.industry and drive sustainable value creation.

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

 

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

 

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

 

Coronavirus Pandemic (COVID-19)Pandemics, the Inflationary Environment and other Weather Related Risks

 

In March 2020, the World Health Organization declared the outbreakThe ongoing outbreaks of novel coronavirus disease (“COVID-19”) as a pandemic.pandemics, including COVID-19 and Avian Influenza, continue to impact This could result in a varietyour business. Due to safety and social distancing reasons, customers continue to request postponement of risks to our business including the inability to perform audits atonsite visits. We work closely with our customers locations dueand standard setting bodies to social distancing, supplier disruptionsidentify innovative solutions and reschedule onsite visits 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.timely as possible.

 

20

 

AllIn late 2021, we were informed by our key tag supplier that materials were becoming scarcer and the ability to meet our need was difficult. In anticipation of this risk, we worked with all our tag suppliers to build our inventory by purchasing excess supply. We believe we have reduced this risk, however, should material shortages continue to impact our tag suppliers, we may be unable to meet the needs of our locations have been affected.customers which could materially impact our revenues. We have adjusted certain aspectscould also experience increases in the cost of our operations to protect our employees while avoiding business interruption. As an essential business to the foodproducts sourced locally 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.abroad.

 

The Company generally performs onsite auditseconomy is facing inflationary pressures that has resulted in connection with its verificationa few headwinds for our business, most notably in the form of a tight labor market where job candidates have considerable bargaining power which has driven wages up. Additionally, we are experiencing higher labor and certification activity.benefit related costs to retain our existing personnel. We believe we will continue to work with standard setting bodiessee significant pressure in our labor and identify innovativebenefit related costs which impacts both our gross margins and net income.

We also continue to monitor for weakened demand in our software and related consulting business segment due to significant customer concentration. Increased inflation could place pressure on our customers’ timing of approval for consulting projects to move forward. Currently, it is difficult to estimate the financial impact to our software and related consulting revenue, if any. We actively market our sustainability solutions and services to offer ournew types of customers. We believe that our transformative approach willthe growing awareness of environmental, social and governance (“ESG”) matters creates a key opportunity for us because we have the expertise and technology needed to 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 incompanies achieve ESG objectives within the food supply chain.

 

The drought conditions that impacted nearly one-half of the United States in the first half of 2022 predominately affected our ranch customers resulting in fewer cattle subject to verification. While this doesn’t directly impact our audit related revenue, it does impact our product sales and other related supply chain fees due to smaller herd sizes. However, we believe the long-term outlook for our industry remains favorable because the demand for verified cattle is still strong, as well as the premiums on verified cattle sold at auction. Additionally, during an inflationary period, most consumers continue to consume beef, although they may trade the quality of protein cut (such as steak) for a lesser cut (such as ground beef).

We will continue to monitor the situationall of these risks closely and will react accordingly, to any future restrictions or limitations, while keeping the interest of our customers, employees and businessshareholders in mind. DuePlease refer to our risk factors included in our Form 10-K for 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.fiscal year ended December 31, 2021 for additional information for risks specifically related to COVID-19.

 

Seasonality

 

Our business is subject to seasonal fluctuations. Significant portions of our verification and certification service revenue areis 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, 2021,2022, we had cash and cash equivalents of approximately $5.6$6.0 million compared to approximately $4.4$5.4 million at December 31, 2020.2021. Our working capital at September 30, 2022 and December 31, 2021 was approximately $5.0$5.7 million compared to $4.4and $5.4 million, at December 31, 2020.respectively.

 

Net cash provided by operating activities for the nine months ended September 30, 2022 and 2021 was approximately $3.0 million compared to $2.2 million during the same period in 2020.million. 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 in 2021, and deferred taxes. Fluctuations are primarily due to operating performance offset by the timing of cash receipts and cash disbursements. The increase in cash provided by operating activities for the periodsperiod ending September 30, 20212022 was primarily driven by a change in accrued expenses, accounts receivable and 2020prepaid expenses. The cash provided by operating activities for the period ending September 30, 2021 was primarily driven by a change in accrued expenses and deferred revenue, offset by cash used for inventory.

 

21

Net cash used in investing activities for the nine months ended September 30, 2022 and 2021, was approximately $0.2 million compared to $0.7 millionmillion. Net cash used in the 2020 period.period ending September 30, 2022 was primarily for the purchase of digital assets. Net cash used in the 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 attributable to the acquisition of Postelsia Holdings, Ltd for $0.3 million and investment in software of $0.4 million.

 

Net cash used in financing activities for the nine months ended September 30, 2022 and 2021 was approximately $2.2 million and $1.6 million, compared to net cash provided by financing activities of $0.5 million in the 2020 period.respectively. Cash used for the periodperiods ending September 30, 2022 and 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.shareholders in 2021.

 

 21

Over the past several years, our growth has been funded primarily through cashflows from operations. We continually evaluate all funding options, including additional offerings of our securities to private, public and institutional investors and other credit facilities as they become available.

 

The primary driver of our operating cash flow is our third-party verification solutions, specifically the gross margin generated from services provided. Therefore, we focus on the elements of those operations, including revenue growth, gross margin and long-term projects that ensure a steady stream of operating profits to enable us to meet our cash obligations. On a weekly basis, we review the performance of each of our revenue streams focusing on third-party verification solutions compared with prior periods and our operating plan. We believe that our various sources of capital, including cash flow from operating activities, overall improvement in our performance, and our ability to obtain additional financing, are adequate to finance current operations as well as the repayment of current debt obligations. We are not aware of any other event or trend that would negatively affect our liquidity. In the event such a trend develops, we believe that there are sufficient financing avenues available to us and from our internal cash-generating capabilities to adequately manage our ongoing business.

 

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

 

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

 

Debt Facility

 

The Company has a revolving line of credit (“LOC”) agreement which matures April 12, 2022.2025. 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, 2021,2022, and December 31, 2020,2021, the effective interest rate was 7.75% and 4.75%, respectively. The LOC is collateralized by all the business assets of Where Food Comes From Organic, Inc. (“WFCFO”). As of September 30, 2021,2022, and December 31, 2020,2021, there were no amounts outstanding under this LOC.

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

 

Off-Balance Sheet Arrangements

 

As of September 30, 2021,2022, we had no off-balance sheet arrangements of any type.

 

22

 

RESULTS OF OPERATIONS

 

Three and nine months ended September 30 2021, 2022 compared to the same periodsperiod in fiscal year 20202021

 

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

 

 Three months ended September 30, 2021 Three months ended September 30, 2020  Three months ended September 30, 2022 Three months ended September 30, 2021 
  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  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:                                                                
Goodwill $1,947  $999  $-  $2,946  $2,946  $-  $-  $2,946  $1,947  $999  $-  $2,946  $1,947  $999  $-  $2,946 
All other assets, net  17,036   3,311   (2,778)  17,569   16,548   5,379   (4,612)  17,315   14,134   3,367   885   18,386   17,036   3,311   (2,778)  17,569 
Total assets $18,983  $4,310  $(2,778) $20,515  $19,494  $5,379  $(4,612) $20,261  $16,081  $4,366  $885  $21,332  $18,983  $4,310  $(2,778) $20,515 
                                                                
Revenues:                                                                
Verification and certification service revenue $4,701  $-  $-  $4,701  $4,307  $-  $-  $4,307  $5,169  $-  $-  $5,169  $4,701  $-  $-  $4,701 
Product sales  1,383   -   -   1,383   1,362   -   -   1,362   1,588   -   -   1,588   1,383   -   -   1,383 
Software and related consulting revenue  -   461   -   461   -   528   -   528   -   508   -   508   -   461   -   461 
Total revenues $6,084  $461  $-  $6,545  $5,669  $528  $-  $6,197  $6,757  $508  $-  $7,265  $6,084  $461  $-  $6,545 
Costs of revenues:                                                                
Costs of verification and certification services  2,438   -   -   2,438   2,233   -   -   2,233   2,900   -   -   2,900   2,438   -   -   2,438 
Costs of products  864   -   -   864   866   -   -   866   826   -   -   826   864   -   -   864 
Costs of software and related consulting  -   315   -   315   -   336   -   336   -   359   -   359   -   315   -   315 
Total costs of revenues  3,302   315   -   3,617   3,099   336   -   3,435   3,726   359   -   4,085   3,302   315   -   3,617 
Gross profit  2,782   146   -   2,928   2,570   192   -   2,762   3,031   149   -   3,180   2,782   146   -   2,928 
Depreciation & amortization  149   51   -   200   112   145   -   257   149   42   -   191   149   51   -   200 
Other operating expenses  1,542   48   -   1,590   1,404   145   -   1,549   1,855   60   -   1,915   1,542   48   -   1,590 
Segment operating income/(loss) $1,091  $47  $-  $1,138  $1,054  $(98) $-  $956  $1,027  $47  $-  $1,074  $1,091  $47  $-  $1,138 
Other items to reconcile segment operating income/(loss) to net income/(loss):                                
Other income/(expense)  29   (2)  -   27   47   (2)  -   45 
Other items to reconcile segment operating income (loss) to net income/(loss):                                
Other income / (expense)  9       -   9   29   (2)  -   27 
Income tax expense  -   -   (298)  (298)  -   (8)  (263)  (271)  -   -   (298)  (298)  -   -   (298)  (298)
Net income/(loss) $1,120  $45  $(298) $867  $1,101  $(108) $(263) $730  $1,036  $47  $(298) $785  $1,120  $45  $(298) $867 

 

 Nine months ended September 30, 2021 Nine months ended September 30, 2020  Nine months ended September 30, 2022 Nine months ended September 30, 2021 
  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  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:                                                                
Goodwill $1,947  $999  $-  $2,946  $2,946  $-  $-  $2,946  $1,947  $999  $-  $2,946  $1,947  $999  $-  $2,946 
All other assets, net  17,036   3,311   (2,778)  17,569   16,548   5,379   (4,612)  17,315   14,134   3,367   885   18,386   17,036   3,311   (2,778)  17,569 
Total assets  18,983   4,310   (2,778)  20,515   19,494   5,379   (4,612)  20,261  $16,081  $4,366  $885  $21,332  $18,983  $4,310  $(2,778) $20,515 
                                                                
Revenues:                                                                
Verification and certification service revenue $11,659  $-  $-  $11,659  $10,218  $-  $-  $10,218  $12,917  $-  $-  $12,917  $11,659  $-  $-  $11,659 
Product sales  3,071   -   -   3,071   2,883   -   -   2,883   3,473   -   -   3,473   3,071   -   -   3,071 
Software and related consulting revenue  -   1,396   -   1,396   -   1,538   (114)  1,424   -   2,362   -   2,362   -   1,396   -   1,396 
Total revenues $14,730  $1,396  $-  $16,126  $13,101  $1,538  $(114) $14,525  $16,390  $2,362  $-  $18,752  $14,730  $1,396  $-  $16,126 
Costs of revenues:                                                                
Costs of verification and certification services  6,363   -   -   6,363   5,373   -   (90)  5,283   7,261   -   -   7,261   6,363   -   -   6,363 
Costs of products  1,969   -   -   1,969   1,869   -   -   1,869   1,885   -   -   1,885   1,969   -   -   1,969 
Costs of software and related consulting  -   995   -   995   -   901   -   901   -   1,899   -   1,899   -   995   -   995 
Total costs of revenues  8,332   995   -   9,327   7,242   901   (90)  8,053   9,146   1,899   -   11,045   8,332   995   -   9,327 
Gross profit  6,398   401   -   6,799   5,859   637   (24)  6,472   7,244   463   -   7,707   6,398   401   -   6,799 
Depreciation & amortization  448   153   -   601   313   423   -   736   443   140   -   583   448   153   -   601 
Other operating expenses  4,463   226   -   4,689   4,206   483   (24)  4,665   4,929   185   -   5,114   4,463   226   -   4,689 
Segment operating income/(loss) $1,487  $22  $-  $1,509  $1,340  $(269) $-  $1,071  $1,872  $138  $-  $2,010  $1,487  $22  $-  $1,509 
Other items to reconcile segment operating income/(loss) to net income/(loss):                                
Other income/(expense)  95   (9)  1,037   1,123   107   (2)  -   105 
Other items to reconcile segment operating income (loss) to net income/(loss):                                
Other income / (expense)  108   (35)  -   73   95   (9)  1,037   1,123 
Income tax expense  -   (5)  (408)  (413)  -   (8)  (328)  (336)  -   -   (579)  (579)  -   (5)  (408)  (413)
Net income/(loss) $1,582  $8  $629  $2,219  $1,447  $(279) $(328) $840  $1,980  $103  $(579) $1,504  $1,582  $8  $629  $2,219 

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Verification and Certification Segment

 

Verification and certification service revenues consist of fees charged for verification audits and other verification and certification related services that the Company performs for customers. Fees earned from our WFCF labeling program are also included in our verification and certification revenues as it represents a value-added extension of our source verification. Verification and certification service revenue for the three and nine months ended September 30, 20212022 increased 9.2%10.0% and 14.1%10.8%, respectively, compared to 2020,the same periods in 2021, primarily due to increased customer demand for our product offerings.

 

Our product sales are an ancillary part of our verification and certification services and represent sales of cattle identification ear tags. Product sales for the three and nine months ended September 30, 20212022 increased 1.5%14.8% and 6.5%13.1%, respectively. Overall, our product sales have increased primarily in responserespectively, compared to the requirement for sourcesame period in 2021, primarily due to increased pricing and age verification using an identification tag at birth for cattle.limited supply elsewhere in the market.

 

Costs of revenues for our verification and certification segment for the three and nine months ended September 30, 20212022 were approximately $2.4$3.7 million and $6.4$9.1 million, respectively, compared to approximately $2.2$3.3 million and $5.3$8.3 million, (including eliminations), respectively, for the same periods in 2020.2021. Gross margin for the three months 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 theand nine months ended September 30, 2021 decreased to 43.4%2022 was 44.9% and 44.2%, respectively compared to 44.0% (including eliminations) for the same period ended September 30, 2020. The changes are45.7% and 43.4%, respectively, in 2021 primarily due to a change in product mix of our offerings which included new customers and new offerings.offerings, offset by increases in compensation related costs due to a tight labor market and inflation. Our margins are generally impacted by various fixed costs such as cost of products, salaries and benefits, insurance and taxes.

 

Other operating expenses for the three and nine months ended September 30, 20212022 increased by approximately 9.8%20.3% and 6.6%10.4%, respectively, compared to the same three and nine month periods in 20202021. The increase was primarily due to increased discretionaryincreases in compensation expenserelated costs due to a tight labor market 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. Theinflation, as well as, an increase in depreciation and amortization is predominately from shifting certain assets and personnel from SureHarvest to WFCF in 2020 to better support the entire Company.headcount.

 

Software and Related Consulting Segment

 

Software and related consulting revenue is a revenue stream specific to our acquisitions of SureHarvest and Postelsia. We employ a SaaS revenue model that bundles annual software licenses with ongoing software enhancements and upgrades andprimarily represents fees earned from a wide range of professional consulting services such as professional appearances, customer education and training,technology solutions that support our verification business and generate incremental revenue specific to the food and agricultural industry. For the three months ended September 30, 2021, softwareSoftware and related consulting revenue was decreased $0.1 million compared to 2020 (including eliminations). Forfor the three and nine months ended September 30, 2021, software2022 increased approximately 10.2% and related consulting revenue was relatively flat69.2%, respectively compared to 2020 (including eliminations).the same periods in 2021. The nine month increase is due to a significant short-term engagement with a Japanese party to promote Japanese seafood products into the American supply chain. While we are hopeful that the engagement will be an annual recurring source of revenue for our consulting segment, as well as a potential opportunity for our verification and certification segment, we can give no assurance that it will be an ongoing source of revenue. Additionally, because this was a short-term engagement, it is not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

 

Costs of revenues for our software and related consulting segment for the three and nine months ended September 30, 20212022 was approximately $0.4 and $1.9 million, respectively, compared to approximately $0.3 million and $1.0 million, respectively, for the same periods in 2021. Gross margin for the three months ended September 30, 2020 was approximately $0.3 million. The cost of revenues2022 decreased to 29.3% compared to 31.7% for the same period in 2021. Gross margin for the nine months ended September 30, 2021 and September 30, 2020 was $1.0 million and $0.9 million, respectively. Gross margin for the three and nine months ended September 30, 20212022 decreased to 31.7% and 28.7%, respectively,19.6% compared to 36.4% and 44.7% (including eliminations)28.7% for the same period in 2020.2021. The three and nine month decrease in gross margin is due primarily to increased cost of contract labor to support our enhancements to our customer’s technology.the short-term consulting engagement mentioned above.

 

Other operating expenses for the three and nine months ended September 30, 2021 decreased2022 increased approximately 66.9% and 53.2%, respectively,$12,000 compared to the same period in 2020 (including eliminations).2021. Other operating expenses for the nine months ended September 30, 2022 decreased approximately $41,000 compared to the same period in 2021. Depreciation and amortization for the three and nine months ended September 30, 20212022 decreased 64.8%$9,000 and 63.8%,$13,000, 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 and personnel from SureHarvest to WFCF in 2020 to better support the entire Company.2021.

 

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

 

Dividend Income from Progressive Beef

 

For the three and nine months ended September 30, 2022 and 2021, and 2020, the Company received dividend income of $30,000$50,000 and $90,000,$30,000, respectively, from Progressive Beef representing a distribution of their earnings. For the nine months ended September 30, 2022 and 2021, the Company received dividend income totaling $150,000 and $90,000, respectively.

 

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, 2021,2022, we recorded income tax expense of approximately $298,000 and $413,000,$579,000, respectively, compared to income tax expense of $271,000$298,000 and $336,000, respectively,$413,000 for the same periods in 2020.2021. The effective tax rate for the nine months ended September 30, 2021 iswas 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, 20212022 was approximately $0.8 million and $1.5 million, respectively, and $0.13 and $0.25, respectively, per basic and diluted common share, respectively, compared to net income of 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, or $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 the nine months ended September 30, 2020.

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

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Internal Control Over Financial Reporting

 

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

 

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

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 20202021 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 2021,, 2022, the Company recognizes matters specific to COVID-19, the coronavirus pandemicinflationary environment and weather-related risks may have ana continued economic impact on the Company, but management does not know and cannot estimate what the long-term 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. For additional information on specific risks in our current filing, see “Coronavirus Pandemic (COVID-19), the Inflationary Environment and other Weather Related Risks” in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations above.

 

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, 20212022 is as follows:

  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 
  Number of
Shares		  Cost of Shares
(in thousands)		  Average Cost
per Share		 
Shares purchased - July 2022  26,000  $282  $10.87 
Shares purchased - August 2022  35,733   396  $11.08 
Shares purchased - September 2022  47,000   459  $9.77 
Total  108,733  $1,137     

 

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
101.INSInline XBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

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 4, 202114, 2022Where Food Comes From, Inc.
 By:/s/ John K. Saunders
  Chief Executive Officer
 By:/s/ Dannette Henning
  Chief Financial Officer

28