Where Food es From(WFCF) - 2021 Q2 - Quarterly Report

Part I - Financial Information This section presents the unaudited consolidated financial statements and management's analysis of Where Food Comes From, Inc.'s financial condition and operations Item 1. Financial Statements This section provides the unaudited consolidated financial statements, including balance sheets, statements of operations, cash flows, and equity, with detailed explanatory notes Consolidated Balance Sheets This section provides a snapshot of the company's financial position at specific dates, detailing assets, liabilities, and equity Consolidated Balance Sheet Highlights (Amounts in thousands): | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Total current assets | $8,659 | $7,474 | | Total assets | $20,262 | $19,448 | | Total current liabilities | $3,801 | $3,124 | | Total liabilities | $6,954 | $6,984 | | Total equity | $13,308 | $12,464 | - Total assets increased by $814 thousand from December 31, 2020, to June 30, 2021, primarily driven by an increase in cash and cash equivalents and inventory[8] - Total equity increased by $844 thousand, reflecting net income and additional paid-in capital, partially offset by treasury stock repurchases[8] Consolidated Statements of Operations (Three Months Ended June 30) This section details the company's financial performance for the three months ended June 30, comparing revenues, expenses, and net income year-over-year Consolidated Statements of Operations Highlights (Three Months Ended June 30, Amounts in thousands): | Metric | 2021 | 2020 | Change (YoY) | | :-------------------------------- | :--- | :--- | :----------- | | Total revenues | $5,141 | $4,416 | +16.4% | | Gross profit | $2,009 | $2,100 | -4.3% | | Income from operations | $282 | $469 | -39.9% | | Net income | $202 | $351 | -42.5% | | Basic EPS | $0.03 | $0.06 | -50.0% | | Diluted EPS | $0.03 | $0.06 | -50.0% | - Total revenues increased by 16.4% year-over-year, driven by growth in verification and certification service revenue and product sales[10] - Net income and EPS decreased significantly due to higher costs of revenues and selling, general and administrative expenses, leading to a lower gross profit and operating income[10] Consolidated Statements of Operations (Six Months Ended June 30) This section presents the company's financial performance for the six months ended June 30, highlighting revenue growth and a significant increase in net income Consolidated Statements of Operations Highlights (Six Months Ended June 30, Amounts in thousands): | Metric | 2021 | 2020 | Change (YoY) | | :-------------------------------- | :--- | :--- | :----------- | | Total revenues | $9,581 | $8,328 | +15.0% | | Gross profit | $3,871 | $3,710 | +4.3% | | Income from operations | $371 | $115 | +222.6% | | Net income | $1,352 | $110 | +1129.1% | | Basic EPS | $0.22 | $0.02 | +1000.0% | | Diluted EPS | $0.22 | $0.02 | +1000.0% | - Net income for the six months ended June 30, 2021, significantly increased by 1129.1% year-over-year, primarily due to a $1,037 thousand gain from the forgiveness of a Paycheck Protection Program loan[13] - Total revenues grew by 15.0%, with verification and certification service revenue increasing by 17.7% and product sales by 11.0%[13] Consolidated Statements of Cash Flows This section outlines the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30 Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, Amounts in thousands): | Activity | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Net cash provided by operating activities | $1,620 | $1,748 | | Net cash used in investing activities | $(128) | $(629) | | Net cash (used in) / provided by financing activities | $(569) | $760 | | Net change in cash | $923 | $1,879 | | Cash at end of period | $5,297 | $4,517 | - Net cash provided by operating activities slightly decreased from $1,748 thousand in 2020 to $1,620 thousand in 2021, despite higher net income, due to changes in working capital accounts[16] - Net cash used in financing activities shifted from a $760 thousand inflow in 2020 (due to PPP loan proceeds) to a $569 thousand outflow in 2021, primarily due to stock repurchases[16] Consolidated Statements of Equity This section details changes in the company's equity, including retained earnings, treasury stock, and additional paid-in capital Consolidated Statements of Equity Highlights (Amounts in thousands): | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Total Equity | $13,308 | $12,464 | | Retained Earnings | $4,900 | $3,548 | | Treasury Stock | $(3,308) | $(2,702) | | Additional Paid-in Capital | $11,710 | $11,612 | - Total equity increased by $844 thousand from December 31, 2020, to June 30, 2021, driven by net income and stock-based compensation, partially offset by common share repurchases[18] - The company repurchased 42 thousand common shares under its Stock Buyback Plan during the six months ended June 30, 2021, totaling $606 thousand[18][16] Notes to the Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies, significant transactions, and financial statement line items Note 1 - The Company and Basis of Presentation This note describes the company's business, its subsidiaries, and the basis for preparing the consolidated financial statements - Where Food Comes From, Inc. is an independent, third-party food verification company conducting on-site and desk audits for livestock, food, and agricultural products, ensuring claims are accurate[25] - The company also provides sustainability programs, compliance management, and farming information management solutions through a SaaS model, bundling annual software licenses with enhancements and professional services[26] - The financial statements are prepared in conformity with GAAP and include subsidiaries like WFCFO, Validus, Sterling, SureHarvest, A Bee Organic, Sow Organic, JVF Consulting, and Postelsia Holdings, Ltd[28] - The business is subject to seasonal fluctuations, with significant verification and certification service revenue typically realized from late May through early October, coinciding with peak calf marketings and growing seasons[33] Note 2 – Basic and Diluted Net Income / (Loss) per Share This note details the calculation of basic and diluted net income per share, including the impact of dilutive securities Weighted Average Common Shares Outstanding (in thousands): | Period | Basic (2021) | Basic (2020) | Diluted (2021) | Diluted (2020) | | :-------------------------------- | :----------- | :----------- | :------------- | :------------- | | Three months ended June 30 | 6,100 | 6,219 | 6,186 | 6,258 | | Six months ended June 30 | 6,151 | 6,228 | 6,241 | 6,271 | - Diluted EPS calculations include the weighted average effects of dilutive securities, which were 86 thousand shares for the three months ended June 30, 2021, and 90 thousand shares for the six months ended June 30, 2021[36] Note 3 - Investment in Progressive Beef, LLC This note outlines the dividend income received from the company's investment in Progressive Beef, LLC Dividend Income from Progressive Beef (Amounts in thousands): | Period | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Three months ended June 30 | $30 | $30 | | Six months ended June 30 | $60 | $60 | - The company received consistent dividend income of $30 thousand for both the three-month periods and $60 thousand for both the six-month periods ended June 30, 2021 and 2020, from its investment in Progressive Beef[39] Note 4 – Intangible and Other Assets This note provides a breakdown of intangible and other assets, including those subject to and not subject to amortization Intangible and Other Assets (Amounts in thousands): | Asset Category | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Intangible assets subject to amortization (net) | $2,278 | $2,462 | | Tradenames/trademarks (not subject to amortization) | $465 | $465 | | Other assets | $23 | $21 | | Total Intangible and other assets | $2,766 | $2,948 | - Total intangible and other assets decreased from $2,948 thousand at December 31, 2020, to $2,766 thousand at June 30, 2021, primarily due to accumulated amortization of intangible assets[40] Note 5 – Accrued Expenses and Other Current Liabilities This note details the components of accrued expenses and other current liabilities, including payroll and professional fees Accrued Expenses and Other Current Liabilities (Amounts in thousands): | Category | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Income and sales taxes payable | $32 | $168 | | Payroll related accruals | $709 | $271 | | Customer deposits | $28 | $31 | | Professional fees and other expenses | $349 | $129 | | Total | $1,118 | $599 | - Accrued expenses and other current liabilities increased by $519 thousand from December 31, 2020, to June 30, 2021, mainly driven by higher payroll-related accruals and professional fees[41] Note 6 – Notes Payable This note describes the company's debt facilities, including the Paycheck Protection Program loan and revolving line of credit Long Term Debt (Amounts in thousands): | Debt Type | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Paycheck Protection Program Loan | $0 | $1,035 | | Notes payable and other long-term debt (net of current portion) | $0 | $572 | - The Paycheck Protection Program (PPP) loan of $1,035 thousand and accrued interest was forgiven on March 4, 2021, resulting in no outstanding long-term debt at June 30, 2021[43] - The company maintains a revolving line of credit (LOC) of $75,080, maturing April 12, 2022, with an effective interest rate of 4.75%, but had no outstanding amounts as of June 30, 2021, and December 31, 2020[44] Note 7 – Stock-Based Compensation This note outlines the company's stock-based compensation plans, including expense recognition and stock option activity Stock-Based Compensation Expense (Amounts in thousands): | Period | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Three months ended June 30 | $29 | $24 | | Six months ended June 30 | $54 | $55 | - The company awarded 17,000 stock options at an exercise price of $14.77 per share during the three months ended June 30, 2021[46] - Unrecognized compensation cost from unvested awards totaled $228 thousand as of June 30, 2021, to be recognized ratably over the remaining vesting phase through 2024[48] Stock Option Activity (June 30, 2021, all amounts adjusted for 1-for-4 reverse split): | Metric | Number of awards | Weighted avg. exercise price per share | | :-------------------------------- | :--------------- | :------------------------------------- | | Outstanding, December 31, 2020 | 105,086 | $6.25 | | Granted | 17,000 | $14.77 | | Exercised | (17,763) | $2.30 | | Expired/Forfeited | (1,988) | $7.17 | | Outstanding, June 30, 2021 | 102,335 | $8.31 | | Exercisable, June 30, 2021 | 68,657 | $6.93 | | Unvested, June 30, 2021 | 33,678 | $11.12 | Note 8 – Income Taxes This note details the company's income tax expense and the factors influencing its effective tax rate Income Tax Expense (Amounts in thousands): | Period | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Three months ended June 30 | $104 | $145 | | Six months ended June 30 | $115 | $65 | - The effective tax rate for the six months ended June 30, 2021, was favorably impacted by the non-taxability of the PPP loan forgiveness income[55] Note 9 - Revenue Recognition This note disaggregates the company's revenue by category and discusses deferred revenue from customer contracts Disaggregated Revenue (Three Months Ended June 30, Amounts in thousands): | Revenue Category | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Verification and certification service revenue | $3,695 | $3,108 | | Product sales | $964 | $796 | | Software and related consulting revenue | $482 | $512 | | Total revenues | $5,141 | $4,416 | Disaggregated Revenue (Six Months Ended June 30, Amounts in thousands): | Revenue Category | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Verification and certification service revenue | $6,958 | $5,911 | | Product sales | $1,688 | $1,521 | | Software and related consulting revenue | $935 | $896 | | Total revenues | $9,581 | $8,328 | - Deferred revenue from contracts with customers increased from $1.1 million at December 31, 2020, to $1.7 million at June 30, 2021, with the balance expected to be recognized within one year[61] Note 10 – Leases This note provides information on the company's operating and finance lease liabilities, costs, and maturity schedules Total Net Lease Cost (Amounts in thousands): | Period | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Three months ended June 30 | $120 | $120 | | Six months ended June 30 | $240 | $239 | Lease Liabilities (Amounts in thousands): | Category | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Total operating lease liabilities | $3,424 | $3,525 | | Total finance lease liabilities | $37 | $44 | - The weighted average remaining lease term for operating leases was 9.5 years (10.0 years in 2020) and for finance leases was 3.5 years (3.7 years in 2020)[65] Maturities of Lease Liabilities (Amounts in thousands): | Years Ending December 31st | Operating Leases | Finance Leases | | :-------------------------------- | :--------------- | :------------- | | 2021 (six remaining months) | $241 | $7 | | 2022 | $482 | $15 | | 2023 | $468 | $10 | | 2024 | $407 | $5 | | 2025 | $405 | $5 | | Thereafter | $2,496 | $0 | | Total lease obligations | $3,424 | $37 | Note 11 – Commitments and Contingencies This note addresses potential legal actions and administrative proceedings in the ordinary course of business - The company may be involved in various legal actions and administrative proceedings in the ordinary course of business but is not aware of any significant legal actions at this time[69] Note 12 - Segments This note disaggregates the company's financial performance into its two reportable segments: Verification and Certification, and Software and Related Consulting - The company operates in two reportable segments: Verification and Certification, and Software and Related Consulting[70][71] - The Verification and Certification segment includes IMI Global, WFCFO, and Validus, aggregating operations due to economic similarities and nature of services[70] - The Software and Related Consulting segment, primarily SureHarvest (including Postelsia), focuses on software license, maintenance, support, and consulting services[71] Segment Operating Income (Three Months Ended June 30, Amounts in thousands): | Segment | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Verification and Certification Segment | $289 | $509 | | Software and Related Consulting Segment | $(7) | $(40) | | Consolidated Income from operations | $282 | $469 | Segment Operating Income (Six Months Ended June 30, Amounts in thousands): | Segment | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Verification and Certification Segment | $396 | $286 | | Software and Related Consulting Segment | $(25) | $(171) | | Consolidated Income from operations | $371 | $115 | Note 13 – Supplemental Cash Flow Information This note provides supplemental cash flow details, including cash paid for interest and income taxes Cash Paid During the Six Months Ended June 30 (Amounts in thousands): | Expense Type | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Interest expense | $1 | $5 | | Income taxes | $345 | $10 | - Cash paid for income taxes significantly increased from $10 thousand in 2020 to $345 thousand in 2021[77] Note 14 – Subsequent Events This note discloses significant events that occurred after the reporting period, such as dividend declarations - On July 1, 2021, the Board of Directors declared a special cash dividend of $0.15 per common share, payable on August 16, 2021, to stockholders of record as of July 27, 2021[78] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition and operational results, covering business overview, COVID-19 impact, seasonality, liquidity, and segment performance General This section provides context for the management discussion, advising it be read with the consolidated financial statements - This discussion should be read in conjunction with the consolidated financial statements and notes in Item 1 and the audited financial statements in the Form 10-K for the fiscal year ended December 31, 2020[80] Business Overview This section describes the company's core business as a third-party food verification resource and its expanded offerings through recent acquisitions - Where Food Comes From, Inc. is a leading third-party verification resource for food production practices in North America, supporting over 15,000 farmers, ranchers, and other food industry participants[81] - The company's core business involves on-site and desk audits to verify claims about livestock, crops, and other food products, ensuring credibility for claims like gluten-free, non-GMO, and humane handling[81] - Through recent acquisitions, the company offers sustainability programs, compliance management, and farming information management solutions via a SaaS model, bundling software licenses with professional services[82] - The Where Food Comes From Source Verified® labeling program connects consumers to food sources using product labeling and QR technology for web-based information sharing[83] Coronavirus Pandemic (COVID-19) This section discusses the risks and operational adaptations of the company in response to the COVID-19 pandemic - The COVID-19 pandemic poses risks including inability to perform on-site audits, supplier disruptions, and potential negative impacts on revenue and costs due to disarray in food systems[85] - As an essential business, the company maintained standard operations by allowing most employees to work remotely, with essential staff on-site, and internal controls over financial reporting were not impacted[86] - The company is adapting by working with standard-setting bodies and identifying innovative solutions for verification and certification activities, believing third-party verification is essential to the food supply chain[87] Seasonality This section explains the seasonal fluctuations in the company's revenue, particularly for verification and certification services - The business experiences seasonal fluctuations, with a significant portion of verification and certification service revenue generated from late May through early October, coinciding with peak calf marketings and growing seasons[89] - Quarterly results are not necessarily indicative of full fiscal year performance due to this seasonality[89] Liquidity and Capital Resources This section analyzes the company's cash position, working capital, and cash flow activities, along with future growth plans Liquidity Highlights (Amounts in millions): | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $5.3 | $4.4 | | Working capital | $4.9 | $4.4 | Cash Flow from Activities (Six Months Ended June 30, Amounts in millions): | Activity | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Net cash provided by operating activities | $1.6 | $1.7 | | Net cash used in investing activities | $0.1 | $0.6 | | Net cash used in financing activities | $0.6 | $(0.8) | | Net change in cash | $0.9 | $1.9 | - Operating cash flow is primarily driven by gross margin from third-party verification solutions, with management focusing on revenue growth and long-term projects to ensure steady operating profits[95] - The company plans for continued growth through diversification of product offerings in national and international markets, as well as potential acquisitions, leveraging growing consumer awareness and demand[97] Debt Facility This section details the company's revolving line of credit and the forgiveness of its Paycheck Protection Program loan - The company has a revolving line of credit (LOC) of $75,080, maturing April 12, 2022, with an interest rate of Wall Street Journal prime plus 1.50%, collateralized by WFCFO's business assets[98] - No amounts were outstanding under the LOC as of June 30, 2021, and December 31, 2020[98] - A $1.0 million Paycheck Protection Program (PPP) loan received in April 2020 was forgiven on March 4, 2021[99] Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements for the company as of the reporting date - As of June 30, 2021, the company had no off-balance sheet arrangements[100] Results of Operations This section analyzes the financial performance of the company's operating segments, including revenue, gross margin, and net income Verification and Certification Segment This section details the revenue and gross margin performance of the Verification and Certification segment, highlighting growth drivers and cost impacts - Verification and certification service revenue increased by 18.9% for the three months and 17.7% for the six months ended June 30, 2021, driven by increased customer demand[104] - Product sales, primarily cattle identification ear tags, increased by 21.1% for the three months and 11.0% for the six months, due to demand for source and age verification[105] - Gross margin for this segment decreased to 40.3% (three months) and 41.9% (six months) in 2021, down from 48.3% and 43.0% in 2020, due to changes in product mix, new offerings, returned demand for delayed audits, and increased compensation expenses[106] Software and Related Consulting Segment This section reviews the revenue and gross margin trends for the Software and Related Consulting segment, noting its strategic role - Software and related consulting revenue remained relatively flat for both the three and six months ended June 30, 2021, compared to 2020[108] - Gross margin for this segment decreased to 27.0% (three months) and 27.3% (six months) in 2021, from 41.6% and 49.7% in 2020, primarily due to increased labor costs for technology enhancements[109] - The company views the software segment as ancillary to its overall business, focusing on maintaining proprietary software and leveraging data to enhance competitiveness in the verification market, rather than licensing to others[112] Dividend Income from Progressive Beef This section reports the consistent dividend income received from the investment in Progressive Beef Dividend Income from Progressive Beef (Amounts in thousands): | Period | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Three months ended June 30 | $30 | $30 | | Six months ended June 30 | $60 | $60 | - Consistent dividend income of $30 thousand for the three-month periods and $60 thousand for the six-month periods was received from Progressive Beef in both 2021 and 2020[113] Income Tax Expense This section details the income tax expense and the impact of the PPP loan forgiveness on the effective tax rate Income Tax Expense (Amounts in thousands): | Period | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Three months ended June 30 | $104 | $145 | | Six months ended June 30 | $115 | $65 | - The effective tax rate for the six months ended June 30, 2021, was positively influenced by the non-taxability of the PPP loan forgiveness income[114] Net Income and Per Share Information This section summarizes the net income and earnings per share, highlighting the impact of the PPP loan forgiveness Net Income and EPS (Amounts in millions, except per share): | Metric | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :----------------------------- | :------------------------------- | :----------------------------- | | Net income | $0.2 | $1.4 | $0.4 | $0.1 | | Basic EPS | $0.03 | $0.22 | $0.06 | $0.02 | | Diluted EPS | $0.03 | $0.22 | $0.06 | $0.02 | - Net income for the six months ended June 30, 2021, significantly increased to $1.4 million (from $0.1 million in 2020), largely due to the PPP loan forgiveness[115] Item 4. Controls and Procedures This section evaluates the effectiveness of the company's disclosure controls and internal control over financial reporting, reporting no material changes Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of June 30, 2021 - Management, including principal executive and financial officers, concluded that disclosure controls and procedures were effective as of June 30, 2021, ensuring timely and accurate reporting[116] Internal Control Over Financial Reporting This section addresses management's responsibility for internal control over financial reporting and reports no material changes - Management is responsible for establishing and maintaining adequate internal control over financial reporting, which provides reasonable assurance regarding financial statement preparation[117] - No material changes to the company's internal control over financial reporting occurred during the most recent fiscal quarter[118] Part II - Other Information This section covers legal proceedings, risk factors, equity security sales, and required exhibits Item 1. Legal Proceedings This section states that the company may be involved in routine legal actions but is not currently aware of any significant legal proceedings - The company may be involved in various legal actions, administrative proceedings, and claims in the ordinary course of business[121] - Losses for claims are recorded when probable and estimable, and no significant legal actions are currently known[121] Item 1A. Risk Factors This section refers to the risk factors identified in the company's 2020 Annual Report on Form 10-K and acknowledges the uncertain economic impact of the coronavirus pandemic - The company's business is subject to risks identified in Item 1A of its 2020 Annual Report on Form 10-K[122] - As of June 30, 2021, the economic impact of the coronavirus pandemic on the company is recognized, but management cannot estimate its financial impact[122] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's common stock repurchase activity under its Stock Buyback Plan for the three months ended June 30, 2021 - The Board of Directors approved a Stock Buyback Plan on September 30, 2019, to repurchase up to ten million additional shares of common stock[123] Issuer Purchases of Equity Securities (Three Months Ended June 30, 2021, Amounts in thousands, except per share): | Month | Number of Shares | Cost of Shares | Average Cost per Share | | :-------------------------------- | :--------------- | :------------- | :--------------------- | | April 2021 | 6 | $87 | $14.56 | | May 2021 | 3 | $48 | $14.27 | | June 2021 | 4 | $60 | $15.00 | | Total | 13 | $195 | $15.00 | Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications required by the Sarbanes-Oxley Act - Exhibits include certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[124]