8-K
Where Food Comes From, Inc. (WFCF)
UNITEDSTATES
SECURITIESAND EXCHANGE COMMISSION
WASHINGTON,D.C. 20549
FORM8-K
CURRENTREPORT
Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 5, 2020
WHEREFOOD COMES FROM, INC.
(Exact Name of Registrant as Specified in its Charter)
| Colorado | 333-133624 | 43-1802805 |
|---|---|---|
| (State<br>or Other Jurisdiction <br><br>of Incorporation) | (Commission<br><br> <br>File<br> Number) | (I.R.S.<br> Employer <br><br> Identification No.) |
| 202 6^th^ Street, Suite 400 | ||
| --- | --- | |
| Castle Rock, Colorado | 80104 | |
| (Address<br> of Principal Executive Offices) | (Zip<br> Code) |
(303)895-3002
(Registrant’s Telephone Number, Including Area Code)
Notapplicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| [ ] | Written<br> communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| [ ] | Soliciting<br> material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| [ ] | Pre-commencement<br> communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| [ ] | Pre-commencement<br> communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title<br> of each class | Trading<br> Symbol(s) | Name<br> of each exchange on which registered |
|---|---|---|
| Common<br> Stock, $0.001 par value | WFCF | OTC<br> Markets Group |
Item2.02 Results of Operations and Financial Condition
Reference is made to the Where Food Comes From, Inc. (the “Company”) press release on November 5, 2020 and conference call transcript, attached hereto as Exhibits 99.1 and 99.2, respectively, and incorporated by reference herein (including, without limitation, the information set forth in the cautionary statement contained in the press release and conference call transcript), relating to the Company’s financial results for the third quarter and year to date period ended September 30, 2020.
Item9.01 Financial Statements and Exhibits
| (d) | Exhibits |
|---|---|
| Exhibit<br> No. | Description |
| --- | --- |
| 99.1 | Press Release issued and dated November 5, 2020 |
| 99.2 | Transcript for November 5, 2020 conference call |
SIGNATURE
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 hereunto duly authorized.
| WHERE FOOD COMES FROM, INC.<br><br> <br>(Registrant) | ||
|---|---|---|
| By: | /s/ Dannette Henning | |
| Date:<br> November 10, 2020 | Dannette<br> Henning | |
| Chief<br> Financial Officer |
Exhibit99.1
WhereFood Comes From, Inc. Reports 2020 Third Quarter Financial Results
CASTLE ROCK, Colorado – November 5, 2020 – Where Food Comes From, Inc. (WFCF) (OTCQB: WFCF), the most trusted resource for independent, third-party verification of food production practices in North America, today announced its 2020 third quarter and nine-month financial results.
“Customer demand for beef-related products and services remained strong in the third quarter as producers and packers continued to prioritize premium verifications and momentum around our BeefCARE™ program continued to grow,” said John Saunders, chairman and CEO. “The strong growth of our beef business nearly offset the pandemic-related decline in auditing activity for pork, poultry, dairy and egg customers, who are delaying audits due to restrictions on third-party access to their more enclosed production environments. Once restrictions ease as the pandemic is brought under control, we expect these audits to resume in earnest and will be prepared for the expected surge in demand.
“Our positive revenue performance, which comes at a time when many companies are reporting sharp declines in revenue year over year, underscores the importance of the diverse revenue mix we have built over the past 10 years through both M&A activity and internal development of new verification services,” Saunders added. “In addition, our focus on higher-margin beef products and services, coupled with a reduction in SG&A expenses year over year, resulted in the most profitable quarter in Company history. Gross margins improved by 310 basis points in the third quarter and net income attributable to WFCF grew by 35% to a record $730,000, or $0.03 per share. We continued to generate positive cash flows from operations in the third quarter and have a strong balance sheet with $3.9 million in working capital and $4.9 million in cash, cash equivalents and short-term investments.”
ThirdQuarter Results – 2020 vs. 2019
Revenue in the third quarter ended September 30, 2020, was essentially flat year-over-year at $6.2 million. An increase in beef-related audits and an associated jump in tag sales nearly offset sharply lower verification revenue from poultry, pork, dairy and egg customers due to COVID-19 restrictions on on-site audits. Revenue mix included:
| ● | Verification<br> and certification services, down 10% to $4.3 million from $4.8 million. |
|---|---|
| ● | Product<br> revenue, up 25% to $1.4 million from $1.1 million. |
| ● | Software<br> license, maintenance, and support (excluding intercompany sales), up 8% to $245,000 from $227,000. |
| ● | Software-related<br> consulting services (excluding intercompany sales), up 77% to $283,000 from $160,000. |
Gross profit in the third quarter increased to $2.8 million from $2.6 million. Gross margin increased to 44.6% from 41.5% due primarily to an increase in higher-margin tag sales and beef audits.
Selling, general and administrative expense decreased 8% in the third quarter to $1.8 million from $2.0 million in the same quarter last year.
Operating income increased 56% in the third quarter to $956,000 from $614,000 in the same quarter last year.
Net income attributable to Where Food Comes From, Inc. in the third quarter increased 35% to $730,000, or $0.03 per share, from net income of $541,000, or $0.02 per share, in the same quarter last year.
Adjusted EBITDA in the third quarter increased 28% to $1.3 million from $1.0 million in the same quarter last year.
Nine-MonthResults – 2020 vs. 2019
Total revenue for the nine-month period ended September 30, 2020, decreased 4% to $14.5 million from $15.1 million in the same period last year. Revenue mix included:
| ● | Verification<br> and certification services, down 10% to $10.2 million from $11.3 million. |
|---|---|
| ● | Product<br> revenue, up 22% to $2.9 million from $2.4 million. |
| ● | Software<br> license, maintenance, and support (excluding intercompany sales), down 24% to $625,000 from $822,000. |
| ● | Software-related<br> consulting services (excluding intercompany sales), up 39% to $799,000 from $576,000. |
Gross profit for the nine-month period increased 2% to $6.5 million from $6.3 million. Gross margin increased to 44.6% from 42.1% based on a shift in revenue mix to higher margin services and products.
Selling, general and administrative expense decreased 4% year over year to $5.4 million from $5.6 million.
Operating income increased 49% year over year to $1.1 million from $717,000.
Net income attributable to Where Food Comes From, Inc. increased 11% year over year to $840,000, or $0.03 per share, from $759,000, or $0.03 per share, in the prior year.
Adjusted EBITDA increased 5% year over year to $2.0 million from $1.9 million.
The Company generated $2.2 million in net cash from operations in the first nine months of 2020, down 7% from $2.3 million in the same period last year.
The cash, cash equivalents and short-term investments balance at September 30, 2020, increased 69% to $4.9 million from $2.9 million at 2019 year-end. The Company had $3.9 million in working capital at September 30, 2020, up from $3.1 million at 2019 year-end.
The Company will conduct a conference call today at 10:00 a.m. Mountain Time.
Call-innumbers for the conference call:
Domestic Toll Free: 1-877-407-8289
International: 1-201-689-8341
Conference Code: 13712011
Phonereplay:
A telephone replay of the conference call will be available through December 4, 2020, as follows:
Domestic Toll Free: 1-877-660-6853
International: 1-201-612-7415
Conference Code: 13712011
AboutWhere Food Comes From, Inc.
Where Food Comes From, Inc. is America’s trusted resource for third party verification of food production practices. Through proprietary technology and patented business processes, the Company supports more than 15,000 farmers, ranchers, vineyards, wineries, processors, retailers, distributors, trade associations, consumer brands and restaurants with a wide variety of value-added services. Through its IMI Global, International Certification Services, Validus Verification Services, SureHarvest, A Bee Organic and Sterling Solutions units, Where Food Comes From solutions are used to verify food claims, optimize production practices and enable food supply chains with analytics and data driven insights. In addition, the Company’s Where Food Comes From® retail and restaurant labeling program uses web-based customer education tools to connect consumers to the sources of the food they purchase, increasing meaningful consumer engagement for our clients.
*Noteon non-GAAP Financial Measures
This press release and the accompanying tables include a discussion of EBITDA and Adjusted EBITDA, which are non-GAAP financial measures provided as a complement to the results provided in accordance with generally accepted accounting principles (“GAAP”). The term “EBITDA” refers to a financial measure that we define as earnings (net income or loss) plus or minus net interest plus taxes, depreciation and amortization. Adjusted EBITDA excludes from EBITDA stock-based compensation and, when appropriate, other items that management does not utilize in assessing WFCF’s operating performance (as further described in the attached financial schedules). None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income as an indicator of operating performance or any other GAAP measure. We have reconciled Adjusted EBITDA to GAAP net income in the Consolidated Statements of Income table at the end of this release. We intend to continue to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting.
CAUTIONARYSTATEMENT
This news release contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, based on current expectations, estimates and projections that are subject to risk. Forward-looking statements are inherently uncertain, and actual events could differ materially from the Company’s predictions. Important factors that could cause actual events to vary from predictions include those discussed in our SEC filings. Specifically, statements in this news release about industry leadership and demand for, and impact and efficacy of, the Company’s products and services on the marketplace; ability to continue posting positive financial results; and expectations for a surge in demand for certain audits when the pandemic subsides are forward-looking statements that are subject to a variety of factors, including availability of capital, personnel and other resources; competition; governmental regulation of the agricultural industry; the market for beef and other commodities; and other factors. Financial results for the third quarter and nine-month period are not necessarily indicative of future results. Readers should not place undue reliance on these forward-looking statements. The Company assumes no obligation to update its forward-looking statements to reflect new information or developments. For a more extensive discussion of the Company’s business, please refer to the Company’s SEC filings at www.sec.gov.
Company Contacts:
John Saunders
Chief Executive Officer
303-895-3002
Jay Pfeiffer
Pfeiffer High Investor Relations, Inc.
WhereFood Comes From, Inc.
Statementsof Income (unaudited)
| Nine<br>months ended<br><br>September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Amounts<br> in thousands, except per share amounts) | 2019 | 2020 | 2019 | ||||||||
| Revenues: | |||||||||||
| Verification<br> and certification service revenue | 4,307 | $ | 4,759 | $ | 10,218 | $ | 11,314 | ||||
| Product<br> sales | 1,362 | 1,086 | 2,883 | 2,363 | |||||||
| Software<br> license, maintenance and support services revenue | 245 | 227 | 625 | 822 | |||||||
| Software-related<br> consulting service revenue | 283 | 160 | 799 | 576 | |||||||
| Total<br> revenues | 6,197 | 6,232 | 14,525 | 15,075 | |||||||
| Costs<br> of revenues: | |||||||||||
| Costs<br> of verification and certification services | 2,233 | 2,673 | 5,283 | 6,332 | |||||||
| Costs<br> of products | 866 | 697 | 1,869 | 1,538 | |||||||
| Costs<br> of software license, maintenance and support services | 138 | 153 | 393 | 469 | |||||||
| Costs<br> of software-related consulting services | 198 | 122 | 508 | 395 | |||||||
| Total<br> costs of revenues | 3,435 | 3,645 | 8,053 | 8,734 | |||||||
| Gross<br> profit | 2,762 | 2,587 | 6,472 | 6,341 | |||||||
| Selling,<br> general and administrative expenses | 1,806 | 1,973 | 5,401 | 5,624 | |||||||
| Income<br> from operations | 956 | 614 | 1,071 | 717 | |||||||
| Other<br> expense (income): | |||||||||||
| Dividend<br> income from Progressive Beef | (30 | ) | (30 | ) | (90 | ) | (90 | ) | |||
| Other<br> income, net | (2 | ) | (2 | ) | (6 | ) | (7 | ) | |||
| Loss<br> / (Gain) on foreign currency exchange | 2 | - | 1 | - | |||||||
| Gain<br> on sale of assets | (19 | ) | - | (19 | ) | (1 | ) | ||||
| Interest<br> expense | 4 | 2 | 9 | 8 | |||||||
| Income<br> before income taxes | 1,001 | 644 | 1,176 | 807 | |||||||
| Income<br> tax expense | 271 | 184 | 336 | 230 | |||||||
| Net<br> income | 730 | 460 | 840 | 577 | |||||||
| Net<br> loss attributable to non-controlling interest | - | 81 | - | 182 | |||||||
| Net<br> income attributable to Where Food Comes From, Inc. | 730 | $ | 541 | $ | 840 | $ | 759 | ||||
| Per<br> share - net income attributable to Where Food Comes From, Inc.: | |||||||||||
| Basic | 0.03 | $ | 0.02 | $ | 0.03 | $ | 0.03 | ||||
| Diluted | 0.03 | $ | 0.02 | $ | 0.03 | $ | 0.03 | ||||
| *<br> less than 0.01 per share | |||||||||||
| Weighted<br> average number of common shares outstanding: | |||||||||||
| Basic | 24,745 | 24,792 | 24,857 | 24,879 | |||||||
| Diluted | 24,894 | 24,972 | 25,011 | 25,062 |
All values are in US Dollars.
The accompanying notes are an integral part of these consolidated financial statements.
WhereFood Comes From, Inc.
Calculationof Adjusted EBITDA*
(Unaudited)
| Three months ended<br><br>September 30, | Nine months endedSeptember30, | |||||||
|---|---|---|---|---|---|---|---|---|
| (Amounts in thousands) | 2020 | 2019 | 2020 | 2019 | ||||
| Net income attributable to Where Food Comes From, Inc. | $ | 730 | $ | 541 | $ | 840 | $ | 759 |
| Adjustments to EBITDA: | ||||||||
| Interest expense | 4 | 2 | 9 | 8 | ||||
| Income tax expense | 271 | 184 | 336 | 230 | ||||
| Depreciation and amortization | 257 | 257 | 736 | 802 | ||||
| EBITDA* | 1,262 | 984 | 1,921 | 1,799 | ||||
| Adjustments: | ||||||||
| Stock-based compensation | 25 | 37 | 80 | 129 | ||||
| Cost of acquisitions | 15 | - | 15 | - | ||||
| ADJUSTED EBITDA* | $ | 1,302 | $ | 1,021 | $ | 2,016 | $ | 1,928 |
*Use of Non-GAAP Financial Measures: Non-GAAP results are presented only as a supplement to the financial statements and for use within management’s discussion and analysis based on U.S. generally accepted accounting principles (GAAP). The non-GAAP financial information is provided to enhance the reader’s understanding of the Company’s financial performance, but non-GAAP measures should not be considered in isolation or as a substitute for financial measures calculated in accordance with GAAP. Reconciliations of the most directly comparable GAAP measures to non-GAAP measures are provided herein.
All of the items included in the reconciliation from net income to EBITDA and from EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization of purchased intangibles, stock-based compensation, etc.) or (ii) items that management does not consider to be useful in assessing the Company’s ongoing operating performance (e.g., M&A costs, income taxes, gain on sale of investments, loss on disposal of assets, etc.). In the case of the non-cash items, management believes that investors can better assess the Company’s operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect the Company’s ability to generate free cash flow or invest in its business.
We use, and we believe investors benefit from the presentation of, EBITDA and Adjusted EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that EBITDA is useful to investors and other external users of our financial statements in evaluating our operating performance because EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, and depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired.
Because not all companies use identical calculations, the Company’s presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating the Company’s performance against its peer companies because management believes the measures provide users with valuable insight into key components of GAAP financial disclosures.
WhereFood Comes From, Inc.
BalanceSheets
| December 31, | |||||
|---|---|---|---|---|---|
| (Amounts in thousands, except per share amounts) | 2019 | ||||
| Assets | |||||
| Current assets: | |||||
| Cash and cash equivalents | 4,625 | $ | 2,638 | ||
| Accounts receivable, net of allowance | 2,523 | 2,515 | |||
| Short-term investments in certificates of deposit | 262 | 258 | |||
| Prepaid expenses and other current assets | 717 | 450 | |||
| Total current assets | 8,127 | 5,861 | |||
| Property and equipment, net | 1,669 | 1,545 | |||
| Operating lease right-of-use assets | 3,073 | 3,268 | |||
| Investment in Progressive Beef | 991 | 991 | |||
| Intangible and other assets, net | 3,105 | 3,248 | |||
| Goodwill | 2,946 | 2,946 | |||
| Deferred tax assets, net | 350 | 378 | |||
| Total assets | 20,261 | $ | 18,237 | ||
| Liabilities and Equity | |||||
| Current liabilities: | |||||
| Accounts payable | 953 | $ | 1,023 | ||
| Accrued expenses and other current liabilities | 1,179 | 674 | |||
| Deferred revenue | 1,148 | 797 | |||
| Current portion of long term debt | 641 | - | |||
| Current portion of finance lease obligations | 9 | 8 | |||
| Current portion of operating lease obligations | 260 | 239 | |||
| Total current liabilities | 4,190 | 2,741 | |||
| Long term debt, net of current portion | 391 | - | |||
| Finance lease obligations, net of current portion | 14 | 21 | |||
| Operating lease obligation, net of current portion | 3,328 | 3,526 | |||
| Total liabilities | 7,923 | 6,288 | |||
| Commitments and contingencies | |||||
| Equity: | |||||
| Preferred stock, 0.001 par value; 5,000 shares authorized; none issued or outstanding | - | - | |||
| Common stock, 0.001 par value; 95,000 shares authorized; 25,812 (2020) and 25,802 (2019) shares issued, and 24,677 (2020) and 24,977 (2019) shares outstanding | 26 | 26 | |||
| Additional paid-in-capital | 11,508 | 11,425 | |||
| Treasury stock of 1,135 (2020) and 825 (2019) shares | (2,199 | ) | (1,665 | ) | |
| Retained earnings | 3,003 | 2,163 | |||
| Total equity | 12,338 | 11,949 | |||
| Total liabilities and stockholders’ equity | 20,261 | $ | 18,237 |
All values are in US Dollars.
The accompanying notes are an integral part of these consolidated financial statements.
Exhibit99.2
WFCF
2020Third Quarter Conference Call Script
Call date: Thursday November 5, 2020
Call time: 10:00 a.m. Mountain Time
Operator
Greetings, and welcome to Where Food Comes From Third Quarter Earnings Conference Call. At this time all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.
I would now like to turn the conference over to your host, Jay Pfeiffer, Investor Relations. Thank you. You may begin.
Jay
Good morning and welcome to the Where Food Comes From third quarter earnings call.
Joining me on the call today are John Saunders, CEO; Leann Saunders, President, and Dannette Henning, CFO.
During this call we’ll make forward-looking statements based on current expectations, estimates and projections that are subject to risk. Statements about current and future financial metrics, growth strategy, new customer wins, business opportunities, market acceptance of our products and services, and potential acquisitions are forward looking statements. Listeners should not place undue reliance on these statements as there are many factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our publicly filed documents as well as our news releases and website for more information about the Company. Today we’ll also discuss Adjusted EBITDA, a non-GAAP financial measure provided as a complement to GAAP results. Please refer to today’s earnings release for important disclosures regarding non-GAAP measures.
I will now turn the call over to John Saunders, chairman and chief executive officer.
John
Good morning and thanks for joining the call today.
This morning we released our Q3 financial results and, as in the second quarter, we are pleased with our performance – especially in the context of the pandemic’s ongoing impact on our customers and other key players in the food supply chain that impact our business. Since late in the first quarter, protein processors have struggled to stay up and running on a consistent basis and many producers have severely curtailed on-site audits due to restrictions on third parties visiting their facilities. This is particularly true of our pork, poultry, dairy and egg producing customers, which have relatively enclosed production facilities. Our verification services for these commodities generate a meaningful percentage of our revenue and that revenue has declined significantly since restrictions were put in place in March. We expect to resume auditing in these commodities once the pandemic subsides.
The good news for us is that our beef business has been exceptionally strong over the last seven months and has for the most part offset the declines we experienced in other verification revenue categories that I just referenced. As a result, at a time when a lot of companies are reporting pandemic-related revenue declines, our revenue was roughly flat in Q3 and down only slightly through the first nine months of 2020. And perhaps more importantly, our profitability has improved dramatically. Let me share of a few financial highlights with you.
Revenue in the third quarter was flat at $6.2 million and down less than 4% year to date at $14.5 million versus $15.1 million. As I mentioned earlier, four of our core verification revenue categories contributed very little to the top line but our beef verification business was very strong and related tag sales increased 25% year over year as producers and packers continued to prioritize premium verifications. In addition, customer demand for our new BeefCARE™ program continued to grow in the third quarter as we added new producer and processor customers, including two of the world’s largest meat packers. We were delighted that one of those packers, Tyson Foods, highlighted Where Food Comes From in a recent press release announcing their commitment to BeefCARE in what they said would be “the largest beef transparency program in the U.S.”
BeefCARE is the cornerstone of the new CARE initiative we introduced in the first quarter of this year. The CARE program is a suite of sustainability solutions that address consumer demand for sustainably produced beef, dairy, poultry and pork products and it’s a great example of the kind of organic growth initiative that sets us apart from our competition and helps insulate us from black swan events like the pandemic. With sustainability front and center as a fast-growing trend among consumers, the CARE program offers us solid growth potential for years to come. If you haven’t done so already, I encourage you to visit WFCFCARE.com to learn more about this exciting program.
Moving on to our profitability, which was another bright spot for the Company in the third quarter.
The increase in beef-related activity, which tends to be higher margin revenue for us, drove gross margins higher by 310 Bps in the third quarter and by 250 Bps year to date. So again, as revenue has trended flat to down slightly, our margins have improved considerably. There are two specific factors at play here. One, the growth in less costly remote audits conducted by salaried personnel has increased the profitability of each audit. And two, the increased demand for premium beef audits drove increased sales of our higher-margin RFID ear tags.
In addition to the impact of improved gross margins, our bottom line has benefitted from a meaningful reduction in SG&A expense. During both the third quarter and nine-month period we experienced a pandemic-related reduction in travel and marketing costs and we hope to make some of these cost reductions permanent going forward. Additionally, during 2020 we have benefitted from lower public company costs. Specifically, in Q3 our SG&A came down 8%, or $167,000, year over year. Through nine months, SG&A is lower by 4%, or $223,000.
As a result, our third quarter YOY comparisons included the following highlights:
| ● | Operating<br> income increased 56% to $956,000 from $614,000. |
|---|---|
| ● | Net<br> income attributable to WFCF increased 35% to $730,000, or $0.03 per share, from net income of $541,000, or $0.02 per share. |
| ● | It<br> was WFCF’s most profitable quarter in Company history. |
| ● | And<br> adjusted EBITDA increased 28% to $1.3 million from $1.0 million. |
For the nine-month period:
| ● | Operating<br> income increased 49% to $1.1 million from $717,000. |
|---|---|
| ● | Net<br> income attributable to WFCF increased 11% to $840,000 from $759,000. |
| ● | And<br> adjusted EBITDA increased 5% to $2.0 million from $1.9 million. |
| ● | We<br> generated $2.2 million in net cash from operations in the first nine months of 2020, down 7% from $2.3 million in the same<br> period last year due to the timing of state and federal income tax payments. |
| ● | And<br> we continued to strengthen our balance sheet, with cash, cash equivalents and short-term investments at September 30th up<br> 69% to $4.9 million from $2.9 million at 2019 year-end. We had $3.9 million in working capital at September 30, up from $3.1<br> million at 2019 year-end. |
In closing, I want to again thank the Where Food Comes From team for their outstanding effort this year and our shareholders and other stakeholders for their continued support.
And with that, I’ll open the call to questions. Operator…
Question1:
RaphiSavitz: Congrats on a good quarter. Could you maybe talk about how your access to your company’s facilities has evolved since March? And where that stands today? And then I have a follow-up as well.
JohnSaunders: And are you referring to our customers or to our own operations here?
RaphiSavitz: No, your customer facilities, right? Because it sounds like obviously, during the pandemic, you have limited access to some facilities. And I’m trying to understand how that’s evolved since the March period and kind of where that stands today and what sort of access you may have today and the ability to do the audits you’d normally do?
JohnSaunders: Yes. Great question. So it’s dependent on the different industries that we’re in and then the geography of where they’re located. So there’s been a big difference between our beef business and our other businesses, as I’ve mentioned. But I’ll let Leann kind of give some specifics on what means specifically and what it means for our auditing business and more importantly, what it means moving forward.
LeannSaunders: So, with some of operations where we were able to work with different standard-setting bodies and establish virtual and remote auditing, we did that. So we moved in that direction as quickly as possible. In some cases, we tended to be the certification body that was helping them kind of make that decision in order to continue operations. When you think about virtual and remote auditing, a lot of that is obviously technology-driven. So when you think about really remote locations, such as dairies, such as cow-calf operations, where you don’t have good technology, the ability to do remote audit, and you’ve been trying to physically go on-site as much as possible, when the customer is comfortable with that and our auditor. So that’s how we’ve been handling it. When you think about visitor policies when you have some of these large entities and that are processing facilities that were really struggling with COVID internally themselves, then those were just really basically shut down for a period of time, and we’ve been slowly moving back to doing audits as we could. We’re also, as you can imagine, dealing with the complexity of different state rules and quarantine rules when we look at physically going on site. So it’s been a bit to manage, but I have to — we’re very encouraged, and our team has done a wonderful job innovating and being flexible during these times.
JohnSaunders: Yes, and I’ll just finish with — I think, we were — we felt relatively positive as we moved through the summer. But unfortunately, I think we’re seeing more lockdowns occurring across the country. So we’re really kind of dealing with that. I think it’s — again, as Leann said, we’re much more reliant on technology, and I think we’re going to be much smarter as a verification company as we move forward.
RaphiSavitz: Okay. That’s super helpful. And I guess, as you — maybe switching gears a bit, as you think about the business over the next few years, let’s say, 3, 5 years, whatever time frame you want to put on it, what do you feel like will be the #1 driver of your business? Is it more kind of the consumer demand for — better for you products? Is it the beef export market? Is it your tag regulations? Or is it something else that we should be thinking about?
JohnSaunders: Yes. I’d say it’s — in many ways, it’s a combination of all those things. There’s a few things that I think really specifically have changed, Raphi. One is that the pandemic has highlighted the lack of transparency and traceability in our food supply chain. So we’ve seen a strong push towards online systems, regional and local producers that are trying to connect directly with consumers, with themselves and to eliminate reliance on the more cumbersome foundation that we have within our food system right now. So that trend is going to have a significant impact on our business. Sustainability, I think, as a result of the pandemic as well has become a keyword that we talked a lot about back in 2008, 2009. And literally has kind of gone off the radar. But as a result of what we’ve seen, major retailers like Walmart and others are really focusing on sustainability as something that they’re looking forward to with their consumers and trying to understand where they’re going.
And then your final point that I think, again, not to blame the pandemic or to give credit to the pandemic, but it’s highlighted the need for a more robust disease traceability system in the U.S. and we’ve been strong proponents of a voluntary program. And we’ve seen a lot of tailwinds in that regard that I think industry leaders are saying, “We really need to address this now.” And the industry I’m talking about specifically is the beef industry. And so we’re a big part of that. So I think all three of those trends and changes that we’ve seen in the last 6 months are going to have probably bigger impacts on our business than we really can even anticipate right now.
RaphiSavitz: And how does software kind of play a role in your future?
JohnSaunders: Yes. It’s just highlighted the — I think in the past, it was always on-site, having boots on the ground, people being in a specific area at some interval. And typically, once a year was that interval. And I think what we’ve found is that — and it ranges even from just FaceTime. It’s FaceTime, right? Isn’t that the one? Yes, FaceTime that we’re using technology in a way that we never did before. All of our auditors are using iPads. We’re using a lot of video to conduct verifications. And again, we’re doing at an interval that was different than what we were doing before. So maybe we check on an operation once a month or once a quarter as opposed to once a year. So I would say that’s probably been the biggest difference, Raphi, is that we are every day looking to use more technology. And some of it’s proprietary, some of it we’re developing internally, but a lot of it we’re just using off-the-shelf products, Salesforce, again, FaceTime, Zoom, GoToMeeting, everything that everybody else has been using — learning to adapt to, we’re doing that as well. So it’s a big part of the future.
Question2:
TimothyBardes: It’s great to see the results this quarter and this year so far and kind of the work that you’ve done. I think you’ve talked very well about kind of your business strategy and kind of your acquisition strategy as well as the acquisition — the kind of the business strategy within the acquisition strategy, but I wanted to get more into kind of capital allocation and how that kind of works into it. So when you’re looking at kind of acquisitions in the past, how have you kind of made the yes, no decisions on acquisitions? How do you look at valuation within those decisions? And then how do you look at how you’re going to fund it with your decisions on either cash on hand or taking on debt or issuing equity?
JohnSaunders: Great question, Tim. So in the past, we’ve completed in excess of 10 acquisitions. And when we started, as you may or may not be aware, we didn’t have a lot of cash on our balance sheet. So at the time, being a public company really gave us an opportunity to complete some of those really transformative acquisitions for us. So we were very, very blessed, I think, and we looked at those businesses, almost all in the same — the same glass, and that is that we look for strong businesses with a history, with a strong customer base, with literally impeccable reputations. That was something that was a strong part of our business. And then in most cases, they were family-founded and family-run businesses. So that wasn’t necessarily a requirement, but it just kind of worked out that way.
From a financial perspective, it was really pretty simple. We looked at — we looked at the revenue of those businesses. And I would say, usually, we look at either at 8.5x EBITDA or 1.5x revenue to come with a valuation that we would then, in most cases, have an initial investment, where we would buy a controlling interest in the business. And then at some point later, we would complete the transaction-based on the financial performance of the principles that we would leave in place.
So that was kind of the world before. The world today, I think, is you can look at our most recent acquisition, which was Postelsia, which met a lot of those same criteria that I mentioned. It’s a husband-and-wife team, one of the most well-renowned groups within the seafood space. And our deal was roughly 1.5x revenue. The big difference, Tim, is that we are very protective of our stock now. So as you probably noticed, we use 100% cash within that acquisition, and I’d say that will be the trend moving forward. So we’re going to use cash. We’ll probably even pursue debt before we would do equity at this point if the transaction was large enough or we — it required something bigger. But as you guys can see from the balance sheet, that’s not really a problem for us right now.
Question3:
TerryThompson: Hey, John. Looks like a nice quarter. Congratulations on another good quarter, especially with everything that’s going on. And really, everybody is swimming upstream now it seems like. I was pleased to see Tyson include Where Food Comes From in their press release. Is there anything we can do to have them highlight Where Food Comes From’s participation in this and whatever other programs to help raise our public profile?
JohnSaunders: They’re actually — good question. I’ll let Leann kind of follow up to me, but they actually are doing quite a bit. In fact, we’ve been surprised at their commitment to BeefCARE. And even though it may not be in the same circles that this crew necessarily works, and they really are putting a lot behind the BeefCARE program to developing out videos and really talking to their retail customers about the program. So I’ve — it probably doesn’t show quite as much, Terry, but they’re really doing a lot. Go ahead.
LeannSaunders: Terry, they have put a strong commitment behind BeefCARE. And I think when you look at the announcement and their Chief Sustainability Officer actually being John R. Tyson. So when you think about kind of the level within the organization this rises to and their commitment to it, I think we’re very encouraged. And it takes — for a company like that to make this commitment is huge, and it takes a long time within their certain supply chains to move in a direction. So I’m sure they’re going to be conservative about talking about certain things publicly, but they’ve been extremely committed to moving things forward in their supply chain, and we’re very encouraged.
JohnSaunders: I was just going to say, we’ll continue to pass along information that we see as relevant, Jay will distribute. Even if it’s not a press release from us, if there’s information that we think is important, we’ll convey that.
TerryThompson: Yes. And I’m sure there’s a lot of inertia involved with that larger organization. Has there been any further developments on the McDonald’s program here from a year or 2 ago. Is anything going on with that? Or is that kind of dead in the water?
LeannSaunders: So the pilot project that we worked on for them, we actually did another pilot project this spring with some other members of a pilot through the U.S. Roundtable for Sustainable Beef. So there’s — it’s still very active. We still have a presence in Canada, tied to the Canadian Roundtable, which is really what that McDonald’s pilot prompted the Canadian Roundtable for Sustainable Beef to get off the ground. So we’re still — we still have very close ties, still very active. Similar to a company like Tyson, it’s hard for McDonald’s to move in a direction of, say, making a claim on a product on a menu. That takes years. But they’re still very focused on it and aggressive members of these roundtables that we meet with all the time.
TerryThompson: Good. And then one other question, and I’ll let you move on to the next questioner. What are your plans? Are you anticipating having a shareholders’ meeting this next spring? Or is that still up in the air?
JohnSaunders: Yes. I’d say that’s up in the air. We’ll kind of — I think, go with the flow and see what most other groups are doing as well. So we’ll let you know. But we have a meeting in the plan.
Operator: We have reached the end of our question-and-answer session. And I would like to turn the call back over to Mr. John Saunders for any closing remarks.
JohnSaunders: Once again, thank you all for joining today. Have a great end of the year, and we’ll talk to you after the first of the year.
**Operator:**This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.