Where Food Comes From, Inc. (filing registrant: Integrated Management Information, Inc.) — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as Integrated Management Information, Inc.; management says the company changed its ticker to WFCF in June 2012. It provides verification and certification services to the agriculture, livestock, and food industries. Results include 60%-owned International Certification Services, Inc. (ICS) from its February 29, 2012 acquisition.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1.545 million | $1.250 million | $3.972 million | $3.197 million |
| Gross profit | $803,000 | $671,000 | $2.130 million | $1.800 million |
| Gross margin | 52.0% | 53.7% | 53.6% | 56.3% |
| Operating income | $116,000 | $211,000 | $374,000 | $580,000 |
| Net income attributable to parent | $63,632 | $203,950 | $730,188 | $558,317 |
| Diluted earnings per share | Less than $0.01 (reported as $—) | $0.01 | $0.03 | $0.03 |
- Revenue increased 23.6% in Q3 and 24.2% year to date. Service revenue grew 38.6% in Q3 and 29.6% year to date; product sales declined 18.8% and 4.3%, respectively. Other revenue, primarily WFCF labeling fees, rose 46.8% in Q3 and 194.3% year to date.
- Operating income fell despite higher sales, as SG&A increased 49.1% in Q3 and 43.8% year to date. The nine-month net income comparison benefited from a $363,000 income tax benefit, including reversal of the remaining deferred-tax valuation allowance; this added approximately $0.02 per diluted share.
- Operating cash flow was $318,000 for the first nine months, down from $640,000 in 2011. Cash increased to $1.350 million from $969,000 at December 31, 2011. Working capital was $1.564 million, versus $1.523 million.
- At September 30, total liabilities were $941,000. Notes and other debt totaled $385,000, including $200,000 of related-party debt; capital lease obligations were $23,000. The $180,620 Great Western Bank SBA loan is secured by company assets and guaranteed by significant shareholders. ICS had a $70,050 revolving credit facility with no amount drawn.
- Total assets were $3.328 million, including $378,000 goodwill and $331,000 net intangible assets. Investing cash flow was $32,000 provided, principally reflecting $283,000 of securities-sale proceeds offset by the cash cost of the ICS acquisition and other investment. Financing cash flow was $31,000 provided.
Material changes and management commentary
- The February acquisition of 60% of ICS broadened the business into organic certification and other food categories. ICS contributed approximately $714,500 of revenue and $7,700 of net income from acquisition through September 30. Purchase-price allocation remained preliminary; customer-list intangibles and goodwill were provisionally valued at $355,000 and $378,000.
- Management attributed lower margins partly to ICS’s lower gross margin and a shift toward multi-attribute audits, which take more time. Q3 SG&A included a $60,000 settlement expense to terminate an unsuccessful joint-venture agreement; year-to-date SG&A also included acquisition-related fees and increased marketing and staffing.
- Management said speculation about Japan potentially raising its beef import age limit pressured source-and-age verification, down approximately 18% in Q3. NHTC, Verified Natural Beef, and other verification programs grew approximately 15%; management also cited retail demand for animal-welfare audits and potential opportunities in international markets and domestic animal-disease traceability.
- The company identifies seasonality, with significant revenue typically in Q2 and Q3. Management expects growth opportunities from consumer demand, organic certification, and international verification, but gives no quantified financial guidance and cautions that marketing investment may not generate future revenue.
- Management stated existing cash, operating cash generation, and potential financing options should support current operations and debt repayment. The filing reports no known material legal claims and no off-balance-sheet arrangements. Disclosure controls were deemed effective; ICS controls were still being integrated. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether the preliminary ICS purchase-price allocation, including goodwill and customer-list values, is finalized and whether the acquisition produces the expected growth and earnings contribution.
- How much reported year-to-date earnings depends on the one-time deferred-tax valuation-allowance reversal, and the realizability of remaining deferred tax assets and net operating losses.
- Whether revenue growth translates into stronger operating profit and cash flow as margins face acquisition mix and more labor-intensive audits.
- Developments in Japan’s beef import rules and the resulting effects on source-and-age verification, alongside growth in NHTC, VNB, organic, and other services.
- Debt repayment terms and related-party exposure, collateral and guarantees on the SBA loan, and the continued integration of ICS financial controls.