Business context and reporting period
Integrated Management Information, Inc. (IMI Global; ticker changed to WFCF in June 2012) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company provides verification and certification services for agriculture, livestock and food businesses. The filing describes the company as a single reporting segment following its February 2012 acquisition of 60% of International Certification Services, Inc. (ICS). The filing is under Integrated Management Information, Inc., notwithstanding the requested company name, Where Food Comes From, Inc.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1.397 million | $1.125 million | $2.426 million | $1.947 million |
| Gross profit | $756,000 | $677,000 | $1.327 million | $1.129 million |
| Gross margin | 54.1% | 60.2% | 54.7% | 58.0% |
| Operating income | $175,000 | $284,000 | $257,000 | $369,000 |
| Net income attributable to IMI | $304,000 | $277,000 | $666,000 | $354,000 |
| Diluted EPS | $0.01 | $0.01 | $0.03 | $0.02 |
Revenue grew 24.1% in Q2 and 24.6% year to date. Net income included deferred tax benefits of $127,382 for Q2 and $409,632 year to date from reversing the valuation allowance on deferred tax assets; management attributed about $0.01 and $0.02 per diluted share, respectively, to the benefit. Excluding that tax item, operating income was lower year over year in both periods.
- Cash flow: Six-month operating cash flow was $184,173, versus $303,390 in 2011. Investing used $225,464, principally for the ICS acquisition; financing used $20,330. Cash declined by $61,621 to $907,399.
- Liquidity: Working capital was $1.372 million, down from $1.523 million at December 31, 2011. Current assets were $1.863 million and current liabilities $491,000.
- Debt and leases: Notes payable totaled $389,159, including $200,000 of related-party debt; capital lease obligations totaled $25,411. The SBA loan balance was $182,388, and ICS reported no balance drawn on its $70,050 revolving credit facility.
- Balance sheet: Total assets were $3.119 million and total liabilities $875,000 at June 30, 2012. Intangible assets were $715,000, largely reflecting the ICS acquisition.
Material changes versus prior period
- Q2 service revenue rose 24.9%; product sales rose 7.7%. Other revenue, primarily WFCF labeling fees, increased from a small base. Six-month service revenue increased 24.5% and product sales 10.6%.
- ICS contributed approximately $268,000 of Q2 service revenue and $345,000 year to date. From acquisition through June 30, ICS reported revenue of approximately $344,600 and a loss of $18,200.
- Gross margin declined, which management attributed partly to ICS’s lower margins and a sales mix shift toward multiple-attribute audits that require more work.
- SG&A increased 47.8% in Q2 and 40.6% year to date, including ICS expenses, customer-list amortization, added marketing and staffing costs, and acquisition-related professional fees.
- Cash used for investing and the increase in assets and liabilities primarily reflect the ICS acquisition. Acquisition consideration was approximately $427,800: $350,000 cash and 172,840 shares valued at approximately $77,800. The purchase-price allocation remained preliminary.
Outlook, commentary and risks
- Management cited retailer demand for animal-welfare audits, growth in NHTC and Verified Natural Beef programs, organic certification opportunities through ICS, and international markets as potential growth drivers. It provided no numerical earnings or revenue guidance and cautioned that anticipated marketing returns are uncertain.
- Management said speculation about Japan changing US beef age-import restrictions reduced source-and-age verification business by approximately 25% in Q2 year over year. NHTC and Verified Natural Beef programs grew approximately 20%, according to management; the effect of future Japanese policy remains uncertain.
- Revenue is seasonal, typically stronger in the second and third quarters. The filing warns that interim results may not indicate full-year performance.
- The company reported no known legal proceedings expected to have a material adverse effect and no material changes to risks disclosed in its 2011 Form 10-K. It reported no off-balance-sheet arrangements.
- Management said disclosure controls were effective at a reasonable-assurance level. ICS was still being integrated into internal control over financial reporting. The acquisition allocation—including estimated customer lists of $355,000 and goodwill of $378,000—was provisional and subject to change.
Important facts for investors to verify
- How much of year-to-date earnings growth persists after excluding the $409,632 deferred-tax benefit, and whether deferred tax assets are ultimately realizable.
- Final ICS purchase-price allocation, integration costs and controls, and ICS’s contribution to revenue, margins and earnings.
- Whether declining gross margins stabilize as the acquired business and audit-service mix evolve.
- How Japanese import-policy developments affect source-and-age verification, and whether growth in alternative verification programs offsets weakness.
- Debt repayment capacity, related-party note terms and guarantees, and the effect of seasonality on cash and working capital.