Where Food Comes From, Inc. annual report, FY2011

Business context and reporting period

The filing is Integrated Management Information, Inc.’s (IMI Global) Form 10-K for the fiscal year ended December 31, 2011—not a standalone fourth-quarter report. Although the request identifies Where Food Comes From, Inc., the filing names Integrated Management Information, Inc. as the issuer; Where Food Comes From is a verification and consumer-labeling program described in the filing.

IMI provides livestock, agriculture, and food-industry verification, traceability, auditing, consulting, and related technology services, plus identification hardware. Its principal revenue source is third-party verification services. The company reports that verification programs generated 78.7% of 2011 revenue and hardware sales 19.9%.

Financial performance and position

Net income included a $224,350 deferred income-tax benefit from reducing the valuation allowance on deferred tax assets; the benefit was not an operating cash inflow. Basic and diluted earnings per share were $0.04, compared with $0.02 in 2010. Management attributed revenue growth principally to retailer demand for animal-welfare audits and increased NHTC verification; gross-margin improvement reflected higher audit volume, fixed-cost absorption, and sales mix.

At December 31, 2011, cash and cash equivalents were $969,020, marketable securities were $283,511, and working capital was $1.523 million. Total assets were $1.807 million and stockholders’ equity was $1.164 million. Total notes and debt were $451,845, including $25,644 current, $176,201 long-term, and $250,000 related-party debt. The filing reports no off-balance-sheet arrangements.

Investing cash outflow was $315,972 in the audited cash-flow statement, including net marketable-security purchases and $12,171 of capital expenditures. Financing cash inflow was $51,231, including a $200,000 SBA loan, debt repayments, and $61,597 of share repurchases.

Material changes versus the prior year

• Revenue rose 29.3%; operating income nearly doubled, and gross margin edged up from 55.0% to 55.5%.
• SG&A increased 16.1% to $1.672 million, with higher consulting, marketing, and advertising spending. Advertising expense was $61,502, versus $43,762.
• Cash increased from $513,076 to $969,020 and working capital from $555,074 to $1.523 million. Debt increased overall, principally with the new SBA borrowing, while related-party principal was repaid.
• The company bought back 247,691 shares for $61,597 in 2011. One customer accounted for approximately 14% of 2011 revenue; no customer exceeded 10% in 2010.
• In February 2012, after year-end, IMI acquired 60% of International Certification Services, Inc. (ICS) for $420,000: $350,000 cash and 172,840 IMI shares valued at about $77,800. The filing says purchase-price allocation was not yet available.

Outlook, commentary, risks, and unusual items

Management expected continued growth from consumer awareness of WFCF, verification demand, international markets, animal-welfare services, and the ICS acquisition. It described WFCF revenue as small but growing and planned continued marketing investment, while acknowledging that it could not assure those expenditures would generate future revenue. The filing provides no quantified revenue, earnings, or cash-flow guidance.

Management stated that operating cash generation, available capital, and financing access were adequate for current operations and debt obligations. The SBA note bears a variable rate of prime plus 2.5% (5.75% at year-end), matures May 1, 2021, and is secured by company assets and guaranteed by the founders. Related-party debt was reduced to 6% interest and its maturity extended to March 31, 2014; $250,000 remained outstanding at year-end.

Risks highlighted include competition and technology change; uncertain adoption of verification in a largely voluntary U.S. market; export restrictions and market access; food-demand and customer-industry conditions; seasonality, with revenue typically stronger in the second and third quarters; international expansion; acquisition integration; intellectual-property protection; and reliance on key executives. The company had 18 employees and disclosed that two customers each represented more than 10% of year-end receivables. No material legal proceedings were reported. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal controls.

The 2011 financial statements received an unqualified audit opinion. The prior auditor resigned effective January 10, 2012, citing audit-partner rotation requirements, and GHP Horwath was engaged as successor. The filing also reports an unrealized $6,693 loss on marketable securities and a $13,597 realized loss on their sale.

Important facts for investors to verify

• Confirm the issuer identity: the filing is for Integrated Management Information, Inc., not a company named Where Food Comes From, Inc.
• Reconcile cash-flow figures: MD&A gives 2010 operating cash flow of $430,535, while the audited statement gives $430,885; MD&A gives 2011 investing outflow of $310,780, while the audited statement gives $315,972.
• Assess customer concentration and the durability and margins of retailer-driven verification and hardware growth.
• Review the ICS acquisition’s final purchase-price allocation, cash funding, integration performance, and the rights and obligations associated with the remaining 40%.
• Evaluate how much reported 2011 net income depended on the $224,350 deferred-tax benefit and whether future taxable income supports realization of deferred tax assets.
• Review related-party debt terms, collateral and guarantees on the SBA loan, and the scheduled $267,754 of debt payments shown for 2014.
• Consider the scale and returns of WFCF marketing investment, seasonality, and the company’s ability to sustain growth without a quantified outlook.