Where Food Comes From, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in thousands of dollars except per-share data, percentages, and where noted. The company provides independent food-production verification and certification, related product sales, and food and agriculture consulting and technology services.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $7,011 | $7,265 | $18,404 | $18,752 |
| Gross profit | $2,866 | $3,180 | $7,515 | $7,707 |
| Gross margin | 40.9% | 43.8% | 40.8% | 41.1% |
| Operating income | $946 | $1,074 | $1,774 | $2,010 |
| Net income | $723 | $785 | $1,376 | $1,504 |
| Diluted earnings per share | $0.13 | $0.13 | $0.24 | $0.25 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $2,613 | $3,006 |
- Q3 revenue declined about 3.5% year over year; nine-month revenue declined about 1.9%. Verification and certification revenue grew 3.7% for the quarter and 8.0% year to date, while product sales and consulting revenue fell.
- Q3 net income decreased about 7.9%; nine-month net income decreased about 8.5%. Basic EPS was $0.13 for Q3 and $0.25 year to date in both comparable periods; diluted year-to-date EPS declined from $0.25 to $0.24.
- At September 30, cash was $3,813, versus $4,368 at December 31, 2022. Working capital was approximately $3.6 million, down from $4.9 million. Current assets were $7,719 and current liabilities $4,103.
- Nine-month investing cash use was $287, including a $200 investment in BlueTrace. Financing cash use was $2,881, primarily share repurchases of $2,921. Cash fell $555 over the period.
- Total liabilities were $6,669, including $2,832 of operating lease obligations and $57 of finance lease obligations. No line-of-credit borrowings were outstanding. The company reports a revolving credit facility, but its stated capacity of “$75,080” is unclear in the filing text.
Changes and management commentary
- Verification and certification revenue growth was offset by lower cattle identification tag sales, which management linked to reduced beef-cow inventories and the cattle-cycle contraction. Management also cited inflationary pressure on customers and consumer movement toward lower-priced foods.
- Verification and certification segment gross margin was 42.2% for Q3 versus 44.9%, and 42.3% for nine months versus 44.2%. The company cited higher product, compensation, insurance, and tax costs.
- Consulting revenue declined approximately $77,000 for Q3 and $1.0 million for nine months. The prior-year nine-month period included a significant short-term Japanese seafood engagement. Consulting is predominantly project-based and not recurring.
- Management describes verification revenue as seasonal, typically concentrated from late May through early October, and says the cattle industry is in a contraction phase. Drought and pasture conditions may affect the duration of that cycle.
- Management says operating cash generation, available financing avenues, and current capital sources are adequate for current operations. Growth plans include diversified and bundled offerings, potential acquisitions, and national and international opportunities. No quantitative earnings or revenue guidance is provided.
Risks, contingencies, and unusual items
- Management notes continued potential effects from inflation, weather, and pandemics but says the long-term financial impact cannot be estimated. Quarterly results may not indicate full-year or future performance because of seasonality and industry cyclicality.
- The credit line is secured by WFCF Organic’s business assets, bears interest at prime plus 1.50%, and matures April 12, 2025; the filing states principal and interest are payable on demand.
- The company reported no significant legal actions known at the filing date, no material off-balance-sheet arrangements, and no material or unusual subsequent events through issuance of the financial statements.
- The company repurchased 60,537 shares for $855 during Q3; nine-month repurchases totaled $2,921. Its corporate headquarters lease is with an entity partly owned by the CEO and president.
- Disclosure controls were assessed as effective at period end; the company reported no material quarterly changes to internal control over financial reporting.
Important facts for investors to verify
- Clarify the revolving credit facility’s stated capacity (“$75,080”) and review its demand repayment terms and collateral.
- Track verification revenue and margins against cattle-cycle contraction, herd inventories, drought, and inflationary cost pressures.
- Assess whether consulting revenue can recover after the prior-year project comparison and given its project-based, non-recurring nature.
- Monitor cash, working capital, deferred revenue, and the pace of share repurchases relative to operating cash flow.
- Review the related-party headquarters lease terms and the valuation and performance of the BlueTrace investment.