Where Food Comes From, Inc. (Integrated Management Information, Inc.) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The filing identifies the registrant as Integrated Management Information, Inc. (IMI Global), which operates the Where Food Comes From program; it does not use Where Food Comes From, Inc. as the registrant name.
Business context
The company provides verification, certification, traceability and related services to the agriculture, livestock and food industries. On February 29, 2012, it acquired 60% of International Certification Services, Inc. (ICS), an organic certification provider. Results include ICS only from the acquisition date.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 or prior date |
|---|---|---|
| Revenue | $1,029,284 | $821,819 |
| Gross profit / gross margin | $570,959 / approximately 55.5% | $452,073 / approximately 55.0% |
| Operating income | $82,822 | $85,066 |
| Net income attributable to IMI | $362,133; $0.02 per basic and diluted share | $77,423; less than $0.01 per share |
| Operating cash flow | $39,430 | $4,354 |
| Cash and cash equivalents | $781,947 at March 31, 2012 | $969,020 at December 31, 2011 |
| Working capital | $1,197,423 at March 31, 2012 | $1,523,429 at December 31, 2011 |
| Total assets / total liabilities | $2,896,564 / $994,009 at March 31, 2012 | $1,806,976 / $643,189 at December 31, 2011 |
Revenue rose 25.2% year over year. Service revenue increased 24.0%, product sales 14.6%, and other revenue—primarily Where Food Comes From labeling fees—increased 823% from a small base. Operating income declined despite higher revenue as selling, general and administrative expense increased 33.0% to $488,137. Net income was substantially boosted by a $282,090 income tax benefit from releasing part of the deferred-tax valuation allowance; management cited a deferred tax benefit of approximately $282,250 in the tax note.
Investing cash outflow was $220,052, primarily related to the ICS acquisition; financing cash outflow was $6,451. Cash declined by $187,073 during the quarter. Notes payable totaled $446,361, including $250,000 of related-party debt; capital lease obligations were $27,818. The related-party note matures March 31, 2014. The company reported no outstanding borrowings on ICS’s $70,050 revolving credit line at March 31.
Material changes and unusual items
- The ICS acquisition consideration was $427,778: $350,000 cash and 172,840 IMI shares valued at $77,778. The preliminary allocation included $732,581 of excess assigned to intangible assets, provisionally comprising $355,000 of customer lists and $350,000 of goodwill; the purchase-price allocation remained under review.
- From acquisition through March 31, ICS contributed approximately $76,500 of revenue and a $6,100 loss. Pro forma results assuming acquisition on January 1 showed Q1 2012 revenue of $1,197,753 and net income of $315,367.
- Q1 SG&A included approximately $46,000 attributable to ICS and approximately $18,000 of acquisition-related accounting, advisory and legal fees. Management also cited increased WFCF marketing, staffing and public-company costs.
- Marketable securities were $297,556 at quarter-end, including an $11,709 unrealized gain recorded in other comprehensive income.
Outlook, risks and contingencies
Management said it planned continued investment in WFCF marketing and expected growth opportunities from verification services, animal-welfare audits, international markets and ICS’s organic certification business. It expressed confidence in available operating cash flow and financing sources to support operations and debt repayment, but gave no quantified financial guidance and cautioned that marketing investments may not generate future revenue. The business is seasonal, with significant revenue typically in the second and third quarters; Q1 results may not indicate full-year performance. Management reported no material change to previously disclosed risk factors, no known legal matters expected to have a material adverse effect, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- How much of reported growth and future results is attributable to ICS, and whether the preliminary acquisition valuation and intangible-asset assumptions change.
- The sustainability of operating cash generation and liquidity after the acquisition, given lower cash and working capital.
- The extent to which reported Q1 net income depends on the one-time deferred-tax valuation-allowance release.
- Whether WFCF marketing spending and the acquired certification platform produce durable revenue and profit growth, especially given seasonality.
- Debt terms and related-party exposure, including the $250,000 related-party note and the collateral and guarantees supporting the SBA loan.