WFCF 10-K Annual Report Dec. 31, 2012

WHERE FOOD COMES FROM, INC.

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10-K 1 wmf-10k_123112.htm ANNUAL REPORT wmf-10k_123112.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2012

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File No. 333-133634

WHERE FOOD COMES FROM, INC.

Colorado	43-1802805
(State of incorporation or organization)	(I.R.S. Employer Identification No.)

221 Wilcox, Suite A

Castle Rock, CO 80104

(Address of principal executive offices, including zip code)

Issuer’s telephone number, including area code:

(303) 895-3002

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer:	o		Accelerated filer:	o
Non-accelerated filer:	o		Smaller reporting company:	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares of the registrant’s common stock, $.001 par value per share, outstanding as of February 26, 2013 was 21,458,799. The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2012, the last business day of our most recently completed second fiscal quarter was $11,878,070.

DOCUMENTS INCORPORATED BY REFERENCE: None

TABLE OF CONTENTS


		PAGE

	PART I

ITEM 1.	BUSINESS	3
ITEM 1A.	RISK FACTORS	10
ITEM 1B.	UNRESOLVED STAFF COMMENTS	12
ITEM 2.	PROPERTIES	12
ITEM 3.	LEGAL PROCEEDINGS	13
ITEM 4.	MINE SAFETY DISCLOSURES	13

	PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	14
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	25
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	51
ITEM 9A.	CONTROLS AND PROCEDURES	51
ITEM 9B.	OTHER INFORMATION	51
	PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	52
ITEM 11.	EXECUTIVE COMPENSATION	54
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	55
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	56
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	57
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	58

	SIGNATURES	59

PART I

ITEM 1.

BUSINESS

GENERAL

Where Food Comes From, Inc. and its subsidiary (“WFCF,” the “Company,” “our,” “we,” or “us,”) provides verification and certification solutions for the agriculture, livestock and food industry. We provide our owned and operated online products and services which specialize in identification and traceability, process/production-practice/supply verification, document control for United States Department of Agriculture (“USDA”) and other verification programs and third party auditing services. Our services ensure compliance with governmental and private standards by providing transparency and value in food products for both producers and consumers world-wide.

We were incorporated in 1998 as a Missouri corporation. In March, 2005, we reincorporated in Delaware, and in March 2006, we changed our domicile from Delaware to Colorado. Until December 31, 2004 we were structured as a Subchapter S corporation and on January 1, 2005, we converted to a Subchapter C corporation.

In late 2012, we changed our corporate name from Integrated Management Information, Inc. (“IMI”) to Where Food Comes From, Inc. to better reflect our brand strategy and to raise awareness in the investor community. We are listed on the over-the-counter electronic bulletin board (“OTC:BB”) under the stock ticker symbol “WFCF.”

Acquisition of 60% of outstanding shares of ICS

On February 29, 2012, we entered into a Purchase and Exchange Agreement (the “Purchase Agreement”), by and among IMI and International Certification Services, Inc. (“ICS”), and other shareholders as individually named in the Agreement (collectively the “Sellers”).

ICS is a premier provider of organic accreditation services and has a strong reputation in the organic market segment. They have a large and growing customer base that includes food retailers as well as producers and processors of fruits, vegetables, dairy, livestock and honey. Their flagship certification program is Farm Verified Organic® – an ISO Guide 65 and IFOAM accredited program that meets the requirements of the USDA National Organic Program – that is designed for organic producers selling to the US and international markets. ICS also offers USDA National Organic Program, Canadian Organic Regime (COR) and Food Alliance sustainability certification as well as facilitation and compliancy of European Union (EU), Japan and Bio Suisse standards. It is estimated that the total organic market segment in the US and EU is more than $50 billion annually.

ICS represents an opportunity to extend the range of our existing programs and establish our capabilities in other major food groups, including poultry, grain, fruits and vegetables and dairy when sold as fresh, processed or packaged goods. We believe this acquisition has tremendous synergies for both IMI and ICS. As industry leaders in our respective product and service offerings, we are now positioned to offer our customers new solutions across the verification and certification spectrum. We also believe it provides diversification for our company in the produce, grain and dairy industries.

INDUSTRY BACKGROUND

The value-added food industry has been growing rapidly for the past several years in response to increased consumer education about food production. Organic is a labeling term that indicates that the food or other agricultural product has been produced through approved methods that integrate cultural, biological, and mechanical practices that foster cycling of resources, promote ecological balance, and conserve biodiversity. Organic food is produced without the use of synthetic pesticides and fertilizers, sewage sludge, bioengineering (GMOs), or ionizing radiation. Organic meat, poultry, eggs, and dairy products come from animals that are given no antibiotics or growth hormones.

Organic sales are only part of the story. Consumers are becoming more educated about food choices. Factors such as the carbon footprint that a particular food represents are playing an increasing role in consumers’ decision making. Food safety also plays a significant role in consumer preferences. In recent years, demand increased for livestock identification due to concerns regarding bovine spongiform encephalopathy (mad cow disease). With all of the food recalls, fraudulent food labeling and other food scares (spinach, jalapenos, tomatoes, hamburger, peanuts, horsemeat), consumers are spending their dollars more diligently.

As the agriculture, livestock and food industry continues to mature and expand internationally, there is an increasing need to record, manage, report and audit information regarding the source, age, genetic background, animal treatment, nutrition, and other credence attributes for the benefit of producers, processors, distributors, retailers, consumers, and regulators. New governmental and industry regulations are changing rapidly. Technology, including radio frequency ID tags for livestock, and web-based systems facilitate the need for real-time data entry, reporting, and auditing.

Many of the world’s largest agriculture, beef and other livestock exporting countries, including Brazil, Argentina, and Australia, have established mandatory traceability and verification standards. Other countries have issued voluntary traceability and verification standards. Historically, the United States government had not established mandatory traceability standards until January 2011 when the Food Safety Modernization Act (FSMA) was signed into law by President Obama. FSMA represents the most sweeping reform of our food safety laws in more than 70 years. Additionally, new requirements for animal identification and traceability will become effective on March 11, 2013. This ruling solidifies the need for beef producers to participate in a national animal identification program.

Trade arrangements under the United States Department of Agriculture

The United States has trade arrangements with several nations to facilitate the exchange of agriculture, livestock and food products. USDA programs provide guidelines and structure to enable suppliers of agricultural products and services to assure customers of their ability to provide consistent quality products or services by having their processes audited by independent, third-party auditors using USDA approved methodologies and programs.

The USDA’s programs are applicable to a company’s entire program or certain portions of its programs where specified producer or product requirements are supported by a documented quality management system and the documented delivery processes are verified through an independent, third party audit. To operate an approved program, suppliers must submit a documented quality management system to the USDA and successfully pass a document review and an on-site audit.

Within the United States, these USDA programs are mostly voluntary. These programs are primarily useful in providing the industry with a process for demonstrating source, age, and other quality attributes as the product moves through the supply chain. In addition, compliance with the programs allows producers to verify claims such as “organic, non-hormone treated, gluten-free, or guaranteed tender.”

Export Markets/Programs

To market agriculture and livestock products outside of the United States, suppliers must comply with USDA trade arrangements and address the specified product requirements addressed in the USDA Export Verification (EV) Instructions specific to each country. Regardless of final export destination or specific Export Verification program requirements, US suppliers seeking to sell agriculture and livestock products must participate in a pre-approved program so as to have an approved means of verifying source, age, and other specific product requirements. Therefore, although the program is voluntary, it is mandatory to gain access to many export markets.

Mexico, Canada, South Korea, the Middle East, and Japan are the world’s largest export markets. To market agriculture and livestock products in these markets; beef, for example, is required to be sourced from cattle that are of a certain maximum age at the time of slaughter. The USDA’s program is the standard mechanism for verifying source and age for these export markets and, therefore, is a mandatory requirement for producers, packers, and distributors to export to these key markets.

Current Marketplace Opportunities

We believe the following marketplace opportunities will drive our business forward effectively increasing consumer demand for third party verification services:

●

U.S. beef has been largely absent from the European Union (EU) for the past 20+ years due to an EU ban on hormone-treated meat and meat products. In late 2009, the EU announced an annual duty-free quota of 20,000 metric tons for high-quality beef from cattle not treated with growth hormones (NHTC). In March 2012, the EU expanded the annual duty-free quota from 20,000 metric tons to 48,200 metric tons. NHTC requires third party verification, but with duty-free access lowering the cost of doing business in Europe, we believe that it offers significantly more potential for third party NHTC verification services and our product line, High Quality Beef verification services.

●

One-fourth of the world’s beef and nearly one-fifth of the world’s grain, milk and eggs are produced in the United States. With increased consumer consciousness, Americans are demanding to know where their food comes from and how they can support development of local and regional food systems. We believe that as consumers become better educated they will have more confidence in their food purchase decisions. To date, we have a major retailer, a very well-known restaurant, two major beef packers, a food service distributor and a major pork packer utilizing the Where Food Comes From® label. Consumer demand should accelerate the growth of our “Where Food Comes From®” labeling program.

●

The worldwide market for certified organic products is estimated at $59.4 billion in 2010. The U.S. market is estimated at $28.5 billion in 2010 and is expected to reach $42.5 billion by 2015. Increasing consumer demand for healthy, better-for-you products produced with sustainable agricultural practices is driving growth in the organic market. Additionally, specialty food-store chains, conventional grocery store chains and big box retailers are allocating more shelf space to organic products in order to meet the growing demand. Our acquisition of a 60% ownership investment in ICS creates a strategic transaction offering major participants in the food and agriculture industries a comprehensive range of verification services for the major food groups through a single platform.

●

In January 2011, the Food Safety Modernization Act (FSMA) was signed into law by President Obama. FSMA represents the most sweeping reform of our food safety laws in more than 70 years. It aims to ensure the U.S. food supply is safe by shifting the focus from responding to contamination to preventing it. On January 4, 2013, two major proposed FSMA rules regarding preventive controls in human food and produce safety were issued. The

proposed rules build on existing voluntary industry guidelines for food safety, which many producers, growers and others currently follow. The US Food and Drug Administration (FDA) expects to soon issue its proposed rule on importer foreign supplier verification; future proposed rules will address preventive controls for animal food, and accreditation of third-party auditors.

●

Effective March 11, 2013, the USDA will mandate the Animal Disease Traceability Rule primarily covering cattle 18 months of age or less. This ruling solidifies the need for beef producers to participate in a national animal identification program. This presents a significant opportunity for our business. As a result, we have been participating in an industry-led coalition to offer private industry solutions for this ruling.

Current Business Speculation for Source and Age Verified Product

On January 28, 2013, the Japanese government announced a change in its export requirements on US beef imports of cattle aged from below 21 months to 30 months or younger. To date, we still do not understand the specific requirements that will accompany this change; both in policy and in commercial trade negotiations.

Speculation about this change negatively impacted our source and age verification business beginning in the latter half of 2012, and we expect it to continue throughout 2013. Initially, we believe the change will most likely enable a significant increase in the amount of product qualifying for export to Japan and accordingly, this may negatively impact the premiums typically seen in the marketplace for source and age verified cattle.

Many Japanese retail and food service companies have already expressed their desire to maintain a verified-only product line to ensure a known source and a high quality eating experience. This alone will continue to drive added value for source and age-verified product. We continue to see growth in our NHTC and Verified Natural Beef (VNB) programs as domestic customers shift from source and age verification to NHTC and VNB. Additionally, we are seeing an increase in the number of “source verifications” requested in international markets. Although we cannot forecast the impact of the change in “age verifications,” we also cannot assume that Japan will change its requirement for source verification from US beef producers, especially considering that Japan has domestic traceability laws.

In summary, we know the inherent value of source and age verifications and the resulting peace of mind that is provided at the consumer level. We believe that the demand for verification, whether at the base level (source and age verification) or at a level that incorporates multiple credence factors (source and age with NHTC and VNB), will continue to grow as more consumers demand to know where their food comes from.

WHAT WE DO

We apply information technology to the agriculture, livestock and food industry by addressing the growing importance of marketing claims such as:

●

source of origin information

●

genetic background

●

animal treatment, animal health history, animal age, animal movements and nutrition

●

carbon credits

●

organic and other sustainable practices

●

other credence attributes

Our solutions ensure compliance with governmental and private standards related to food production. We provide assurance regarding those claims made that cannot be confirmed by visual inspection once the

product reaches the retail food case and is marketed to the consumer. We have developed a range of proprietary web-based applications, consulting methodologies, auditing processes, and other services to allow the agriculture, livestock and food industry to record, manage, report, and audit this information. Our solutions help our customers establish their own systems, meet government regulations, create their own premium brand identity, gain cost efficiencies and command a higher price for their product.

SALES

Our revenues are generated from sales of our identification, verification and certification solutions, consulting services, web-based development and hardware sales. We sell our products and services directly to customers at various levels in the agriculture, food and livestock supply chain. Our customers include some of the largest U.S. beef and pork packers, organic producers and processors, and specialty retail chains. In 2011, one customer generated approximately 12% of our total net revenue. No single customer generated more than 10% of total net revenue in 2012.

Third Party Verification Services

Some of the product attributes that we verify include:

●

Source (identification and traceability)

●

Source and Age

●

Region specific such as California, Nebraska, Colorado

●

No added hormones

●

USDA NeverEver3 Natural

●

Grass-fed

●

Flax-fed

●

Gluten-free

●

Organic

●

Humane handling

●

Global Animal Partnership 5-step Animal Welfare Rating™

●

Food Alliance

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Verified Green

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Beta-agonist free beef

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Private industry marketing claims for beef, pork and poultry

Our services are accredited by the following:

●

USDA Process Verified Program (“PVP”)

●

Global Food Safety Initiative (“GFSI”)

●

Global Animal Partnership (“GAP”)

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ISO Guide 65

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Farm Verified Organic® Certification

●

USDA Organic Certification – National Organic Program (“NOP”)

●

Canada Organic Certification – National Organic Regime (“COR”)

●

European Union Equivalency – EU 834/2007

●

Bio Suisse

●

Japan Agricultural Standard (“JAS”)

●

ICS Certified Gluten-Free (“ICS-GF”)

Most of our service offerings can be bundled to provide a “one-stop shop” for customers that have multiple levels of verification and certification needs, such as source verification and food safety certification.

We also offer consulting, program development and web-based development services on a customized basis to meet special customer requirements. For the years ended December 31, 2012 and 2011, our third party verification programs provided 82.3% and 78.7% of our total revenue, respectively.

Hardware Sales

In support of our third party verification service offerings, we offer hardware products (primarily identification cattle ear tags) to our customers. While these hardware products have lower profit margins than our proprietary offerings, they allow us to offer our customers a comprehensive solution. Approximately 15.4% and 19.9% of our total revenue was provided by the sale of hardware during the years ended December 31, 2012 and 2011, respectively.

Other Revenue – WhereFoodComesFrom ®

In March 2010, in response to consumers’ demand for increased transparency regarding the origins and safety of their food, we introduced our “WhereFoodComesFrom®” consumer labeling program. This program is a rigorous qualification protocol under which only those farmers, ranchers and processors who meet strict third-party verification requirements may display our distinctive brand. It is the first of its kind that directly connects the consumer with the food supply chain in a way that fosters confidence at the point of purchase. We believe that as consumers become better educated, they will have more confidence in their food purchase decisions.

All of our verification products that are source-verified qualify for our WhereFoodComesFrom® verification seal of approval. As a third-party verification service provider, we must review each individual producer or food company’s claim and system to ensure that 100 percent of the supply is managed through a third party verification program recognized by the USDA, ISO and/or another internationally recognized standards. In addition to building consumer confidence, our WhereFoodComesFrom® label gives producers and processors a way to enhance, differentiate and even protect their valuable brands.

This revenue stream primarily represents the licensing fees earned from our labeling program. The revenue source is still in its infancy, and we anticipate exponential growth in the future as more and more food producers continue to show interest in this product offering.

MARKETING

Our marketing strategy includes direct marketing, advertising, event sponsorship, and trade show participation. From a public relations perspective, our staff is frequently quoted in industry trade journals and requested as speakers at various industry events as subject matter experts on the topics of animal identification, traceability, branding, and the USDA QSA, EV and PVP programs. We maintain strong affiliations with breed associations, US Meat Export Federation, The National Meat Association, The National Cattlemen’s Beef Association, and Livestock Marketing Association.

In order to reach additional customers, we continually develop strategic marketing partnerships with leading companies in the industry with complementary abilities and products. We do not currently rely on any third party contracts with distributors, licenses or manufacturers in conducting our business.

We also use social media sites such as Facebook and Twitter to help promote our business, market our product offerings, and connect consumers with current topics in the agriculture, livestock and food industry.

COMPETITION

Of the approximately 775,000 independent suppliers of cattle in the United States, we estimate that only approximately 40,000 use some form of verification program. We currently provide tracking information for approximately 6,000 of the most significant independent suppliers which we believe supply greater than 50% of the beef and other livestock products available for export markets. Our key competitors for our SupplyVerified Program are: Trace Gains AgInfolink, Scientific Certification Systems, Validus Services, MicroBeef Technologies, Quality Assurance International and Sterling Solutions. We believe we differentiate ourselves from our competitors by providing better, more flexible solutions to all segments of the supply chain. We are also the market leader in the area of diversifying to the Non-Hormone Treated Cattle Verification Program and the USDA’s Never Ever 3 Verification Program.

In the organic market, we believe our key competitors are: Quality Assurance International, California Certified Organic Farmers, Oregon Tilth and Organic Crop Improvement Association. We believe we differentiate ourselves in the market place by offering a cost effective bundled service package of valuable and unique solutions, such as Food Alliance and Gluten Free certification.

SEASONALITY

Our business is subject to seasonal fluctuations. Significant portions of our revenues are typically realized during the second and third quarters of the fiscal year when the calf marketings are at their peak. Because of the seasonality of the business and our industry, results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

INTELLECTUAL PROPERTY

We create, own and maintain a variety of intellectual property assets that we believe are among our most valuable assets. Our intellectual property assets include patents and patent applications related to our innovations, products and services, trademarks related to our brands, products and services, and other property rights. We also have licensing arrangements when features from our programs are desirable to incorporate into either a new or an existing technology we offer. We seek to protect our intellectual property right assets through patent, copyright, trade secret, trademark and other laws of the United States and other countries, and through contractual provisions. Additional information regarding certain risks related to our intellectual property is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K.

EMPLOYEES

As of December 31, 2012, we had 35 employees, of which 20 are employed by our Colorado office and 15 are employed by our North Dakota office. Our future success is substantially dependent upon the performance of our key senior management personnel, as well as our ability to attract and retain highly qualified technical personnel. Additional information regarding certain risks related to our employees is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K.

AVAILABLE INFORMATION

Our corporate website is located at www.imiglobal.com. We make available free of charge on our investor relations website under “SEC Filings” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (SEC). Further, a copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC

maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov.

ITEM 1A.

RISK FACTORS

In addition to the other information included in this report and our other public filings and releases, the following factors should be considered when evaluating our business, financial condition, results of operations and prospects:

We operate in a highly competitive industry with a limited market characterized by changing technology, frequent introductions of new products, product enhancements, and evolving industry standards.

We compete with many other vendors of products and services designed for tracking cattle and other livestock and for herd management. Our competitors range from small start-up companies to multi-national firms. Our competitors may have significantly greater financial, technical and marketing resources. Competition is likely to intensify as current competitors expand their product offerings and as new companies enter the market. Increasing competition may result in reduced margins and the loss of market share. Our competitors may offer broader product lines or technologies that are more commercially attractive and gain greater market acceptance than our current or future products. Additionally, new technology may render our products obsolete.

The success of our business model depends on the broad acceptance of our technologies into markets that are continuing to develop as a result of the increasing focus on food safety and assurance.

We are currently benefiting from a slow but growing movement among U.S. and international beef and other livestock producers to source and age verify products. This emerging trend is fueled in part by consumers focus on food safety and assurance. However, we can offer no assurances that there will be market acceptance of our technologies. Furthermore, some of our primary target segments within the livestock and food industry are experiencing unpredictable economic conditions and are expected to continue to struggle with supply, trade and profitability issues in the near term. Although we believe that our products, if adopted on a wide-scale basis, would have a significant impact on improving the safety, quality and confidence in our nation’s food supply, our customers for these products historically have been very slow to change and reluctant to adopt new technologies and business practices.

Our business may be negatively impacted by international export market activities, including trade barriers to US beef and other livestock exports and customer acceptance of US beef and other livestock products.

In prior years, the Japanese and Korean beef and other livestock markets were closed to the U.S. as a result of mad cow disease in at least one animal in the United States. Currently, the Japanese and Korean markets are the largest beef and other livestock export markets for U.S. producers. Both markets require verification, which is important to the sale of our products. Because the U.S. market does not mandate verification, there is limited incentive for beef and other livestock producers to purchase our products. Therefore, international trade barriers and limited consumer acceptance of U.S. beef and other livestock products can significantly impair our sales and profitability.

In the event that market demand for beef and other livestock products declines, our customers may not be able to generate sufficient revenues to justify purchase of our verification solutions and consulting services.

Public attitudes towards beef and other livestock products may be influenced by claims that these products are unsafe for consumption or pose unknown health risks. Decreased demand for beef and other livestock products could have a material adverse effect on the operating results and financial condition of

our existing or prospective customers. If operating results of our customers are impaired, the resources that our customers can devote to building information systems for tracking cattle and other livestock and herd management would be reduced which in turn would limit purchases of our verification solutions and consulting services. Therefore, our ability to generate revenue is subject to the risks and uncertainties relating to the financial condition of our customers.

We look for opportunities to expand our presence in international markets in which we may have limited experience and inherently international operations are subject to increased risks which could harm our business, operating results and financial condition.

We continually seek to expand our product and service offerings in international markets. As we expand into new international markets, we will have only limited experience in marketing and operating our products and services in such markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets. Certain international markets may develop more slowly than domestic markets and our operations in international markets may not develop at a rate that supports our level of investment.

In addition to uncertainty about our ability to expand into international markets, there are certain risks inherent in doing business internationally, including:

●

trade barriers and changes in trade regulations;

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difficulties in developing, staffing and simultaneously managing a large number of varying foreign operations as a result of distance, language and cultural differences;

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stringent local labor laws and regulations;

●

longer payment cycles;

●

currency exchange rate fluctuations;

●

political or social unrest or economic instability;

●

import or export restrictions;

●

seasonal volatility in business activity;

●

risks related to government regulation or required compliance with local laws in certain jurisdictions, including those more fully described above; and

●

potentially adverse tax consequences.

One or more of these factors could harm our future international operations and consequently, could harm our brand, business, operating results and financial condition.

We face risks associated with growth and acquisitions.

As part of our business strategy, we regularly evaluate acquisition opportunities as a means of accelerating our growth and achieving our long-term strategic objectives. For example, in February 2012, we completed our acquisition of 60% of the outstanding stock of ICS. ICS represents an opportunity to extend the range of our existing programs and establish our capabilities in other major food groups, including poultry, grains, fruits and vegetables, dairy, packaged and processed goods.

The expansion of our operations, whether through acquisitions, development or internal growth, could divert management’s attention and could also cause us to incur substantial costs, including legal, professional and consulting fees. There can be no assurance that we will be able to identify, acquire, develop or profitably manage additional companies or operations or successfully integrate such companies or operations into our existing operations without substantial costs, delays or other problems.

Our future success depends upon our ability to obtain and enforce patents; prevent others from infringing on our patents, trademarks and other intellectual property rights; and operate without infringing upon the patents and proprietary rights of others.

We will be able to protect our intellectual property from unauthorized use of third parties only to the extent that it is covered by valid and enforceable patents and trademarks. Patent protection generally involves complex legal and factual issues and, therefore, the enforceability of patent rights cannot be predicted with certainty. Moreover, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. In the event that patents owned by us do not provide adequate protection, we may not be able to prevent competitors from offering substantially similar products and services.

Failure to protect our proprietary rights could seriously impair our competitive position.

In the event that third parties claim that our current or future products or services infringe upon their intellectual property, we may face litigation and be prevented from selling the products and services at issue. Infringement or other claims could be asserted or prosecuted against us in the future, and it is possible that past or future assertion or prosecutions could harm our business. Litigation either in defense of our intellectual property rights or in response to infringement claims made by others may be, both expensive and time consuming, which in turn would adversely affect our business.

Our future success depends to a significant degree upon the continued service of key senior management personnel, in particular, John and Leann Saunders.

Both John and Leann Saunders’ reputation and prominence in the field provide us with a strong competitive advantage. While they are currently bound by employment agreements, we can offer no assurance that John and or Leann Saunders will be able to continue to work for us in the event of an unforeseen accident, severe injury or major disease, or on a long-term basis. The loss of key personnel could have a material adverse effect on our business and operating results.

Because we are not presently subject to the same corporate governance standards as companies listed on registered stock exchanges or NASDAQ, our officers and Directors may have interests adverse to those of the Shareholders.

Registered stock exchanges and NASDAQ have enhanced corporate governance requirements that apply to issuers that list their securities on those exchanges. For example, we are not required to have any independent directors or to adopt a code of ethics. In certain circumstances, management may not have the same interests as the shareholders and conflicts of interest may arise. We do not presently have a policy to resolve conflicts of interest. Notwithstanding the exercise of their fiduciary duties as directors and executive officers and any other duties that they may have to us or our shareholders in general, these persons may have interests different than yours which could adversely affect your investment.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None

ITEM 2.

PROPERTIES

We lease approximately 3,100 square feet of office space in a one story office facility in Castle Rock, Colorado which is used as our corporate headquarters. Our lease expires in June 2015. Our rent for the facility in Castle Rock, Colorado is approximately $6,000 per month, which includes common area maintenance (CAM) charges.

We also own approximately ¾ acre on which a 2,300 square foot building leased by our ICS office is located in Medina, North Dakota. The North Dakota office is leased for a period of 5 years with an expiration date of March 1, 2018. One additional option to renew for a 5-year term exists and is deemed to automatically renew unless written notice is provided 60 days before the end of the term. This location pays a minimum monthly rental rate of approximately $150 plus all utilities, taxes and other expenses based on actual expenses to maintain the building.

ITEM 3.

LEGAL PROCEEDINGS

From time to time, we may become involved in various legal actions, administrative proceedings and claims in the ordinary course of business. We generally record losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable.

ICS is involved in a claim that is pending in the District Court of Lancaster County, Nebraska. The plaintiff in this claim alleges that ICS conspired with another party to deny the plaintiff organic certification. The plaintiff is seeking damages (an amount up to approximately $7.5 million) from the alleged difference in value of his crops if they had been certified organic versus the value of the crops as conventional grains. Written discovery has been completed, and ICS and the other defendant to this claim have filed motions for summary judgment seeking dismissal of plaintiff’s claims and an award for attorney’s fees. We believe this claim is without merit; however, we are not yet in a position to state an outcome of this matter with any certainty.

Although it is not possible to predict with certainty the outcome of this unresolved action, we do not believe, based on current knowledge, that this claim, or any legal proceeding or claim, is likely to have a material effect on our financial position, results of operations, or cash flows.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable

PART II

ITEM 5. MARKET FOR COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information for Common Stock

Since the inception of the public trading of our securities in November 2006 until June 2012, our common stock has been listed on the over-the-counter electronic bulletin board (“OTC:BB”) under the symbol “INMG.” In June 2012, we changed our stock ticker symbol to “WFCF” to better reflect our brand strategy and to raise awareness in the investor community. The following table sets forth the range of high and low bid prices over the past two years. The quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions.

	2012				2011
	High		Low		High		Low
First quarter	$	0.60	$	0.31	$	0.38	$	0.13
Second quarter	$	0.98	$	0.40	$	0.40	$	0.18
Third quarter	$	1.53	$	0.03	$	0.37	$	0.13
Fourth quarter	$	1.65	$	1.00	$	0.50	$	0.20

Stockholders

As of February 26, 2013, we estimate that there were 235 beneficial and actual owners of our Common Stock. A significant number of the outstanding shares of common stock which are beneficially owned by individuals and entities are registered in the name of Cede & Co. A nominee of The Depository Trust Company, Cede & Co. is a securities depository for banks and brokerage firms.

Dividends

We have not declared or paid any cash dividends on our common stock. We presently do not have plans to pay any cash dividends in the future.

Recent Sales of Unregistered Securities

On February 29, 2012, in connection with our acquisition of 60% of the outstanding shares of ICS, we issued 172,840 shares of our common stock valued at $0.45 per share, or approximately $77,800 in total.

The issuance of these shares of our common stock described above was pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended and related state private offering exemptions. All of the investors were Accredited Investors as defined in the Securities Act who took their shares for investments purposes without a view to distribution and had access to information concerning the company and its business prospects, as required by the Securities Act. In addition, there was no general solicitation or advertising for these shares. All certificates for these shares issued pursuant to Section 4(2) contain a restrictive legend. Finally, our stock transfer agent has been instructed not to transfer any of such shares, unless such shares are registered for resale or there is an exemption with respect to their transfer.

Issuer Purchases of Equity Securities

On January 7, 2008, we announced our intention to buy back up to one million shares of our common stock from the open market. Repurchased shares under the Stock Buyback Plan by year are as follows:

					Average
	Number of		Cost of		Cost per
For the year ended December 31,	Shares		Shares		Share
2008		57,200	$	16,124	$	0.28
2009		22,325		4,020	$	0.18
2010		171,031		27,273	$	0.16
2011		247,691		61,597	$	0.25
2012		15,000		12,280	$	0.82
Total		513,247	$	121,294	$	0.24

Our stock buyback plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. In the future, we may consider additional share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, and planned investment and financing needs.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These forwarding-looking statements include without limitation statements regarding our expectations and beliefs about the market and industry, our goals, plans, and expectations regarding our operations and properties and results, our intentions and strategies regarding future operations, acquisitions and sales of properties, our intentions and strategies regarding the formation of strategic relationships, our beliefs regarding the future success of our operations, our expectations and beliefs regarding competition, competitors, the basis of competition and our ability to compete, our beliefs and expectations regarding our ability to hire and retain personnel, our beliefs regarding period to period results of operations, our expectations regarding revenues, our expectations regarding future growth and financial performance, our beliefs and expectations regarding the adequacy of our facilities, and our beliefs and expectations regarding our financial position, ability to finance operations and growth and the amount of financing necessary to support operations. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this annual report on Form 10-K.

As used in this annual report on Form 10-K, unless the context otherwise requires, the terms “we,” “us,” “the Company,” “WFCF” and “IMI” refer to Where Food Comes From, Inc. and its subsidiary.

Business Overview

Where Food Comes From, Inc. is a leading provider of verification and communication solutions for the agriculture, livestock and food industry. We provide our owned and operated online products and services which specialize in identification and traceability, process/production-practice/supply verification, document control for United States Department of Agriculture (USDA) and other verification programs and third party auditing services. Our services ensure compliance with governmental and private

standards by providing transparency and value in food products for both producers and consumers world-wide.

Management’s Strategy

For several years, management focused its efforts on building a strong foundation to enhance profitability for the long term. Initially our efforts focused on our age and source verification services. Throughout 2009, we introduced a more robust offering of verification services. We also internally developed automated processes which improved our efficiency and reduced our employee headcount. As a direct result, total verification sales and hardware sales improved. We were able to provide more verification certifications (a multiple service offering) in a single audit but this type of service has marginal increases in revenue with declining profit margins as compared to our single service offerings. Interestingly enough, because our customers were seeing more profit per head from multiple verifications at a minimal increase in cost per verification service, they increased the number of cattle within each group audited. We benefitted from increased hardware sales which has higher profit margins due to our process automation.

In early 2009, we understood that all this work was necessary to build a solid foundation but we also recognized a “potential market saturation and decreasing profits dilemma” early on and began working toward a solution. Through our research and development, we learned that we needed to be on the cutting edge of this industry and that the most significant person to influence the food industry was the consumer. We were concerned about various food claims that the industry made without any third party verification. In response, we identified opportunities for horizontal and vertical integration. In addition to our current business structure, we knew we needed to develop a self-sustaining revenue stream with minimal management and labor costs, while simultaneously addressing food concerns near to our heart. We had built a company with strong credibility in the industry and we had the technical expertise to make our processes operate very efficiently. The opportunities that we identified in early 2009 are built upon the verification services we provide and the solid reputation we have built.

In early 2010, we began to see some of the fruits of our labor. We were able to connect food processors and packers to those suppliers that provided product verified for the specific credence attributes demanded, thereby generating a new revenue stream based upon coordination within the food supply chain. We also introduced the WhereFoodComesFrom® brand. Revenue generated from this program is based upon a similar supply chain sales model. Many long hours of research went into this project and currently we are working hard to market this program to the consumer. Research indicates that transparency in food production is becoming more and more important to consumers. We believe that the future growth of verification services will be achieved only through consumer awareness and demand. The WhereFoodComesFrom® brand is a labeling program that reconnects the consumer to the farmers and ranchers that produce the food. For the consumer, it is a seal of approval on a package or an individual product that provides assurance that those marketing claims are authentic and have been verified by an accredited, unbiased third party.

During 2010, management, along with the assistance of industry consulting experts, intentionally made the decision to invest heavily in marketing our services and our WhereFoodComesFrom® labeling program to build consumer awareness. Today, we still continue to invest heavily in marketing our verification services and our WhereFoodComesFrom® brand to build consumer awareness and demand through the use of videos, television exposure, word-of-mouth and the internet. We believe we are positioning ourselves to benefit significantly in 2013 and beyond, but, of course, no assurance can be given that this investment will generate future revenue nor can we determine for how long, if at all.

Acquisition of 60% of outstanding shares of ICS

As part of our business strategy, we regularly evaluate acquisition opportunities as a means of accelerating our growth and achieving our long-term strategic objectives. On February 29, 2012, we entered into a Purchase and Exchange Agreement (the “Purchase Agreement”), by and among IMI and International Certification Services, Inc. (“ICS”), and other shareholders as individually named in the Agreement (collectively the “Sellers”).

Pursuant to the Purchase Agreement, on February 29, 2012 (the “Closing”) the Company acquired 60% of the issued and outstanding common stock of ICS in exchange for aggregate consideration of approximately $427,800, which included $350,000 in cash and 172,840 shares of common stock of IMI valued at approximately $77,800, based upon the closing price of our stock on February 29, 2012, of $0.45 per share. The Purchase Agreement provides for 50% of the Shares to be held in escrow for a period of eighteen months to support any indemnification claims by us for breach of ICS representations, warranties and covenants under the Purchase Agreement. The Purchase Agreement also includes non-dilution provisions, and we have right of first refusal on the remaining 40% of the outstanding stock.

RESULTS OF OPERATIONS

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenues

Total revenues for the year ended December 31, 2012 increased 24.3% over the year ended December 31, 2011. We still continue to experience double-digit sales growth from year over year, and we believe this is significant performance in light of the current economic conditions severely impacting the food industry.

Service revenues include sales of our USVerified solutions and related consulting, program development and web-based development services. Service revenues for the year ended December 31, 2012 increased 30.0% compared to the year ended December 31, 2011. Included in our service revenues is approximately $974,000 attributable to ICS.

Speculation regarding Japanese government imposed age restrictions on US beef imports negatively impacted our source and age verification business by approximately 29% for the year ended December 31, 2012 compared to the 2011 period. However, our business is experiencing approximately 30% growth in our NHTC, Verified Natural Beef (VNB), and other verification programs. We are seeing our domestic customers shift from source and age verification to NHTC and VNB. We are also seeing an increase in the number of “source verifications” requested in international markets. Although we cannot forecast the impact of the aforementioned speculation upon “age verifications,” we also cannot assume that Japan will change its requirement for source verification from US beef producers, especially considering that Japan has domestic traceability laws. Additionally, movement within the US for a regulatory program to address Animal Disease Traceability domestically may prove to be a significant opportunity for our business.

Product sales are primarily sales of cattle identification ear tags. Product sales for the year ended December 31, 2012 decreased 4.0% compared to the year ended December 31, 2011. The decrease was due to decreased volume in the quantity of tags sold in connection with our Source and Age verification programs.

Other revenue primarily represents the fees earned from our WhereFoodComesFrom® labeling program. Other revenue for the year ended December 31, 2012 increased 106.6% compared to the year ended December 31, 2011. This revenue source is still in its infancy, and we anticipate exponential growth in the future as more and more food producers continue to show interest in this product offering.

Cost of Sales and Gross Margin

Cost of sales for the year ended December 31, 2012 were approximately $2,431,400 compared to $1,884,400 for the year ended December 31, 2011. Included in our cost of sales is approximately $499,700 attributable to ICS. Gross margin for 2012 decreased to 53.8% of revenues compared to 55.5% for 2011.

Our gross margins for 2012 are slightly declining compared to 2011, partially because ICS currently operates at a lower gross margin and due to shifts in our sales mix. Many of our customers are transitioning from verification of a single attribute to verification of multiple attributes performed in a single audit. A multiple attribute type of audit provides a slight increase in revenue but costs us more time to complete the audit, thereby resulting in lower gross margins as compared to our single service offerings. For a more detailed discussion regarding profitability, read “Management’s Strategy” above.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2012 were approximately $2,341,700, an increase of $669,900, or 40.1% over the year ended December 31, 2011. Included in our selling, general and administrative expenses is approximately $466,400 attributable to ICS.

Excluding ICS expenses, our selling, general and administrative expenses for the year ended December 31, 2012 increased approximately $203,400 over 2011. Approximately $30,000 was recorded as amortization expense related to the identifiable intangible assets acquired in the ICS acquisition, offset by a decrease of approximately $24,000 in annual depreciation expense. Another $123,000 of the increase was in salaries associated with two additional employees. One of these employees is dedicated solely to promoting WhereFoodComesFrom® and IMI via various marketing channels and social media sites, including Facebook and Twitter. The other employee is specifically dedicated to marketing our products within retail sales channels, and for building brand awareness. Also included in selling, general and administrative expenses for 2012, is approximately $24,000 in additional spending for consulting, marketing and advertising WhereFoodComesFrom®, $29,000 in accounting, advisory and legal fees specifically related to the acquisition of ICS, and approximately $13,000 in additional costs related to various mandates required of public companies. Additionally, we accrued $60,000 in contract settlement expenses associated with the termination of a joint venture agreement established in 2010. The purpose of the joint venture was to conduct business in Guatemala, Latin America, South America and Mexico. After two years, the joint venture failed at its attempts to develop the business. The settlement releases us from any further obligations under the agreement.

Income Tax Benefit

During the year ended December 31, 2012 and 2011, utilization of NOL carry forwards reduced our effective tax rate. For the year ended December 31, 2012, we recorded an income tax benefit of approximately $391,500. The income tax benefit included the effect of reversing the remainder of our valuation allowance that existed as of December 31, 2011 after concluding that the likelihood for a full realization of the benefits of our deferred tax assets is more likely than not.

Net Income and Per Share Information

As a result of the foregoing, net income attributable to WFCF shareholders for the year ended December 31, 2012 was approximately $870,400 or $0.04 per basic and diluted common share, compared to net income of $864,500 or $0.04 per basic and diluted common share for the year ended December 31, 2011. The benefit from income taxes that we recorded related to the reversal of a portion of our valuation allowance on our deferred tax assets had an impact of approximately $0.02 per share on a dilutive basis in 2012 and approximately $0.01 per share on a dilutive basis in 2011.

Liquidity and Capital Resources

At December 31, 2012, we had cash and cash equivalents of approximately $1,403,500 compared to approximately $969,000 of cash and cash equivalents at December 31, 2011. Our working capital at December 31, 2011 was $1,699,500 compared to approximately $1,523,400 at December 31, 2010.

Net cash provided by operating activities during 2012 was approximately $334,700 compared to net cash provided of $720,700 during the same period in 2011. Cash provided by operating activities is driven by our net income and adjusted by non-cash items. Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock based compensation expense, and a deferred tax benefit resulting from the reversal of the valuation allowance and recognition of our deferred tax assets. Fluctuations are primarily due to the timing of cash receipts and cash disbursements offset by operating performance.

Net cash provided by investing activities during 2012 was approximately $12,300 compared to cash used of $316,000 during 2011. Net cash provided in 2012 was due to proceeds of approximately $302,100 from the sale of marketable securities partially offset by the acquisition of 60% of the outstanding stock of ICS in which we paid $350,000 in cash less approximately $135,200 in cash acquired. Additionally, we spent approximately $73,900 towards property and equipment and $13,700 to renew our USDA Accreditation. Net cash used during 2011 was primarily attributable to net purchases of marketable equitable securities of approximately $298,600 in 2011, offset by capital expenditures of $12,200.

Net cash provided by financing activities during 2012 was approximately $87,500 compared to $51,200 in the 2011 period. Net cash provided in 2012 was primarily due to proceeds of approximately $145,900 from stock option exercises offset by net repayments towards notes payable and capital lease obligations of $46,200. During the 2011 period, we received $200,000 under our new SBA loan agreement offset by repayments of approximately $89,000 towards our notes payable and $61,600 in repurchases under our Stock Buyback program.

Historically, our growth has been funded through a combination of convertible debt from private investors and private placement offerings. We continually evaluate all funding options including additional offerings of our securities to private, public and institutional investors and other credit facilities as they become available.

The primary driver of our operating cash flow is our third-party verification solutions, specifically the gross margin generated from services provided. Therefore we focus on the elements of those operations including revenue growth and long term projects that ensure a steady stream of operating profits to enable us to meet our cash obligations. On a weekly basis we review the performance of each of our revenue streams focusing on third party verification solutions compared with prior periods and our operating plan. We believe that our various sources of capital, including cash flow from operating activities, overall improvement in our performance, and our ability to obtain additional financing are adequate to finance current operations as well as the repayment of current debt obligations. We are not aware of any other event or trend that would negatively affect our liquidity. In the event such a trend develops, we believe that there are sufficient financing avenues available to us and from our internal cash generating capabilities to adequately manage our ongoing business.

The culmination of all our efforts has brought significant opportunities to us including: increased investor confidence and renewed interest in our company, third-party interest in our expertise to develop and enhance websites, as well as the potential to develop business relationships with long term strategic partners. In keeping with our core business, we will continue to review our business model with a focus on profitability, long term capital solutions and the potential impact of acquisitions or divestitures, if such an opportunity arises.

Our plan for continued growth is primarily based upon acquisitions, as well as, intensifying our focus on international markets. We believe that there are significant growth opportunities available to us because often the only way to access various restrictions as imposed on international market imports/exports is via a quality verification program.

Debt Facility

On April 22, 2011, we entered into a U.S. Small Business Administration Note with Great Western Bank. The Note which matures on May 1, 2021 provides for $200,000 in additional working capital. The interest rate on the Note is at prime plus 2.5% and is adjusted quarterly. Principal and interest are payable monthly. The note can be prepaid without penalties and contains certain customary affirmative and negative covenants.

The loan agreement is secured by the accounts receivable, property and equipment, and intangible assets of the Company. The Note is further guaranteed by John and Leann Saunders, founders of the Company,

with a security interest in 3,000,000 shares of the Company’s common stock, which are personally owned by the Saunders.

Simultaneous with the closing of the new loan agreement with Great Western Bank, we amended the terms of our existing $300,000 in unsecured debt. The note is held by a major shareholder who is related to Pete Lapaseotes, a director of the Company. Modifications to the terms of the existing agreement include a reduction in the interest rate from 9% to 6% annually, as well as an extension of the maturity date from September 12, 2012 to March 31, 2014. Principal is due in full upon the maturity date; interest is payable quarterly.

ICS has a revolving line of credit (LOC) agreement which matures on April 4, 2014, and provides for $70,050 in working capital. The interest rate is at the bank index rate less 0.5% and is adjusted daily. Interest is calculated using a 360 day year. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only is due, with the principal balance due on maturity. The LOC is collateralized by all the business assets of ICS.

Off Balance Sheet Arrangements

As of December 31, 2012, we had no off-balance sheet arrangements of any type.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are discussed in Note 2 to our financial statements as set forth in Item 8 of this Form 10-K.

Stock-Based Compensation Expense

Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and the pre-vesting option forfeiture rate. We utilize the Black-Scholes option-pricing model to estimate the fair value of stock options. Under this pricing model, which incorporates ranges of assumptions for inputs, our assumptions are as follows:

●

Dividend yield is based on our historical and anticipated policy of not paying cash dividends.

●

Expected volatility assumptions were derived from our actual volatilities.

●

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant with maturity dates approximately equal to the expected life at the grant date.

●

The expected term of options represents the period of time that options granted are expected to be outstanding giving consideration to vesting schedules, based on historical exercise patterns, which we believe are representative of future behavior.

The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment.

There is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may differ from the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of our share-based awards is determined in accordance with GAAP and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 using an option-pricing model, the value calculated may not be indicative of the fair value observed in a willing buyer / willing seller market transaction.

Estimates of share-based compensation expenses do have an impact on our financial statements, but these expenses are based on the aforementioned option valuation model and will never result in the payment of cash by us. For this reason, and because we do not view share-based compensation as being related to our operational performance, we exclude estimated share-based compensation expense when internally evaluating our performance.

Income Taxes and Realization of Deferred Tax Assets

We compute income taxes using the asset and liability method. Under this method, deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income statement purposes using the enacted statutory rate in effect for the year these differences are expected to be taxable or deductible. Deferred income tax expense or benefit is based on the changes in the net deferred tax asset or liability from period to period. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. If we determine that a deferred tax asset could be realized in a greater or lesser amount than recorded, the asset’s recorded amount is adjusted and the income statement is either credited or charged, respectively, in the period during which the determination is made.

We reduce our deferred tax assets by a valuation allowance if we determine that it is more likely than not that some portion or all of these tax assets will not be realized. In making this determination, we consider various qualitative and quantitative factors, such as:

●

The level of historical taxable income and projections for future taxable income over periods in which the deferred tax assets would be deductible,

●

Accumulation of income (loss) before taxes utilizing a look-back period of three years.

●

Events within the industry,

●

The cyclical nature of our business,

●

The health of the economy,

●

Our future forecasts of taxable income, and

●

Historical trending.

The recognition of our net deferred income tax assets requires significant management judgment regarding the interpretation of applicable statutes, the status of various income tax audits, and our particular facts and circumstances. In the fourth quarter of 2011, after assessing the existing qualitative and quantitative data, including the wide-spread consensus that the economic climate was beginning to improve, we reduced our valuation allowance to $419,020. By the second quarter of 2012, we reversed the remaining portion of our valuation allowance after concluding the likelihood for a full realization of the benefits of our deferred tax assets is more likely than not.

applicable interest and penalties within the provision for income tax. Management believes there are no current uncertain tax positions that would result in an asset or liability being recognized in the accompanying financial statements. Interest and penalties on unrecognized tax benefits, if any, are recognized as a component of income tax expense.

Business Combinations

A component of our growth strategy has been to acquire businesses that complement our existing operations. We account for business combinations in accordance with the guidance for business combinations and related literature. Accordingly, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the date of purchase. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill.

In determining the fair values of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods including present value modeling and referenced market values (where available). Further, we make assumptions within certain valuation techniques including discount rates and timing of future cash flows. Valuations are performed by management or independent valuation specialists under management’s supervision, where appropriate. We believe that the estimated fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates.

Intangible Assets

Our intangible assets consist of a customer list, beneficial lease arrangement and trade name related to the acquisition of ICS, recorded at estimated fair value. It also consists of our trademark rights and the related costs incurred to obtain the trademark rights recorded at cost. These assets are subject to amortization using the straight-line method over the estimated useful lives of the respective assets, which range from two to eleven years. We review our intangible assets for impairment at least annually or whenever impairment indicators are determined to be present. If an impairment exists, the amount of impairment is measured as the excess of the carrying amount of the asset over its fair value as determined utilizing the estimated discounted future cash flows, or some other fair value measure, or the expected proceeds, net of costs to sell, upon sale of the asset. During 2012 we completed an impairment analysis, and based upon the work performed, we concluded that no impairment existed.

Goodwill

Goodwill relates to the acquisition of ICS. ICS is a reporting unit one level below our certification and verification services segment. We review goodwill for impairment annually in the fourth quarter, or more frequently if impairment indicators arise. Impairment indicators include (i) a significant decrease in the market value of an asset (ii) a significant change in the extent or manner in which an asset is used or a significant physical change in an asset, (iii) a significant adverse change in legal factors or in the business climate that could affect the value of an asset or an adverse action by a regulator, and (iv) a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing revenue. During 2012, we completed a goodwill impairment analysis, and based upon the work performed, we concluded that no impairment existed in our ICS reporting unit, and goodwill was not at risk of failing step one of the goodwill impariment test.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to our financial statements set forth in Item 8 of this Form 10-K for a detailed description of recent accounting pronouncements. We do not expect these recently issued accounting pronouncements to have a material impact on our results of operations, financial condition, or liquidity in future periods.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

		Page
Financial Statements:
Report of Independent Registered Public Accounting Firm		26
Consolidated Balance Sheets as of December 31, 2012 and 2011		27
Consolidated Statements of Income for the years ended December 31, 2012 and December 31, 2011		28
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012 and December 31, 2011		29
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and December 31, 2011		30
Consolidated Statements of Equity for the years ended December 31, 2012 and December 31, 2011		31
Notes to Financial Statements		32

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Where Food Comes From, Inc.:

We have audited the accompanying consolidated balance sheets of Where Food Comes From, Inc. and its subsidiary, International Certification Services, Inc. (“ICS”) (collectively, the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Where Food Comes From, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 3 to the consolidated financial statements, in February 2012, the Company acquired 60% of the issued and outstanding capital stock of ICS, Inc.

/s/ GHP Horwath, P.C.

Denver, Colorado

March 6, 2013

Where Food Comes From, Inc.
Consolidated Balance Sheets

	December 31,			December 31,
	2012			2011
Assets
Current assets:
Cash and cash equivalents	$	1,403,489		$	969,020
Accounts receivable, net		377,072			226,760
Investment in marketable securities		-			283,511
Prepaid expenses and other current assets		80,189			36,776
Deferred tax assets		242,944			224,350
Total current assets		2,103,694			1,740,417
Property and equipment, net		146,563			57,354
Intangible and other assets, net		303,810			9,205
Goodwill		532,997			-
Long-term deferred tax assets		277,177			-
Total assets	$	3,364,241		$	1,806,976

Liabilities and Equity
Current liabilities:
Accounts payable	$	134,913		$	148,384
Accrued expenses and other current liabilities		58,808			42,960
Customer deposits		27,478			-
Deferred revenue		139,022			-
Short-term debt and current portion of notes payable (Note 7)		22,873			25,644
Current portion of capital lease obligations		5,506			-
Total current liabilities		388,600			216,988
Capital lease obligations, net of current portion		14,981			-
Notes payable and other long-term debt (Note 7)		191,106			176,201
Notes payable, related party (Note 7)		200,000			250,000
Total liabilities		794,687			643,189

Commitments and contingencies (Note 13)

Equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued or outstanding		-			-
Common stock, $0.001 par value; 95,000,000 shares authorized;
21,837,046 (2012) and 21,049,006 (2011) shares issued, and
21,323,799 (2012) and 20,550,759 (2011) shares outstanding		21,837			21,049
Additional paid-in-capital		3,668,556			3,416,343
Treasury stock of 513,247 (2012) and 498,247 (2011) shares		(121,294	)		(109,014	)
Accumulated other comprehensive loss		-			(6,693	)
Accumulated deficit		(1,287,540	)		(2,157,898	)
Total Where Food Comes From, Inc. equity		2,281,559			1,163,787
Non-controlling interest		287,995			-
Total equity		2,569,554			1,163,787
Total liabilities and stockholders ’ equity	$	3,364,241		$	1,806,976

The accompanying notes are an integral part of these financial statements.

Where Food Comes From, Inc.
Consolidated Statements of Income

	Year to date ended
	December 31,			December 31,
	2012			2011
Revenues, net:
Service revenues	$	4,328,277		$	3,329,615
Product sales		809,084			843,098
Other revenue		124,006			60,036
Total net revenues		5,261,367			4,232,749
Costs of revenues:
Labor and other costs of services		1,844,655			1,282,342
Costs of products		586,767			602,049
Total costs of revenues		2,431,422			1,884,391
Gross profit		2,829,945			2,348,358
Selling, general and administrative expenses		2,341,665			1,671,835
Income from operations		488,280			676,523
Other expense (income):
Interest expense		25,929			29,539
Loss (gain) on sale of marketable securities		(11,892	)		13,597
Gain on disposal of property and equipment		(3,208	)		-
Other income, net		(4,239	)		(6,715	)
Income before income taxes		481,690			640,102
Income tax benefit		(391,478	)		(224,350	)
Net income		873,168			864,452
Net income attributable to non-controlling interest		(2,810	)		-
Net income attributable to Where Food Comes From, Inc.	$	870,358		$	864,452

Net income per share:
Basic	$	0.04		$	0.04
Diluted	$	0.04		$	0.04

Weighted average number of common shares outstanding:
Basic		20,943,966			20,674,739
Diluted		21,678,858			21,008,549

The accompanying notes are an integral part of these financial statements.

Where Food Comes From, Inc.
Consolidated Statements of Comprehensive Income

	Year ended
	December 31,			December 31,
	2012			2011

Net income	$	873,168		$	864,452
Reclassification adjustment for loss included in net income		6,693			-
Unrealized loss on marketable securities		-			(6,693	)
Comprehensive income		879,861			857,759
Comprehensive income attributable to non-controlling interest		(2,810	)		-
Comprehensive income attributable to Where Food Comes From, Inc.	$	877,051		$	857,759

The accompanying notes are an integral part of these financial statements.

Where Food Comes From, Inc.
Consolidated Statements of Cash Flows

	Year to date ended December 31,
	2012			2011
Operating activities:
Net income	$	873,168		$	864,452
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		94,111			74,880
Stock-based compensation expense		29,325			13,170
Deferred tax benefit		(391,638	)		(224,350	)
Bad debt expense		8,886			10,605
Loss (gain) on sale of marketable securities		(11,892	)		13,597
Gain on disposal of property and equipment		(3,208	)		-
Changes in operating assets and liabilities, net of effects from purchase of ICS:
Accounts receivable		(109,498	)		(14,885	)
Prepaid expenses and other current assets		(22,000	)		(2,196	)
Accounts payable		(33,953	)		(23,940	)
Accrued expenses and other current liabilities		1,379			9,352
Deferred revenue		(99,966	)		-
Net cash provided by operating activities		334,714			720,685

Investing activities:
Acquisition of International Certification Services, Inc., net of cash acquired		(214,774	)		-
Purchases of marketable securities		-			(429,399	)
Proceeds from sale of marketable securities		302,096			125,598
Purchases of property and equipment		(73,876	)		(12,171	)
Proceeds from sale of property and equipment		12,519			-
Purchase of long-term USDA accreditation		(13,664	)		-
Net cash provided by (used in) investing activities		12,301			(315,972	)

Financing activities:
Proceeds from notes payable		37,407			200,000
Repayments of notes payable		(75,271	)		(88,972	)
Repayments of capital lease obligations		(8,300	)		-
Proceeds from stock option exercise		145,898			1,800
Stock repurchase under Buyback Program		(12,280	)		(61,597	)
Net cash provided by financing activities		87,454			51,231
Net increase in cash and cash equivalents		434,469			455,944
Cash and cash equivalents at beginning of year		969,020			513,076
Cash and cash equivalents at end of year	$	1,403,489		$	969,020

The accompanying notes are an integral part of these financial statements.

Where Food Comes From, Inc.
Consolidated Statements of Equity
Years ended December 31, 2012 and 2011

	Integrated Management Information, Inc.
					Additional					Other
	Common Stock				Paid-in		Treasury			Comprehensive			Accumulated			Non-controlling
	Shares		Amount		Capital		Stock			(Loss) Gain			Deficit			Interest		Total
Balance at January 1, 2011	20,788,450		$	21,039	$	3,401,383	$	(47,417	)	$	-		$	(3,022,350	)	$	-	$	352,655

Stock-based compensation expense	-			-		13,170		-			-			-			-		13,170
Stock repurchase on the open market	(247,691	)		-		-		(61,597	)		-			-			-		(61,597	)
Issuance of common shares upon exercise of options	10,000			10		1,790		-			-			-			-		1,800
Unrealized loss on marketable securities	-			-		-		-			(6,693	)		-			-		(6,693	)
Net income	-			-		-		-			-			864,452			-		864,452
Balance at December 31, 2011	20,550,759			21,049		3,416,343		(109,014	)		(6,693	)		(2,157,898	)		-		1,163,787
Acquisition of International Certification Services, Inc.:
Shares issued	172,840			173		77,605		-			-			-			-		77,778
Non-controlling interest	-			-		-		-			-			-			285,185		285,185
Stock-based compensation expense	-			-		29,325		-			-			-			-		29,325
Stock repurchase on the open market	(15,000	)		-		-		(12,280	)		-			-			-		(12,280	)
Issuance of common shares upon exercise of options	615,200			615		145,283		-			-			-			-		145,898
Reclassification adjustment for losses included in net income	-			-		-		-			6,693			-			-		6,693
Net income	-			-		-		-			-			870,358			2,810		873,168
Balance at December 31, 2012	21,323,799		$	21,837	$	3,668,556	$	(121,294	)	$	-		$	(1,287,540	)	$	287,995	$	2,569,554

The accompanying notes are an integral part of these financial statements.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Note 1 - The Company and Basis of Presentation

Business Overview

Where Food Comes From, Inc. is a Colorado corporation based in Castle Rock, Colorado (the “Company,” “our,” “we,” or “us”). We provide verification and certification solutions for the agriculture, livestock and food industry. Most of our customers are located throughout the United States.

In December 2012, we changed our corporate name from Integrated Management Information, Inc. (“IMI”) to Where Food Comes From, Inc. to better reflect our brand strategy and to raise awareness in the investor community.

On February 29, 2012, we completed an acquisition of a 60% ownership investment in a North Dakota company, International Certification Services, Inc. (“ICS”) (Note 3). This acquisition has been accounted for using the acquisition method of accounting and, accordingly, its results are included in the Company’s consolidated financial statements from the date of acquisition.

With the acquisition of ICS, we began aggregating operations into one reportable segment: Certification and Verification Services. The factors considered in determining this aggregated reporting segment include the economic similarity of the businesses, the nature of services provided, production processes, types of customers and distribution methods. The Company’s chief operating decision maker (the Company’s CEO) allocates resources and assesses the performance of its Certification and Verification Services activities as one segment. The Company also has an operating licensing segment which does not currently meet the quantitative threshold to be considered a reporting segment.

Basis of Presentation

Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues, costs and expenses during the reporting period. Actual results could differ from the estimates.

The accompanying consolidated financial statements includes the results of operations, financial position and cash flows of the Company and its majority owned subsidiary ICS, and all intecompany balance have been eliminated in consolidation.

Note 2 - Summary of Significant Accounting Policies

Cash and Cash Equivalents

All cash and short-term investments with original maturities of three months or less are considered cash and cash equivalents, since they are readily convertible to cash. Amounts in-transit from credit card processors are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. We place our cash with high quality financial institutions. At times, cash balances may exceed the FDIC insurance limit, however; we have not experienced any losses related to balances that exceed such FDIC insurance limits, and we believe our credit risk is minimal.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Revenue Recognition

We offer a range of products and services to deploy and maintain identification, traceability, and verification systems and to facilitate customers’ participation in and compliance with USDA’s Quality System Assessment, Process Verification and Export Verification Programs. We generate revenue primarily from the sale of our verification solutions, consulting services and hardware sales. We sell our products and services directly to customers at various levels in the livestock supply chain.

Revenue is recognized when persuasive evidence of an agreement with the customer exists, delivery has occurred or services have been provided, the sales price is fixed or determinable, collectability is reasonably assured, and risk of loss and title have transferred to the customer.

In 2011, one customer generated approximately 12% of our total net revenue. No single customer generated more than 10% of total net revenue in 2012.

Service revenues primarily consist of fees charged for verification audits and other verification services that the Company performs for customers. Revenue from verification audits is recognized upon completion of the audits. Contracts for these services are cancelable only for non-performance.

Deferred revenue represents payments received in advance from our customers for annual customer support services not yet performed as of December 31, 2012, and revenue is recognized as services are performed, generally over one year.

Customer deposits represent down-payments made in advance of a verification audit to be performed for a customer, and deposits are applied to the customer’s accounts when invoiced.

Revenues under contracts for consulting and website development are recognized when completed (for short-term projects). On occasion, we may enter into long-term projects, for which we use the percentage of completion method. No such long-term projects occurred during 2012 and 2011.

Product sales are primarily generated from the sale of cattle identification ear tags. Revenue is recognized when goods are shipped and after title has transferred to the customer.

Other revenue primarily represents the fees earned from our “WhereFoodComesFrom®” labeling program. Revenue is recognized when our customer, who has been granted a right to use our WhereFoodComesFrom® label, places this label on their product and ships their product. Revenue is billed based on pounds of product shipped.

Generally, we do not provide right of return or warranty on product sales or services performed.

Accounts Receivable and Allowance for Doubtful Accounts

The majority of our receivables are due from trade customers. Credit is extended based on our evaluation of the customer’s financial condition and generally, collateral is not required. Accounts receivable are due approximately 30 days from the invoice date and are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts receivable that are outstanding longer than the contractual payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss and payment history, the customer’s current ability to pay its obligations to us and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

subsequently received on such receivables are credited to the allowance for doubtful accounts. The allowance for doubtful accounts was approximately $16,200 and $7,000 at December 31, 2012 and 2011, respectively.

One customer accounted for 10% of our outstanding accounts receivable balance at December 31, 2012. No single customer accounted for greater than 10% of our accounts receivable balances at December 31, 2011.

Cost of Revenues

Cost of revenues includes the cost of products sold, which consists of livestock ear tags used in connection with the US Verified Source and Age Verification programs. Salaries and related fringe benefits directly associated with our verification services are allocated to cost of revenues.

Livestock identification ear tags sold in connection with our verification offerings are purchased primarily from one supplier. However, there are numerous other companies which manufacture and market such ear tags.

Investment in Marketable Securities

We classify our investments in marketable securities as available-for-sale securities and account for the investments at fair value. Changes in the fair value of these securities are recognized as a component of accumulated other comprehensive income (loss) within equity on the balance sheet. Realized gains or losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are determined by specific identification of the cost basis of each security and are reported on the statement of operations. We follow a conservative investment strategy of optimizing liquidity and protecting principal. We invest primarily in high credit quality equity securities, both in mutual funds and individual corporate stocks, and all investments are traded in active markets (Note 4). We do not utilize derivative financial instruments to manage interest rate risk.

At December 31, 2012, we did not have any investments in marketable securities.

Fair Value Measurements

The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short maturities. The amounts shown for short-term debt and notes payable also approximate fair value because current interest rates and terms offered to us for similar debt are substantially the same. Our investments in marketable securities at December 31, 2011 consist of equity securities classified as available-for-sale and are recorded at fair value on a recurring basis.

Fair value accounting guidance defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements, for both financial and non-financial assets. It also establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:

●

Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

●

Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.

●

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Our investments in available-for-sale marketable securities at December 31, 2012 include equity mutual funds, exchange-traded funds and individual corporate equity securities. For these securities, we used quoted prices in active markets for identical assets to determine their fair value, thus they are considered to be Level 1 instruments under the fair value hierarchy. The method described may produce a fair value calculation that may not be indicative of net realizable value of future fair values. Although we believe our valuation method is appropriate, the use of a different methodology or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets. Land is not depreciated. Buildings are depreciated over 20 years. All other property and equipment have depreciable lives which range from one to seven years.

Intangible Assets

Impairment of Long-Lived Assets

We review all of our long-lived assets (including intangible assets) for impairment at least annually or whenever impairment indicators are determined to be present. If an impairment exists, the amount of impairment is measured as the excess of the carrying amount of the asset over its fair value as determined utilizing the estimated discounted future cash flows, or some other fair value measure, or the expected proceeds, net of costs to sell, upon sale of the asset.

Goodwill

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

performed a goodwill impairment analysis, and based upon the work performed, we concluded that no impairment existed at December 31, 2012, in our ICS reporting unit and goodwill was not at risk of failing step one of the goodwill impairment test.

Research and Development, Software Development Costs, and Internal Use Software Development Costs

Research and development costs are charged to operations as incurred. We did not incur any research and development expense in 2012 or 2011.

Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable. For products where proven technology exists, this may occur very early in the development cycle. Factors we consider in determining when technological feasibility has been established include (i) whether a proven technology exists; (ii) the quality and experience levels of the individuals developing the software; (iii) whether the software is similar to previously developed software which has used the same or similar technology; and (iv) whether the software is being developed with a proven underlying engine. Technological feasibility is evaluated on a product-by-product basis. Capitalized costs for those products that are cancelled or abandoned are charged immediately to cost of sales. The recoverability of capitalized software development costs is evaluated on the expected performance of the specific products for which the costs relate.

Internal use software development costs represent the capitalization of certain external and internal computer software costs incurred during the application development stage. The application development stage is characterized by software design and configuration activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality.

Website software development costs related to certain planning and training costs incurred in the development of website software are expensed as incurred, while application development stage costs are capitalized.

Prior to 2011, we capitalized certain external and internal use software and website development costs totaling $183,385. The estimated useful life of costs capitalized is evaluated for each specific project and ranges from one to three years. During 2012 and 2011, the amortization of capitalized costs totaled approximately $24,000 and $53,200, respectively. Capitalized costs are included in property and equipment, net.

Advertising Expenses

Advertising costs are expensed as incurred. The total advertising expenses included in the statement of operations for the years ended December 31, 2012 and 2011, were approximately $70,200 and $61,500, respectively.

Income Taxes

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

carryforwards. If we determine that a deferred tax asset could be realized in a greater or lesser amount than recorded, the asset’s recorded amount is adjusted and the income statement is either credited or charged, respectively, in the period during which the determination is made.

●

The level of historical taxable income and projections for future taxable income over periods in which the deferred tax assets would be deductible,

●

Accumulation of income (loss) before taxes utilizing a look-back period of three years.

●

Events within the industry,

●

The cyclical nature of our business,

●

The health of the economy,

●

Our future forecasts of taxable income, and

●

Historical trending.

We recognize the tax benefit from an uncertain tax position when we determine that it is more-likely-than-not that the position would be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If we derecognize an uncertain tax position, our policy is to record any applicable interest and penalties within the provision for income tax. Management believes there are no current uncertain tax positions that would result in an asset or liability being recognized in the accompanying financial statements. Interest and penalties on unrecognized tax benefits, if any, are recognized as a component of income tax expense.

We file income tax returns in the US federal jurisdiction and various state jurisdictions. We are no longer subject to US federal tax examination for years beginning before January 1, 2009 and the state tax returns that remain subject to examination range from December 31, 2008 through the years ended December 31, 2012.

Stock-Based Compensation

The fair value of stock options is estimated using the Black-Scholes option-pricing model, which incorporates ranges of assumptions for inputs. Our assumptions are as follows:

●

Dividend yield is based on our historical and anticipated policy of not paying cash dividends.

●

Expected volatility assumptions were derived from our actual volatilities.

●

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant with maturity dates approximately equal to the expected life at the grant date.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

●

Our stock-based compensation cost for the years ended December 31, 2012 and 2011, was approximately $29,300 and $13,200, respectively, and has been included in income from operations.

The fair value of stock options granted during 2012 and 2011 (Note 10) was estimated using the following assumptions:

	Years ended December 31,
	2012	2011

Stock options granted	100,000 shares	220,000 shares
Expected life of options from date of grant	8 years	8 years
Risk free interest rate	2.56%	2.26%
Expected volatility	212.5%	229.6%
Assumed dividend yield	0%	0%

As of December 31, 2012, total unrecognized stock-based compensation cost related to non-vested awards granted under our option plans, and expected periods of recognition, are as follows:


For the year ending
December 31,
2013	$	55,818
2014		42,639
2015		26,495
	$	124,952

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend fair value disclosure requirements. The updated guidance requires separate disclosures of transfers into and out of Levels 1 and 2, more detailed reconciliations of Level 3 recurring fair value measurements on a gross basis, fair value information by class of assets and liabilities, and descriptions of valuation techniques and inputs for Level 2 and Level 3 measurements. We have adopted the disclosure requirements of the new guidance. The adoption of this new guidance did not have a material impact on our financial position, results of operations or cash flows. In May 2011, the FASB issued guidance further amending the fair value measurement and disclosure requirements. The guidance requires the disclosure of quantitative information about unobservable inputs, a description of the valuation processes used, and a qualitative discussion around the sensitivity of the measurements. This guidance was effective for our Company on January 1, 2012. The adoption of this new guidance also did not have a material impact on our financial position, results of operations or cash flows.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

In June 2011, the FASB issued guidance that revises the manner in which entities present comprehensive income in their financial statements. The guidance requires entities to report the components of comprehensive income in either a single, continuous statement or two separate but consecutive statements. The Company adopted this guidance on January 1, 2012, without material impact on our financial position, results of operations or cash flows.

In September 2011, the FASB issued guidance that simplifies how entities test goodwill for impairment and permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance was effective for our Company on January 1, 2012. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

We have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.

Note 3 - Acquisition of 60% of outstanding shares of ICS

On February 29, 2012, we entered into a Purchase and Exchange Agreement (the “Purchase Agreement”), by and among the Company and ICS, and other shareholders as individually named in the Agreement (collectively the “Sellers”).

Pursuant to the Purchase Agreement, on February 29, 2012 (the “Acquisition Date”), the Company acquired 60% of the issued and outstanding common stock of ICS in exchange for aggregate consideration of approximately $427,800, which included $350,000 in cash and 172,840 shares of common stock of the Company valued at approximately $77,800, based upon the closing price of our common stock on February 29, 2012, of $0.45 per share. The Purchase Agreement provides for 50% of the Shares to be held in escrow for a period of eighteen months to support any indemnification claims by us for breach of ICS representations, warranties and covenants under the Purchase Agreement. The Purchase Agreement also includes non-dilution provisions, and we have right of first refusal on the remaining 40% of the outstanding stock. The transaction was accounted for using the acquisition method of accounting.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

The following table summarizes the estimated provisional fair values of the assets acquired and liabilities assumed based on information that was available at the Acquisition Date. Measurement period adjustments were completed in 2012 and reflect new information obtained about facts and circumstances that existed as of the Acquisition Date. Accordingly, the carrying amounts were retrospectively adjusted as of February 29, 2012. The impact of the retrospective adjustments was not material to the Company’s results of operations or cash flows for the period from the Acquisition Date through December 31, 2012.

	Feb 29, 2012					Feb 29, 2012
	(As reported)			Adjustments		(As adjusted)
Cash	$	135,200				$	135,200
Accounts receivable		49,700					49,700
Prepaid expenses and other current assets		21,000					21,000
Deferred tax assets		21,400					21,400
Property and equipment		60,600					60,600
Other assets		400					400
Accounts payable		(20,500	)				(20,500	)
Accrued expenses		(12,500	)				(12,500	)
Customer deposits		(29,400	)				(29,400	)
Deferred revenue		(239,000	)				(239,000	)
Capital lease obligation		(6,500	)				(6,500	)
Deferred tax liability		-		(117,197	)		(117,197	)
Identifiable intangible assets:		355,000		(355,000	)		-
Customer lists		-		150,300			150,300
Beneficial lease arrangement		-		120,200			120,200
Tradename		-		46,300			46,300
Goodwill		377,600		155,397			532,997
Total fair value		713,000					713,000
Fair value of non-controlling interest		(285,200	)				(285,200	)
Total consideration	$	427,800				$	427,800

On the acquisition date, the fair value of the non-controlling interest was estimated to be $285,200. This amount was based upon the gross consideration that would have been paid assuming 100% of the outstanding stock had been acquired. At December 31, 2012, the weighted average remaining lives of the identified intangible assets is 8.3 years.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

From the Acquisition Date through December 31, 2012, ICS revenues and net income were approximately $978,100 and $7,025, respectively. The following unaudited pro forma information presents the results of operations for the years ended December 31, 2012 and 2011, as if the acquisition of ICS had occurred on January 1, 2012 and 2011.

	Unaudited
	December 31,		December 31,
	2012		2011
Total revenue	$	5,433,900	$	5,396,300
Net income	$	847,800	$	836,600
Basic and diluted earnings per share	$	0.04	$	0.04

Included in the pro forma information for the year ended December 31, 2012, is approximately $50,500 in accounting, advisory and legal fees incurred related to the acquisition of ICS.

Note 4 – Investments in Marketable Securities

The following table summarizes our investments in marketable securities at December 31, 2011:

	December 31, 2011
	Gross		Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Equity securities	$	224,012	$	6,189	$	(9,884	)	$	220,317
Mutual funds		61,000		-		(2,998	)		58,002
Uninvested cash		5,192		-		-			5,192
Investment in marketable securities	$	290,204	$	6,189	$	(12,882	)	$	283,511

There were no marketable securities that had gross unrealized losses greater than twelve months. At December 31, 2011, the fair value of equity securities and mutual funds in loss positions were approximately $158,800 and $58,000, respectively.

During the third and fourth quarters of 2012, we sold our investments in marketable securities and reinvested the cash in money market accounts to be used for operations and potential acquisitions. A gain from the sale of marketable securities of $11,892 was recognized during 2012. The gain was recorded in other income on the statement of operations.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Note 5 - Property and Equipment

The major categories of property and equipment are as follows:

	December 31,
	2012		2011

Automobiles	$	47,397	$	39,946
Furniture and office equipment		158,491		53,709
Software and tools		205,218		13,988
Website development and other enhancements		183,385		183,385
Building and leasehold improvements		48,747
Land		2,436		-
		645,674		291,028
Less accumulated depreciation		499,111		233,674
Property and equipment, net	$	146,563	$	57,354

Depreciation expense for the years ended December 31, 2012 and 2011 was approximately $58,300 and $69,400, respectively.

Note 6 – Intangible Assets

The following table summarizes our intangibles assets subject to amortization as of December 31:


					Estimated
	2012		2011		Useful life

Tradenames and Trademarks	$	64,307	$	18,007	2.5 - 8.0 years
National Organic Program Accreditation		13,663		-	5.0 years
Customer Relationships		150,300		-	8.0 years
Beneficial Lease Arrangement		120,200		-	11.0 years
		348,470		18,007
Less accumulated amortization		44,660		8,802
Intangible Assets, net	$	303,810	$	9,205

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Amortization expense for the years ended December 31, 2012 and 2011 was approximately $35,900 and $5,500, respectively. Future scheduled amortization of these intangible assets is as follows:

Fiscal year ending December 31:

2013	$	40,136
2014		40,136
2015		39,186
2016		38,235
2017		36,413
Thereafter		109,704
	$	303,810

Note 7 - Notes Payable

Notes payable consist of the following:

	December 31,
	2012		2011

Equipment Note Payable	$	37,407	$	11,630
Lapaesotes Note Payable - Related Party		200,000		250,000
Great Western Bank SBA Loan		176,572		190,215
		413,979		451,845
Less current portion of notes payable and other long-term debt		22,873		25,644
Notes payable and other long-term debt	$	391,106	$	426,201

Equipment Note Payable

In 2009, we issued a note payable in the amount of $35,963 for the purchase of a vehicle. Interest and principal payments were due in equal monthly installments of $870 over four years beginning March 17, 2009. This note bears an interest rate of 7.4% per annum and is collateralized by the vehicle. In December 2012, we paid the outstanding balance in full and traded in the vehicle towards the purchase of another vehicle. Additionally, we entered into a new note payable for $37,407 with interest and principal payments due in equal monthly installments of $715 over five years beginning January 2013. This note bears an interest rate of 5.5% per annum and is collateralized by the vehicle.

Lapaseotes Notes Payable – Related Party

In September 2007, we obtained $300,000 in unsecured debt financing. The notes are held by a major shareholder who is related to Mr. Lapaseotes, a member of our Board of Directors. Principal is due in full upon the maturity date; interest is payable quarterly. In April 2012, we paid an additional $50,000 towards the principal.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

In April 2011, modifications to the terms of the existing agreement were completed. Such modifications included a reduction in the interest rate from 9% to 6% annually, as well as an extension of the maturity date from September 12, 2012 to March 31, 2014. We applied the 10% significance test in accordance with GAAP to determine if the original debt should be accounted for as an extinguishment. The results were less than 10% and therefore the original debt has not been accounted for as an extinguishment.

Great Western Bank SBA Loan

On April 22, 2011, we entered into a U.S. Small Business Administration (“SBA”) Note with Great Western Bank. This note, which matures on May 1, 2021, provides for $200,000 in additional working capital. The interest rate is at prime plus 2.5% and is adjusted quarterly. Principal and interest are payable monthly. As of December 31, 2012, the effective interest rate is 5.75%. The note can be prepaid without penalties and contains certain customary affirmative and negative covenants.

The loan agreement is collateralized by the accounts receivable, property and equipment, and intangible assets of the Company. The note is further guaranteed by John and Leann Saunders, significant shareholders, officers and members of the Company’s Board of Directors, with a security interest in 3,000,000 shares of the Company’s common stock, which are personally owned by the Saunders.

ICS Revolving Line of Credit

ICS has a revolving line of credit (“LOC”) agreement which matures on April 4, 2014, and provides for $70,050 in working capital. The interest rate is at the bank index rate less 0.5% and is adjusted daily. Interest is calculated using a 360 day year. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only is due, with the principal balance due on maturity. As of December 31, 2012, the effective interest rate is 5.75%. The LOC is collateralized by all the business assets of ICS. As of the date of acquisition and through December 31, 2012, ICS had no amounts outstanding under this LOC.

Our obligations under our notes payable for the next five years and thereafter, as of December 31, 2012, are as follows:

Fiscal year ending December 31:

2013	$	22,873
2014		224,782
2015		26,229
2016		27,741
2017		29,381
Thereafter		82,973
	$	413,979

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Note 8 - Income Taxes

The reconciliation of income taxes calculated at the statutory rates to our effective tax rate is as follows:

	December 31,
	2012			2011
Expected tax expense	$	165,146		$	222,219
State tax provision, net		14,572			19,047
Permanent differences		11,240			3,129
Stock-based compensation adjustment and other		(131,683	)		(58,765	)
Change in valuation allowance		(419,020	)		(388,586	)
Other, net		(31,733	)		(21,394	)
Total provision for taxes (deferred)	$	(391,478	)	$	(224,350	)

Deferred federal tax benefit for 2012 and 2011 was $359,737 and $206,160, respectively. Deferred state tax benefit for 2012 and 2011 was $31,741 and $18,190, respectively.

The income tax effects of temporary differences that give rise to significant portions of deferred tax assets as of December 31, 2012 and 2011 are as follows:


	December 31,
	2012			2011

Deferred tax assets, current:
Net operating loss carryforwards of the Company	$	219,820		$	636,982
Accruals, stock-based compensation and other		23,124			6,388
Less valuation allowance		-			(419,020	)
Deferred tax assets, current		242,944			224,350

Deferred tax assets (liabilities), non-current:
Net operating loss carryforwards of the Company		383,447			-
Intangibles related to acquisition of ICS		(106,270	)		-
Deferred tax assets, non-current		277,177			-

Net deferred tax assets	$	520,121		$	224,350

As of December 31, 2012, our net operating loss carryforwards for U.S. federal income tax purposes were approximately $1.6 million, and were subject to the following expiration schedule:

Net operating loss incurred:	Amount		Expiration dates:
December 31, 2006	$	1,264,933	December 31, 2026
December 31, 2007		365,518	December 31, 2027
Total tax carryforwards	$	1,630,457

Our unused net operating loss carryforwards may be applied against future taxable income.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Note 9 – Stock Buyback Plan

On January 7, 2008, we announced our intention to buy back up to one million shares of our common stock from the open market at the quoted market price on the date of repurchase. Repurchased shares under the Stock Buyback Plan by year are as follows:

For the year ended December 31,	Number of Shares		Cost of Shares		Average Cost per Share

2008		57,200	$	16,124	$	0.28
2009		22,325		4,020	$	0.18
2010		171,031		27,273	$	0.16
2011		247,691		61,597	$	0.25
2012		15,000		12,280	$	0.82
Total		513,247	$	121,294	$	0.24

The repurchased shares are recorded as part of treasury stock and are accounted for under the cost method.

Note 10 - Stock Option and Warrant Plans

2006 Equity Incentive Plan

The 2006 Equity Incentive Plan (the “Plan”) provides for the issuance of stock-based awards to employees, officers, directors and consultants. The Plan permits the granting of stock awards and stock options. The vesting of stock-based awards is generally subject to meeting certain performance based objectives, the passage of time or a combination of both, and continued employment through the vesting period. The Plan provides for the issuance of a maximum of 3,000,000 shares of our common stock, of which 471,500 shares were still available for issuance as of December 31, 2012.

Stock Option Activity

On April 1, 2011, the Board of Directors granted 220,000 options to purchase shares of common stock at a strike price of $0.24 per share, vesting over 3 years, with an expiration date of April 1, 2021.

On June 17, 2011, Dr. Gary Smith, a member of the Board of Directors, exercised his options to purchase 10,000 shares of common stock at a strike price of $0.18 per share.

On September 18, 2012, the Board of Directors granted 100,000 options to purchase shares of common stock at a strike price of $1.15 per share, vesting over 3 years, with an expiration date of September 18, 2022.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

During 2012, employees have exercised options to purchase 615,200 shares of common stock at strike prices ranging from $0.10 - $0.38 per share.

Stock option activity during 2012 and 2011 is summarized as follows:


								Weighted Avg.
				Weighted Avg.		Weighted Avg.		Remaining
	Number of			Exercise Price		Fair Value		Contractual Life		Aggregate
	Options			per Share		per Share		(in years)		Intrinsic Value
Outstanding, January 1, 2011		7,848,500		$	1.74	$	0.01		0.12	$	2,700
Granted		220,000		$	0.24	$	0.24		9.26
Exercised		(10,000	)	$	0.18	$	0.18		1.68
Expired		(6,737,500	)	$	1.98	$	-		-
Outstanding, December 31, 2011		1,321,000		$	0.25	$	0.07		2.83	$	98,295
Granted		100,000		$	1.15	$	1.15		9.72
Exercised		(615,200	)	$	0.24	$	0.04		0.48
Expired		-		$	-	$	-		-
Outstanding, December 31, 2012		805,800		$	0.37	$	0.24		3.85	$	561,723
Exercisable, December 31, 2012		559,126		$	0.26	$	0.07		1.64	$	442,917
Unvested, December 31, 2012		246,674		$	0.61	$	0.61		8.85

The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of our common stock on December 31, 2012 and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on December 31, 2012.

The following table summarizes information concerning outstanding and exercisable options as of December 31, 2012:


	Options Outstanding						Options Exercisable
			Average
			Remaining		Weighted Avg.				Weighted Avg.
	Number		Contractual Life		Exercise Price		Number		Exercise Price
	Outstanding		(in years)		per Share		Outstanding		per Share

Range of exercise prices per share:
$0.00 - $0.20		45,000		0.51	$	0.15		45,000	$	0.15
$0.21 - $0.30		623,300		3.25	$	0.24		476,626	$	0.24
$0.31 - $0.50		-		-	$	-		-	$	-
$0.51 - $0.80		37,500		2.17	$	0.61		37,500	$	0.61
$0.81 - $2.00		100,000		9.72	$	1.15		-	$	-
Total		805,800		3.85	$	0.37		559,126	$	0.26

Note 11 - Basic and Diluted Net Income per Share

Basic income per share was computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

The following is a reconciliation of the share data used in the basic and diluted income per share computations:

	Year ended December 31,
	2012		2011
Basic:
Weighted average number of shares outstanding		20,943,966		20,674,739

Diluted:
Weighted average number of shares outstanding		20,943,966		20,674,739
Weighted average effects of dilutive securities		734,892		333,810
Total		21,678,858		21,008,549

Antidilutive securities		100,000		67,500

Note 12 - Related Party Transactions

In 2012 and 2011, we recorded total net revenue of approximately $12,500 and $10,000, respectively, from related parties. The related parties included a business owned by the father of Leann Saunders, our President, and a business owned by Pete Lapaseotes, a member of our Board of Directors.

Note 13 – Commitments and Contingencies

Operating Leases

In June 2012, we amended the building lease for our headquarters in Castle Rock, Colorado. The lease is for a period of three years with an expiration date of June 15, 2015. In addition to the primary rent, the lease requires additional payments for operating costs and other common area maintenance costs.

Rent expense for the years ended December 31, 2012 and 2011, was approximately $103,500 and $74,700, respectively.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Future minimum lease payments for our headquarters are as follows:


Years Ending December 31,	Amount
2013	$	73,481
2014		74,256
2015		32,135
2016		1,818
Thereafter		2,121
Total lease commitments	$	183,811

Sub-lease Agreement

ICS sub-leases approximately 300 square feet of space located within its corporate office to a third party on a month-to-month basis. Monthly rent of $302 includes utilities and other common area maintenance. The sub-lease agreement provides for 30 days’ notice to terminate the agreement.

Capital Leases

During the first quarter ended March 31, 2012, we entered into a capital lease for certain office equipment with a base rent of $405 per month. This 63-month lease expires April 2017. Approximately $22,300 in asset cost has been included in property and equipment and is being amortized over 63 months. Imputed interest of 5.25% was used in determining the minimum lease payments.

ICS leases certain office equipment under a capital lease with a base rent of $521 per month. The lease expires in April 2013. Included in property and equipment is $7,100 in asset cost. Imputed interest of 6.25% was used in determining the minimum lease payments.

As of December 31, 2012, future minimum lease payments for capital leases are as follows:


Years Ending December 31,	Amount
2013	$	6,422
2014		4,860
2015		4,860
2016		4,860
2017 and thereafter		1,797
Future minimum lease payments		22,799
Less amount representing interest		(2,312	)
Present value of net minimum lease payments		20,487
Less current portion		(5,506	)
Capital lease obligations	$	14,981

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

Employment Agreements

In January 2006, we entered into employment agreements with John Saunders, our Chief Executive Officer, and with Leann Saunders, our President. The agreements automatically renew annually unless a 60-day notice of non-renewal is provided by either the Company or the employee.

Effective January 1, 2012, ICS entered into an employment agreement with Christina Dockter as its Chief Executive Officer, for a period of 2 years. The agreement automatically renews annually unless a 60-day notice of non-renewal is provided by either the Company or the employee.

Legal proceedings

Employee Benefit Plan

On February 13, 2006, we established a 401(K) plan for the benefit of our employees. The Plan covers substantially all of our employees who have attained age 21. We may make a discretionary matching contribution in an amount that is determined by our Board of Directors. If a matching contribution is made, the amount cannot exceed the elective deferral contributions. For the years ended December 31, 2012 and 2011, we made matching contributions of approximately $19,000 and $7,000, respectively.

Note 14 – Supplemental Cash Flow Information

	Year to date ended December 31,
	2012		2011
Cash paid during the year:
Interest on Lapaseotes Notes - related party	$	13,292	$	15,361
Other interest	$	10,925	$	10,748
Income taxes	$	-	$	-

Non-cash investing and financing activities:
Unrealized loss on marketable securities	$	-	$	(6,693	)
Assets acquired under capital lease obligations	$	22,258	$	-
Common stock issued in connection with ICS acquisition	$	77,778	$	-

Note 15 - Subsequent Events

We evaluated all subsequent events and transactions for potential recognition or disclosure in the consolidated financial statements through the date of issuance.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements and that receipts and expenditures of company assets are made in accordance with management authorization; and (iii) provide reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.

Our management evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, management concluded that the company’s internal control over financial reporting was effective as of December 31, 2012.

Attestation Report of the Registered Public Accounting Firm

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

None

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Directors and Officers

Our directors are elected by the stockholders to a term of one (1) year and serve until his successor is elected and qualified. Our key executive officers are appointed by the Board of Directors to a term of one (1) year and serve until his successor is duly elected and qualified, or until he is removed from office.

The names and ages of our directors and executive officers and their positions are as follows:


Name	Age	Position Held
John Saunders	41	CEO and Chairman of the Board
Leann Saunders	42	President and Director
Dannette Henning	43	Chief Financial Officer
Tom Heinen	57	Director
Pete Lapasotes	54	Director
Adam Larson	43	Director
Dr. Gary Smith	74	Director
Robert VanSchoick	62	Director

John Saunders founded our company in 1998 and has been the chief executive officer since founding. Previously, Mr. Saunders was a partner and consultant for Pathfinder Consulting Services, Inc. in Parker, Colorado. An expert in both technology and the livestock industry, Mr. Saunders is a graduate of Yale University.

Leann Saunders joined IMI in 2003 and is our President. Mrs. Saunders is responsible for overseeing key customer relationships along with management of product development and delivery of USVerified solutions. Prior to 2003, Mrs. Saunders worked for PM Beef Holdings, an integrated beef company, and developed a supply system for PM’s Ranch to Retail product line and managed PM’s USDA Process Verified program. She then served as the company’s Vice President of Marketing and Communications. Prior to joining PM in 1996, Mrs. Saunders worked for McDonald’s Corporation as a Purchasing Specialist, and Hudson Foods Corporation. Mrs. Saunders graduated with a BS in Agriculture Business and an MS in Beef Industry Leadership from Colorado State University.

Dannette Henning was engaged as a consultant beginning in November 2007 and accepted responsibilities as the Chief Financial Officer in early 2008. From 2004 to 2007, Ms. Henning was the Controller for Einstein Noah Restaurant Group. From 2001 to 2003, she served as the Controller for Vari-L Company. Mrs. Henning’s previous experience includes financial management positions with KPMG Peat Marwick, DF&R Restaurant Company, and CSI/CDC Company. Mrs. Henning is a CPA with more than 20 years of professional experience. She received a BBA degree in Accounting from the University of Texas at Arlington.

Tom Heinen is a co-president of Heinen’s Fine Food Stores (Heinen’s). Heinen’s specializes in offering the freshest, highest quality foods while providing world-class service in seventeen neighborhood locations serving various communities throughout Northeast Ohio. Since 1994, Mr. Heinen has managed the labor relations, central manufacturing, and the overall strategic direction for the meat, foodservice and bakery areas of Heinen’s. Mr. Heinen graduated from Bucknell University in 1977 with a B.S.B.A. in Business Management. He also serves as a board member of The Boys and Girls Club of Cleveland.

Pete Lapaseotes co-manages the Lapaseotes family farm and feeding operations in Bridgeport, Nebraska. The business includes a cow calf operation, a grass cattle operation and a finish feed yard. Mr. Lapaseotes is also a

partner in five John Deere dealerships and 11 The Mercantile Farm, Ranch & Home retail stores. He is a member of the board of directors of Valley Bank and Trust.

Adam Larson has been involved in the cattle feeding and ranching business since 1991. During that period, he has been a member and manager of eight family organizations involved in cattle ranching and cattle feeding and is primarily involved in cattle financing. Mr. Larson is a graduate of the University of Colorado.

Dr. Gary Smith serves as a University Distinguished Professor Emeritus at Colorado State University-Fort Collins and on the Graduate Faculty of Texas A&M University-College Station. In 2011, Dr. Smith retired from his position as a professor in the Department of Animal Science at Colorado State University, a position he held since 1990. Dr. Smith received his PhD in Meat Science and Muscle Biology from Texas A&M University. Dr. Smith has also taught at Washington State University, Texas A&M University and FSIS-USDA National Meat Inspection Training Center. Dr. Smith is a member of multiple professional associations and societies and has received numerous academic awards.

Robert Van Schoick II is president of Med-Pharmex Animal Health. His previous experience includes 28 years in sales and marketing with pharmaceutical giant Merck & Co., where he served for nine years with Merial, Merck’s world leading animal health joint venture. He holds BA and MA degrees from Austin College and a BS in Animal Science from Texas A&M.

Family Relationships

John Saunders and Leann Saunders are husband and wife.

Board Structure

The board of directors held one formal meeting and one telephonic meeting during calendar year 2012. We currently have no nominating, executive, compensation committee or other board committee performing equivalent functions. Currently, all members of our board of directors participate in discussions concerning executive officer compensation; however, Mr. and Mrs. Saunders abstain from voting concerning their compensation. Messrs. Lapaseotes, Larson, Smith and Van Schoick function as the Audit Committee and Mr. Larson acts as a financial expert.

Director Compensation

We presently compensate all directors by paying them $500 per meeting attending in person and $200 per telephonic meeting in excess of fifteen minutes. The same compensation applies for any committee meetings attended. In addition, directors are reimbursed for all company travel related expenses. Equity awards of options to purchase 10,000 shares of our common stock at $0.24 per share were granted to members of our board of directors during the year ended December 31, 2011. Equity awards of options to purchase 5,000 shares of our common stock at $1.15 per share were granted to members of our board of directors during the year ended December 31, 2012.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our reporting directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company with the Securities and Exchange Commission. Officers, directors and stockholders holding more than 10% of the class of stock are required to furnish us with copies of all Section 16(a) forms they file with the Commission.

To our knowledge, based solely on review of the copies of such reports furnished to us and written representations, we believe that during the fiscal year ended December 31, 2012 all applicable filing requirements were complied with by our executive officers and directors.

Code of Conduct

Our board of directors has adopted a code of conduct, which is posted on our website at http://imiglobal.com. Our Code of Conduct applies to all employees, including our Chief Executive Officer, Chief Financial Officer and Controller. The Code of Conduct sets forth specific policies to guide the designated officers in their duties. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver from, a provision of this Code of Ethics by posting such information on our website, at the address and location specified above.

ITEM 11.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth, for the last two completed fiscal years ended December 31, 2012 and 2011, the cash compensation paid by the Company, as well as certain other compensation paid with respect to those years and months, to the Chief Executive Officer and to each of the two other executive officers of the Company in all capacities in which they served:

	Annual Compensation
Name and Position	Year	Salary ($)	Bonus ($)		Other ($)
John Saunders	2012	150,000		1,500		-
CEO	2011	150,000		6,250		-

Leann Saunders	2012	132,788		1,500		-
President	2011	125,000		5,238		-

Dannette Henning	2012	53,058		1,500		-
Chief Financial Officer	2011	50,000		1,563		-

Employment Contracts

Aggregated Option Exercises in the Last Fiscal Year and Year End Option Values

The following table sets forth the total number of securities underlying unexercised options held by our named executive officers as of December 31, 2012:


	Number of Outstanding Options							Value of Outstanding in-the- Money Options*
Name Executive Officer	Exercisable (#)		Unexercisable (#)		Exercise Price		Expiration Date	Exercisable ($)		Unexercisable ($)
John Saunders		3,333		6,667	$	0.24	1/4/2021	$	3,833	$	7,667

Leann Saunders		3,333		6,667	$	0.24	1/4/2021	$	3,833	$	7,667

Dannette Henning		50,000		-	$	0.24	7/7/2013	$	57,500	$	-
		3,333		6,667	$	0.24	1/4/2021	$	3,833	$	7,667
		-		5,000	$	1.15	9/18/2012	$	-	$	5,750

* Based on the closing stock price of our common stock on February 18, 2013 of $1.15 per share.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

The following table sets forth as of February 18, 2013 the record and beneficial ownership of Common Stock held by (i) each person who is known to the Company to be the beneficial owner of more than 5% of the Common Stock of the Company; (ii) each current director; (iii) each “named executive officer” (as defined in Regulation S-B, Item 402 under the Securities Act of 1933); and (iv) all executive officers and directors of the Company as a group. Securities reported as “beneficially owned” include those for which the named persons may exercise voting power or investment power, alone or with others. Voting power and investment power are not shared with others unless so stated. The number and percent of shares of Common Stock of the Company beneficially owned by each such person as of February 18, 2013 includes the number of shares, which such person has the right to acquire within sixty (60) days after such date.

Name and Address	Number of Shares
Michael D. Smith		2,562,896	(1)
3310 I-40 West, Suite 100, Amarillo, TX 79102

John and Leann Saunders		7,535,477	(2), (3), (4)
Tom Heinen		100,000	(2), (5)
Pete Lapaseotes		592,377	(2), (6)
Adam Larson		171,667	(2), (6)
Dr. Gary Smith		66,667	(2), (7)
Robert VanSchoick		16,667	(2), (6)
Dannette Henning		56,667	(2), (8)
All officers and directors as a group (7 persons)		8,539,522
* Less than 1% beneficial ownership

(1)

This table is based upon information obtained from our stock records. Unless otherwise indicated in the footnotes to the above table and subject to community property laws where applicable, we believe that each stockholder named in the above table has sole or shared voting and investment power with respect to the shares indicated as beneficially owned.

(2)

The address for all persons is 221 Wilcox, Suite A, Castle Rock, CO 80104

(3)

John and Leann Saunders are husband and wife and own the shares as joint tenants.

(4)

Includes options to purchase 20,000 shares of common stock, of which 13,334 are currently exercisable.

(5)

Includes options to purchase 10,000 shares of common stock, of which none are currently exercisable.

(6)

Includes options to purchase 25,000 shares of common stock, of which 16,667 are currently exercisable.

(7)

Includes options to purchase 15,000 shares of common stock, of which 6,667 are currently exercisable.

(8)

Includes options to purchase 65,000 shares of common stock, of which 56,667 are currently exercisable.

Change of Control

There are currently no arrangements that would result in a change of control of the company.

Equity Compensation Plan Information

The following table sets forth securities authorized for issuance under our equity compensation plans as of December 31, 2012:

Plan Category	No. of securities to be issued upon exercise of outstanding options and warrants		Weighted average exercise price of outstanding options and warrants		No. of securities remaining available for future issuance under equity compensation plans

Equity compensation plans approved by security holders:
2006 Equity Incentive Plan		805,800	$	0.37		471,500
Equity compensation plans not approved by security holders:		-				-
Total		805,800				471,500

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

John Saunders, our CEO and Chairman of the Board, is married to Leann Saunders, our President. Both Mr. and Mrs. Saunders serve on our Board of Directors.

In 2012 and 2011, we recorded revenue of approximately $12,500 and $10,000, respectively, from related parties. The related parties included a business owned by the father of Leann Saunders, our President, and a business owned by Pete Lapaseotes, a member of our Board of Directors.

In September 2007, we obtained $300,000 in unsecured debt financing. In April 2009, an additional $50,000 was obtained under the same financing terms. The notes are held by a major shareholder who is related to Mr. Lapaseotes, a member of our Board of Directors. The note bears an interest rate of 9% per annum, payable quarterly. During April 2011, modifications to the terms of the existing agreement were completed. Such modifications included a reduction in the interest rate from 9% to 6% annually, as well as an extension of the maturity date from September 12, 2012 to March 31, 2014. Principal is due in full upon the maturity date; interest is payable quarterly.

Messrs. Heinen, Larson, Smith and Van Schoick are considered independent directors. Mr. Lapaseotes, Mr. Saunders and Mrs. Saunders are not independent. Messrs. Lapaseotes, Larson, Smith and Van Schoick function as the Audit Committee and Mr. Larson acts as a financial expert.

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

The following table presents fees for professional audit services rendered by GHP Horwath, P.C. for the audits of the Company’s annual financial statements for the years ended December 31, 2012 and 2011.


	2012		2011
Audit fees (1)	$	48,500	$	30,250
Audit related fees (2)		-		13,000
Tax fees		-		-
	$	48,500	$	43,250

(1)

Includes fees and expenses related to the fiscal year audit and interim reviews, notwithstanding when the fees and expenses were billed or when the services were rendered. Audit fees also include fees and expenses related to SEC filings.

(2)

Represents audit fees incurred specific to the acquisition of ICS.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibit Number	Document Name
3.1	Articles of Incorporation	Incorporated by reference from Registrant’s Registration Statement on Form SB-2
3.2	By-laws of the Registrant	Incorporated by reference from Registrant’s Registration Statement on Form SB-2
4.1	Form of the Registrant ’ s Common Stock Certificate	Incorporated by reference from Registrant’s Registration Statement on Form SB-2
4.2	2005 Stock Option Plan	Incorporated by reference from Registrant’s Registration Statement on Form SB-2
4.3	2006 Equity Incentive Plan	Incorporated by reference from Registrant’s Registration Statement on Form SB-2
10.1	Lease dated July 15, 2005 for offices in Platte City, Missouri	Incorporated by reference from Registrant’s Registration Statement on Form SB-2
10.2	Employment Agreement dated January 1, 2006 between the Registrant and John K. Saunders	Incorporated by reference from Registrant’s Registration Statement on Form SB-2
10.3	Employment Agreement dated January 1, 2006 between the Registrant and Leann Saunders	Incorporated by reference from Registrant’s Registration Statement on Form SB-2
10.4	Purchase and Exchange Agreement, dated as of February 29, 2012, by and among Integrated Management Information, Inc. and International Certification Services, Inc.	Incorporated by reference from Registrant’s Form 8-K filed March 2, 2012
10.5	Shareholders’ Agreement, dated as of February 29, 2012, by and among Integrated Management Information, Inc. and International Certification Services, Inc. and the selling shareholders.	Incorporated by reference from Registrant’s Form 8-K filed March 2, 2012
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification Pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.2	Certification Pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 6, 2013	Where Food Comes From, Inc.
		By:	/s/ John K. Saunders
			Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures	Title	Date

/s/ John K. Saunders	Chairman and CEO	March 6, 2013
John K. Saunders

/s/ Leann Saunders	President and Director	March 6, 2013
Leann Saunders

/s/ Dannette Henning	Chief Financial Officer	March 6, 2013
Dannette Henning

/s/ Tom Heinen	Director	March 6, 2013
Tom Heinen

/s/ Pete Lapaseotes	Director	March 6, 2013
Pete Lapaseotes

/s/ Adam Larson	Director	March 6, 2013
Adam Larson

/s/ Dr. Gary Smith	Director	March 6, 2013
Dr. Gary Smith

/s/ Robert VanSchoick	Director	March 6, 2013
Robert VanSchoick

TABLE OF CONTENTS

Part I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures Part II Item 5. Market For Common Equity Related Stockholder Matters and Issuer Purchases Of Equity Securities Item 5. Market For Common Equity Related Stockholder Matters Item 7. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 8. Financial Statements and Supplementary Data Note 1 - The Company and Basis Of Presentation Note 2 - Summary Of Significant Accounting Policies Note 3 - Acquisition Of 60% Of Outstanding Shares Of Ics Note 4 Investments in Marketable Securities Note 5 - Property and Equipment Note 6 Intangible Assets Note 7 - Notes Payable Note 8 - Income Taxes Note 9 Stock Buyback Plan Note 10 - Stock Option and Warrant Plans Note 11 - Basic and Diluted Net Income Per Share Note 12 - Related Party Transactions Note 13 Commitments and Contingencies Note 14 Supplemental Cash Flow Information Note 15 - Subsequent Events Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Part III Item 11. Executive Compensation Item 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholders Matters Item 13. Certain Relationships and Related Transactions and Director Independence Item 14. Principal Accountants Fees and Services Item 15. Exhibits and Financial Statement Schedules

Exhibits

31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith 32.2 Certification Pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith

WFCF 10-K Fiscal year ended Dec. 31, 2012

Exhibits