WFCF 10-Q Quarterly Report March 31, 2013

WHERE FOOD COMES FROM, INC.

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10-Q 1 wmf-10k_033113.htm QUARTERLY REPORT wmf-10k_033113.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly period ended March 31, 2013

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. 333-133624

WHERE FOOD COMES FROM, INC.

(exact name of registrant as specified in its charter)

Colorado	43-1802805
(State or other jurisdiction 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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer:	¨		Accelerated filer:	¨
Non-accelerated filer:	¨		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 April 26, 2013 was 21,587,765.

Where Food Comes From, Inc.
Table of Contents
March 31, 2013

Part 1 - Financial Information

Item 1.	Financial Statements		1

Item 2.	Management's Discussion and Analysis of Financial Condition		17
		and Results of Operations

Item 4.	Controls and Procedures		24


Part II - Other Information

Item 1.	Legal Proceedings		24

Item 1A.	Risk Factors		24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25

Item 6.	Exhibits		25

Where Food Comes From, Inc.

Condensed Consolidated Balance Sheets

	March 31,			December 31,
	2013			2012
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	1,505,638		$	1,403,489
Accounts receivable, net		329,850			377,072
Prepaid expenses and other current assets		52,217			80,189
Deferred tax assets		277,232			242,944
Total current assets		2,164,937			2,103,694
Property and equipment, net		139,602			146,563
Intangible and other assets, net		293,776			303,810
Goodwill		532,997			532,997
Long-term deferred tax assets		277,177			277,177
Total assets	$	3,408,489		$	3,364,241

Liabilities and Equity
Current liabilities:
Accounts payable	$	149,907		$	134,913
Accrued expenses and other current liabilities		42,918			58,808
Customer deposits		30,969			27,478
Deferred revenue		207,990			139,022
Short-term debt and current portion of notes payable		23,745			22,873
Current portion of capital lease obligations		4,012			5,506
Total current liabilities		459,541			388,600
Capital lease obligations, net of current portion		13,958			14,981
Notes payable and other long-term debt, net of current portion		184,465			191,106
Notes payable, related party		200,000			200,000
Total liabilities		857,964			794,687

Commitments and contingencies

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;
21,977,046 (2013) and 21,837,046 (2012) shares issued, and
21,463,799 (2013) and 21,323,799 (2012) shares outstanding		21,977			21,837
Additional paid-in-capital		3,713,124			3,668,556
Treasury stock of 513,247 shares (2013 and 2012)		(121,294	)		(121,294	)
Accumulated deficit		(1,345,923	)		(1,287,540	)
Total Where Food Comes From, Inc. equity		2,267,884			2,281,559
Non-controlling interest		282,641			287,995
Total equity		2,550,525			2,569,554
Total liabilities and stockholders' equity	$	3,408,489		$	3,364,241

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

Where Food Comes From, Inc.

Condensed Consolidated Statements of Income (Loss)

(Unaudited)


	Quarter ended
	March 31,			March 31,
	2013			2012
Revenues:
Service revenues	$	853,606		$	845,827
Product sales		129,009			156,954
Other revenue		42,888			26,503
Total revenues		1,025,503			1,029,284
Costs of revenues:
Labor and other costs of services		405,792			355,453
Costs of products		85,889			102,872
Total costs of revenues		491,681			458,325
Gross profit		533,822			570,959
Selling, general and administrative expenses		625,515			488,137
Income (loss) from operations		(91,693	)		82,822
Other expense (income):
Interest expense		6,779			7,872
Other income, net		(447	)		(2,662	)
Income (loss) before income taxes		(98,025	)		77,612
Income tax benefit		(34,288	)		(282,090	)
Net income (loss)		(63,737	)		359,702
Net loss attributable to non-controlling interest		5,354			2,431
Net income (loss) attributable to Where Food Comes From, Inc.	$	(58,383	)	$	362,133

Net income (loss) per share:
Basic	$	*		$	0.02
Diluted	$	*		$	0.02

Weighted average number of common shares outstanding:
Basic		21,439,355			20,609,639
Diluted		21,439,355			21,105,614

* less than a penny ($0.01) per share

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

Where Food Comes From, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Quarter ended
	March 31,			March 31,
	2013			2012


Net income (loss)	$	(63,737	)	$	359,702
Unrealized gain on marketable securities		-			11,709
Comprehensive income (loss)		(63,737	)		371,411
Comprehensive loss attributable to non controlling interest		5,354			2,431
Comprehensive income (loss) attributable to Where Food Comes From, Inc.	$	(58,383	)	$	373,842

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

Where Food Comes From, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Quarter ended March 31,
	2013			2012

Net cash provided by operating activities	$	83,455		$	39,430

Investing activities:
Acquisition of International Certification Services, Inc., net of cash acquired		-			(214,774	)
Purchases of marketable securities		-			(2,336	)
Purchases of property and equipment		(4,520	)		(2,942	)
Net cash used in investing activities		(4,520	)		(220,052	)

Financing activities:
Repayments of notes payable		(5,769	)		(5,484	)
Repayments of capital lease obligations		(2,517	)		(967	)
Proceeds from stock option exercise		31,500			-
Net cash provided by (used in) financing activities		23,214			(6,451	)
Net change in cash and cash equivalents		102,149			(187,073	)
Cash and cash equivalents at beginning of period		1,403,489			969,020
Cash and cash equivalents at end of period	$	1,505,638		$	781,947

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

Where Food Comes From, Inc.

Condensed Consolidated Statement of Equity

Quarter ended March 31, 2013

(Unaudited)

	Where Food Comes From, Inc.
					Additional
	Common Stock				Paid-in		Treasury			Accumulated			Non-controlling
	Shares		Amount		Capital		Stock			Deficit			Interest			Total
Balance at December 31, 2012		21,323,799	$	21,837	$	3,668,556	$	(121,294	)	$	(1,287,540	)	$	287,995		$	2,569,554
Stock-based compensation expense		-		-		13,208		-			-			-			13,208
Issuance of common shares upon exercise of options		140,000		140		31,360		-			-			-			31,500
Net loss		-		-		-		-			(58,383	)		(5,354	)		(63,737	)
Balance at March 31, 2013		21,463,799	$	21,977	$	3,713,124	$	(121,294	)	$	(1,345,923	)	$	282,641		$	2,550,525

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

Where Food Comes From, Inc.

Notes to the Condensed 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 2). 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

The accompanying unaudited condensed consolidated financial statements include the results of operations, financial position and cash flows of Where Food Comes From, Inc. and its majority-owned subsidiary, ICS (collectively referred to as “we,” “us,” and “our” throughout this Form 10-Q). All intercompany balances have been eliminated.

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and should be read in conjunction with our audited financial statements and footnotes thereto for the year ended December 31, 2012, included in our Form 10-K filed on March 6, 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. The financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations. The consolidated operating results for the first quarter ended March 31, 2013 are not necessarily indicative of the results to be expected for any other interim period of any future year.

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 and the growing seasons 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.

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

Recent Accounting Pronouncements

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

Note 2 - 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 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.

From the acquisition date through March 31, 2012, ICS revenues and net income were approximately $76,500 and $6,100, respectively. The following unaudited pro forma information presents the results of operations for the first quarter ended March 31, 2012, as if the acquisition of ICS had occurred on January 1, 2012.

Total revenue	$	1,197,753
Net income	$	315,367
Diluted earnings per share	$	0.02

Note 3 - Basic and Diluted Income (Loss) per Share

Basic income (loss) per share was computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) 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 Condensed Consolidated Financial Statements

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

	Quarter ended
	March 31,		March 31,
	2013		2012
Basic:
Weighted average shares outstanding		21,439,355		20,609,639

Diluted:
Weighted average shares outstanding		21,439,355		20,609,639
Weighted average effects of dilutive securities		-		495,975
Total		21,439,355		21,105,614

Antidilutive securities:		665,800		37,500

The effect of the inclusion of the dilutive shares would have resulted in a decrease in loss per share during the quarter ended March 31, 2013. Accordingly, the weighted average shares outstanding have not been adjusted for dilutive shares.

Note 4 - Stock-Based Compensation

Our stock-based award plans (collectively referred to as the “Plans”) provide for the issuance of stock-based awards to employees, officers, directors and consultants. The Plans permit 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 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 US Treasury yield curve in effect at the date of grant with maturity dates approximately equal to the expected term 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.

No stock options were granted during the first quarters ended March 31, 2013 or 2012. Stock-based compensation expense for the first quarter ended March 31, 2013 and 2012 was $13,208 and $4,394, respectively. Stock-based compensation expense has been included in general and administrative expenses.

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

Note 5 - Stock Option Plan Activity

Stock option activity under our Plans is summarized as follows:

								Weighted Avg.
				Weighted Avg.		Weighted Avg.		Remaining
	Number of			Exercise Price		Fair Value		Contractual Life		Aggregate
	Options/Warrants			per Share		per Share		(in years)		Intrinsic Value

Outstanding, December 31, 2012		805,800		$	0.37	$	0.24		3.85	$	561,723
Granted		-		$	-	$	-		-
Exercised		(140,000	)	$	0.23	$	0.03		0.24
Canceled		-		$	-	$	-		-
Outstanding, March 31, 2013		665,800		$	0.39	$	0.28		4.31	$	451,881
Exercisable, March 31, 2013		419,126		$	0.27	$	0.08		1.78	$	331,608

The aggregate intrinsic value represents the total pre-tax intrinsic value (the aggregate difference between the closing price of our common stock on March 31, 2013 and the exercise price for the in-the-money options) that would have been received by the option holders if all the in-the-money options had been exercised on March 31, 2013.

Note 6 - 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. Repurchased shares under the Stock Buyback Plan by year are as follows:

For the year to date period ended:	Number of Shares		Cost of Shares		Average Cost per Share

December 31, 2008		57,200	$	16,124	$	0.28
December 31, 2009		22,325		4,020	$	0.18
December 31, 2010		171,031		27,273	$	0.16
December 31, 2011		247,691		61,597	$	0.25
December 31, 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.

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.

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

Note 7 – Income Taxes

Deferred tax assets and liabilities have been determined based upon the differences between the financial statement amounts and the tax bases of assets and liabilities as measured by enacted tax rates expected to be in effect when these differences are expected to reverse. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our net operating loss (NOL) carry forwards are the most significant component of our deferred tax assets; however, the ultimate realization of our deferred tax assets is dependent upon generation of future taxable income. We consider past history, the scheduled reversal of taxable temporary differences, projected future taxable income, and tax planning strategies in making this assessment. Utilization of our NOL carry forwards reduces our federal and state income tax liability incurred.

As of December 31, 2012, our net operating loss carry forwards for U.S. federal income tax purposes were $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	$	1,630,451

]

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

During the first quarter ended March 31 2012, utilization of NOL carry forwards reduced our effective tax rate. For the first quarter ended March 31, 2013 and 2012, we recorded an income tax benefit of approximately $34,300 and approximately $282,100, respectively. The income tax benefit for the quarter ended March 31, 2012 included the effect of reversing $282,250 of the valuation allowance that existed as of December 31, 2011 after concluding the likelihood for a full realization of the benefits of our deferred tax assets was more likely than not.

Note 8 - Notes Payable

Notes payable consist of the following:

	March 31,		December 31,
	2013		2012

Equipment Note Payable	$	35,772	$	37,407
Lapaseotes Note Payable - Related Party		200,000		200,000
Great Western Bank SBA Loan		172,438		176,572
		408,210		413,979
Less current portion of notes payable and other long-term debt		23,745		22,873
Notes payable and other long-term debt	$	384,465	$	391,106

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

Equipment Note Payable

In December 2012, we entered into a note payable of $37,407 for the purchase of a vehicle. Interest and principal payments are 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 Note 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. 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. In March 2013, an additional modification was made to extend the maturity date to March 31, 2015. 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. Principal is due in full upon the maturity date; interest is payable quarterly.

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 March 31, 2013, 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 March 31, 2013, 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 March 31, 2013, ICS had no amounts outstanding under this LOC.

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

Note 9 - 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.

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 five years with an expiration date of March 1, 2018. One additional option to renew for a five-year term exists and is deemed to automatically renew unless written notice is provided 60 days before the end of the term. Rent for this location consists of a minimum monthly rental rate of approximately $150 plus all utilities, taxes and other expenses based on actual expenses to maintain the building.

As of March 31, 2013, future minimum lease payments are as follows:

Years Ending December 31,	Amount
2013 (remaining nine months)		55,224
2014		74,256
2015		32,135
2016		1,818
Thereafter		2,121
Total lease commitments	$	165,554

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 expired in April 2013. Included in property and equipment is $17,000 in asset cost. Imputed interest of 6.25% was used in determining the minimum lease payments.

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

As of March 31, 2013, future minimum lease payments for capital leases are as follows:

Years Ending December 31,	Amount
2013 (remaining nine months)		3,645
2014		4,860
2015		4,860
2016		4,860
2017 and thereafter		1,797
Future minimum lease payments		20,022
Less amount representing interest		(2,052	)
Present value of net minimum lease payments		17,970
Less current portion		(4,012	)
Capital lease obligations	$	13,958

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

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.

Where Food Comes From, Inc.

Notes to the Condensed Consolidated Financial Statements

Note 10 – Supplemental Cash Flow Information

	Quarter ended March 31,
	2013		2012
Cash paid during the year:
Interest on Lapaseotes Notes - related party	$	5,918	$	3,429
Other interest	$	3,152	$	2,940
Income taxes	$	-	$	-

Non-cash investing and financing activities:
Unrealized gain on marketable securities	$	-	$	11,709
Assets acquired under capital lease obligations	$	-	$	22,258
Common stock issued in connection with ICS acquisition	$	-	$	77,778

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Form 10−K for the fiscal year ended December 31, 2012. The following discussion and analysis includes historical and certain forward−looking information that should be read together with the accompanying condensed consolidated financial statements, related footnotes and the discussion below of certain risks and uncertainties that could cause future operating results to differ materially from historical results or from the expected results indicated by forward−looking statements.

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.

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.”

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 while this type of service results in an increase in revenue; it also has a lower profit margin 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.

In 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. 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.

Today, 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. Our company strives to identify opportunities to develop verification programs in advance of market demand and we continue to offer competitively-priced, bundled solutions to our growing customer base. Frequently, those bundled solutions include our newest programs in order to address the most recent concerns in the food supply. At times, we may sacrifice short-term profits in order grow a bigger, stronger company for the long-term; and we believe, to help increase transparency in our food production.

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 also includes non-dilution provisions, and we have right of first refusal on the remaining 40% of the outstanding stock.

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. It should enable us to better serve our customers, as well as accelerate our revenue growth, be accretive to earnings and provide another avenue for our WhereFoodComesFrom® labeling program.

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 was estimated at $59.4 billion in 2010. The U.S. market was 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 mandated 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.

Speculation surrounding this change negatively impacted our source and age verification business beginning in the latter half of 2012, first quarter 2013, 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.

Seasonality

Liquidity and Capital Resources

At March 31, 2013, we had cash and cash equivalents of $1,505,638 compared to $1,403,489 of cash and cash equivalents at December 31, 2012. Our working capital at March 31, 2013 was $1,705,396 compared to $1,715,094 at December 31, 2012.

Net cash provided by operating activities during the first quarter ended March 31, 2013 was approximately $83,500 compared to cash provided of approximately $39,400 during the same period in 2012. 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 deferred taxes. Fluctuations are primarily due to the timing of cash receipts and cash disbursements offset by operating performance.

Net cash used in investing activities during the first quarter ended March 31, 2013 was approximately $4,500 compared to net cash used of approximately $220,100 in the 2012 period. Net cash used in first quarter of 2012 was primarily attributable to 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.

Net cash provided by financing activities during the first quarter ended March 31, 2013 was approximately $23,200 compared to net cash used of approximately $6,500 in the 2012 period. Net cash provided in the first quarter of 2012 was due to proceeds of $31,500 from stock option exercises offset by repayments towards notes payable and capital lease obligations of approximately $8,300.

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 toward net income has brought 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 means to entry 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. In March 2013, an additional modification was made to extend the maturity date to March 31, 2015. 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 March 31, 2012, we had no off-balance sheet arrangements of any type.

RESULTS OF OPERATIONS

First Quarter ended March 31, 2013 compared to the Same Period in Fiscal Year 2012

The acquisition of ICS 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. Therefore, in the analysis below, first quarter 2012 includes results of ICS operations from February 29, 2012 through March 31, 2012 whereas; first quarter 2013 includes results of ICS operations from January 1, 2013 through March 31, 2013.

Revenues

Total revenues for the first quarter ended March 31, 2013 slightly decreased by less than one percent compared to the same period in 2012.

Service revenues include sales of our USVerified solutions and related consulting, program development and web-based development services. Service revenues of approximately $853,600 for the first quarter ended March 31, 2013 slightly increased approximately $8,000, or 0.9%, compared to approximately $845,800 for the first quarter 2012. Overall, the increase is due to the inclusion of a full quarter of ICS operations in 2013; offset by changes in Japanese government imposed age restrictions on US beef imports, which has negatively impacted our source and age verification business.

Product sales represent sales of cattle identification ear tags. Product sales of approximately $129,000 for the first quarter ended March 31, 2013 decreased approximately $27,900, or 17.8%, compared to approximately $157,000 for the first quarter 2012. 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 WFCF labeling program. Other revenue of approximately $42,900 for the first quarter ended March 31, 2013 increased 61.8% compared to approximately $26,500 for the first quarter 2012. 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 Revenues and Gross Margin

Cost of revenues for the first quarter ended March 31, 2013 was approximately $491,700 compared to approximately $458,300 during the first quarter 2012. Gross margin for the first quarter 2013 decreased to 52.1% of revenues compared to 55.5% for the first quarter 2012.

Our margins are impacted by various costs such as cost of products, salaries and benefits, insurance, and taxes. Because certain elements of our cost of revenues are fixed in nature, incremental sales positively impact our margins. Conversely, our gross margins for first quarter 2013 slightly declined compared to 2012, predominately due to the absorption of increases in our fixed costs (salaries, payroll taxes and medical insurance) over a slightly smaller revenue base.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the first quarter 2013 were approximately $625,500, an increase of $137,400, or 28.1% over the first quarter 2012. Overall, the increase in our selling, general and administrative expenses is due to the inclusion of a full quarter of ICS operations in 2013.

In connection with the changes in Japanese government imposed age restrictions on US beef imports and its corresponding negative impact on our source and age business, we have taken an aggressive approach to minimize our expenses. In some instances, we have reduced employee hours and benefits, outsourced certain functions where savings were identified, and brought some functions in-house to the extent that we had the expertise. Inherently, all profitable businesses have a base amount of expense and personnel that must remain in place in order for the business to operate. But, we believe that the measures we have taken will still enable us to offer superior customer service, while addressing long-term objectives of growth, profitability and maximizing shareholder value.

Income Tax Benefit

For the first quarter ended March 31, 2013 and 2012, we recorded an income tax benefit of approximately $34,300 and $282,100, respectively. The income tax benefit for the 2012 period included the effect of reversing $282,250 of our valuation allowance that existed as of December 31, 2011 after concluding the likelihood for a full realization of the benefits of our deferred tax assets was more likely than not.

Net Income (Loss) and Per Share Information

As a result of the foregoing, net loss attributable to WFCF shareholders for the first quarter ended March 31, 2013 was approximately $58,400 or less than a penny per basic and diluted common share. Net income attributable to WFCF shareholders for the first quarter ended March 31, 2012 was approximately of $362,100 or $0.02 per basic and diluted common share, which included a $282,250 benefit from income taxes related to the reversal of a portion of our valuation allowance on our deferred tax assets that had an impact of approximately $0.01 per share on a dilutive basis.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Compliance 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 report, have concluded that our disclosure controls and procedures are effective based on our evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

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.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 2012 Annual Report on Form 10−K, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. As of March 31, 2013, there have been no material changes to the risks disclosed in our most recent Annual Report on Form 10−K. We may also disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In connection with the acquisition of 60% of the issued and outstanding stock of ICS, we issued 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. These shares were issued pursuant to the exemption from registration provided by Section 4 (2) of the Securities Act of 1933. The shares bear a legend restricting the sale, transfer or exchange, and may only be sold, transferred or exchanged pursuant to a registration of such shares or a valid exemption therefrom.

ITEM 6. EXHIBITS

(a) Exhibits

	Number		Description
	31.1		Section 302 Certification of CEO
	31.2		Section 302 Certification of CFO
	32.1		Section 906 Certification of CEO
	32.2		Section 906 Certification of CFO

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: May 1, 2013	Where Food Comes From, Inc.

	By:	/s/ John K. Saunders____________________
		Chief Executive Officer

	By:	/s/ Dannette D. Henning____________________
		Chief Financial Officer

TABLE OF CONTENTS

Part 1 - Financial Information Item 1. Financial Statements 1 Item 2. Management's Discussion and Analysis Of Financial Condition 17 Item 4. Controls and Procedures 24 Part II - Other Information Item 1. Legal Proceedings 24 Item 1A. Risk Factors 24 Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds 25 Item 6. Exhibits 25 Note 1 - The Company and Basis Of Presentation Note 2 - Acquisition Of 60% Of Outstanding Shares Of Ics Note 3 - Basic and Diluted Income (loss) Per Share Note 4 - Stock-based Compensation Note 5 - Stock Option Plan Activity Note 6 - Stock Buyback Plan Note 7 Income Taxes Note 8 - Notes Payable Note 9 - Commitments and Contingencies Note 10 Supplemental Cash Flow Information Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 6. Exhibits

WFCF 10-Q Quarter ended March 31, 2013