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 September 30, 2017~~

	☐
	For the Quarterly period ended September 30, 2020

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

	For the transition period from ____________ to _____________

~~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.)

202 6^th Street, Suite 400

Castle Rock, CO 80104

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code:

(303) 895-3002

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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 ☐ [ ]

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 ☐[ ]

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

Large accelerated filer:	☐	[ ]	Accelerated filer:	☐[ ]
Non-accelerated filer:	☐	[ ]	Smaller reporting company:	☒[X]
Emerging growth company	☐	[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [ ] No [X]

~~Yes ☐ No ☒~~

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.001 par value		WFCF		OTC Markets Group

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of ~~November 2, 2017,~~October 30, 2020, was ~~[24,703,535].~~24,685,704.

Where Food Comes From, Inc.

Table of Contents

September 30, 2020

~~Where Food Comes From, Inc.~~Part 1 - Financial Information
~~Table of Contents~~
~~September 30, 2017~~

~~Part 1 - Financial Information~~

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1921

Item 4.	Controls and Procedures	2527

Part II - Other Information

Item 1.	Legal Proceedings	2628

Item 1A.	Risk Factors	2628

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2628

Item 6.	Exhibits	26

~~Where Food Comes From, Inc.~~

~~Consolidated Balance Sheets~~28

Part 1 - Financial Information

September 30, December 31,
2017 2016
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,809,867 $ 2,489,985
Accounts receivable, net of allowance 1,911,275 1,344,646
Short-term investments 740,739 733,104
Prepaid expenses and other current assets 381,261 203,744
Total current assets 6,843,142 4,771,479
Property and equipment, net 1,122,594 1,229,350
Intangible and other assets, net 4,076,860 4,228,228
Goodwill 2,652,250 2,652,250
Deferred tax assets, net 157,560 —
Total assets $ 14,852,406 $ 12,881,307

Liabilities and Equity
Current liabilities:
Accounts payable $ 719,026 $ 333,784
Accrued expenses and other current liabilities 1,326,091 480,047
Customer deposits and deferred revenue 849,285 524,396
Current portion of notes payable 8,525 —
Current portion of capital lease obligations 7,477 4,067
Total current liabilities 2,910,404 1,342,294
Capital lease obligations, net of current portion 27,320 15,735
Notes payable, net of current portion 45,640 —
Lease incentive obligation 149,898 158,025
Deferred tax liabilities, net — 49,440
Total liabilities 3,133,262 1,565,494

Commitments and contingencies (Note 8)

Contingently redeemable non-controlling interest 1,601,294 1,888,135

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;
24,964,684 issued and 24,703,535 outstanding at 9/30/2017
24,890,121 issued and 24,647,186 outstanding at 12/31/2016 24,964 24,890
Additional paid-in-capital 10,314,549 10,052,597
Treasury stock (564,688 ) (524,892 )
261,149 shares at 9/30/2017
242,935 shares at 12/31/2016
Retained earnings (accumulated deficit) 343,025 (124,917 )
Total equity 10,117,850 9,427,678
Total liabilities and stockholders’ equity $ 14,852,406 $ 12,881,307

Item 1. Financial Statements

Where Food Comes From, Inc.

Consolidated Balance Sheets

	September 30,			December 31,
(Amounts in thousands, except per share amounts)	2020			2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	4,625		$	2,638
Accounts receivable, net of allowance		2,523			2,515
Short-term investments in certificates of deposit		262			258
Prepaid expenses and other current assets		717			450
Total current assets		8,127			5,861
Property and equipment, net		1,669			1,545
Operating lease right-of-use assets		3,073			3,268
Investment in Progressive Beef		991			991
Intangible and other assets, net		3,105			3,248
Goodwill		2,946			2,946
Deferred tax assets, net		350			378
Total assets	$	20,261		$	18,237

Liabilities and Equity
Current liabilities:
Accounts payable	$	953		$	1,023
Accrued expenses and other current liabilities		1,179			674
Deferred revenue		1,148			797
Current portion of long term debt		641			-
Current portion of finance lease obligations		9			8
Current portion of operating lease obligations		260			239
Total current liabilities		4,190			2,741
Long term debt, net of current portion		391			-
Finance lease obligations, net of current portion		14			21
Operating lease obligation, net of current portion		3,328			3,526
Total liabilities		7,923			6,288

Commitments and contingencies

Equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; none issued or outstanding		-			-
Common stock, $0.001 par value; 95,000 shares authorized; 25,812 (2020) and 25,802 (2019) shares issued, and 24,677 (2020) and 24,977 (2019) shares outstanding		26			26
Additional paid-in-capital		11,508			11,425
Treasury stock of 1,135 (2020) and 825 (2019) shares		(2,199	)		(1,665	)
Retained earnings		3,003			2,163
Total equity		12,338			11,949
Total liabilities and stockholders’ equity	$	20,261		$	18,237

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

Where Food Comes From, Inc.

~~Where Food Comes From, Inc.~~

~~Consolidated Statements of Income~~

~~(Unaudited)~~

Consolidated Statements of Operations

(Unaudited)

	Three months ended September 30,					Three months ended September 30,
	2017			2016
(Amounts in thousands, except per share amounts)						2020			2019
Revenues:
Verification and certification service revenue	$	3,672,587		$	2,963,853	$	4,307		$	4,759
Product sales		687,235			380,393		1,362			1,086
Software license, maintenance and support services revenue		243,186			—		245			227
Consulting service revenue		131,427			—
Software-related consulting service revenue							283			160
Total revenues		4,734,435			3,344,246		6,197			6,232
Costs of revenues:
Labor and other costs of services		1,890,888			1,522,203
Costs of verification and certification services							2,233			2,673
Costs of products		410,309			220,599		866			697
Cost of software license, maintenance and support services		141,902			—
Costs of software license, maintenance and support services							138			153
Costs of software-related consulting services							198			122
Total costs of revenues		2,443,099			1,742,802		3,435			3,645
Gross profit		2,291,336			1,601,444		2,762			2,587
Selling, general and administrative expenses		1,841,597			1,239,834		1,806			1,973
Income from operations		449,739			361,610		956			614
Other expense (income):
Dividend income from Progressive Beef							(30	)		(30	)
Other income, net							(2	)		(2	)
Gain on sale of assets							(19	)		-
Loss on foreign currency exchange							2			-
Interest expense		287			649		4			2
Other (income) expense, net		(1,691	)		1,008
Income before income taxes		451,143			359,953		1,001			644
Income tax expense		199,000			135,000		271			184
Net income		252,143			224,953		730			460
Net loss attributable to non-controlling interest		38,049			—		-			81
Net income attributable to Where Food Comes From, Inc.	$	290,192		$	224,953	$	730		$	541

Per share - net income attributable to Where Food Comes From, Inc.:
Basic	$	0.01		$	0.01	$	0.03		$	0.02
Diluted	$	0.01		$	0.01	$	0.03		$	0.02

Weighted average number of common shares outstanding:
Basic		24,705,934			23,772,967		24,745			24,792
Diluted		24,886,147			23,929,011		24,894			24,972
* less than $0.01 per share

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

Where Food Comes From, Inc.

~~Where Food Comes From, Inc.~~

~~Consolidated Statements of Income~~

~~(Unaudited)~~

Consolidated Statements of Operations

(Unaudited)

	Year to date ended September 30,						Nine months ended September 30,
	2017			2016
(Amounts in thousands, except per share amounts)							2020			2019
Revenues:
Verification and certification service revenue	$	9,152,520		$	7,733,613		$	10,218		$	11,314
Product sales		1,226,141			855,986			2,883			2,363
Software license, maintenance and support services revenue		532,684			—			625			822
Consulting service revenue		399,120			—
Software-related consulting service revenue								799			576
Total revenues		11,310,465			8,589,599			14,525			15,075
Costs of revenues:
Labor and other costs of services		4,860,857			3,973,299
Costs of verification and certification services								5,283			6,332
Costs of products		743,308			490,162			1,869			1,538
Cost of software license, maintenance and support services		362,139			—
Costs of software license, maintenance and support services								393			469
Costs of software-related consulting services								508			395
Total costs of revenues		5,966,304			4,463,461			8,053			8,734
Gross profit		5,344,161			4,126,138			6,472			6,341
Selling, general and administrative expenses		5,023,446			3,412,211			5,401			5,624
Income from operations		320,715			713,927			1,071			717
Other expense (income):
Dividend income from Progressive Beef								(90	)		(90	)
Other income, net								(6	)		(7	)
Gain on foreign currency exchange								1			-
Gain on sale of assets								(19	)		(1	)
Interest expense		603			1,347			9			8
Other income, net		(10,989	)		(2,623	)
Income before income taxes		331,101			715,203			1,176			807
Income tax expense		150,000			264,950			336			230
Net income		181,101			450,253			840			577
Net loss attributable to non-controlling interest		286,841			31,605			-			182
Net income attributable to Where Food Comes From, Inc.	$	467,942		$	481,858		$	840		$	759

Per share - net income attributable to Where Food Comes From, Inc.:
Basic	$	0.02		$	0.02		$	0.03		$	0.03
Diluted	$	0.02		$	0.02		$	0.03		$	0.03

Weighted average number of common shares outstanding:
Basic		24,673,080			23,817,980			24,857			24,879
Diluted		24,834,931			23,969,134			25,011			25,062
* less than $0.01 per share

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

Where Food Comes From, Inc.

~~Where Food Comes From, Inc.~~

~~Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

Consolidated Statements of Cash Flows

(Unaudited)

	Year to date ended September 30,						Nine months ended September 30,
	2017			2016
(Amounts in thousands)							2020			2019

Operating activities:
Net income	$	181,101		$	450,253		$	840		$	577
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		634,152			199,460			736			802
Gain on sale of assets								(19	)		(1	)
Stock-based compensation expense		130,637			84,457			80			129
Common stock issued for services rendered		25,000			—
Deferred tax expense		(207,000	)		264,950
Deferred tax benefit								28			(73	)
Bad debt expense		17,525			—			49			27
Loss on disposal of property and equipment		—			7,480
Changes in operating assets and liabilities:
Changes in operating assets and liabilities, net of effect from acquisitions:
Accounts receivable		(584,154	)		(313,804	)		(57	)		(794	)
Short-term investments		(7,635	)		—			(4	)		(11	)
Prepaid expenses and other assets		(177,517	)		(26,453	)		(267	)		233
Accounts payable		385,242			54,133			(70	)		481
Accrued expenses and other current liabilities		846,044			253,357			505			641
Customer deposits and deferred revenue		324,889			224,751
Lease incentive obligation		(8,127	)		—
Deferred revenue								351			297
Right of use assets and liabilities, net								4			27
Net cash provided by operating activities		1,560,157			1,198,584			2,176			2,335

Investing activities:
Acquisition of Validus, remaining 40% interest		—			(162,707	)
Acquisition of A Bee Organic		(150,000	)		—
Purchases of property and equipment		(55,609	)		(429,333	)
Proceeds from sale of property and equipment		—			11,990
Net cash used in investing activities		(205,609	)		(580,050	)
Acquisition of Postelsia Holdings, Ltd.								(300	)		-
Proceeds from sale of assets								34			1
Purchases of property, equipment and software development costs								(416	)		(268	)
Proceeds from maturity of short-term investments								-			253
Net cash used in by investing activities								(682	)		(14	)

Financing activities:
Repayments of notes payable		—			(16,211	)		-			(7	)
Repayments of capital lease obligations		(3,038	)		(3,543	)
Proceeds from long term debt								1,030			-
Repayments of finance lease obligations								(6	)		(5	)
Proceeds from stock option exercise		8,168			44,519			3			-
Stock repurchase under Buyback Plan		(39,796	)		(179,647	)
Net cash used in financing activities		(34,666	)		(154,882	)
Stock repurchase under Stock Buyback Plan								(534	)		(371	)
Net provided by (cash used) in financing activities								493			(383	)
Net change in cash		1,319,882			463,652			1,987			1,938
Cash at beginning of year		2,489,985			3,781,397
Cash at end of year	$	3,809,867		$	4,245,049
Cash at beginning of period								2,638			1,482
Cash at end of period							$	4,625		$	3,420

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

Where Food Comes From, Inc.

~~Where Food Comes From, Inc.~~

~~Consolidated Statement of Equity~~

~~Year to date ended September 30, 2017~~

~~(Unaudited)~~

Consolidated Statement of Equity

(Unaudited)

Additional Accumulated
Common Stock Paid-in Treasury Deficit/Retained
Shares Amount Capital Stock Earnings Total

Balance at December 31, 2016 24,647,186 24,890 10,052,597 (524,892 ) (124,917 ) 9,427,678

Acquisition of A Bee Organic 45,684 45 98,176 — — 98,221
Issuance of common shares for acquisition-related consulting services 11,628 12 24,988 — — 25,000
Stock based compensation expense — 130,637 — — 130,637
Issuance of common shares upon exercise of options 7,001 7 8,161 — — 8,168
Repurchase of common shares under Buyback Program (18,214 ) — — (39,796 ) — (39,796 )
Vesting of restricted stock awards 10,250 10 (10 ) — — —
Net income attributable to Where Food Comes From, Inc. — — — — 467,942 467,942
Balance at September 30, 2017 24,703,535 $ 24,964 $ 10,314,549 $ (564,688 ) $ 343,025 $ 10,117,850

						Additional
	Common Stock					Paid-in		Treasury			Retained
(Amounts in thousands)	Shares			Amount		Capital		Stock			Earnings			Total

Balance at January 1, 2019		24,968		$	25	$	11,031	$	(1,109	)	$	818		$	10,765
Stock-based compensation expense		-			-		45		-			-			45
Repurchase of common shares under Stock Buyback Plan		(47	)		-		-		(83	)		-			(83	)
Net income attributable to Where Food Comes From, Inc.		-			-		-		-			(143	)		(143	)
Balance at March 31, 2019		24,921		$	25	$	11,076	$	(1,192	)	$	675		$	10,584

Stock-based compensation expense		-			-		47		-			-			47
Repurchase of common shares under Stock Buyback Plan		(95	)		-		-		(169	)		-			(169	)
Net income attributable to Where Food Comes From, Inc.		-			-		-		-			361			361
Balance at June 30, 2019		24,826		$	25	$	11,123	$	(1,361	)	$	1,036		$	10,823

Stock-based compensation expense		-			-		37		-			-			37
Vesting of restricted shares to Employees		25			-		-								-
Repurchase of common shares under Stock Buyback Plan		(67	)		-		-		(119	)		-			(119	)
Net income attributable to Where Food Comes From, Inc.		-			-		-		-			541			541
Balance at September 30, 2019		24,784		$	25	$	11,160	$	(1,480	)	$	1,577		$	11,282

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

Where Food Comes From, Inc.

Consolidated Statement of Equity

(Unaudited)

						Additional
	Common Stock					Paid-in		Treasury			Retained
(Amounts in thousands)	Shares			Amount		Capital		Stock			Earnings			Total

Balance at December 31, 2019		24,977		$	26	$	11,425	$	(1,665	)	$	2,163		$	11,949

Stock-based compensation expense		-			-		31		-			-			31
Repurchase of common shares under Stock Buyback Plan		(84	)		-		-		(158	)		-			(158	)
Net loss attributable to Where Food Comes From, Inc.		-			-		-		-			(241	)		(241	)
Balance at March 31, 2020		24,893		$	26	$	11,456	$	(1,823	)	$	1,922		$	11,581

Stock-based compensation expense		-			-		24		-			-			24
Stock options exercised		10			-		3		-			-			3
Repurchase of common shares under Stock Buyback Plan		(64	)		-		-		(111	)		-			(111	)
Net income attributable to Where Food Comes From, Inc.		-			-		-		-			351			351
Balance at June 30, 2020		24,839		$	26	$	11,483	$	(1,934	)	$	2,273		$	11,848

Stock-based compensation expense		-			-		25		-			-			25
Repurchase of common shares under Stock Buyback Plan		(162	)		-		-		(265	)		-			(265	)
Net income attributable to Where Food Comes From, Inc.		-			-		-		-			730			730
Balance at September 30, 2020		24,677		$	26	$	11,508	$	(2,199	)	$	3,003		$	12,338

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

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Note 1 - The Company and Basis of Presentation

Business Overview

Where Food Comes From, Inc. is a Colorado corporation based in Castle Rock, Colorado (“WFCF”, the “Company,” “our,” “we,” or “us”). ~~The Company’s principal business is~~We are an independent, third-party food verification company conducting both on-site and desk audits to verify that claims being made about livestock, food, other high-value specialty crops and agricultural products are accurate. We care about food and other agricultural products, how it is grown and raised, the quality of what we eat, what farmers and ranchers do, and authentically telling that story to the consumer. Our team visits farms and ranches and looks at their plants, animals, and records, and compares the information we collect to specific standards or claims that farms and ranches want to make about how they are producing food. We strive to ensure that everyone involved in the food business - from growers and farmers to retailers and shoppers – can count on WFCF to provide authentic and transparent information about the food we eat and how, where, and by whom it is produced.

We also provide sustainability programs, compliance management and farming information management solutions to drive sustainable value creation. We employ a software-as-a-service (“SaaS”) revenue model that bundles annual software licenses with ongoing software enhancements and upgrades and a wide range of professional services that generate incremental revenue specific to the food and agricultural industry. Finally, the Company’s Where Food Comes From Source Verified® retail and restaurant labeling program utilizes the verification of product attributes to connect consumers directly to the source of the food they purchase through product labeling and web-based information sharing and education.

Most of our customers are located throughout the United States.

Basis of Presentation

Our unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) andinclude the results of operations, financial position and cash flows ofWhere Food Comes From, Inc.and its subsidiaries, International Certification Services, Inc. (“ICS”), Validus Verification Services, LLC (“Validus”), Sterling Solutions ~~LLC~~ (“Sterling”), SureHarvest Services, LLC. (“SureHarvest”), A Bee Organic, Sow Organic, JVF Consulting and ~~SureHarvest~~Postelsia Holdings, Ltd. (“Postelsia”) (collectively referred to as “we,” “us,” and “our” throughout this Form 10-Q). The preparation of financial statements in conformity with GAAP 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.All significant intercompany transactions and amounts have been eliminated. The results of businesses acquired are included in the consolidated financial statements from the date of the acquisition.Actual results could differ from the estimates.

The 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, ~~2016,~~2019, included in our Form 10-K filed on ~~February 28, 2017.~~March 5, 2020. 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. Certain prior year amounts have been reclassified to conform to current year presentation. Net income and shareholders’ equity were not affected by these reclassifications. 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 ~~period~~three and nine months ended September 30, ~~2017~~2020 are not necessarily indicative of the results to be expected for any other interim period of any future year.

~~Seasonality~~

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Seasonality

Our business is subject to seasonal fluctuations. Significant portions of our verification and certification service revenue isare typically realized during late May through early October 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.~~Recent Accounting Pronouncements

~~Notes~~

The Financial Accounting Standards Board (FASB) Accounting Standards Codification is the sole source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standards Update (ASU) to communicate changes to the ~~Consolidated Financial Statements~~

~~(Unaudited)~~codification. The Company considers the applicability and impact of all ASU’s. ASU’s not listed below were assessed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements.

Recently ~~Issued~~Adopted Accounting Pronouncements

~~Lease Accounting~~

In February 2016, the FASB issued ASU 2016-02, “Leases,” which will require lessees to recognize a right-of-use asset and a lease liability for all leases that are not short-term in nature. For a lessor, the accounting applied is largely unchanged from previous guidance. The new rules will be effective for the Company in the first quarter of 2019. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations and cash flows. Although the evaluation is ongoing, the Company expects that the adoption will impact the Company’s financial statements as the standard requires the recognition on the balance sheet of a right of use asset and corresponding lease liability for all leases, including operating leases, that are not short-term, which differs from current guidance. The Company is currently analyzing its contracts to determine whether they contain a lease under the revised guidance and has not quantified the amount of the asset and liability that will be recognized on the Company’s balance sheet.

~~Revenue from Contracts with Customers~~

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes current revenue recognition requirements and industry-specific guidance. The codification was amended through additional ASUs and, as amended, requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company is required to adopt the new standard in the first quarter of 2018 and may adopt either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption using one of two retrospective application methods. The Company has developed an approach for the implementation of the guidance including a review of revenue streams and contracts to identify any differences in timing, measurement or presentation of revenue recognition. Currently, the Company has not completed its estimate of the quantitative impact and has engaged a third party to assist in its evaluation. While the Company is still in the process of completing its evaluation of the standard, it currently believes the most significant impact will be related to accounting for its software license, maintenance and support revenue, and the timing in which those revenues are recognized.

~~Clarifying the Definition of a Business~~

InOn January ~~2017, the FASB issued~~1, 2020 we adopted ASU 2017-01, “Clarifying the Definition of a Business,” which provides guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU amends ASC 805 to provide a more robust framework to use in determining when a set of assets and activities is a business. In addition, the amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable.~~The new guidance will be effective for the Company in the first quarter of 2018.The Company is currently evaluating the provisions of this new guidance andhas not determined the impact this standard may have on its financial condition, results of operations, cash flows and related disclosures.~~

2017-04, Simplifying the Test for Goodwill Impairment,

~~In April 2017, the FASB has issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,”~~ which removes ~~step~~Step 2 from the goodwill impairment test. AsThe adoption of this update did not have a ~~result, under~~material impact on our Consolidated Financial Statements.

On January 1, 2020 we adopted ASU 2018-13, Fair Value Measurement (Topic 8420): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU ~~an entity should perform its annual, or interim, goodwill impairment test by comparing~~2018-13 modifies the requirements associated with the hierarchy associated with Level 1, Level 2 and Level 3 fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.measurements. The ~~Company is required to adopt the new standard in 2020.The Company is currently evaluating the provisions~~adoption of this ~~new guidance andhas~~update did not ~~determined the~~have a material impact ~~this standard may have~~ on ~~its financial condition, results of operations, cash flows and related disclosures.~~our Consolidated Financial Statements.

~~Where Food Comes From, Inc.~~

~~Notes~~On January 1, 2020 we adopted ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract to align with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The adoption of this update did not have a material impact on our Consolidated Financial ~~Statements~~Statements.

~~(Unaudited)~~

Note 2 – Business Acquisitions

~~SureHarvest Acquisition~~

On ~~December 28, 2016,we entered into an Asset Purchase Agreement (the “SureHarvest Purchase Agreement”), by and among~~February 21, 2020 the Company ~~SureHarvest Services LLC (the “Buyer” or “SureHarvest”); and SureHarvest, Inc., a California corporation (the “Seller” or “SureHarvest, Inc.”). We~~ acquired substantially all the assets of the Seller. SureHarvest develops software and provides services related to sustainability measurement and benchmarking, traceability, verification and certification to the food and agriculture industries.

Pursuant to the SureHarvest Purchase Agreement, WFCF purchased the business assets of the Seller for total consideration of approximately $2.8 million, comprised of approximately $1,122,000 in cash and 850,852 shares of common stock of WFCF valued at approximately $1,710,000 based on the closing price of our stock on December 28, 2016, of $2.01 per share. Additionally, we issued the Seller a 40% membership interest in SureHarvest, with the Company holding a 60% interest.

Following the thirty-six-month anniversary of the effective date of the SureHarvest Purchase Agreement, the Company shall have the option, but not the obligation, to purchase all the units (the 40% interest) of SureHarvest held by the Seller, and the Seller shall have the option, but not the obligation, to require the Company to purchase all the units of SureHarvest held by the Seller. The purchase price for the units shall be equal to the amount the selling holders of the units would be entitled to receive upon a liquidation of SureHarvest assuming all of the ~~assets~~stock of ~~SureHarvest are sold~~privately held Postelsia Holdings, Ltd. (“Postelsia”) for ~~a purchase price equal~~$250,000 in cash at the acquisition closing date, with an additional $50,000 in cash being held in escrow and paid in September 2020. The escrowed funds were to support any claims by the ~~product~~Company for breaches of ~~eight~~representation and ~~half times trailing twelve-month earnings before income taxes, depreciation and amortization, as defined, subject to an $8 million ceiling.~~warranties, of which there were none.

~~Because SureHarvest, Inc. at its option, can require~~Postelsia, based in Victoria, British Columbia, is a leader in the ~~Company~~emerging field of environmental and social sustainability programs for the seafood industry. Postelsia provides a range of programs and consulting services designed to purchase its 40% interest in SureHarvest, the SureHarvest non-controlling interest meets the definition of a contingently redeemable non-controlling interest. Redeemable non-controlling interests are presented at the greater of their carrying amount or redemption value at the end of each reporting periodimprove and ~~are shown~~promote sustainable practices, including environmental conservation, worker care, and food safety compliance. Postelsia operates as a ~~separate caption between liabilities and equity (mezzanine section) in~~wholly owned subsidiary of the ~~accompanying consolidated balance sheet.~~Company.

The following unaudited pro forma information presents the results of operations for the three and nine months ended September 30, 2016, as if the acquisition of SureHarvest had occurred on January 1, 2016. This pro forma information does not reflect any integration activities or cost savings from operating efficiencies, synergies, asset dispositions or other restructurings that could result from the acquisition, nor does it purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.

Three months Year to date
ended ended

September 30,
2016

September 30,
2016

Total revenue $ 3,732,770 $ 9,622,988
Net income attributable to Where Food Comes From, Inc. $ 229,434 $ 397,259
Basic and diluted earnings per share $ 0.01 $ 0.02
* less than $0.01 per share

~~Where Food Comes From, Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

~~A Bee Organic Acquisition~~

On May 30, 2017, we acquired A Bee Organic for $150,000 in cash and 45,684 shares of common stock of WFCF valued at approximately $98,000 based on the closing price of our stock on May 30, 2017, of $2.15 per share. The acquisition primarily consisted of the existing customer relationships and represents further expansion of our verification and certification solutions into hydroponics/aquaponics and apiary spaces. We believe the total consideration paid approximates the fair value of the assets acquired. We have allocated the total consideration to our identifiable intangible assets (customer relationships) to be amortized over an estimated useful life of 8 years.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Note 3 – Basic and Diluted Net Income per Share

Basic net 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 net 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 restricted stock awards 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.

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

	Three months ended September 30,				Year to date ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016		2020		2019		2020		2019
Basic:
Weighted average shares outstanding		24,705,934		23,772,967		24,673,080		23,817,980		24,745		24,792		24,857		24,879

Diluted:
Weighted average shares outstanding		24,705,934		23,772,967		24,673,080		23,817,980		24,745		24,792		24,857		24,879
Weighted average effects of dilutive securities		180,213		156,044		161,851		151,154		149		180		154		183
Total		24,886,147		23,929,011		24,834,931		23,969,134		24,894		24,972		25,011		25,062

Antidilutive securities:		94,000		25,668		94,000		25,168		286		283		286		283

Note 4 - Investment in Progressive Beef, LLC

For the three months ended September 30, 2020 and September 30, 2019, the Company received dividend income from Progressive Beef of $30,000 representing a distribution of their earnings. For the nine months ended September 30, 2020 and September 30, 2019, the Company received dividend income totaling $90,000, respectively. The ~~effect~~income is reflected within the “other expense (income)” section of the ~~inclusion~~Company’s Consolidated Statements of Income for the ~~antidilutive shares would have resulted in an increase in earnings per share. Accordingly, the weighted average shares outstanding have not been adjusted for antidilutive shares.~~three and nine months ended September 30, 2020 and September 30, 2019. The Company completed a qualitative assessment and determined that there were no impairment indicators as of September 30, 2020.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Note 45 – Intangible and Other Assets

The following table summarizes our intangible and other ~~assets:~~assets (amounts in thousands, except useful life):


	September 30,		December 31,		Estimated	September 30,		December 31,		Estimated
	2017		2016		Useful life	2020		2019		Useful Life
Intangible assets subject to amortization:
Tradenames and Trademarks	$	282,307	$	282,307	2.5 - 8.0 years
Tradenames and trademarks						$	417	$	417	2.5 - 8.0 years
Accreditations		88,663		88,663	5.0 years		85		85	5.0 years
Customer Relationships		3,084,551		2,836,330	8.0 - 15.0 years
Beneficial Lease Arrangement		120,200		120,200	11.0 years
Customer relationships							3,664		3,351	3.0 - 15.0 years
Patents		970,100		970,100	4.0 years		970		970	4.0 years
Non-compete agreements							121		121	5.0 years
		4,545,821		4,297,600			5,257		4,944
Less accumulated amortization		947,506		547,917			2,631		2,182
		3,598,315		3,749,683			2,626		2,762
Tradenames/trademarks (not subject to amortization)		465,000		465,000			465		465
		4,063,315		4,214,683			3,091		3,227
Deposit		13,545		13,545
	$	4,076,860	$	4,228,228
Other assets							14		21
Intangible and other assets:						$	3,105	$	3,248

Note 6 – Accrued Expenses and Other Current Liabilities

The following table summarizes our accrued expenses and other current liabilities as of (amounts in thousands):

	September 30,		December 31,
	2020		2019

Income and sales taxes payable	$	483	$	171
Payroll related accruals		398		201
Customer deposits		93		62
Professional fees and other expenses		205		240
	$	1,179	$	674

Note 7 – Notes Payable

Unison Revolving Line of Credit

The Company has a revolving line of credit (“LOC”) agreement which matures April 12, 2022. The LOC provides for $75,080 in working capital. The interest rate is at the Wall Street Journal prime rate plus 1.50% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due on maturity. As of September 30, 2020 and December 31, 2019, the effective interest rate was 4.75% and 6.25%, respectively. The LOC is collateralized by all the business assets of ICS. As of September 30, 2020, and December 31, 2019, there were no amounts outstanding under this LOC.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Long Term Debt

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program (“PPP”), the initiative provides federally guaranteed loans to small businesses. These loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward. On April 17, 2020, the Company received a $1.0 million loan under the PPP with a maturity date of April 17, 2022 and an annual interest rate of 1.00%. The loan will be repaid in 17 monthly consecutive interest and principal payments of approximately $57,876, commencing December 1, 2020. See Note 15 for change in terms agreement effective October 6, 2020. While the Company believes a significant portion of the loan will be forgiven, the Company has not received any notification if any of the loan amount will be forgiven.

Note 58 – Stock-Based Compensation

In addition to cash compensation, the Company may compensate certain service providers, including employees, directors, consultants, and other advisors, with ~~equity based~~equity-based compensation in the form of stock options and restricted stock awards. The Company recognizes all equity-based compensation as stock-based compensation expense based on the fair value of the compensation measured at the grant date. For stock options, fair value is calculated at the date of grant using the Black-Scholes-Merton option pricing model. For restricted stock awards, fair value is the closing stock price for the Company’s common stock on the grant date. The expense is recognized over the vesting period of the grant. For the periods presented, all stock-based compensation expense was classified as a component within selling, general and administrative expense in the Company’s consolidated statements of ~~income.~~operations.

The amount of stock-based compensation expense is as ~~follows:~~follows (amounts in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Stock options	$	24	$	34	$	77	$	114
Restricted stock awards		1		3		3		15
Total	$	25	$	37	$	80	$	129

During the three months ended September 30, 2019, the Company awarded stock options to purchase 10,000 shares of the Company’s common stock at an exercise price of $1.71 per share to the members on the Company’s Board of Directors. No other stock options were awarded during the nine months ended September 30, 2019.

During the three months ended September 30, 2020, the Company awarded stock options to purchase 8,000 shares of the Company’s common stock at an exercise price of $1.80 per shares to the members of the Company’s Board of Directors. During the nine months ended September 30, 2020, the Company awarded stock options to purchase 20,000 shares of the Company’s common stock at an exercise price of $2.05 per share to employees of the Company.

Three months ended
September 30,

Year to date ended
September 30,

2017 2016 2017 2016
Stock options $ 14,687 $ 5,855 $ 44,100 $ 26,297
Restricted stock awards 26,480 21,774 86,537 58,160
Total $ 41,167 $ 27,629 $ 130,637 $ 84,457

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

AsThe Company estimated the fair value of ~~September 30, 2017,~~stock options using the Black-Scholes-Merton option pricing model with the following assumptions:

	Nine months ended September 30,
	2020			2019
Number of options awarded to purchase common shares		28,000			10,000
Risk-free interest rate		1.19	%		1.50	%
Expected volatility		94.7	%		100.30	%
Assumed dividend yield		N/A			N/A
Expected life of options from the date of grant		9.8 years			9.8 years

The estimated unrecognized compensation cost from unvested awards which will be recognized ratably over the remaining vesting phase is as ~~follows:~~follows (amounts in thousands):

Years ended December 31st:	Unvested stock options		Unvested restricted stock awards		Total unrecognized compensation expense
2020 (remaining three months)	$	30	$	1	$	31
2021		83		1		84
2022		20		-		20
2023		4		-		4
	$	137	$	2	$	139

Years ended December 31st: Unvested stock
options Unvested
restricted stock
awards Total
Unrecognized
Compensation
Expense
2017 (three months remaining) $ 14,715 $ 23,781 $ 38,496
2018 58,695 62,833 121,528
2019 53,552 11,426 64,978
$ 126,962 $ 98,040 $ 225,002

Equity Incentive Plans

Our 2016 Equity Incentive Plan (the “Equity Incentive 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 the passage of time and continued employment through the vesting period.

Stock Option Activity

Stock option activity under our Equity Incentive Plan is summarized as follows:

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

Outstanding, December 31, 2016 273,586 $ 1.22 $ 1.22 7.05 $ 217,892
Granted — $ — $ — —
Exercised (7,001 ) $ 1.17 $ 1.24 5.76
Expired/Forfeited — $ — $ — —
Outstanding, September 30, 2017 266,585 $ 1.23 $ 1.22 6.31 $ 294,559
Exercisable, September 30, 2017 172,585 $ 0.86 $ 0.87 4.74 $ 253,199
Unvested, September 30, 2017 94,000 $ 1.89 $ 1.87 9.21 $ 41,360

	Number of awards			Weighted avg. exercise price per share		Weighted avg. grant date fair value per share		Weighted avg. remaining contractual life (in years)		Aggregate intrinsic value

Outstanding, December 31, 2019		437,126		$	1.46	$	1.49		5.97	$	150,417
Granted		28,000		$	1.72	$	1.98		9.57
Exercised		(10,000	)	$	0.24	$	0.24		0.50
Expired/Forfeited		(25,325	)	$	-	$	1.84		6.98
Outstanding, September 30, 2020		429,801		$	1.49	$	1.53		5.51	$	147,950
Exercisable, September 30, 2020		315,686		$	1.38	$	1.40		4.44	$	147,350
Unvested, September 30, 2020		114,115		$	1.77	$	1.90		8.47	$	600

The aggregate intrinsic value represents the total pre-tax intrinsic value (the aggregate difference between the closing price of our common stock on September 30, ~~2017~~2020 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 September 30, ~~2017.~~2020.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Restricted Stock Activity

Restricted stock activity under our Equity Incentive Plan is summarized as follows:

								Weighted avg.
				Weighted Avg		Number of		grant date
	Number of			Grant Date		options		fair value
	Options			Fair Value
Non-vested restricted shares, December 31, 2016		136,000		$	2.44
Non-vested restricted shares, December 31, 2019							5,000	$	2.55
Granted		—		$	—		-	$	-
Vested		(10,250	)	$	2.15		-	$	-
Forfeited		(18,750	)	$	2.18		-	$	-
Non-vested restricted shares, September 30, 2017		107,000		$	2.52
Non-vested restricted shares, September 30, 2020							5,000	$	2.55

Note 69 – 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.

The Company’s subsidiary, SureHarvest, is a California limited liability company (“LLC”). As an LLC, management believes SureHarvest is not subject to income taxes, and such taxes are the responsibility of the respective members.

The provision or benefit for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the three ~~months ended September 30, 2017~~ and ~~2016, we recorded income tax expense of $199,000 and $135,000 respectively. For the~~ nine months ended September 30, ~~2017 and 2016,~~2020 we recorded an income tax expense of ~~$150,000~~approximately $271,000 and ~~$264,950 respectively.~~$336,000, respectively, compared to income tax expense of $184,000 and $230,000 for the same 2019 periods.

Note ~~7 – Notes Payable~~10 - Revenue Recognition

Disaggregation of Revenue

~~Notes Payable consist of the following:~~

September 30, December 31,
2017 2016
Medved Ford Inc. Loan $ 54,165 $ —
Less current portion of notes payable 8,525 —
Long-term portion of notes payable $ 45,640 $ —

~~In September 2017, we entered into a note payable of $54,165 for the purchase of a vehicle. Interest~~We have identified four material revenue categories in our business: (i) verification and ~~principal payments are due in equal monthly installments of $1,087 over five years beginning October 2017. This note bears an interest rate of 7.44% per annum~~certification service revenue, (ii) product sales, (iii) software license, maintenance and ~~is fully secured by the vehicle.~~support services revenue and (iv) software-related consulting service revenue.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Revenue attributable to each of our identified revenue categories is disaggregated in the table below (amounts in thousands).

	Three months ended September 30, 2020								Three months ended September 30, 2019
	Verification and Certification Segment		Software Sales and Related Consulting Segment		Eliminations and Other		Consolidated		Verification and Certification Segment		Software Sales and Related Consulting Segment		Eliminations and Other			Consolidated
Verification and certification service revenue	$	4,307	$	-	$	-	$	4,307	$	4,759	$	-	$	-		$	4,759
Product sales		1,362		-		-		1,362		1,086		-		-			1,086
Software license, maintenance and support services revenue		-		245		-		245		-		287		(60	)		227
Software-related consulting service revenue		-		283		-		283		-		197		(37	)		160
Total revenues	$	5,669	$	528	$	-	$	6,197	$	5,845	$	484	$	(97	)	$	6,232

	Nine months ended September 30, 2020									Nine months ended September 30, 2019
	Verification and Certification Segment		Software Sales and Related Consulting Segment		Eliminations and Other			Consolidated		Verification and Certification Segment		Software Sales and Related Consulting Segment		Eliminations and Other			Consolidated
Verification and certification service revenue	$	10,218	$	-	$	-		$	10,218	$	11,314	$	-	$	-		$	11,314
Product sales		2,883		-		-			2,883		2,363		-		-			2,363
Software license, maintenance and support services revenue		-		715		(90	)		625		-		969		(147	)		822
Software-related consulting service revenue		-		823		(24	)		799		-		661		(85	)		576
Total revenues	$	13,101	$	1,538	$	(114	)	$	14,525	$	13,677	$	1,630	$	(232	)	$	15,075

Contract Balances

As of September 30, 2020, and December 31, 2019, accounts receivable from contracts with customers, net of allowance for doubtful accounts, were approximately $2.5 million.

As of September 30, 2020, and December 31, 2019, deferred revenue from contracts with customers was approximately $1.1 and $0.8 million, respectively. The balance of the contract liabilities at September 30, 2020 and December 31, 2019 are expected to be recognized as revenue within one year or less of the invoice date.

The following table reflects the changes in our contract liabilities during the three month period ended September 30, 2020:

Deferred revenue (in thousands):
Unearned revenue June 30, 2020	$	1,206
Unearned billings		671
Revenue recognized		(729	)
Unearned revenue September 30, 2020	$	1,148

The following table reflects the changes in our contract liabilities during the nine month period ended September 30, 2020:

Deferred revenue (in thousands):
Unearned revenue January 1, 2020	$	797
Unearned billings		2,408
Revenue recognized		(2,057	)
Unearned revenue September 30, 2020	$	1,148

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Note 11 – Leases

The components of lease expense were as follows (amounts in thousands):

	Three months ended				Nine months ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Operating lease cost	$	116	$	115	$	348	$	353
Finance lease cost
Amortization of assets		2		2		6		6
Interest on finance lease obligations		1		2		4		6
Variable lease cost		-		-		-		-
Total net lease cost	$	119	$	119	$	358	$	365

Included in the table above, for the three and nine months ended September 30, 2020, is $92,000 and $276,000, respectively, of operating lease cost for our corporate headquarters. This space is being leased from The Move, LLC. Our CEO and President, each a related party to WFCF, have a 24.3% jointly-held ownership interest in The Move, LLC.

Supplemental balance sheet information related to leases was as follows (amounts in thousands):

	September 30, 2020						December 31, 2019
Operating leases:	Related Party		Other		Total		Related Party		Other		Total
Operating lease ROU assets	$	2,800	$	257	$	3,057	$	2,933	$	314	$	3,247

Current operating lease liabilities		174		86		260	$	158	$	81	$	239
Noncurrent operating lease liabilities		3,127		201		3,328		3,260		266		3,526
Total operating lease liabilities	$	3,301	$	287	$	3,588	$	3,418	$	347	$	3,765

Finance leases:	September 30, 2020			December 31, 2019
Right of use asset, at cost	$	43		$	43
Accumulated amortization		(27	)		(22	)
Right of use asset, net	$	16		$	21

Current obligations of finance leases	$	9		$	8
Finance leases, net of current obligations		14			21
Total finance lease liabilities	$	23		$	29

Weighted average remaining lease term (in years):
Operating leases		10.2			11.0
Finance leases		2.4			3.0

Weighted average discount rate:
Operating leases		5.8	%		5.8	%
Finance leases		20.9	%		20.8	%

Supplemental cash flow and other information related to leases was as follows (amounts in thousands):

	Three months ended				Nine months ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	113	$	109	$	335	$	320
Operating cash flows from finance leases	$	1	$	2	$	4	$	6
Financing cash flows from finance leases	$	2	$	2	$	6	$	5

ROU assets obtained in exchange for lease liabilities:
Operating leases	$	3,507	$	3,513	$	3,507	$	3,513

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Maturities of lease liabilities were as follows (amounts in thousands):

Years Ending December 31st,	Operating Leases			Finance Leases
2020 (remaining three months)	$	114		$	3
2021		462			12
2022		466			10
2023		461			5
2024		407			-
Thereafter		2,901			-
Total lease payments		4,811			30
Less amount representing interest		(1,223	)		(7	)
Total lease obligations		3,588			23
Less current portion		(260	)		(9	)
Long-term lease obligations	$	3,328		$	14

Note 812 – Commitments and Contingencies

~~Unison Revolving Line of Credit~~

The Company has a revolving line of credit (“LOC”) agreement which matures April 12, 2020. The LOC provides for $75,080 in working capital. The interest rate is at the Wall Street Journal prime rate plus 1.50% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due on~~maturity~~. As of September 30, 2017, the effective interest rate was 5.5%. The LOC is collateralized by all the business assets of ICS. As of September 30, 2017, there were no amounts outstanding under this LOC.

~~Operating Leases & Lease Incentive Obligation~~

The Company relocated its headquarters within Castle Rock, Colorado, during the third quarter 2016 and entered into a new lease agreement with The Move, LLC for approximately 8,000 square feet of office space. This space is being leased from a company in which our CEO and President, each a related party to the Company, have a 27% ownership interest. The lease agreement has an initial term of five years plus two renewal periods, which the Company is more likely than not to renew. The office space lease term commenced August 1, 2016. Rental payments are approximately $19,000 per month, which includes common area charges, and provides for escalating rental payments annually over the term of the lease. The Company recognizes rent expense on a straight-line basis over the non-cancelable lease term and option renewal periods. The resulting deferred rent is included in accrued expenses and other current liabilities on the consolidated balance sheet.

The Company recorded leasehold improvements of approximately $406,400, which included approximately $163,000 in lease incentives. Leasehold improvements are included in property and equipment on the consolidated balance sheet. Lease incentives have been included in lease incentive obligation as a long-term liability on the consolidated balance sheet and will reduce rent expense on a straight-line basis over 15 years. Lease incentives are excluded from minimum lease payments in the schedule below.

In August 2017, the Company entered into the first amendment of its lease agreement with The Move, LLC to provide for an additional 7,700 square feet of office space to commence December 1, 2017. The additional space is currently not approved for occupancy. Total rental payments beginning December 1, 2017 will increase to approximately $27,000 per month, which includes common area charges, and provides for escalating rental payments annually over the term of the lease. The Company will also receive approximately $230,000 in lease incentives to build-out the new additional square footage. All other terms will remain the same.

~~Where Food Comes From, Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

~~As of September 30, 2017, future minimum lease payments for all operating leases are as follows:~~

Years ended December 31st: Total
2017 (remaining three months) $ 77,611
2018 364,564
2019 362,630
2020 349,755
2021 360,287
Thereafter 4,048,955
Total lease commitments $ 5,563,802

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. ~~We are not aware of any legal actions currently pending against us.~~

Note ~~9 – Contingently Redeemable Non-Controlling Interest~~

Contingently redeemable non-controlling interest on our consolidated balance sheet represents the non-controlling interest related to the SureHarvest acquisition, in which the non-controlling interest holder, at its election, can require the Company to purchase its 40% investment in SureHarvest. Below is a table reflecting the activity of the contingently redeemable non-controlling interest at September 30, 2017.

Balance, December 31, 2016 $ 1,888,135
Net loss attributable to non-controlling interest in SureHarvest for the nine months ended Sept 30, 2017 (286,841 )
Balance, September 30, 2017 $ 1,601,294

~~The contingently redeemable non-controlling interest was adjusted to the greater of the carrying value or redemption value as of each period end.~~

~~Note 10~~13 - Segments

With each acquisition, we assess the need to disclose discrete information related to our operating segments. Because of the similarities of certain of our acquisitions that provide certification and verification services, we aggregate operations into one verification and certification ~~services~~ reportable segment. The operating segments included in the aggregated verification and certification segment include IMI Global, ICS, JVF Consulting, and Validus. 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 also determined that it has a software sales and related consulting reportable segment. SureHarvest, which includes Sow Organic and Postelsia, is the sole operating segment. This segment includes software license, maintenance, support and software-related consulting service revenues.

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, which includes products sales.~~

With the acquisition of SureHarvest Services, the Company determined that it also has a software sales and related consulting services segment, which meet the quantitative threshold to be considered a reporting segment in the third quarter 2017. This segment includes software license, maintenance, support and consulting service revenues.

~~Where Food Comes From, Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

~~Management~~operating segments. Segment management makes decisions, measures performance, and manages the business utilizing internal reporting operating segment information. Performance of operating segments are based on net sales, gross profit, selling, general and administrative expenses and most importantly, operating income.

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

The ~~company~~Company eliminates intercompany transfers between segments for management reporting purposes. The following table shows information for reportable operating ~~segments:~~segments (amounts in thousands):

	Three months ended September 30, 2020												Three months ended September 30, 2019
	Verification and Certification Segment			Software Sales and Related Consulting Segment			Eliminations and Other			Consolidated Totals			Verification and Certification Segment			Software Sales and Related Consulting Segment			Eliminations and Other			Consolidated Totals
Assets:
Intangible and other assets, net	$	7,079		$	3,856		$	(7,830	)	$	3,105		$	1,344		$	2,054		$	-		$	3,398
Goodwill		2,946			-			-			2,946			1,133			2,011			-			3,144
Total assets		19,494			5,379			(4,612	)		20,261			14,214			5,324			-			19,538

Revenues:
Verification and certification service revenue	$	4,307		$	-		$	-		$	4,307		$	4,759		$	-		$	-		$	4,759
Product sales		1,362			-			-			1,362			1,086			-			-			1,086
Software license, maintenance and support services revenue		-			245			-			245			-			287			(60	)		227
Software-related consulting service revenue		-			283			-			283			-			197			(37	)		160
Total revenues	$	5,669		$	528		$	-		$	6,197		$	5,845		$	484		$	(97	)	$	6,232
Costs of revenues:
Costs of verification and certification services	$	2,233		$	-		$	-		$	2,233		$	2,733		$	-		$	(60	)	$	2,673
Costs of products		866			-			-			866			697			-			-			697
Costs of software license, maintenance and support services		-			138			-			138			-			153			-			153
Costs of software-related consulting services		-			198			-			198			-			122			-			122
Total costs of revenues		3,099			336			-			3,435			3,430			275			(60	)		3,645
Gross profit		2,570			192			-			2,762			2,415			209			(37	)		2,587
Depreciation & amortization		112			145			-			257			78			179			-			257
Other operating expenses		1,404			145			-			1,549			1,520			233			(37	)		1,716
Segment operating (loss)/income	$	1,054		$	(98	)	$	-		$	956		$	817		$	(203	)	$	-		$	614
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:
Other expense (income)		(47	)		2			-			(45	)		(30	)		-			-			(30	)
Income tax expense		-			8			263			271			-			-			184			184
Net loss attributable to non-controlling interest		-			-			-			-			-			81			-			81
Net (loss)/income attributable to WFCF	$	1,101		$	(108	)	$	(263	)	$	730		$	847		$	(122	)	$	(184	)	$	541

	Nine months ended September 30, 2020													Nine months ended September 30, 2019
	Verification and Certification Segment			Software Sales and Related Consulting Segment			Eliminations and Other				Consolidated Totals			Verification and Certification Segment			Software Sales and Related Consulting Segment			Eliminations and Other			Consolidated Totals
Assets:
Intangible and other assets, net	$	7,079		$	3,856		$	(7,830	)		$	3,105		$	1,344		$	2,054		$	-		$	3,398
Goodwill		2,946			-			-				2,946			1,133			2,011			-			3,144
Total assets		19,494			5,379			(4,612	)			20,261			14,214			5,324			-			19,538

Revenues:
Verification and certification service revenue	$	10,218		$	-		$	-			$	10,218		$	11,314		$	-		$	-		$	11,314
Product sales		2,883			-			-				2,883			2,362			-			-			2,362
Software license, maintenance and support services revenue		-			715			(90	)			625			-			969			(147	)		822
Software-related consulting service revenue		-			823			(24	)			799			-			661			(85	)		576
Total revenues	$	13,101		$	1,538		$	(114	)		$	14,525		$	13,676		$	1,630		$	(232	)	$	15,074
Costs of revenues:
Costs of verification and certification services	$	5,373		$	-		$	(90	)		$	5,283		$	6,455		$	-		$	(123	)	$	6,332
Costs of products		1,869			-			-				1,869			1,538			-			-			1,538
Costs of software license, maintenance and support services		-			393			-				393			-			469			-			469
Costs of software-related consulting services		-			508			-				508			-			395			-			395
Total costs of revenues		7,242			901			(90	)			8,053			7,993			864			(123	)		8,734
Gross profit		5,859			637			(24	)			6,472			5,683			766			(109	)		6,340
Depreciation & amortization		313			423			-				736			263			539			-			802
Other operating expenses		4,206			483			(24	)			4,665			4,230			701			(109	)		4,822
Segment operating (loss)/income	$	1,340		$	(269	)	$	-		��	$	1,071		$	1,190		$	(474	)	$	-		$	716
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:
Other expense (income)		(107	)		2			-				(105	)		(90	)		(1	)		-			(91	)
Income tax expense		-			8			328				336			-			-			230			230
Net loss attributable to non-controlling interest		-			-			-				-			-			182			-			182
Net (loss)/income attributable to WFCF	$	1,447		$	(279	)	$	(328	)		$	840		$	1,280		$	(291	)	$	(230	)	$	759

Three months ended
September 30,

Year to date ended
September 30,

2017 2016 2017 2016
Verification and Certification Segment:
Assets $ 10,409,289 $ 9,442,909 $ 10,409,289 $ 9,442,909

Verification and certification revenues $ 3,672,587 $ 2,963,853 $ 9,152,520 $ 7,733,613
Products sales 687,235 380,393 1,226,141 855,986
Total segment revenue $ 4,359,822 $ 3,344,246 $ 10,378,661 $ 8,589,599

Gross profit - verification and certification gross profit $ 1,825,680 $ 1,441,650 $ 4,474,382 $ 3,760,314
Gross profit - products 276,926 159,794 482,833 365,824
Total segment gross profit $ 2,102,606 $ 1,601,444 $ 4,957,215 $ 4,126,138

Selling, general and administrative expenses 1,558,442 1,239,834 3,920,771 3,412,211
Segment operating income $ 544,164 $ 361,610 $ 1,036,444 $ 713,927

Software Sales and Related Consulting Segment:
Assets $ 4,443,117 $ — $ 4,443,117 $ —

Software license, maintenance and support services 243,186 $ — $ 532,684 $ —
Consulting service revenue 131,427 — 399,120 —
Total segment revenue $ 374,613 $ — $ 931,804 $ —

Gross profit - software license, maintenance and support services $ 101,284 $ — $ 170,544 $ —
Gross profit - consulting service revenue 87,446 — 216,402 —
Total segment gross profit $ 188,730 $ — $ 386,946 $ —

Selling, general and administrative expenses 283,155 — 1,102,675 —
Segment operating loss $ (94,425 ) $ — $ (715,729 ) $ —

Consolidated Information:

Verification and certification segment $ 10,409,289 $ 9,442,909 $ 10,409,289 $ 9,442,909
Software and related consulting segment 4,443,117 — 4,443,117 —
Consolidated Assets $ 14,852,406 $ 9,442,909 $ 14,852,406 $ 9,442,909

Verification and certification segment $ 4,359,822 $ 3,344,246 $ 10,378,661 $ 8,589,599
Software and related consulting segment 374,613 — 931,804 —
Consolidated Revenues: $ 4,734,435 $ 3,344,246 $ 11,310,465 $ 8,589,599

Verification and certification segment $ 2,102,606 $ 1,601,444 $ 4,957,215 $ 4,126,138
Software and related consulting segment 188,730 — 386,946 —
Consolidated Gross Profit: $ 2,291,336 $ 1,601,444 $ 5,344,161 $ 4,126,138

Verification and certification segment $ 1,558,442 $ 1,239,834 $ 3,920,771 $ 3,412,211
Software and related consulting segment 283,155 — 1,102,675 —
Consolidated Selling, General and Administrative Expenses: $ 1,841,597 $ 1,239,834 $ 5,023,446 $ 3,412,211

Verification and certification segment $ 544,164 $ 361,610 $ 1,036,444 $ 713,927
Software and related consulting segment (94,425 ) — (715,729 ) —
Consolidated Income from Operations: $ 449,739 $ 361,610 $ 320,715 $ 713,927

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Note 1114 – Supplemental Cash Flow Information

	Nine months ended September 30,
	2020		2019
Cash paid during the year:
Interest expense	$	5	$	8
Income taxes	$	362	$	131

Year to date ended September 30,
2017 2016
Cash paid for:

Interest expense $ 603 $ 876
Income taxes $ 184,440 $ —

Non-cash investing and financing activities:
Common stock issued for remaining interest in Validus Verification Services LLC $ — $ 200,100
Equipment acquired under a capital lease $ 18,033 $ 22,439
Vehicle acquired under note payable $ 54,165 $ —
Lease incentive obligation $ — $ 162,540
Common stock issued in acquisition of A Bee Organic $ 98,221 $ —
Common stock issued for acquisition-related consulting fess $ 25,000 $ —

Note 15 – Subsequent Events

On October 1, 2020 the Paycheck Protection Program (“PPP”) loan had a change in terms agreement modifying the beginning date of the principal and interest payments from December 1, 2020 to May 1, 2021. No other terms of the loan were modified, including the maturity date, interest rate or amount of the loan.

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

General

This information should be read in conjunction with the 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, ~~2016.~~2019. The following discussion and analysis includes historical and certain forward−looking information that should be read together with the accompanying 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. and its subsidiaries (“~~WFCF”, “the Company”, “our”, “we”,~~WFCF,” the “Company,” “our,” “we,” or “us”) is a leading trusted resource for third-party verification of food ~~and agricultural~~ production practices in North America. The Company supports more than 15,000 farmers, ranchers, vineyards, wineries, processors, retailers, distributors, trade associations, consumer brands and restaurants with a wide variety of value-added services provided through its family of verifiers, including IMI Global, International Certification Services, ~~(“ICS”),~~ Validus Verification Services, ~~(“Validus”),~~ Sterling Solutions, ~~SureHarvest Services (“SureHarvest”),~~ and ~~our newest acquisition,~~ A Bee Organic. In order to have credibility, product claims such as gluten-free, non-GMO, non-hormone treated, humane handling, and others require verification by an independent third-party such as WFCF. The Company’s principal business is conducting both on-site and desk audits to verify that claims being made about livestock, ~~food, other high-value specialty~~ crops and ~~agricultural~~other food products are accurate. ~~In addition,~~

Through our more recent acquisitions, including SureHarvest Services LLC (“SureHarvest”); Sow Organic, LLC; and Postelsia Holdings, Ltd. (“Postelsia”) we provide sustainability programs, compliance management and farming information management solutions to drive sustainable value creation. We employ a software-as-a-service (“SaaS”) revenue model that bundles annual software licenses with ongoing software enhancements and upgrades and a wide range of professional services that generate incremental revenue specific to the food and agricultural industry.

Finally, the Company’s Where Food Comes From Source Verified® retail and restaurant labeling program utilizes the verification of product attributes to connect consumers directly to the source of the ~~product~~food they purchase through product labeling and web-based information sharing and education. With the use of Quick Response Code (“QR”) technology, consumers can instantly access information about the producers behind their food.

WFCF was founded in 1996 and incorporated in the state of Colorado as a subchapter C corporation in ~~2005.~~2006. The Company’s shares of common stock trade on the OTCQB marketplace under the stock ticker symbol, ~~“WFCF”.~~“WFCF.”

The Company’s original name – Integrated Management Information, Inc. (d.b.a. IMI ~~Global, Inc.)~~Global) – was changed to Where Food Comes From, Inc. in 2012 to better reflect the Company’s mission. Early growth was attributable to source and age verification services for beef producers ~~who~~that wanted access to markets overseas following the discovery of “mad cow” disease in the U.S. Over the years, WFCF has expanded its portfolio to include verification and software services for most food groups and 3040 standards. This growth has been achieved both organically and through the acquisition of other companies.

~~Current Marketplace Opportunities~~Coronavirus Pandemic (COVID-19)

~~Because~~In March 2020, the World Health Organization declared the outbreak of ~~growing demand~~novel coronavirus disease (“COVID-19”) as a pandemic. The recent global outbreak of COVID-19 and the resulting government-mandated closures and social distancing measures have disrupted economic markets, potentially triggering a global recession. Continued closures and social distancing measures could have a detrimental effect in which the prolonged economic impact is uncertain. This could result in a variety of risks to our business including the inability to perform audits at our customers locations due to social distancing, supplier disruptions as a result of business closures, food systems that are in disarray resulting in global food shortages, euthanasia of animals and dumping of dairy products because farmers have no distribution channel, all of which could negatively influence our revenue and costs. The government may introduce healthcare reform measures for ~~increased transparency into~~which we cannot predict the financial implication of on our business. A weak or declining economy could cause our customers to delay purchases or payments for our services and products. Additionally, COVID-19 may introduce additional challenges including our ability to produce sufficient cash flows from operations or to raise capital when needed at acceptable terms, if at all.

All of our locations have been affected. We have adjusted certain aspects of our operations to protect our employees while avoiding business interruption. As an essential business to the food and agriculture industries, we have maintained standard business operations while under stay at home (and similar) guidelines from various states, by allowing a majority of employees work remotely until government mandates allow for normal business operations. Employees essential to operations, management and the accounting function remain on-site at our corporate headquarters. Internal controls over financial reporting have not been impacted by employees working remotely. Management is continuously monitoring to ensure controls are effective and properly maintained.

The Company generally performs onsite audits in connection with its verification and certification activity. Due to safety and social distancing reasons, some customers have requested postponement of onsite visits. At this time, we are uncertain of the material impact that continued social distancing measures will have upon our business. We continue to work with standard setting bodies and identify innovative solutions to offer our customers. We believe that our transformative approach will help further differentiate us from competitors. Additionally, we believe third party verification is an essential component to the food and agricultural ~~production practices, we believe there are three main market drivers to promote forward momentum for~~supply chain and ensures our ~~business:~~future as a high quality provider of assurance services, thereby increasing the value of products in the food supply chain.

~~Market Driver #1 - Consumer awareness~~We will continue to monitor the situation closely and ~~expectations~~react accordingly to any future restrictions or limitations, while keeping the interest of our customers and business in mind. Due to the uncertainty in the severity and duration of the pandemic, the impact on our revenues, profitability and statement of financial position is uncertain at this time.

●

~~The 13~~^th Edition of “The Why? Behind The Buy,” based on the annual survey conducted by Acosta, a leading full-service sales and marketing agency in the consumer packaged goods industry, was released in December 2016. The survey found that today’s shoppers are seeking positive culinary experiences, making deliberate decisions from the store to the stove, including wanting to feel good about the foods they eat, have pride in the brands they buy and share their cooking journeys online. The survey also explores the key factors contributing to this experiential evolution for grocery shoppers, including the growing natural/organics category. Shoppers’ spending on healthy products has seen steady growth in the past several years, driven by the desire of shoppers to feel good about the foods they’re eating. “From online grocery ordering and a desire to explore new foods, to natural products and socially responsible brands, consumers are at the wheel when it comes to steering the CPG industry in a new direction…there’s no doubt that this evolution will continue in the coming year, so it’s up to the industry to adapt by leaning into these trends and building trust and loyalty among all shoppers.” Colin Stewart, senior vice president at Acosta.

●

According to research dated March 2016 from Sullivan Higdon & Sink FoodThink, only one-third of consumers think the agriculture community and food companies are transparent. The research appears in “Evolving Trust in the Food Industry,” a white paper with insights into Americans’ knowledge and trust of the food industry and how those perceptions have changed from 2012 to 2016. These numbers are an improvement from 2012, when only 22% and 19% agreed that the agricultural community and food companies, respectively, are transparent. Increasing media attention and dialogue about food production, and the food industry’s willingness to be more open about its production practices, have likely caused this increase in perceived transparency. In turn, this provides consumers the knowledge to have definite opinions on the degree of industry transparency and an increased desire for more knowledge about how their food is produced.

●

According to the United States Department of Agriculture (“USDA”) website, the U.S. market for certified organic products continues to grow in double digits with 24,650 operations at the end of 2016, which reflects a 13% growth rate between the end of 2015 and 2016. Increasing consumer demand for healthy, better-for-you products produced with sustainable agricultural practices is driving growth in the organic market.

~~Market Driver #2 - Global competitiveness among retailers~~

●

Restaurant chains and retailers with dominant market shares and large buying power, like McDonald’s and Wal-Mart, are leading the way in prioritizing sustainable food supply initiatives in answer to consumer demands. With information literally at our fingertips, Google searches and smart phone apps are making it easier to expose where sustainable food supply chains are, and where they are not.

●

Producers, packers, distributors and retailers understand that verification, identification and traceability are key competitive differentiators. Oftentimes, it is necessary for export into international markets, including Korea, Russia and the European Union.

~~Market Driver #3 - Government regulation~~

●

In January 2013, the Food Safety Modernization Act (“FSMA”) issued two major proposed rules regarding preventive controls in human/animal food and produce safety. Compliance dates for some businesses began September 2016. Under the new rules, the food safety plan defined by the regulation differs from traditional hazard analysis and critical control points (“HACCP”) plans. It must include a hazard analysis, preventive controls, monitoring procedures, corrective action procedures, verification procedures, a supply chain program, and a recall program. We continue to see significant movement in companies requesting our consulting expertise to developing programs designed to assist them in maintaining compliance with the new rules.

●

The Animal Disease Traceability Rule primarily covers beef cattle 18 months of age or older. Under the final rule, unless specifically exempted, livestock moved interstate must be officially identified and accompanied by an interstate certificate of veterinary inspection or other documentation, such as owner-shipper statements or brand certificates.

●

The Saudi Arabia market closed to U.S. beef in 2012. Since that time, the beef industry has been working with the U.S. government to re-open that market, which officially happened in early August 2016. In order to be approved to meet the export requirements, a company must have or must be approved by a USDA process verified plan (“PVP”) and meet the Saudi Arabia export verification requirements. U.S. exports to Saudi Arabia in 2010 and 2011 were valued at approximately $30 million. We believe the Saudi Arabia market focuses on the highest quality middle meats, making it a valuable market for the U.S. to re-gain access.

●

On June 12, 2017, officials announced the technical requirements for beef exports to the People’s Republic of China. Export verification (“EV”) requirements include source and age verification with the use of a program compliant tag. In addition, China bans the use of synthetic growth promotants, including ractopamine. So, although there is not a formal non-hormone component to the EV requirements for the supply chain, due to China’s residue testing, packers will be seeking non-hormone treated cattle (“NHTC”) and/or Verified Natural cattle to ensure continued market access. China is the world’s second largest buyer of beef, but beef imports from the US to China have been banned since the 2003 Bovine Spongiform Encephalopathy (“BSE”) outbreak, also known as “Mad Cow Disease.”

Seasonality

Liquidity and Capital Resources

At September 30, ~~2017,~~2020, we had cash, cash equivalents and certificates of deposits (classified as short-term ~~investments~~investments) of ~~$4,550,606~~approximately $4.9 million compared to ~~$3,223,089~~approximately $2.9 million at December 31, ~~2016.~~2019. Our working capital at September 30, ~~2017~~2020 was ~~$3,932,738~~approximately $3.9 million compared to ~~$3,429,185~~$3.1 million at December 31, ~~2016.~~2019.

Net cash provided by operating activities for the nine months ended September 30, ~~2017~~2020 was ~~$1,560,157~~approximately $2.2 million compared to net cash provided of ~~$1,210,574~~$2.3 million during the same period in ~~2016.~~2019. Net cash provided by operating activities is driven by our net income ~~(loss)~~ and adjusted by non-cash items. Non-cash adjustments primarily include depreciation, amortization of intangible assets, ~~stock based~~stock-based compensation expense, and deferred taxes. The decrease in cash provided by operating activities was primarily driven by a change in accounts receivable, accounts payable and prepaid expenses and other assets as of September 30, 2020 compared to the same period in 2019. The Company has evaluated their customer receivables in relation to the current economic impact due to the coronavirus pandemic and does not feel any of the receivables are materially impaired at this time, but will keep actively monitoring the customer receivables.

Net cash used in investing activities for the nine months ended September 30, ~~2017,~~2020, was ~~$205,609~~approximately $0.7 million compared to ~~$592,040~~cash used by investing activities of $14,000 in the ~~2016~~2019 period. Net cash used in the ~~2017~~September 30, 2020 period was primarily attributable to ~~the~~ acquisition of ~~A Bee Organic, as well as routine purchases~~Postelsia Holdings, Ltd for $0.3 million and investment in software of property and equipment. Net cash used in the 2016 period was primarily attributable to the acquisition of the non-controlling interest of Validus, as well as routine purchases of property and equipment.

$0.4 million.

Net cash ~~used in~~provided by financing activities for the nine months ended September 30, ~~2017,~~2020, was ~~$34,666~~approximately $0.5 million compared to ~~$154,882~~net cash used by financing activities of $0.4 million in the ~~2016~~2019 period. Net cash provided in the 2020 period was from $1.0 million in loan proceeds offset primarily by $0.5 million to repurchase common shares under the Stock Buyback Plan. Net cash used in the ~~2017~~2019 period was primarily due to ~~repayments under lease obligations of $3,038 and~~the repurchase of common shares under the Stock Buyback Plan of $39,796, offset by cash received from stock option exercises of approximately $8,200. Net cash used in the 2016 period was due to repayments of debt and lease obligations of $19,754 and repurchase of common shares under the Buyback Plan of $179,647 offset by proceeds from stock option exercises of approximately $44,519.

Historically, our growth has been funded through a combination of cash flow from operations, 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.Plan.

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~~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~~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 ~~our acquisition strategy and~~as well as the repayment of current debt obligations. We are ~~not aware~~actively monitoring the economic effect of ~~any other event or trend that would negatively affect~~the coronavirus pandemic on our liquidity. In the event ~~such~~ a negative trend develops over the long term, we ~~believe that there are sufficient financing avenues~~have several options available to us, including various forms of downsizing, company-wide pay decreases, as well as, other forms of financing and ~~from~~ our internal ~~cash generating~~cash-generating capabilities to adequately manage our ongoing business.

~~The culmination of all our efforts toward net income has brought opportunities to usincluding: increased investor confidence and renewed interest in our company,~~ ~~third-party interest in our expertise, 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~~long-term capital solutions and the potential impact of acquisitions or divestitures, if such an opportunity arises. Additionally, 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.

Our plan for continued growth is primarily based upon ~~acquisitions, and continuing to add more accreditations to our products and services,~~continued expansion of verification bundling opportunities, as well as ~~intensifying our focus on~~acquisitions in national and international markets. We believe that there are significant growth opportunities available to us because often the only ~~means~~way to ~~entry as imposed on international market imports/exports~~differentiate a product or brand, or overcome import/export restrictions is via a quality verification program.

Debt Facility

The Company has a revolving line of credit (“LOC”) agreement which matures April 12, ~~2020.~~2022. The LOC provides for $75,080 in working capital. The interest rate is at the Wall Street Journal prime rate plus 1.50% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due onupon maturity. As of September 30, ~~2017,~~2020, and December 31, 2019, the effective interest rate was ~~5.5%.~~4.75% and 6.25%, respectively. The LOC is collateralized by all the business assets of ~~ICS.~~International Certification Services, Inc. (“ICS”). As of September 30, ~~2017,~~2020, and December 31, 2019, there were no amounts outstanding under this LOC.

On April 17, 2020, the Company received a $1.0 million loan under the PPP with a maturity date of April 17, 2022 and an annual interest rate of 1.00%. The loan will be repaid in 17 monthly consecutive interest and principal payments of approximately $57,876, commencing December 1, 2020. See Note 15 for change in terms agreement effective October 6, 2020. The Company has not received any notification if any of the loan amount will be forgiven.

Off-Balance Sheet Arrangements

As of September 30, ~~2017,~~2020, we had no off-balance sheet arrangements of any type.

RESULTS OF OPERATIONS

~~Third quarter~~Three and ~~year to date~~nine months ended September 30, ~~2017~~2020 compared to the same periods in fiscal year ~~2016~~2019

The following table shows information for reportable operating ~~segments:~~segments (amounts in thousands):

Three months ended
September 30,

Year to date ended
September 30,

2017 2016 2017 2016
Verification and Certification Segment:
Assets $ 10,409,289 $ 9,442,909 $ 10,409,289 $ 9,442,909

Verification and certification revenues $ 3,672,587 $ 2,963,853 $ 9,152,520 $ 7,733,613
Products sales 687,235 380,393 1,226,141 855,986
Total segment revenue $ 4,359,822 $ 3,344,246 $ 10,378,661 $ 8,589,599

Gross profit - verification and certification gross profit $ 1,825,680 $ 1,441,650 $ 4,474,382 $ 3,760,314
Gross profit - products 276,926 159,794 482,833 365,824
Total segment gross profit $ 2,102,606 $ 1,601,444 $ 4,957,215 $ 4,126,138

Selling, general and administrative expenses 1,558,442 1,239,834 3,920,771 3,412,211
Segment operating income $ 544,164 $ 361,610 $ 1,036,444 $ 713,927

Software Sales and Related Consulting Segment:
Assets $ 4,443,117 $ — $ 4,443,117 $ —

Software license, maintenance and support services 243,186 $ — $ 532,684 $ —
Consulting service revenue 131,427 — 399,120 —
Total segment revenue $ 374,613 $ — $ 931,804 $ —

Gross profit - software license, maintenance and support services $ 101,284 $ — $ 170,544 $ —
Gross profit - consulting service revenue 87,446 — 216,402 —
Total segment gross profit $ 188,730 $ — $ 386,946 $ —

Selling, general and administrative expenses 283,155 — 1,102,675 —
Segment operating loss $ (94,425 ) $ — $ (715,729 ) $ —

Consolidated Information:
Verification and certification segment $ 10,409,289 $ 9,442,909 $ 10,409,289 $ 9,442,909
Software and related consulting segment 4,443,117 — 4,443,117 —
Consolidated Assets $ 14,852,406 $ 9,442,909 $ 14,852,406 $ 9,442,909

Verification and certification segment $ 4,359,822 $ 3,344,246 $ 10,378,661 $ 8,589,599
Software and related consulting segment 374,613 — 931,804 —
Consolidated Revenues: $ 4,734,435 $ 3,344,246 $ 11,310,465 $ 8,589,599

Verification and certification segment $ 2,102,606 $ 1,601,444 $ 4,957,215 $ 4,126,138
Software and related consulting segment 188,730 — 386,946 —
Consolidated Gross Profit: $ 2,291,336 $ 1,601,444 $ 5,344,161 $ 4,126,138

Verification and certification segment $ 1,558,442 $ 1,239,834 $ 3,920,771 $ 3,412,211
Software and related consulting segment 283,155 — 1,102,675 —
Consolidated Selling, General and Administrative Expenses: $ 1,841,597 $ 1,239,834 $ 5,023,446 $ 3,412,211

Verification and certification segment $ 544,164 $ 361,610 $ 1,036,444 $ 713,927
Software and related consulting segment (94,425 ) — (715,729 ) —
Consolidated Income from Operations: $ 449,739 $ 361,610 $ 320,715 $ 713,927

	Three months ended September 30, 2020												Three months ended September 30, 2019
	Verification and Certification Segment			Software Sales and Related Consulting Segment			Eliminations and Other			Consolidated Totals			Verification and Certification Segment			Software Sales and Related Consulting Segment			Eliminations and Other			Consolidated Totals
Assets:
Intangible and other assets, net	$	7,079		$	3,856		$	(7,830	)	$	3,105		$	1,344		$	2,054		$	-		$	3,398
Goodwill		2,946			-			-			2,946			1,133			2,011			-			3,144
Total assets		19,494			5,379			(4,612	)		20,261			14,214			5,324			-			19,538

Revenues:
Verification and certification service revenue	$	4,307		$	-		$	-		$	4,307		$	4,759		$	-		$	-		$	4,759
Product sales		1,362			-			-			1,362			1,086			-			-			1,086
Software license, maintenance and support services revenue		-			245			-			245			-			287			(60	)		227
Software-related consulting service revenue		-			283			-			283			-			197			(37	)		160
Total revenues	$	5,669		$	528		$	-		$	6,197		$	5,845		$	484		$	(97	)	$	6,232
Costs of revenues:
Costs of verification and certification services	$	2,233		$	-		$	-		$	2,233		$	2,733		$	-		$	(60	)	$	2,673
Costs of products		866			-			-			866			697			-			-			697
Costs of software license, maintenance and support services		-			138			-			138			-			153			-			153
Costs of software-related consulting services		-			198			-			198			-			122			-			122
Total costs of revenues		3,099			336			-			3,435			3,430			275			(60	)		3,645
Gross profit		2,570			192			-			2,762			2,415			209			(37	)		2,587
Depreciation & amortization		112			145			-			257			78			179			-			257
Other operating expenses		1,404			145			-			1,549			1,520			233			(37	)		1,716
Segment operating (loss)/income	$	1,054		$	(98	)	$	-		$	956		$	817		$	(203	)	$	-		$	614
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:
Other expense (income)		(47	)		2			-			(45	)		(30	)		-			-			(30	)
Income tax expense		-			8			263			271			-			-			184			184
Net loss attributable to non-controlling interest		-			-			-			-			-			81			-			81
Net (loss)/income attributable to WFCF	$	1,101		$	(108	)	$	(263	)	$	730		$	847		$	(122	)	$	(184	)	$	541

	Nine months ended September 30, 2020												Nine months ended September 30, 2019
	Verification and Certification Segment			Software Sales and Related Consulting Segment			Eliminations and Other			Consolidated Totals			Verification and Certification Segment			Software Sales and Related Consulting Segment			Eliminations and Other			Consolidated Totals
Assets:
Intangible and other assets, net	$	7,079		$	3,856		$	(7,830	)	$	3,105		$	1,344		$	2,054		$	-		$	3,398
Goodwill		2,946			-			-			2,946			1,133			2,011			-			3,144
Total assets		19,494			5,379			(4,612	)		20,261			14,214			5,324			-			19,538

Revenues:
Verification and certification service revenue	$	10,218		$	-		$	-		$	10,218		$	11,314		$	-		$	-		$	11,314
Product sales		2,883			-			-			2,883			2,362			-			-			2,362
Software license, maintenance and support services revenue		-			715			(90	)		625			-			969			(147	)		822
Software-related consulting service revenue		-			823			(24	)		799			-			661			(85	)		576
Total revenues	$	13,101		$	1,538		$	(114	)	$	14,525		$	13,676		$	1,630		$	(232	)	$	15,074
Costs of revenues:
Costs of verification and certification services	$	5,373		$	-		$	(90	)	$	5,283		$	6,455		$	-		$	(123	)	$	6,332
Costs of products		1,869			-			-			1,869			1,538			-			-			1,538
Costs of software license, maintenance and support services		-			393			-			393			-			469			-			469
Costs of software-related consulting services		-			508			-			508			-			395			-			395
Total costs of revenues		7,242			901			(90	)		8,053			7,993			864			(123	)		8,734
Gross profit		5,859			637			(24	)		6,472			5,683			766			(109	)		6,340
Depreciation & amortization		313			423			-			736			263			539			-			802
Other operating expenses		4,206			483			(24	)		4,665			4,230			701			(109	)		4,822
Segment operating (loss)/income	$	1,340		$	(269	)	$	-		$	1,071		$	1,190		$	(474	)	$	-		$	716
Other items to reconcile segment operating income (loss) to net income attributable to WFCF:
Other expense (income)		(107	)		2			-			(105	)		(90	)		(1	)		-			(91	)
Income tax expense		-			8			328			336			-			-			230			230
Net loss attributable to non-controlling interest		-			-			-			-			-			182			-			182
Net (loss)/income attributable to WFCF	$	1,447		$	(279	)	$	(328	)	$	840		$	1,280		$	(291	)	$	(230	)	$	759

Verification and Certification Segment

Verification and certification service revenuesconsist of fees charged for verification audits and other verification and certification related services that the Company performs for customers. ~~We have recently begun including~~F~~fees~~ees earned from our WFCF labeling programare also included in our verification and certification revenues ~~due to the immateriality of the revenue stream and because~~as it represents a value-added extension of our source verification. Verification and certification service revenue for the three ~~months~~ and ~~year to date period~~nine months ended September 30, ~~2017 increased approximately $708,734, or 23.9%,~~2020 decreased 9.5% and ~~$1,418,907, or 18.3%~~9.7%, respectively, compared to ~~the same periods in 2016. Overall, the increase is~~2019, primarily due to ~~an increase in new verification customers,~~audit delays as ~~well as an increase in product offerings. We are seeing increased demand from cattle producers in response to the re-opening~~a result of ~~the export market to China as discussed above.~~COVID-19.

Our product sales are an ancillary part of our verification and certification services and represent sales of cattle identification ear tags. Product sales for the three ~~months~~ and ~~year to date period~~nine months ended September 30, ~~2017~~2020 increased approximately ~~$306,842,~~$0.2 and $0.5 million, respectively, or ~~80.7%,~~25.4% and ~~$370,155, or 43.2%~~22.1%, respectively, compared to the same ~~periods~~period in ~~2016.~~2019. Overall, our product sales have increased primarily in response to ~~the re-opening of the China export market and~~ the requirement for source and age verification using an identification tag at ~~birth.~~birth for cattle.

Costs of revenues for our verification and certification segment for the three ~~months~~ and ~~year to date period~~nine months ended September 30, ~~2017~~2020 were approximately ~~$2.26~~$3.1 million and ~~$5.42~~$7.2 million, respectively, compared to approximately ~~$1.74~~$3.4 million and ~~$4.46~~$8.0 million, respectively, for the same periods in ~~2016.~~2019. Gross margin for the three ~~months~~ and ~~year to date period~~nine months ended September 30, ~~2017 improved slightly~~2020 increased to ~~48.2%~~45.3% and ~~47.9%~~44.7%, respectively, compared to ~~47.9%~~41.3% and ~~48.0%~~41.6%, respectively, ~~for the same periods~~ in ~~2016.~~2019 primarily due to shifting some verification activity to a desk audit performed by internal staff resulting from COVID-19 on farm biosecurity restrictions and due to introduction of our new CARE verification program. Our margins are generally 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.~~

~~Selling, general and administrative~~Other operating expenses for the three ~~months~~ and ~~year to date period~~nine months ended September 30, ~~2017 were~~2020 decreased approximately ~~$1.56 million~~7.6% and ~~$3.92 million,~~0.6%, respectively, compared to ~~$1.24 million and $3.41 million, respectively, for~~ the same three and nine month periods in ~~2016. Overall, the increase~~2019. The decrease is predominately due to reduced travel, decrease in ~~our selling, general~~market spend and ~~administrative expenses is due in part to slightly higher head count, increased sales and marketing costs, and increasing costs related to being a publicly held~~public company and implementing new accounting standards. The year to date period ended September 30, 2017 also included $118,000 in acquisition-related (legal, accounting and consulting) expenses of SureHarvest and A Bee Organic.expenses.

Software Sales and Related Consulting Segment

Software license, maintenance and support services revenue ~~for the three months and year to date period ended September 30, 2017 of $243,186 and $532,684, respectively, represents~~is a ~~new~~ revenue stream specific to our ~~acquisition~~acquisitions of SureHarvest, ~~as further described in Note 2 to the consolidated financial statements above. SureHarvest employs~~Sow Organic, and Postelsia. We employ a ~~software-as-a-service (SaaS)~~SaaS revenue model that bundles annual software licenses with ongoing software enhancements and upgrades and a wide range of professional services that generate incremental revenue specific to the food and agricultural industry.

~~Consulting service revenue for~~ For the three ~~months~~ and ~~year to date period~~nine months ended September 30, ~~2017~~2020, software license, maintenance and support services revenue decreased approximately 14.6% and 26.2%, respectively, over the same 2019 periods, predominately due customer-related budget delays for significant software enhancements because of ~~$131,427~~COVID-19 concerns which results in a decrease in the number of billable hours of staff focused on software enhancements and ~~$399,120, respectively,~~upgrades.

Software-related consulting service revenue primarily represents fees earned from professional ~~appearances,~~consulting, customer education and training related services. ~~It is a new~~Software-related consulting service revenue ~~stream specific to our acquisition of SureHarvest, as further described in Note 2~~for the three and nine months ended September 30, 2020 increased approximately 43.7% and 24.5%, respectively, compared to the ~~consolidated financial statements above.~~same periods in 2019. The three and nine month increases are due to fluctuations in customer demand for consulting services.

~~Selling, general~~Costs of revenues for our software sales and ~~administrative~~related consulting segment for the three and nine months ended September 30, 2020 and September 30, 2019 was approximately $0.3 million and $0.9 million, respectively. Gross margin for the three and nine months ended September 30, 2020 declined to 36.4% and 41.4%, respectively, compared to 43.2% and 47.0%, respectively, for the same periods in 2019. The three and nine month decrease in gross margin is due to the decrease in billable hours of staff focused on software enhancements and upgrades.

Other operating expenses for the three ~~months~~ and ~~year to date period~~nine months ended September 30, ~~2017 were~~2020 decreased approximately ~~$283,100~~37.8% and ~~$1.10 million. Approximately $424,500~~31.1%, respectively, compared to the same period in 2019. The decrease is predominately due to assets becoming fully depreciated in 2019, resulting in less depreciation and amortization ~~and depreciation expense related to assets acquired with the SureHarvest acquisition; and approximately $675,400~~ in ~~salaries, professional services and other general and administrative costs.~~2020.

As with all of our acquisitions, we continue to identify synergies and implement best practices. We focus our efforts to create value in various ways such ~~as:~~as improving the performance of our ~~acquisitions,~~acquired businesses, removing excess capacity, creating market access for products, acquiring skills and technologies more quickly or at a lower cost than we can build in-house, exploiting our industry-specific scalability and bundling opportunities, and picking winners early and helping them develop their businesses. Achieving any or all of these strategies take time to implement. We have learned that it ~~takes about 2-3~~can take two to three years after an acquisition ~~date~~ to fully understand the complexities, ~~of our larger acquisitions,~~ at which time, we have seen solid improvements in revenues and/or costs.

Dividend Income from Progressive Beef

For the three and nine months ended September 30, 2020 and September 30, 2019, the Company received dividend income of $30,000 and $90,000, respectively, from Progressive Beef representing a distribution of their earnings.

Income Tax Expense

The provision ~~or benefit~~ for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the three and nine months ended September 30, ~~2017 and 2016,~~2020, we recorded income tax expense of ~~$199,000~~approximately $271,000 and ~~$135,000 respectively. For the nine months ended September 30, 2017 and 2016, we recorded~~$336,000, respectively, compared to income tax expense of ~~$150,000~~$184,000 and ~~$264,950 respectively.~~$230,000 for the same periods in 2019.

Net Income and Per Share Information

As a result of the foregoing, net income attributable to WFCF shareholders for the three and nine months ended September 30, ~~2017~~2020 was ~~$290,192, or $0.01 per basic~~approximately $0.7 million and ~~diluted common share, compared to $224,953, or $0.01~~$0.8 million, respectively, $0.03 per basic and diluted common share for ~~the same period in 2016. Net~~both periods, compared to net income ~~attributable to WFCF shareholders for the year to date period ended September 30, 2017 was $467,942~~of approximately $0.5 million and $0.8 million, respectively, or $0.02 and $0.03 per basic and diluted common share, ~~compared to $481,858 or $0.02 per basic and diluted common share~~respectively, for the same ~~period~~periods in ~~2016.~~2019.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our ~~Chief Executive Officer~~management, including our principal executive and ~~Chief Financial Officer, after evaluating~~financial officers, have conducted an evaluation of the effectiveness of the ~~Company’s~~design and operation of our “disclosure controls and ~~procedures” (as~~procedures,” as such term is defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act, to ensure that information we are required to disclose in the ~~Securities~~reports we file or submit under the Exchange Act ~~of 1934 (Exchange Act) Rule 13a-15(e)~~is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive and financial officers concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. We believe that the financial statements included in this report ~~have concluded that~~fairly present in all material respects our ~~disclosure controls~~financial condition, results of operations 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.~~cash flows for the periods presented.

Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and can only provide reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There have not been any other changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-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

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. We are not aware of any significant legal actions at this time.

ITEM 1A. RISK FACTORS

Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our ~~2016~~2019 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 September 30, ~~2017, there~~2020, the Company recognizes the coronavirus pandemic may have ~~been no material changes to~~an economic impact on the ~~risks disclosed in our most recent Annual Report on Form 10−K.~~Company, but management does not know and cannot estimate what the financial impact may be. 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 A Bee Organic acquisition, we issued 45,684 shares~~Issuer Purchases of ~~common stock~~Equity Securities

On September 30, 2019, our Board of ~~Where Food Comes From, Inc. valued at approximately $98,200 based upon the closing price of our stock on May 30, 2017, of $2.15 per share.~~

For services rendered by our advisors in connection with the A Bee Organic acquisition, we issued 11,628 shares of common stock of WFCF valued at approximately $25,000 based upon the closing price of our stock on May 30, 2017, of $2.15 per share.

~~The issuance of these~~Directors approved a new plan to buyback up to ten million additional shares of our common stock ~~described above was pursuant to~~from the ~~exemption from registration provided by Section 4(2) of~~open market (“Stock Buyback Plan”). Activity for the ~~Securities Act of 1933,~~three months ended September 30, 2020 is 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.follows:

	Number of Shares		Cost of Shares		Average Cost per Share

Shares purchased - July 2020		55,665	$	85,778	$	1.54
Shares purchased - August 2020		74,742		119,840	$	1.60
Shares purchased - September 2020		31,112		59,699	$	1.92
Total		161,519	$	265,317	$	1.64

ITEM 6. EXHIBITS

(a)Exhibits

	Number		Description
	31.1		Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2		Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1		Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
	32.2		Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November ~~2, 2017~~5, 2020	Where Food Comes From, Inc.

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

	By:	/s/ Dannette Henning
		Chief Financial Officer

						Additional						Accumulated
	Common Stock					Paid-in			Treasury			Deficit/Retained
	Shares			Amount		Capital			Stock			Earnings			Total

Balance at December 31, 2016		24,647,186			24,890		10,052,597			(524,892	)		(124,917	)		9,427,678

Acquisition of A Bee Organic		45,684			45		98,176			—			—			98,221
Issuance of common shares for acquisition-related consulting services		11,628			12		24,988			—			—			25,000
Stock based compensation expense		—					130,637			—			—			130,637
Issuance of common shares upon exercise of options		7,001			7		8,161			—			—			8,168
Repurchase of common shares under Buyback Program		(18,214	)		—		—			(39,796	)		—			(39,796	)
Vesting of restricted stock awards		10,250			10		(10	)		—			—			—
Net income attributable to Where Food Comes From, Inc.		—			—		—			—			467,942			467,942
Balance at September 30, 2017		24,703,535		$	24,964	$	10,314,549		$	(564,688	)	$	343,025		$	10,117,850

	Three months		Year to date
	ended		ended
	September 30, 2016		September 30, 2016
Total revenue	$	3,732,770	$	9,622,988
Net income attributable to Where Food Comes From, Inc.	$	229,434	$	397,259
Basic and diluted earnings per share	$	0.01	$	0.02
* less than $0.01 per share

Years ended December 31st:	Unvested stock options		Unvested restricted stock awards		Total Unrecognized Compensation Expense
2017 (three months remaining)	$	14,715	$	23,781	$	38,496
2018		58,695		62,833		121,528
2019		53,552		11,426		64,978
	$	126,962	$	98,040	$	225,002

Years ended December 31st:	Total
2017 (remaining three months)	$	77,611
2018		364,564
2019		362,630
2020		349,755
2021		360,287
Thereafter		4,048,955
Total lease commitments	$	5,563,802

Balance, December 31, 2016	$	1,888,135
Net loss attributable to non-controlling interest in SureHarvest for the nine months ended Sept 30, 2017		(286,841	)
Balance, September 30, 2017	$	1,601,294

	Year to date ended September 30,
	2017		2016
Cash paid for:
Interest expense	$	603	$	876
Income taxes	$	184,440	$	—

Non-cash investing and financing activities:
Common stock issued for remaining interest in Validus Verification Services LLC	$	—	$	200,100
Equipment acquired under a capital lease	$	18,033	$	22,439
Vehicle acquired under note payable	$	54,165	$	—
Lease incentive obligation	$	—	$	162,540
Common stock issued in acquisition of A Bee Organic	$	98,221	$	—
Common stock issued for acquisition-related consulting fess	$	25,000	$	—