Where Food Comes From, Inc. (NASDAQ:WFCF) is a leading provider of third-party verification and certification services for the food and agriculture industry. The company's unique business model has allowed it to navigate the challenges of the cyclical cattle industry and deliver consistent profitable growth, even in the face of headwinds.

Financials

In the latest quarter, WFCF reported revenue of $5.6 million, up from $5.3 million in the same period last year. This growth was driven by a 17% increase in verification and certification service revenue, which reached $4.4 million. However, product sales declined 25% to $0.7 million due to smaller herd sizes and fewer sourcing and verification activities. Gross profit increased 9% to $2.3 million, while operating income rose 68% to $261,000. Net income for the quarter was $178,000, or $0.03 per diluted share, compared to $121,000, or $0.02 per diluted share, in the prior-year period.

For the full year 2023, WFCF reported annual revenue of $25.1 million and net income of $2.2 million. The company's annual operating cash flow was $2.8 million, and its free cash flow reached $2.7 million. These strong financial results demonstrate the resilience and sustainability of WFCF's business model.

Business Overview

Where Food Comes From, Inc. was founded in 1996 and incorporated in Colorado in 2006. The company's original name, Integrated Management Information, Inc. (d.b.a. IMI Global), was changed to Where Food Comes From, Inc. in 2012 to better reflect its mission of providing third-party verification and certification services for the food and agriculture industry.

WFCF's principal business is conducting on-site and desk audits to verify that claims being made about livestock, aquaculture, crops, and other food products are accurate. The company's services are essential for producers, processors, and brands that want to differentiate their products and meet the growing consumer demand for transparency and traceability.

WFCF operates through two reportable segments: Verification and Certification, and Professional Services. The Verification and Certification segment includes the company's core verification and certification services, as well as its Where Food Comes From Source Verified® retail and restaurant labeling program. The Professional Services segment provides a wide range of consulting, data analysis, and technology solutions to the food and agriculture industry.

Diversified and Resilient Business Model

One of the key strengths of WFCF's business model is its diversification across multiple food groups and over 50 programs and organizations. This diversification has allowed the company to navigate the cyclical nature of the cattle industry and offset the impact of headwinds in that segment.

For example, in the latest quarter, the company's verification and certification service revenue grew 17%, more than offsetting a 25% decline in product sales. This resilience is a testament to the breadth of WFCF's customer base, which ranges from small family farms and ranches to large multinational consumer packaged goods (CPG) companies.

The company's diversification strategy has also included strategic acquisitions, with WFCF completing more than a dozen small acquisitions over the years. These acquisitions have strengthened the company's capabilities and expanded its reach into new markets and certifications.

One recent example is the acquisition of the Upcycled Certified program from the Upcycled Food Association. Upcycled Certified is a rapidly growing certification that provides consumers a tangible solution to shop sustainably and avoid food waste. Since the program's launch in 2021, the number of certified products has increased by 110% to 531, spanning categories such as snack foods, pet foods, and beverages.

WFCF views Upcycled Certified as a promising sustainability trend that can become a meaningful component of its revenue mix over time. The financial and environmental benefits of upcycling are compelling, and the company believes this certification is in the early stages of a longer-term growth trajectory.

Operational and Financial Strength

WFCF's operational and financial strength is evident in its ability to deliver consistent profitable growth, even in the face of challenges. In the latest quarter, the company's operating income increased 68% year-over-year, and its net income grew 47% to $178,000, or $0.03 per diluted share.

The company's strong cash flow generation is also noteworthy. In the first quarter of 2024, WFCF's operating cash flow increased 48% to $0.7 million, and its free cash flow reached $0.5 million. Over the past 13 quarters, the company has returned nearly $11 million to shareholders through share buybacks and a special dividend.

WFCF's financial ratios also demonstrate its strength and stability. As of March 31, 2024, the company had a current ratio of 1.62 and a quick ratio of 1.29, indicating a healthy liquidity position. Its debt ratio was just 0.18, and its interest coverage ratio was an impressive 560.6, reflecting its low leverage and strong ability to service its debt obligations.

Geographic and Segment Breakdown

WFCF's customer base is primarily located throughout the United States, with the majority of its revenue generated domestically. The company does not currently provide a detailed geographic breakdown of its revenue.

In terms of segment performance, the Verification and Certification segment accounted for the majority of WFCF's revenue in the latest quarter, generating $5.2 million, or 92% of total revenue. This segment includes the company's core verification and certification services, as well as its Source Verified® retail and restaurant labeling program.

The Professional Services segment contributed $0.4 million, or 8% of total revenue, in the first quarter of 2024. This segment provides consulting, data analysis, and technology solutions to the food and agriculture industry.

Outlook

WFCF's management remains cautiously optimistic about the company's future prospects, despite the ongoing challenges in the cattle industry. The company expects the headwinds in its beef business, such as smaller herd sizes and drought-induced feedlot placements, to persist to some extent throughout 2024, but it is hopeful to see improvement starting in 2025.

The company's diversified business model and focus on innovation and strategic acquisitions position it well to navigate these challenges and continue delivering profitable growth. WFCF's management believes the company is in the early innings of a long-term growth trend, driven by increasing consumer demand for transparency and traceability in the food supply chain.

Risks and Challenges

However, the company is not without risks. WFCF operates in a highly competitive industry and is subject to regulatory changes and evolving consumer preferences. The company also faces risks related to the cyclical nature of the cattle industry, as well as potential disruptions from pandemics, inflation, and weather-related events.

Conclusion

Where Food Comes From, Inc. is a diversified leader in the food verification and certification industry, with a unique business model that has allowed it to navigate the challenges of the cyclical cattle industry and deliver consistent profitable growth. The company's focus on innovation, strategic acquisitions, and meeting the evolving needs of its customers positions it well for long-term success. With a strong financial profile, a diversified customer base, and a promising outlook for emerging certifications like Upcycled Certified, WFCF appears well-positioned to continue its industry leadership and create value for shareholders.