Where Food Comes From, Inc.

Greetings and welcome to Where Food Comes From, 2020 Fourth Quarter and Year-End Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jay Pfeiffer, Investor Relations. Thank you. You may begin.

Good morning and welcome to the Where Food Comes From 2020 fourth quarter and year-end earnings call. Joining me on the call today are John Saunders, CEO, LeAnn Saunders, President, and Danette Henning, CFO. During this call, we'll make forward-looking statements based on current expectations, estimates, and projections that are subject to risk. Statements about current and future financial performance, growth strategy, customers, business opportunities, market acceptance of our products and services, and potential acquisitions are forward-looking statements. Listeners should not place undue reliance on these statements as there are many factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our publicly filed documents as well as our news releases and website for more information. Today we'll also discuss adjusted EBITDA, a non-GAAP financial measure provided as a complement to GAAP results. please refer to today's earnings release for important disclosures regarding non-GAAP measures. I'll now turn the call over to John Saunders, Chairman and Chief Executive Officer. John.

Good morning, and thanks for joining the call today. This morning, we released our 2020 financial results before the market opened. As stated in our news release, we were pleased with our performance as our results for both the fourth quarter and full year were generally in line with our internal forecasts. which took into account the ongoing impact of the pandemic across our industry. We're expecting COVID-related headwinds to continue at least through the second quarter of this year, but we are well prepared in the event they persist beyond that. More on that in a minute, but first a few financial highlights. We reported revenue of $20.1 million, down slightly from $20.8 million a year ago despite COVID restrictions eating into our four core revenue categories. Our revenue mix showed a $1.3 million decline in total verification revenue, partially offset by $559,000, or 17% increase in tag sales associated with our growing beef business. Our two software segments combined for modest growth year over year. We posted our highest ever net income of $1.4 million in 2020, which equated to $0.22 per share. In addition to having a lean operating model, we benefited from lower costs in the area of marketing, travel, trade shows, and audit fees. We think some of these cost reductions are sustainable, while others will go away in a post-pandemic environment. We generated $2.5 million in cash from operations, which is down from $2.9 million a year ago. Working capital improved to $4.4 million from $3.1 million year over year. And as always, we remain focused on balance sheet discipline. We also accelerated our share buyback program in 2020 using a little over $1 million of internally generated cash to retire 132,000 shares of stock. We'll continue to evaluate share repurchases in 2021. From a revenue standpoint, we are very pleased to have closed out 2020 down just 3% year over year, given the devastating impact of COVID on our industry. I know I've emphasized this on past calls, but it bears repeating. We have a very resilient business model that is based on the largest and most comprehensive services portfolio in our industry. Because we audit to more than 40 standards covering a wide array of food groups, we are well prepared to weather downturns in one or more segments of our business. In the case of the 2020 pandemic, our auditing activity for pork, poultry, dairy, and egg customers was severely curtailed, due to those producers operating in relatively enclosed production facilities where third-party audits were restricted. As a result, revenue from these four service categories was well below prior year levels. The fact that we continue to serve these four segments to the level that we did is a testament to the resourcefulness of our auditing staff, which made a rapid transition to remote audits that utilize video technologies and other workarounds to perform tasks that previously required our physical presence at customer sites. Another factor contributing to our relatively stable revenue in 2020 was the strength of our beef business, which nearly offset declines in the verification categories I just mentioned. Beef-related revenue growth was driven by producer demand for premium verifications and packer prioritization of cattle with premium verifications. Specifically, when packing plants were struggling to remain open during periods of high infection rates among their workers, cattle with premium verifications moved to the head of the line, and most of those cattle had been verified by our IMI global unit. Another growth driver for our beef business was our new beef care sustainability program launched last year. Shortly after introduction, beef care was adopted by two of the world's largest meat packers, one of which publicly announced that it was joining with us in committing to the largest beef transparency program in the U.S. BeefCare is just one of the new offerings under our CARE suite of sustainability programs that also includes solutions for dairy, pork, chicken, and turkey. If you haven't already done so, I encourage you to visit WFCFCare.com to learn more about these programs because sustainability is extremely important when consumers are making purchasing decisions today. Retailers and food service operators are setting aggressive sustainability goals, and the CARE program helps the food supply chain meet these goals. In addition to our new CARE initiative, we added four new standards in four different proteins. We acquired Pistelsia in 2020, giving us a foothold in the seafood industry, the only major food sector where we didn't have a president to date. Yesterday, we also announced that we were named the exclusive certification body for the upcycled certification standard. If you're not familiar with the upcycle movement, particularly as it pertains to food, go to www.upcycledfood.org. ...developed by the Upcycled Food Association is designed to reduce food waste by promoting the upcycled food economy. Upcycled products use safe nutritional ingredients that for any number of reasons would otherwise have gone to waste. Upcycled certification is available to operators that grow, produce, manufacture, process, and trade in food beverages and other related food products. To earn certification, they must demonstrate that the ingredients they handle have been sourced and produced using verifiable supply chains. It is estimated that more than 40% of food grown annually goes to waste. In the US alone, it is believed that 62.5 million tons of food is wasted annually in the growing and processing stages alone. The upcycled food movement has gained significant traction in the last couple of years with more than 400 upcycled food products in the U.S., including food and beverages, dietary supplements, pet food, cosmetics, personal care products, and household cleaners. Future market insights puts the industry at roughly $46 billion and growing. We're already working with our first customers, and we think this certification can be a steady growing contributor to revenue going forward. Excuse me. On an unrelated topic, in November we affected a 144 reverse stock split that we're pleased to say was well received by investors. The primary purpose of the reverse split was to raise our share price to a level that meets the initial listing standards of the NASDAQ capital market to which we have applied for listing. The application is currently under review. We think an up listing will help raise our profile in the broader investment community. and make us eligible for investment by institutional investors, ETFs, and indexes that were previously unable to buy our shares due to restrictions on buying unlisted stocks. We have been advised by NASDAQ that we meet their listing requirements and expect to hear from them in the very near future. In closing, I want to again thank the Where Food Comes From team for their outstanding effort this year under very challenging circumstances. and also our shareholders and other stakeholders for their continued support. So with that, operator, I'll open the call to questions.