Where Food Comes From, Inc.

Greetings. Welcome to Where Food Comes From Third Quarter Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Jay Pfeiffer, Investor Relations. Jay, you may begin.

Good morning and welcome to the Where Food Comes From 2021 Third Quarter Earnings Call. Joining me today are CEO John Saunders, President Leanne Saunders, and Chief Financial Officer Danette Henning. 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. John.

Good morning, and thanks for joining the call this morning. Today we released our third quarter financial results before the market opened. Those results reflect a slow but growing continuation of the normalization of our industry that we first began to see in the second quarter. Specifically, customers for our pork, poultry, egg, and dairy verification services continued to open their facilities to third-party visitation, which was severely curtailed in 2020 due to the pandemic. We're still not back to pre-pandemic levels, but we're getting there. The resumption of these delayed audits contributed to an increase in revenue in the quarter, although because these audits or categories are typically less profitable than our beef audits, The margin pressure we experienced in the second quarter carried into the third quarter. The good news is our bottom line was much improved on a year-over-year basis, and we think we're well positioned to sustain our revenue growth and profit momentum going forward. To the numbers. Revenue in the third quarter and nine-month period increased 6% and 11% respectively on a year-over-year basis. Net income in Q3 grew 19% to $900,000 or $0.14 per share, compared to a net income of $700,000 or $0.12 per share in the same quarter last year. Net income through nine months grew 164% to $2.2 million, up from $800,000, although you recall that approximately $1 million of the $2.2 million profit resulted from forgiveness of our PPP loan in the first quarter of this year. Not counting the impact of PPP loan forgiveness, net income was still up double digits. Earnings per share year to date was $0.36, up from $0.13 last year. As I mentioned earlier, gross margins have been impacted by the resumption of lower margin verification activity and, to a lesser extent, the accrual of performance bonuses that we suspended a year ago when revenue was under pressure during the height of the pandemic. In addition, we have made several new hires in the areas of sales and personnel management that contributed to higher costs year over year. Despite this, our SG&A line actually decreased slightly in Q3 and was lowered by approximately $111,000 in the year-to-date period as we continue to look for more ways to operate more efficiently. Adjusted EBITDA in Q3 increased 18% to $1.5 million from our nine-month adjusted EBITDA was 20% higher year-over-year at $2.4 million. We generated $3 million in net cash from operations year-to-date, a 39% increase from $2.2 million a year ago. Working capital increased 15% to $5 million from $4.4 million. Our cash and cash equivalents balance grew to $5.6 million from $4.4 million at 2020 year-end, despite the fact that we paid out more than $900,000 in the form of a one-time special dividend to our stockholders in the third quarter. We also continued to repurchase shares under our share buyback program in the quarter, and year-to-date have taken 50,000 shares off the market at a cost of more than $700,000. These efforts to return value to stockholders underscore the confidence we have in our business, both now and, more importantly, into the future. The steady emergence from pandemic restrictions combined with continued momentum in our beef business, driven in part by growing popularity of our CARE-certified offering, have strengthened our industry leadership position while positioning us to extend our track record of revenue and profit growth and strong cash generation. Switching gears, I want to say a few words about our uplisting to NASDAQ that occurred in April of this year. You'll recall that uplisting was intended to raise our profile in the investment community and make us eligible for investment by funds that are prohibited from buying shares of companies that are not traded on a major exchange. Following the uplisting, we experienced a significant increase in interest from this new class of investor with the total number of institutions up several fold over the last six months. Among our new investors are the Vanguard Total Stock Market Index Fund, the iShares MicroCap ETF, the Fidelity MicroCap Index Fund, BlackRock, and several others. In closing, I want to thank Where Food Comes From employees at all levels of our business for the outstanding effort they put forth each and every day. Our employees are the backbone of our business and deserve enormous credit for the positive results Where Food Comes From has been able to deliver over the years. I also want to thank our customers and shareholders for their continued confidence and support. And with that, I'll open the call to questions. Operator?