Where Food Comes From, Inc.

Your access code is confirmed. Please state your name, phone number, and company after the tone. Press the pound key when you are finished. Your entry is confirmed. At any time during playback, you may press zero pound to go to the playback help menu.

Greetings and welcome to Where Food Comes From second quarter earnings conference call. At this time, all participants are on a listen-only mode. A brief 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jay Pfeiffer. Thank you. You may begin.

Good morning, and welcome to Where Food Comes From 2023 Second Quarter Earnings Call. Joining me on the call 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.

Good morning and thanks for joining the call today. This morning we announced our second quarter financial results for the period ended June 30th, 2023. We were very pleased with the results, following as they did a challenging first quarter in which we faced a confluence of headwinds that negatively impacted both our top and bottom lines. The strong results we delivered in Q2 underscore the resiliency of our unique business model. We have by far the industry's most expansive solutions portfolio and are able to provide a level of value that fosters customer loyalty and high customer retention rates. Going forward, we may experience a continuation of certain headwinds over the next several quarters, particularly in the area of inflationary pressures and cyclical cattle trends. But again, we believe our diversification and dominant position in the beef industry, combined with the impact of new solutions coming online, will keep us on a path of long-term sustainable growth and profitability. Now to our Q2 results. Revenue in the second quarter increased 15% to $6.1 million from $5.3 million in the same quarter last year. That growth included a 21% increase in core verification and certification revenue and a 7% increase in product sales, partially offset by a 16% decline in consulting revenue. Higher revenue and a stable expense base led to a 140% increase in net income to $532,000 or $0.09 per diluted share from $222,000 or $0.04 per diluted share in the second quarter last year. Adjusted EBITDA in the quarter totaled $917,000 up 61% from $570,000 in the year-ago second quarter. The strong Q2 performance helped us make up some ground on our year-to-date numbers. Six-month revenue pulled nearly flat at 11.4 million versus 11.5 million last year. You'll recall that the year-ago total included a non-recurring $850,000 consulting fee booked in the first quarter of 2022. Absent that, on an apples-to-apples basis, six-month revenue this year would have been well ahead of prior year levels. Again, verification and certification revenue led the way with an 11% growth year-over-year. Net income at the mid-year point was $653,000, or 11 cents per diluted share, versus $719,000, or 12 cents per diluted share for the same period last year. Adjusted EBITDA was $1.3 million versus $1.5 million. We generated $1.3 million in cash from operations year-to-date and closed the quarter with $3.4 million in cash and cash equivalents, which was down from $4.4 million at year-end due to the continuation of our stock repurchase program. Speaking of which, during the second quarter we bought back $836,000 of stock, raising our year-to-date total repurchases to more than $2 million. Over the past 10 quarters, we have returned approximately $7.5 million in value to stockholders through buybacks and a special dividend. The Board intends to continue considering buybacks and other value-creating measures for the foreseeable future. Turning to some business highlights, you've often heard me speak about the diversity of our business model and the resulting benefits that accrue to us as a company and to our customers. The breadth and depth of our solution portfolio is what sets us apart and what is responsible for the wide moat we have built around our business. We have been very busy this year expanding on what was already far and away the industry's largest solution set. In the first quarter, one of our long-term customers, Certified Piedmontese Beef, became the first brand to be certified to the PaleoFlex diet, which is a relatively new standard of the Paleo diet that is exclusively administered by Where Food Comes From. In the second quarter, we were named exclusive third-party verify for the Bee Friendly Farming Certification, a program that helps farmers and ranchers protect critical pollinators through implementation of regenerative policies within their operations. With these two additions, Where Food Comes From and its divisions now certify customers to 56 different standards. This diversity affords us a distinct competitive advantage, and it positions us as a true one-stop shop able to offer customers convenience and price advantages through the bundling of multiple verification services. On a related note, in the second quarter, we continue to advance our aquaculture initiative through an investment in the seafood traceability company, Blue Trace. a privately held tech company that helps players in the North American shellfish industry comply with government regulations, manage their inventories, and optimize profitability. We are now collaborating with Blue Trace to strengthen our respective aquaculture efforts. Blue Trace is currently focused on the North American seafood industry, but our aquaculture initiative is very much geared towards global opportunities. The cornerstone of this effort is our fish care sustainability standard, which helps seafood producers adhere to higher standards to care for seafood products, employees, and the environment. We are making steady inroads with this project, particularly as it pertains to shrimp in Asian markets, where the majority of shrimp consumed in North America is farmed, but where less than 5% of producers are compliant with any broadly recognized certification. We're still in the early stages of this effort, but we believe it holds excellent potential to grow into a meaningful revenue stream over time. So in conclusion, with another good quarter behind us, we continue to execute our business plan and look forward to talking to you following our third quarter. Thank you again for joining us on the call today. Operator, you may open the call to questions.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from John Knowison. Please proceed with your question.

Hey, good morning, and thanks for taking my call. I was just curious, shrimp interests me a lot because I know a lot of them do come from Asia. How is that going to work in terms of you guys certifying those? Are you going to have to build out a lot of measurement services over in Asia? And does that change your overall growth rate of the company and given the TAM there? And do you think it will increase your growth rate? And how soon do you think that business will be profitable? So a couple of questions there. Sorry about that.

Yeah, no, that's great, John. Thanks for the questions. In 2021, we acquired Pistelsia. Pistelsia has had a large footprint in Southeast Asia through a program called ASIC, the Asian Seafood Innovation Consortium. That program has been around for about 15 years, John, and there's a number of different certification bodies over there that we've worked with in the past that we're evaluating using in addition to creating our own infrastructure. But I think one of the things that we really believe is an opportunity there is to partner or potentially acquire certification opportunities and businesses that currently exist. So we will have a little bit different evolution of the fish care standard and specifically the shrimp care standard in Southeast Asia because it's a global opportunity for us and it's a new growth strategy for us. But we're very excited about the potential we think that it has in It has some of the same dynamics of the cattle industry in the United States, which is really a key driver for us in that there's a lot of fragmentation currently in the business. There's a lot of different types of production systems. So we're very excited about the forecast. I would say it's probably still 12 to 24 months away for us before we really start to understand the trends and where it's coming from. But it's But there is no doubt it's a huge growth opportunity for us, and there's so many consumers here in the United States and around the world that are looking for more information around shrimp. And I'll kind of finish with this and back to the blue trace comment. One of the things that's lacking in shrimp, you probably know this, John, is there's really no true traceability related to where the shrimp is coming from. So we see that the opportunity for sustainable certification is there, but we really believe that the core opportunity is just providing potentially with Blue Trace or with other technologies to create a traceability system within the shrimp industry. And that's kind of what we're tackling right now, just trying to figure out that. So you have to know where it comes from before you can really certify much about it. But great question, and hopefully you get some of my excitement about it because that's It's an industry that we think there's a lot of opportunity in.

Great. Thank you.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment while we poll for questions. There are no further questions at this time. At this point, I'd like to turn the call back over to management for closing comments.

Well, once again, thank you all for your participation. We truly appreciate all of your support, and we'll talk to you in three months.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

You have reached the end of playback for this conference recording. Press 4 pound to increase the volume. Press 6 pound to decrease the volume. Press 7 pound to skip backward in the conference recording. Press 8 pound to go to the