Where Food Comes From, Inc.

Greetings and welcome to Where Food Comes From, Third Quarter Earnings Conference Call. At this time, all participants are on 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. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Jay Fiver, Investor Relations.

Thank you. Good morning and welcome to the Where Food Comes From 2024 Third Quarter Earnings Call. Joining me on the call today are CEO John Saunders, President Leigh Ann 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 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 material from our forward-looking statements. We encourage you to review our publicly filed documents as well as our news releases and websites 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 news 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. Total revenue in the third quarter increased slightly to $7.1 million from $7 million. That included a 2% increase in verification and certification services to $5.5 million from $5.4 million year over year. It also included an increase in product revenue which rose 9% or about $100,000 to $1.3 million from $1.2 million. Professional services revenue declined to $0.3 million from $0.4 million year over year. Gross profit in the third quarter declined slightly to $2.8 million from $2.9 million. SG&A increased 13% year over year to $2.2 million from $1.9 million, reflecting higher marketing, personnel, and travel costs. As a result of the higher fixed costs and lower operating margins, we reported a 32% decline in net income to $0.5 million or $0.09 per diluted share versus $0.7 million or $0.13 per diluted share last year. Adjusted EBITDA in the third quarter was 29% lower at $0.8 million versus $1.2 million. We continued our share buyback program in the third quarter, repurchasing 66,620 shares of stock at a cost of $734,000. Turning to the nine-month results, total revenue through nine months increased 4% to $9.1 million from $18.4 million in the same period last year. Revenue mix included verification and certification services up 9% to $15.2 million from $13.9 million. Product revenue down 8% to $2.9 million from $3.1 million. Professional services revenue of $1.0 million compared to $1.3 million. Gross profit through nine months was $7.8 million, up 3% from $7.5 million a year ago. SG&A expense increased 10% to $6.3 million from $5.7 million due to the aforementioned increases in marketing, personnel, and travel costs. Operating income -to-date declined 18% to $1.5 million from $1.8 million. Net income through nine months decreased 16% to $1.2 million or $0.21 per diluted share compared to net income of $1.4 million or $0.24 per diluted share in the prior year period. Adjusted EBITDA was $2.1 million versus $2.5 million -over-year. We generated $2.8 million in cash from operations through nine months, which was a 6% increase compared to $2.6 million in the same period last year. Our cash and cash equivalence balance through nine months increased 4% to $2.8 million from $2.6 million at 2023 year-end. We have a solid balance sheet with no long-term debt. Through the first nine months of 2024, we bought back 216,039 shares of stock. That total included 135,838 shares as part of our ongoing buyback program and another 80,201 shares in a single private purchase. Given the persistent headwinds in our beef fabrication business, we're pleased with our overall business performance. We expect those headwinds to continue until the cyclical or hertz downsizing begins to cycle back around and the impact of drought conditions subsides. As you probably know, our beef business, which includes multiple verification services as well as hardware sales, is our largest revenue generator. So I'll reiterate that we're very fortunate to have a diverse non-beef services mix that right now is more than compensating for the temporary slowdown in our beef-related revenue. On another topic, a question we frequently hear from investors is, how might government regulation play into our growth potential, both with our beef business and other traceability and verification activities? That's a particularly timely question today due to a couple recent developments relating to USDA activities. We touched on this in our earnings release this morning, but I'd like to provide some more color because we think it's important that investors understand the potential positive impact of these developments. The first involves the USDA's Animal Disease Traceability, or ADT, program. We've been talking about this for several years and are now able to report some meaningful forward progress with this initiative. In April of this year, the USDA issued a general rule to strengthen procedures and compliance for our animal disease traceability in order to enhance the regulator's ability to manage an animal disease outbreak. A key component of the rule is a requirement that for certain classes of cattle, ranchers transition to electronic RFID tags from the traditional metal clip tag that must be read manually. Beginning last week on November 5th, in order to qualify for the interstate transport, heifers over 18 months, dairy cattle, bulls, and certain other animals destined for interstate transfer are required to have electronic RFID tags. As you know, we have required RFID EID tags for years because they allow the beef supply chain to read tags and verify claims at the speed of commerce. These tags are critical to our ability to accurately trace cattle and to ensure that the claims producers are making about their beef products have been verified by an independent third party. So what does all this mean for where food comes from? Well, in the short term, we're already seeing a positive impact in terms of new tag customers coming on board. Although this growth has been slower than we'd hoped, the .C.A.'s decision to provide tags and subsidies to help soften the financial impact of the new requirement. Whether those subsidies are sustainable is yet to be determined because there are a few complicating factors. Cheap among them, the continuing availability of federal funding and potential tax implications for ranchers. Another important consideration is that these subsidies limit ranchers to vanilla one-dimensional tags as opposed to the more reversible, customizable tags that we provide our customers. We also think that there's a high likelihood that some ranchers now transitioning to electronic tags for traceability purposes will determine that they may as well take full advantage by engaging in one or more of our value-added programs to help them catch higher sales for their beef. Our long-term view on this change is the more cattle with RFID tags translate into a much larger addressable market for us over time. We estimate that up to an additional 10 million head of cattle will be RFID tagged over the next year or so with the potential for another 90 million cattle becoming eligible for our value-added programs over the next 10 years. That gives us a lot of run rate considering our current annual tag run rate is roughly two and a half million. For those of you doing the math, your next question is what percentage of those additional tagged cattle will we be able to convert to customers for our value-added services? That's a great question, the one we're not ready to speculate on at this early stage. What I will say is we believe this transition will inevitably lead to new growth phases in our beef business. Our second recent example of how government regulation is impacting our business is the new Strengthening Organic Enforcement, or SOE, rule implemented by the USDA's National Organic Program. This rule is designed to increase transparency and reduce fraud in organic certification claims. It is the most significant update to the organic regulations since the Organic Fence Production Act of 1990. Specifically, SOE requires domestic brands and producers as well as importers of organic products to comply with new requirements around record keeping and reporting, supply chain traceability audits, label review, inspections, and other processes. In addition, it mandates that other participants in the supply chain, entities once exempt from oversight, must now comply with the same requirements as the producers and brands themselves. These include brokers, traders, co-manufacturers, and other entities. Our organic business has been a strength for us in recent years as we've dedicated significant resources to new customer acquisition as well as refinement of our SOE Organic Technology Platform that directly addresses key requirements of the SOE program at a time when compliance is becoming more challenging and costly. SOE Organic automates the process of achieving an annually renewing organic certification, replacing cumbersome paper-based processes with easy to use software that our customers depend on to lower costs and streamline compliance. The software is flexible, nimble, accepting changes in real time that are immediately available on our end. So as usual, we've got a lot going on across multiple fronts. I'm proud of the work we're doing and how individuals throughout our organization continue to lead the industry in innovating new solutions that benefit producers and consumers of agricultural products in the United States. We believe we are positioned to remain at the forefront of our industries for years to come. With that, I'll turn the call over to questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone when to get your line is in the question queue. You may press star two 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. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment please while we poll for questions. There are no questions at this time. At this point, I'd like to turn the call back over to John Saunders for closing comments.

Well, thank you all again for your time and we'll look forward to talking to you in three months. Have a great fall.

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