Earnings Call: Q2 2021

Aug 5, 2021

Greetings. Welcome to the Where Food Comes From Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note that the conference is being recorded. I will now turn the conference over to your host, Jay Pfeiffer with Investor Relations. You may begin. Good morning, and welcome to the Where Food Comes From 2nd quarter earnings call. Joining me on the call today are John Saunders, CEO And Lee Ann Solanders, President. 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 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 the non GAAP measures. I'll now turn the call over to John Saunders, Chairman and Chief Executive Officer. Good morning, and thanks for joining the call today. This morning, we released our Q2 financial results before the market opened. These results reflected what we hope is the beginning of a return to normalcy as a lot of the restrictions put in place due to the COVID Pandemic began to lift. That said, the recent surge in COVID delta variant and the government's evolving response to that surge Reminds us that the timetable for business as usual is still up in the air. You'll recall that in 2020, as the pandemic Gained momentum, many of our customers for pork, poultry, egg and dairy audits, and to a lesser extent, organic audits, We're forced to limit 3rd party visits to their operations due to government mandated social distancing restrictions. With the approval of standard setting bodies under our unprecedented conditions, we responded to that challenge by transitioning to remote audits Using various video technologies that allowed us to complete a limited amount of work for these customers and generate a modest amount of revenue against what is typically a more meaningful component of our revenue mix. Fast forward to the Q2 this year, as restrictions began to ease, We began to resume on-site audits. This resulted in a sharp increase in revenue at our Validus and Where Food Comes From organic units that coupled with other solid performance by our IMA Global Beef Unit, drove a 16% year over year increase in revenue to 5,100,000 from $4,400,000 For the 6 months, revenue was up 15% to $9,600,000 from 8,300,000 While we are certainly happy to see a resumption of these delayed audits, it is important to note that the revenue derived from these verification categories It's lower margin than our core beef business and that impacted our consolidated margins for both Q2 and the 6 month period. Margins were also impacted by an increase in travel expense related to the resumption in on-site audits and higher compensation costs due to new hires and important to dig into the detail when margins swing like they did this quarter, so our investors can put such swings into context. As a general statement, once we return to normal conditions, we expect margins to become more predictable and to steadily improve as we scale our business. Net income in the Q2 was $202,000 or $0.03 per share, down from $351,000 or $0.06 per share. This was partially due to all the things I just mentioned in terms of margin pressure as well as to an approximate $100,000 increase in SG and A related Growth in headcount and compensation expense, plus higher public company costs related to our April NASDAQ uplisting. Net income through 6 months was $1,400,000 up from $110,000 but remember $1,000,000 of the $1,400,000 from forgiveness of our PPP loan in the Q1. Absent that $1,000,000 in other income, net income was still up approximately 3 times year over year. Adjusted EBITDA in Q2 was down 32% year over year to $535,000 but up 22% to $889,000 for the 6 month period. We generated $1,600,000 in net cash from operations year to date, nearly equaling the $1,700,000 in the year ago 6 month period. Our cash and cash equivalents balance New since our last earnings call, in April, we finalized our uplifting to the NASDAQ Capital Market. This uplifting was intended to raise our profile in the broader And make us eligible for investment by institutional investors and ETFs that were previously unable to invest in our shares due to restrictions on buying unlisted stocks. Since the uplifting was completed, we've experienced a noticeable uptick in unsolicited Interest from institutional investors and expect that to continue to grow as we grow our business. More recently, we announced a Special dividend of $0.15 per share with an aggregate value of $914,000 Since that announcement, we've had some questions about why now And are we going to be on an income stock? As to why now, the Board has been considering it for quite a while. We have what I believe is an unusual Many of our shareholders have been in the stock for 10 or 15 years. A number of our largest shareholders were original investors in our business either prior to or near the time we went public. I believe we are a rare microcap company that actually has shareholders who take the time to show up in person for annual meetings during non pandemic years. With all this in mind and because of the recent timing of our uplifting to NASDAQ, the Board decided that now would be a good time to distribute some cash to shareholders. I think it's also important to point out that our balance sheet was strong enough to support this dividend. We used just 2% of our $5,000,000 cash and cash equivalents balance at the end of the Q1 to pay the dividend. And we believe our remaining cash balance is more sufficient to support growth initiatives and maintain a healthy balance sheet. As to the second question, are we now in income stock? The answer is no. Hence, the designation special dividend. To be clear, we view Where Food Comes From as a growth company That is in the very early innings of the game. We understand that our legacy and new investors buy Microcaps primarily for the promise This is not to say the Board will not authorize another special dividend at some future date. We are focused on returning value to shareholders And stock price appreciation is just one way of doing that. A special dividend is another. Our stock buyback program, which last Year totaled $1,370,000 in purchases is another. Over the past 15 months, we have remained focused on managing our business Through the pandemic, pursuing customer based growth and retention initiatives and maintaining a strong balance sheet, which I'll remind you is still debt free. We are laser focused on delivering profitable and sustainable growth for our stockholders, and we are excited about prospects for doing so. In closing, I want to again thank the Where Food Comes From team for their outstanding effort this year under very challenging Circumstances and our shareholders and other stakeholders for their continued confidence and support. With that, I'll Our first question comes from Terry Thompson, a Private Investor. John, congratulations the quarter and I want to thank you personally for the special dividend. We spoke about that very generally and briefly the last We spoke face to face at our last in person meeting. And I mentioned that to a few people and they kind of poo pooed it. And now I can call them back and tell them I told you so. So I just want to thank you very much. You all are doing a fantastic job there. And I think you Weathered the disruptions in this last year, year and a half in the economy extremely well, and I just feel privileged to be a long time stockholder with you all and look forward to bigger and brighter things in the future. Thank you so much to you and everybody there in Castle Rock. Thank you very much, Terry. Not exactly sure about the conversation, but I really, really appreciate the sentiment. And as I mentioned, we've been very, very Fortunate to have the group of shareholders that we've had and commitment over the long term. And so thank you very much. Thank you. Take care and I hope we're able to get back to in person shareholder meetings. I really enjoyed those. Take care and God bless to everyone there. Thank you, At this time, there are no more questions. We have reached the end of the question and answer session. And I will now turn the call over to John Saunders for closing remarks. Once again, thanks everybody for joining the call and we'll talk to you in 3 months. This concludes today's meeting. Thank you for your participation. You may disconnect your lines at this time.