HEADNOTE TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION
Where Food Comes From, Inc. 8-K/A
EXHIBIT 99.2
HEADNOTE TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION
On December 28, 2016, we entered into an Asset Purchase Agreement (the “SureHarvest Purchase Agreement”), by and among the Company, SureHarvest Services LLC (the “Buyer” or “SureHarvest”); and SureHarvest, Inc., a California corporation (“SureHarvest, Inc.”). We acquired substantially all the assets of the Seller. SureHarvest develops software and provides services related to sustainability measurement and benchmarking, traceability, verification and certification to the food and agriculture industries.
Pursuant to the SureHarvest Purchase Agreement, WFCF purchased the business assets of SureHarvest, Inc. in exchange for total consideration of approximately $2.8 million, comprised of approximately $1,122,000 in cash and 850,852 shares of common stock of WFCF valued at approximately $1,710,000 based on the closing price of our stock on December 28, 2016, of $2.01 per share, and a 40% membership interest in SureHarvest. The consideration paid by WFCF in connection with this acquisition was determined by arms-length negotiations between WFCF and SureHarvest, Inc. The transaction was financed through cash on hand.
The Purchase Agreement provides for a period of eighteen months to support any indemnification claims for breach of SureHarvest, Inc. representations, warranties and covenants. The Shares were placed in escrow during such indemnification period. The Purchase Agreement also includes non-dilution provisions.
SureHarvest, Inc. made certain additional customary covenants, including not soliciting or initiating discussions, engaging in negotiations or providing any non-public information concerning alternative business combination transactions with respect to the transaction and covenants not to compete.
The Company has the right of first refusal on the remaining 40% membership interest of SureHarvest. At any time following the thirty-six-month anniversary of the effective date of the Purchase Agreement, the Company shall have the option, but not the obligation, to purchase all the units (the 40% interest) of SureHarvest held by the Seller, and the Seller shall have the option, but not the obligation, to require the Company to purchase all the units of SureHarvest held by the Seller. The purchase price for the units shall be equal to the amount the selling holders of the units would be entitled to receive upon a liquidation of the SureHarvest assuming all of the assets of SureHarvest are sold for a purchase price equal to the product of eight and half times trailing twelve-month earnings before income taxes, depreciation and amortization, as defined, subject to an $8 million floor.
The pro forma adjustments represent the Company’s provisional allocation of acquisition accounting adjustments and are based upon available information and certain assumptions that the Company believes to be reasonable. Consequently, the amounts reflected in the unaudited pro forma condensed consolidated statement of operations are subject to change, and the final amounts may differ substantially from the provisional amounts.
The accompanying pro forma condensed consolidated statement of operations for year ended December 31, 2016, gives effect to the acquisition as if it had been consummated as of January 1, 2016.
The pro forma financial information should be read in conjunction with our historical consolidated financial statements used in the presentation of the pro forma financial information. THE PRO FORMA INFORMATION PRESENTED IS NOT NECESSARILY INDICATIVE OF THAT WHICH WOULD HAVE BEEN ATTAINED HAD THE TRANSACTION OCCURRED AT THE DATES INCLUDED IN THE PRO FORMA FINANCIAL INFORMATION.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
| WFCF Year ended December 31, 2016 | SureHarvest
Year ended December 28, 2016 | Pro Forma Adjustments | Notes | Pro
Forma Year ended December 31, 2016 | ||||||||||||||
| (historical) | (historical) | |||||||||||||||||
| Revenues: | ||||||||||||||||||
| Verification and certification service revenue | $ | 10,308,670 | $ | — | $ | — | $ | 10,308,670 | ||||||||||
| Product sales | 1,180,919 | — | — | 1,180,919 | ||||||||||||||
| Software license, maintenance and support services revenue | — | 1,074,268 | — | 1,074,268 | ||||||||||||||
| Consulting service revenue | — | 603,524 | — | 603,524 | ||||||||||||||
| Other revenue | 125,444 | — | — | 125,444 | ||||||||||||||
| Total revenues | 11,615,033 | 1,677,792 | — | 13,292,825 | ||||||||||||||
| Costs of revenues: | ||||||||||||||||||
| Labor and other costs of services | 5,518,024 | 277,871 | — | 5,795,895 | ||||||||||||||
| Costs of products | 684,121 | 684,121 | ||||||||||||||||
| Cost of software license, maintenance and support services | — | 534,973 | — | 534,973 | ||||||||||||||
| Total costs of revenues | 6,202,145 | 812,844 | — | 7,014,989 | ||||||||||||||
| Gross profit | 5,412,888 | 864,948 | — | 6,277,836 | ||||||||||||||
| Selling, general and administrative expenses | 4,778,389 | 881,440 | 146,462 | (a) | 5,806,291 | |||||||||||||
| Income from operations | 634,499 | (16,492 | ) | (146,462 | ) | 471,545 | ||||||||||||
| Other expense (income): | ||||||||||||||||||
| Interest expense | 1,517 | 38,956 | (38,956 | ) | (b) | 1,517 | ||||||||||||
| Other income, net | (4,131 | ) | — | — | (4,131 | ) | ||||||||||||
| Income before income taxes | 637,113 | (55,448 | ) | (107,506 | ) | 474,159 | ||||||||||||
| Income tax expense (benefit) | 235,547 | — | (21,327 | ) | (c) | 214,220 | ||||||||||||
| Net income | 401,566 | (55,448 | ) | (86,179 | ) | 259,939 | ||||||||||||
| Adjustment to net income for non-controlling interest | 31,605 | — | — | 31,605 | ||||||||||||||
| Net income attributable to WFCF common shareholders | $ | 433,171 | $ | (55,448 | ) | $ | (86,179 | ) | $ | 291,544 | ||||||||
| Net income per share: | ||||||||||||||||||
| Basic | $ | 0.02 | $ | 0.01 | ||||||||||||||
| Diluted | $ | 0.02 | $ | 0.01 | ||||||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||||
| Basic | 23,818,762 | 850,952 | (d) | 24,669,714 | ||||||||||||||
| Diluted | 23,964,026 | 850,952 | (d) | 24,814,978 | ||||||||||||||
See accompanying notes to unaudited pro forma condensed consolidated statement of operations.
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Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the year ended December 31, 2016
The following notes relate to the unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2016:
| (a) | To reflect approximately $365,400 in amortization of the identifiable intangible assets, offset by approximately $219,000 in acquisition related costs incurred by the Seller specifically for broker related monthly retainer fees and reimbursed travel. |
| (b) | To eliminate interest expense incurred by Seller under its note payable. |
| (c) | To record the income tax benefit of SureHarvest |
| (d) | To reflect the pro forma weighted average number of common shares outstanding based upon actual shares issued at closing. |
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