Jay Pfeiffer - Investor Relations John Saunders - Chairman and CEO Dannette Henning - CFO Leann Saunders - President and COO.

Travis Wiedower - Wiedower Capital Terry Thompson - Private Investor Ian Cassel - MicroCapClub.

Welcome to the Where Food Comes From Third Quarter Earnings Call. [Operator Instructions]. It is now my pleasure to introduce your host Jay Pfeiffer, Investor Relations. Thank you, Mr. Pfeiffer. You may now begin..

Good morning and welcome to the Where Food Comes From 2017 third quarter earnings call. During the course of this call, we'll be making forward-looking statements based on current expectations, estimates, projections that are subject to risk.

Statements about future revenue, expenses, profitability, cash, growth strategy, new customer wins, 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 about the company.

Today we'll also be discussing EBITDA and adjusted EBITDA, which are non-GAAP financial measures provided as a complement to the results provided in accordance with Generally Accepted Accounting Principles.

We use and we believe investors benefit from presentation of EBITDA and adjusted EBITDA in evaluating our operating performance because it provides us and our investors with additional tools to compare our operating performance on a consisting basis by removing the impact of certain items that management believes do not directly reflect our core operations.

It is the Company's policy not to provide specific guidance with respect to future revenue and earnings expectations, or new customer wins. I'll now turn the call over to John Saunders, Chairman and Chief Executive Officer.

John?.

Good morning and thanks for joining us today. Q3 was eventful and productive quarter for Where Food Comes From. From a financial performance perspective revenue increased 42% year-over-year to $4.7 million and $3.3 million a year ago. Gross margins increased 50 basis points to 48.4% from 47.9%.

Net income increased 29% to 290,000 from 225,000 and adjusted EBITDA grew by 64% to 744,000 from 454,000.

As a reminder we think adjusted EBITDA is more accurate method of evaluating the profitability and heath of our business because our bottom line is significantly impacted by non-cash depreciation and amortization expense primarily related to assets acquired in the SureHarvest transaction.

But specifically depreciation and amortization increased 224% in the quarter to $213,200 from $65,900 and increased 218% Year-to-date to 634,000 from 199,000. I should also note that earnings continued to be impacted by investments in sales and marketing activities and in hiring, training and retaining new personnel to keep pace with our growth.

In addition we continue to incur legal costs associated with our ongoing M&A strategy as well higher public company costs including the implementation of new accounting standards at the beginning of 2018. So again we think EBITDA is a better measure and we feel good where we are from a profit standpoint relative to our revenue growth.

Year-to-date we have generated nearly 1.6 million in cash from operations and our balance sheet remained strong with cash, cash equivalents and short term investments of 41% to 4.6 million from 3.2 million at year-end.

Turning to some operational highlights, we had number of exciting developments during the third quarter and I'd like to focus on a few of them. The most obvious involve China reopening its markets to U.S. [indiscernible] ports for the first time since the ban was put in place in 2003 due to the of B&C in the United States.

This reopening resulted in revenue spike for us as producers for U.S.

producers as scramble to get into compliance with China's source verification and traceability requirement and keep in mind that because China is conducting spot checks on beef imports to screen for banned substances such as ractopamine producers are also engaging us to conduct natural and/or NHTC audits.

On top of that the source verification for China requires that a program compliant tag be put in place at the source of origin. Therefore in addition to a sharp increase in the verification activity in Q3 we had an 81% increase in electronic tag revenue. We expect China related verification activity to continue to increase into the foreseeable future.

Remember China's the world's second largest but fastest growing consumer beef. Their growing middle class is driving demand and that's a population estimated at more than 300 million. U.S.

producers will be competing with Australia, New Zealand, Brazil and for its consumers but our beef is widely considered to be the finest in the world so we believe U.S. producers will be able to capture existing market share and capitalize on increasing demand as more consumers enter the middle class.

Another highlight during the third quarter was our success in winning new business in areas that are outside of what we would generally be considered our core competencies in the food and livestock sectors. In August we announced that we have been selected the exclusive third party verifier for certified American Grown Flowers.

We may not be aware that most flowers sold in the U.S. are imported from South America and other areas of the world so this program the largest customer facing certification in the floral industry [indiscernible] through its Buy America movement. Accordingly where food comes from we will conduct audits for U.S.

flower growers who want to distinguish their products under the certified American Grown brand. In September the iconic Ben & Jerry's Ice Cream made Where Food Comes From its exclusive provider of verifications to ensure its milk and cream suppliers are compliant with the company's caring dairy standards.

These standards address cow care, sustainable farming and farmer livelihood. Where Food Comes From is now conducting on firm audits to ensure all Ben & Jerry suppliers meet the stringent guidelines of the program.

More recently our Validus unit was selected by the center for Canine Welfare as an exclusive verification provider for the new Canine Care certified program.

More than 26 million dogs are purchased from breeders annually and this program sets rigorous time space standards that address both the physical needs and the behavioral wellbeing of those animals.

The programs Standards of Care are result of extensive research and pilot testing the Purdue University's Center for Animal Welfare Science in response to a request from responsible breeders seeking to differentiate themselves from non-certified breeders.

So these are three disparate examples of verification programs that didn't even exist six months ago and here they are three new revenue streams from Where Food Comes From driven by what is undoubtedly a major consumer megatrend, the desire to do more about the origins and/or production practices involving the things they buy.

I also see this new business as a tribute to the people throughout our organization in all of our operating units with the help to build the reputation, confidence, reliability and excellent customer service in an ever-growing number of verification areas. In all three cases I just outlined these customers sought us out because of that reputation.

So to recap Q3 we continue to produce very solid financial results are now benefiting from four new revenue streams in addition of three new verification standards to what is already the industry's most diversified solutions portfolio. And with that I will open the call to questions.

Operator?.

[Operator Instructions]. Our first question comes from the line of Travis Wiedower with Wiedower Capital..

It looks like the SureHarvest segment was up quite a bit over the first two quarters of the year.

Was there anything notable there? Or was that just kind of normal growth?.

Fairly normal growth. We actually think the second half of the year is going to be much more strong for SureHarvest so we anticipate a strong fourth quarter as well..

Okay.

So that's kind of more of a seasonal thing than anything?.

Correct..

Have guys looked into of doing any auditing for the Marijuana industry or producers at all?.

Great question. We have, we've done some extensive research into it and we have a number of different standards and areas where that could be an opportunity the most notable one that we have seen is the opportunity to verify some production units as organic which we found as much more difficult when rubber meets the road. So we see that.

We're also confronted with obviously the federal, the state aspects of what that looks like and fairly confident that the [indiscernible] allowed verification of Marijuana.

I will verify that but it is not illegal to do it so the question really becomes what standards you would verify against and as of yet those standards at least on a more national basis to our understanding do not exist. So we're keeping pretty good close track of it Travis but we haven't found the right opportunity yet to enter..

Okay. I appreciate it. I figured especially with you guys being based out of Colorado you might kind of advantage there you know but obviously becomes federally illegal at some point. Then last question I had I saw in the 2016 10K that you guys added STS [ph] to your list of competitors.

Did they do something specific they called you - start thinking of them as more of a direct competitor than past years?.

Good question. No, I think it was just casting the net out one more time and looking as we went through the Q2 to see those competitors so as GS just came up on a couple different stream that they didn't before. So nothing really changed with their activities..

[Operator Instructions]. Our next question comes from Terry Thompson who is a Private Investor. Please proceed with your question..

The Canine Verification, if I remember correctly you all do livestock verifying correct?.

Correct..

Have you given any thought to moving into verifying of the retail [indiscernible]?.

Yes we have and we have looked at different ways to do that. In fact when we verify through several standards that we audit via the Validus operating unit there's a number of those operations which are suppliers, pet food manufacturers so we've actually done a lot of the ground work.

We're working with renderers and different type of operations across the country that are involved at a supplier level to pet food manufacturers. So we're working in that direction literally every day..

Have you had any contact with Merrick at Hereford, Texas? I use them pretty exclusively for my standard puddle and they are definitely high-end, $3 a can and so forth and if there was verified pet food there, I wouldn't even think twice about buying them for my baby. So I think that would be a really good market to get in..

Could you spell it Terry?.

Merrick. When they demo their pet foods at pet stores they put them in a crockpot and they eat themselves it's all human grade food..

Did you try some?.

No I missed the demo, but I've heard about it at two separate stores, pretty effective sales if you're selling pet food but they are definitely high end and it might be somebody that might be interested in adding this to their labels..

We have got the name written down. We're on..

Okay, great. They out of Hereford, Texas - it's pretty much a feed lock town too far [indiscernible]..

Yes we have a few operations there.

Do you have a contact?.

I'm just a customer, but last time I bought it I bought almost $200 worth at a time. I don't have any contacts. I don't know anybody in the company, I'm just a dedicated customer..

One more question Terry, how many dogs do you have?.

I just have one Garbo, black female standard puddle and she is spoilt rotten..

Well thanks Terry. Thanks for the question..

Thank you for another great quarter. I've been looking forward to the end of the year and give my best to everyone in Castle Rock..

Thank you. Our next question comes from the line of Ian Cassel with MicroCapClub. Please proceed with your question..

My question is about China and I was just curious if you could just maybe shine some light on some of the work that you have had to do as a company to kind of prepare for the demand that you're seeing and maybe some more color on some of the work that you're going to have to do to bring on that additional demand and yes if you could provide some color on that it would be great..

Yes, sure I've got Leann here, I will let her answer that question Ian..

So in preparation as you can imagine we have probably spent three years preparing for the opportunities because we have been talking about China for that long. So we had discussions around what we would have to put in place for verification program.

So we have literally have been just growing a trigger win when the opportunity hits, which was just basically working with the USDA expert verification instruction and then for [indiscernible] internally obviously around documents referred in and contacting all of our customers.

So we had that ready to go so that we could be the first listed as soon as it hits..

Okay. And do you still see the opportunity I mean when you look at it as a baseball game and we're kind of in the first inning, you know how long do you think it takes for us to kind of bring on full supply or potential supply at least in the near term.

Do you think it's a two or three year process to kind of get up to the figures that you talked about in the last conference call I think 3 million to 5 million?.

So when you think about that opportunity because it requires first verification in the life span of an animal it's going to take a long time for that pipeline to the supply chain to fulfil the needs.

I mean right now what you've packers and processers in the United States just trying to get back into that market that takes a long time to capture market share so they're doing that aggressively. I guess I've been surprised that's a volume that are already trying to source.

We have seen more demand than I thought in a very short period of time but it will take years to develop those supply chains in China. So I don't want to be overly optimistic on how long what you say baseball analogy how long it takes to get to that inning. So we have been seeing the - get 10 and 11 so I don't Ian..

I guess my next question and it might still go to Leann is on relationship like Ben & Jerry's I'm just curious how long it took for a relationship like that from first conversation to implementation of something like that and then also maybe if you can provide some color on how many other additional brands of kind of that nature you think the opportunity set is to do similar things with it out there?.

So when you think about a brand like Ben & Jerry they have so much to lose in the partner that they choose.

So it takes a lot of time for them to have enough confidence in that partner selection and here is where I and John talked about earlier we have a great deal of people that work very hard on gaining the trust of those customers and that's what they work on every day and it is also based on the reputation so they are always looking at referrals from other brands where they feel like we can go in there and continue to protect that brand integrity.

I think the future is you know honestly when you look at these brands and where the future holds on that list honestly with all of them looking at third party verification to protect their brand. So hope that answers your question..

Yes.

I mean this might be a softball but when you look at what they're doing was there really anybody else that could really provide this type of service and support that you guys provide them in relation to the auditing and everything kind of under one umbrella?.

Sure, but I think it goes back to what we Ian said at the very beginning that their brand was really their value and if they don't make the right choice there it could significantly impact that brand. We just literally have to turn on the news daily to see that.

Yes there is a lot of opportunity there and we think that Where Food Comes From is the obvious choice to everybody but we're not the only group out there that says that they can perform audits for sure..

Okay. Last question and then I will back in the queue, John when you look at the M&A pipeline, is that still kind of on your mind when you wake up every morning and also maybe if you could just talk a little bit about the breadth of that M&A pipeline if it's changed over the last every one to two years..

Just as critically hot as it's always been and again there's really nothing other than the timing of the relationship and how that proceeds from both the buyer and seller perspective as far as when we can predict or when I can predict that any of these potential transactions would occur so there's that.

On the - I would just look at the things that we talk about you know those were the areas that are critically important and that's where the growth opportunity is.

So if you go back through what we talked about, what we're launching our new partners that we've got you know I mentioned a few of them are pretty excited about, we will see what happens there but that and then the existing markets that have always been there..

[Operator Instructions]. Our next question comes from the line of [indiscernible] who is a Private Investor. Please proceed with your question..

Thanks for taking my call, my question, Ian covered a bunch of them but I guess my last question was just you know what is an average contract on the verification side look like? I mean we see a lot of pressure releases for this and does that one year, several year is it a 100,000, is it a million like what kind of I know they're all different but on average what does that mean when we see a press release like that from a financial standpoint?.

In general when we perform a verification and we're doing that on a timing and materials basis but just use a round number it's probably about $2500 for us to get somebody on site on location.

When we perform those audits, and those certifications for a specific group and it is totally dependent on the size of that group and that supply and if you take that supply base and multiply it times the number of audits or the cost per audit that's what roughly the opportunity is for us as a verification unit and it's always on an annual basis..

And so how many for example I mean on average can you even just talk through a contract or something give us a sense of what that is so 2500 per audit I mean your average customer will have how many audits spots or?.

We don't have an average customer. Well you would be probably better off doing is going and looking at the actual website of the brand that we talk about and they would talk more about the number of locations that they have.

It's one of those things in food and agriculture business that you don't talk a lot about how big your spread is, so in these case in all of our customers would be the same and that's something that they're going to discuss we're not going to discuss publicly..

[Operator Instructions]. There are no further questions at this time. I'd like to turn the floor back to management for closing comments..

Thanks again for the time everybody and I will look forward to talking to you after the first through year. Happy Holidays. One more thing everybody we look forward to the next version of Where Food Comes From coming sometime around Thanksgiving, so I hope you all enjoy. Take care..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..