UNITED STATES SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C. 20549

 

FORM 10-K

 

☒       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended December 31, 2016

 

☐       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

 

Commission File No. 333-133624

 

WHERE FOOD COMES FROM, INC.  

(Exact name of registrant as specified in its charter) 

Colorado 43-1802805
(State of incorporation or organization) (I.R.S. Employer Identification No.)

 

202 6 th Street, Suite 400

Castle Rock, CO 80104 

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code:

(303) 895-3002

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐   No ☒ 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐   No ☒ 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.     Yes ☒           No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒    No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 

Large accelerated filer: ☐   Accelerated filer: ☐
Non-accelerated filer: ☐   Smaller reporting company: ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒ 

 

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of February 20, 2017, was 24,652,187. The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2016, the last business day of our most recently completed second fiscal quarter was $28,231,262, based on the closing stock price on that date of $2.55.

 

DOCUMENTS INCORPORATED BY REFERENCE: Part III is incorporated by reference from the registrant’s Definitive Proxy Statement for its 2017 Annual Meeting of Stockholders to be filed, pursuant to Regulation 14A, within 120 days after the close of the registrant’s 2016 fiscal year.

 

 

 

 

 

TABLE OF CONTENTS

 

      Page
  PART I  
     
ITEM 1. BUSINESS 3
ITEM 1A. RISK FACTORS 10
ITEM 1B. UNRESOLVED STAFF COMMENTS 15
ITEM 2. PROPERTIES 16
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. MINE SAFETY DISCLOSURES 16
     
  PART II  
   
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 17
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 55
ITEM 9A. CONTROLS AND PROCEDURES 55
ITEM 9B. OTHER INFORMATION 55
     
  PART III  
     
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 56
ITEM 11. EXECUTIVE COMPENSATION 56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 56
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 56
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 57
     
  SIGNATURES  

 

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PART I

 

ITEM 1. BUSINESS

 

GENERAL

 

Where Food Comes From, Inc. and its subsidiaries (“WFCF”, “the Company”, “our”, “we”, or “us”) is a leading trusted resource for third-party verification of food production practices in North America. The Company supports more than 12,000 farmers, ranchers, vineyards, wineries, processors, retailers, distributors, trade associations and restaurants with a wide variety of value-added services provided through its family of verifiers, including IMI Global, International Certification Services (ICS), Validus Verification Services, Sterling Solutions, and our newest acquisition, SureHarvest Services (SureHarvest). In order to have credibility, product claims such as gluten-free, non-GMO, non-hormone treated, humane handling, and others require verification by an independent third-party such as WFCF. The Company’s principal business is conducting both on-site and desk audits to verify that claims being made about livestock, crops and other food products are accurate. In addition, the Company’s Where Food Comes From Source Verified® retail and restaurant labeling program utilizes the verification of product attributes to connect consumers directly to the source of the food they purchase through product labeling and web-based information sharing and education. With the use of Quick Response Code (“QR”) technology, consumers can instantly access information about the producers behind their food.

 

WFCF was founded in 1996 and incorporated in the state of Colorado as a subchapter C corporation in 2005. The Company’s shares of common stock trade on the OTCQB marketplace under the stock ticker symbol, “WFCF”.

 

The Company’s original name – Integrated Management Information, Inc. (d.b.a. IMI Global, Inc.) – was changed to Where Food Comes From, Inc. in 2012 to better reflect the Company’s mission. Early growth was attributable to source and age verification services for beef producers who wanted access to markets overseas following the discovery of “mad cow” disease in the U.S. Over the years, WFCF has expanded its portfolio to include verification and software services for most food groups and 30 standards. This growth has been achieved both organically and through the acquisition of other companies.

 

BUSINESS OVERVIEW

 

What We Do

 

The Company is one of the nation’s largest independent, third-party provider of food production audits and uses rigorous verification processes to ensure that claims made by food producers and processors are accurate.

  

The Where Food Comes From® labeling program offers food retailers and restaurants a means of connecting consumers to information on where and how the food they purchase has been grown or raised.

 

With the acquisition of SureHarvest on December 28, 2016, the Company employs a software-as-a-service (SaaS) revenue model that bundles annual software licenses with ongoing software enhancements and upgrades and a wide range of professional services that generate incremental revenue specific to the food and agricultural industry.

 

The Company’s business benefits from growing demand by consumers, retailers and government for increased transparency into food production practices.

 

Consumers: Due to concerns about food safety, animal welfare and an overall increase in health consciousness, consumers are demanding more information about the food they purchase.

 

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Retailers: Responding to consumer demands for increased transparency as well as to the negative impact food scandals have on their bottom lines, retailers are requiring their suppliers to adhere to more stringent traceability and verification of product claims.

 

Government Regulation: The U.S. Department of Agriculture’s (USDA’s) Animal Disease Traceability program, being phased in over the next few years, gluten-free testing requirements, and ingredient labeling regulations are all impacting product verification.

 

Growth Strategy

 

Due to organic growth in our portfolio of auditing standards, consumer demand and acquisitions, our sales have grown rapidly from $1.1 million in 2006 to $11.6 million in 2016, a 10-year compounded annual growth rate of approximately 27%.

 

Our growth strategy is as follows:

● To cover more food groups than any other verification provider. Currently we verify beef, lamb, pork, poultry, dairy, eggs, produce and grain. In the future we hope to include seafood, beverages and other produce.

● To offer solutions for ALL participants in the food supply chain including feed and input providers, ranchers, producers, packers, auction barns, processors, distributors, restaurants, retailers and consumers.

● To expand on the industry’s largest solutions portfolio. We currently are verifying or certifying to more than 30 certification standards or guidelines. To our knowledge, that is the most in the industry.

● To continue organic growth. We leverage our ‘bundling’ capability to aggressively pursue new customers, while sustaining our recurring revenue model and high retention rates.

● To continue growth through merger and acquisition opportunities. Through selective acquisitions, we can expand our footprint, add new services, food groups and revenue streams.

 

In line with our growth strategy, we regularly evaluate acquisition opportunities as a means of achieving our long-term strategic objectives.

 

Acquisition of Validus Verification Services, LLC

 

On September 16, 2013, we entered into an Asset Purchase and Contribution Agreement (the “Asset Purchase Agreement”), by and among the Company, Validus Verification Services LLC (Validus), and Praedium Ventures, LLC (Praedium), formerly known as Validus Ventures LLC.

 

Pursuant to the Purchase Agreement, WFCF caused Validus to be organized to purchase and acquire certain audit, assessment and verification business assets of Praedium. The Company acquired a 60% interest in Validus in exchange for aggregate consideration of approximately $1.5 million, which included $565,000 in cash and 708,681 shares of common stock of WFCF valued at approximately $940,000 based upon the closing price of our stock on September 16, 2013, of $1.32 per share. On March 16, 2016, the Company exercised its call option to purchase the remaining 40% of the outstanding stock of Validus in exchange for aggregate consideration of approximately $363,000, which included $163,000 in cash and 93,057 shares of common stock of WFCF valued at approximately $200,000 based upon the closing price of our stock on February 29, 2016, of $2.15 per share.

 

Acquisition of SureHarvest Services, LLC

 

On December 28, 2016, we entered into an Asset Purchase Agreement (the “SureHarvest Purchase Agreement”) , by and among Where Food Comes From, Inc.; SureHarvest Services LLC, a California limited liability company and wholly-owned subsidiary of WFCF; SureHarvest, Inc., a California corporation (SureHarvest, Inc.); and Jeff Dlott, the President, key manager and shareholder of SureHarvest, Inc..

 

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Pursuant to the SureHarvest Purchase Agreement, WFCF purchased 60% of the business assets of SureHarvest, Inc. in exchange for total consideration of approximately $2.8 million, comprised of $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. The Company has the right of first refusal on the remaining 40% membership interest of SureHarvest.

 

SureHarvest develops software and provides services related to sustainability measurement and benchmarking, traceability, verification and certification to the food and agriculture industries. Their patented sustainability software solutions support more than 2,200 agri-food operations, including growers, packers, shippers, processors, wineries and trade associations. We believe the transaction adds complementary solutions and services, a unique customer base and a valuable patent portfolio. It expands and diversifies our commodity reach with high value specialty crops, including wine grapes, almonds, hazelnuts, mushrooms, cut flowers, leafy greens and other fresh produce. Additionally, the software as a service (SaaS) model bundles annual software subscriptions with professional services to provide predictable, recurring revenue.

 

INDUSTRY BACKGROUND

 

The value-added food industry has been growing rapidly for the past several years in response to increased consumer interest about food production. Per the 2010 U.S. Census, less than 1% of United States citizens are involved in producing food; thus there is a growing interest from consumers regarding how their food is produced. We are also in an increasingly global food market with food products traveling around the world, and brands differentiating themselves in the market. These key drivers are increasing the number of food labeling claims made on food products. Natural and/or organic are examples of food labels that indicate that the food or other agricultural product has been produced a certain way.

 

Natural and organic sales are only part of the story of how consumers look for the verification of practices tied to food labeling claims. Other factors are also becoming increasingly more important to consumers, evidenced on menus and product labels. While not an exhaustive list, some of the issues that farms, ranches, producers, processors, restaurants and retailers are addressing include: how animals are cared for and handled, how a product’s production impacts the environment and societies, and what inputs were used in the production of food items (like antibiotics).

 

As consumers want more assurance about the trustworthiness of labeling claims, there is a growing trend for verification of raising practices. Additionally, as the agriculture, livestock and food industry continues to mature and expand internationally, there is an increasing need to record, manage, report and verify information regarding the source, age, genetic background, animal treatment, nutrition, and other credence attributes. We believe verification of labeling claims by an independent third-party can meet consumer demands and expectations. Third-party verification also benefits producers, processors, distributors, restaurants, and retailers by addressing marketplace differentiation and global competitiveness.

 

Current Marketplace Opportunities

 

Because of growing demand for increased transparency into food production practices, we believe there are three main market drivers to promote forward momentum for our business:

 

Market Driver #1 - Consumer awareness and expectations

 

● A recent survey conducted by Acosta, a leading full-service sales and marketing agency in the consumer packaged goods industry, which was released in 2015, indicates consumers are actually changing their shopping habits in the grocery store. Increasingly more Americans are shopping the perimeter of the grocery store rather than stocking their pantries, and choosing to cook healthy meals at home, even if it comes at a higher cost.

 

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● According to the US Grocery Shopper Trends 2014 Report, more than 25% of consumers surveyed are seeking products that are minimally processed, locally grown or produced, with recognizable and a short list of ingredients. Jenny Zegler, Global Food and Drink Analyst at Mintel, said “These trends explore how consumers’ evolving priorities, opportunities from advancements in functional formulation and the almost inescapable reach of technology will affect food and drink in the coming year. Consumers are not only the influencers, as shifting economics, natural phenomena and social media are shaping what, how, where and with whom consumers are choosing to eat and drink…”

 

● Based on a survey in the March 13, 2014 Cone Communication Food Issues Trend Tracker, food safety and nutritional value rose to the top as the most important factors when hitting the grocery aisles. Additionally, at least two-thirds of Americans prioritized the following as significant factors when deciding what makes it into the shopping cart: locally produced, sustainable packaging, animal welfare, non-GMO, protection and renewal of natural resources.

 

● Three in five Americans are on the lookout for non GMO-labeled foods when shopping. Per the March 13, 2014 Cone Communication Food Issues Trend Tracker, 39% believe that non-GMO foods are healthier, 32% are concerned about the effects on the environment, and 24% question the ethics behind the use of GMOs.

 

● According to the USDA website, the U.S. market for certified organic products was estimated at more than $39 billion as of October 2015 while USDA-approved organic operations have grown more than 250% since 2002. Increasing consumer demand for healthy, better-for-you products produced with sustainable agricultural practices is driving growth in the organic market.

 

Market Driver #2 - Global competitiveness among retailers

 

● Restaurant chains and retailers with dominant market shares and large buying power, like McDonald’s and Wal-Mart, are leading the way in prioritizing sustainable food supply initiatives in answer to consumer demands. With information literally at our fingertips, Google searches and smart phone apps are making it easier to expose where sustainable food supply chains are, and where they are not.

 

● Producers, packers, distributors and retailers understand that verification, identification and traceability are key competitive differentiators. Oftentimes, it is necessary for export into international markets, including Korea, Russia and the European Union.

 

Market Driver #3 - Government regulation

 

● In January 2013, the Food Safety Modernization Act (FSMA) issued two major proposed rules regarding preventive controls in human/animal food and produce safety. Compliance dates for some businesses began September 2016. Under the new rules, the food safety plan defined by the regulation differs from traditional hazard analysis and critical control points (HACCP) plans. It must include a hazard analysis, preventive controls, monitoring procedures, corrective action procedures, verification procedures, a supply chain program, and a recall program. We have begun to see significant movement in companies requesting our consulting expertise to developing programs designed to assist them in maintaining compliance with the new rules.

 

● The Animal Disease Traceability Rule primarily covers beef cattle 18 months of age or older. Under the final rule, unless specifically exempted, livestock moved interstate must be officially identified and accompanied by an interstate certificate of veterinary inspection or other documentation, such as owner-shipper statements or brand certificates.

 

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● The Saudi Arabia market closed to U.S. beef in 2012. Since that time, the beef industry has been working with the U.S. government to re-open that market, which officially happened in early August 2016. In order to be approved to meet the export requirements, a company must have or must be approved by a process verified plan (PVP), like our Verified Natural product. U.S. exports to Saudi Arabia in 2010 and 2011 were valued at approximately $30 million. We believe the Saudi Arabia market focuses on the highest quality middle meats, making it a valuable market for the U.S. to re-gain access.

 

● After a recent visit to the US which included an audit of the beef supply chain, Chinese officials announced in September 2016 that the ban on imports of US beef has been lifted. While the technical requirements for export verification have yet to be determined, source and age verification will be required, at a minimum. China is the world’s second largest buyer of beef, but beef imports from the US to China have been banned since the 2003 Bovine Spongiform Encephalopathy (BSE) outbreak, also known as “Mad Cow Disease.”

 

Current Concerns in Our Industry

 

US Beef

 

U.S. beef exports to the European Union (EU) must be third-party verified as High Quality Beef (a USDA feeding claim) and non-hormone treated cattle (NHTC). With duty-free access to the EU lowering the cost of doing business in Europe, we believe that it offers significantly more potential for third-party NHTC verification services and High Quality Beef verification services. However, due to the current strength of the US dollar, we are seeing downward pressure on NHTC cattle prices causing the momentum of these programs to slow.

 

Cattle markets moved to the lowest level since 2011 in the continuation of a trend that began during the first quarter of this year. High prices in cattle date back to the drought of 2012. When grain prices exploded to all-time highs, animal protein producers could not afford to feed their herds. As feed prices rose, producers sent the animals to processing plants early to avoid losses that would result from high feed costs. It takes between 18 and 24 months to raise cattle, so thus began the great cattle bull market of 2014. Moreover, the population of planet Earth now stands at over 7.3 billion people. In Asia, diets have changed as wealth has grown. A traditional rice-based diet now includes more complex proteins, which has increased demand for beef and pork in the region. In 2015 and early 2016, ample supplies of grains lowered the input costs for producing cattle. Therefore, lower grain or feed prices filtered through and caused the price of live cattle to drop over the course of 2015, and this continued into 2016.

 

During the second quarter, a rally in soybean and soybean product prices caused feed prices to rally. Live cattle prices fell as producers were facing a scenario similar to what they saw in 2012. The potential for an early slaughter to avoid high feed prices caused live cattle futures to fall as soybeans, and other grain prices moved higher. Slower growth in China along with rising feed prices contributed to lower cattle prices during 2016. Lower cattle prices are driving many producers to reduce overall operating costs, which includes opting out of certain verification programs.

 

We believe this may be a short-sighted reaction and we encourage our customers to stay in those verification programs. We continue to see higher premiums paid for verified beef. We also know that early slaughter creates a short-term oversupply and increases the chances of another shortage developing in 2017 as herd sizes decline. Retail meats markets have remained virtually unchanged. At this time, we have no way to reasonably estimate the future impact this could have on our business. Management continues to monitor the situation. We believe we have diversified our product offerings across multiple species such that it did not have a significant negative impact on our 2016 operations.

 

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SALES

 

Our revenues are generated primarily from third-party verification services, hardware sales and our labeling program, Where Food Comes From®. We sell our products and services directly to customers at various levels in the agriculture, food and livestock supply chain. Our customers include some of the largest U.S. beef and pork packers, organic producers and processors, and specialty retail chains. No single customer generated more than 10% of total net revenue in 2016 or 2015.

 

Service Revenues

 

We offer a wide array of verification and certification services to help food producers, brands and consumers differentiate certain attributes and production methods in the marketplace. We are recognized and utilized by numerous standard setting bodies as an accredited verification or certification service provider. We enable food producers and brands to make certain claims on live animals or packaged food products by verifying that they are meeting the standards or guidelines associated with the claim(s) they are making.

 

Most of our service offerings can be bundled to provide a “one-stop shop” for customers that have multiple levels of verification and certification needs, such as source verification and food safety certification.

 

We also offer consulting, program development and web-based development services on a customized basis to meet special customer requirements. For the years ended December 31, 2016 and 2015, our third-party verification programs provided 88.8% and 87.3% of our total revenue, respectively.

 

Product Sales

 

In support of our third-party verification service offerings, we offer hardware products (primarily cattle identification ear tags) to our customers. While these hardware products have lower profit margins than our proprietary offerings, they allow us to offer our customers a comprehensive solution. Approximately 10.2% and 11.6% of our total revenue was provided by the sale of hardware during the years ended December 31, 2016 and 2015, respectively.

 

Other Revenue

 

All of our verification products that are source-verified qualify for our WhereFoodComesFrom® verification seal of approval. As a third-party verification service provider, we must review each individual producer’s or food company’s claim and system to ensure that 100 percent of the supply is managed through a third-party verification program recognized by the USDA, International Organization for Standardization (ISO) and/or another internationally recognized standard setting body. This revenue stream primarily represents a price per pound fee for use of our WhereFoodComesFrom® label.

 

The WhereFoodComesFrom® labeling program offers food retailers and restaurants a means of connecting consumers to information on where and how the food they purchase has been grown or raised. Grocery stores and restaurants can display the Where Food Comes From® label along with a quick response (QR) code consumers can scan with smart phones to access information on the farmers and ranchers who produce food for that establishment.

 

We offer incentives to select producers and processors who exclusively use our verification and certification services in connection with our distinctive brand.

 

MARKETING

 

Our marketing strategy includes direct marketing, advertising, event sponsorship, and trade show participation. From a public relations perspective, members of our staff are frequently quoted in industry trade journals and requested as speakers at various industry events as subject matter experts on the topics of animal identification, traceability, branding, third-party verification and certification, and the USDA verification programs.

 

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In order to reach additional customers, we continually develop strategic marketing partnerships with leading companies in the industry with complementary abilities and products. We do not currently rely on any third-party contracts with distributors, licenses or manufacturers in conducting our business.

 

We also use social media sites such as Facebook and Twitter to help promote our business, market our product offerings, and connect consumers with current topics in the agriculture, livestock and food industry.

 

COMPETITION

 

The competition for third-party verification services in the food and agriculture industry is growing more intense, especially within the organic market. As of December 31, 2016, we estimate that there are approximately 8 key competitors serving the food and agricultural industry, including Quality Assurance International, California Certified Organic Farmers, Oregon Tilth, Organic Crop Improvement Association, Earth Claims, FoodChain ID, NSF International, SGS and SCS Global Services. Differentiation hinges upon understanding all facets of food verification and the complex compliance challenges to make product verifications efficient, cost-effective, and seamless. Our core business and expertise focuses on the “on farm” verifications to a variety of standards, guidelines and criteria including source verification, natural, animal care and well-being, and sustainability verification.

 

SEASONALITY

 

Our business is subject to seasonal fluctuations. Significant portions of our revenues are typically realized during the second and third quarters of the fiscal year when the calf marketings and crop production are at their peak. Because of the seasonality of the business and our industry, results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

 

INTELLECTUAL PROPERTY

 

We create, own and maintain a variety of intellectual property assets that we believe are among our most valuable assets. Our intellectual property assets include patents and patent applications related to our innovations, products and services, trademarks related to our brands, products and services, and other property rights. We also have licensing arrangements when features from our programs are desirable to incorporate into either a new or an existing technology we offer. We seek to protect our intellectual property right assets through patent, copyright, trade secret, trademark and other laws of the United States and other countries, and through contractual provisions. Additional information regarding certain risks related to our intellectual property is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K.

 

EMPLOYEES

 

As of December 31, 2016, we had 60 employees. Our future success is substantially dependent upon the performance of our key senior management personnel, as well as our ability to attract and retain highly qualified technical personnel. Additional information regarding certain risks related to our employees is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K.

 

AVAILABLE INFORMATION

 

Our corporate website is located at www.wherefoodcomesfrom.com. We make available free of charge on our investor relations website under “SEC Filings” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (SEC). Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov .

 

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EXECUTIVE OFFICERS OF THE REGISTRANT

 

John Saunders , 45, founded the Company in 1998 and has served as the Chief Executive Officer since then. Mr. Saunders is also the Chairman of the Board of Directors of the Company and has served in this position since 1998. Previously, Mr. Saunders was a partner and consultant for Pathfinder Consulting Services, Inc. in Parker, Colorado. An expert in both technology and the livestock industry, Mr. Saunders is a graduate of Yale University.

 

Leann Saunders , 46, has been the President of the Company since 2008. Mrs. Saunders is also a Director on our Board of Directors and has served in this position since January 2012. Prior to 2003, Mrs. Saunders worked for PM Beef Holdings (“PM”), an integrated beef company, and developed a supply system for PM’s Ranch to Retail product line and managed PM’s USDA Process Verified program. She then served as the company’s Vice President of Marketing and Communications. Prior to joining PM in 1996, Mrs. Saunders worked for McDonald’s Corporation as a Purchasing Specialist, and Hudson Foods Corporation. Mrs. Saunders graduated with a B.S. in Agriculture Business and an M.S. in Beef Industry Leadership from Colorado State University. Mrs. Saunders sits on the Board of Directors for the International Stockmen’s Education Foundation, and was the chair-elect for the United States Meat Export Federation for the 2014-2015 year.

 

Dannette Henning , 46, has been the Chief Financial Officer of the Company since January 2008. Prior to her appointment, she was engaged by the Company as a consultant in November 2007. From 2004 to 2007, Mrs. Henning was the Controller for Einstein Noah Restaurant Group. From 2001 to 2003, she served as the Controller for Vari-L Company. Mrs. Henning’s previous experience includes financial management positions with KPMG Peat Marwick, DF&R Restaurant Company, and CSI/CDC Company. Mrs. Henning is a Certified Public Accountant with more than 25 years of professional experience. She received a B.B.A. degree in Accounting from the University of Texas at Arlington.

 

Family Relationships

 

John Saunders, our CEO and Chairman of the Board, is married to Leann Saunders, our President. Both Mr. and Mrs. Saunders serve on our Board of Directors.

 

ITEM 1A. RISK FACTORS

 

In addition to the other information included in this report and our other public filings and releases, the following factors should be considered when evaluating our business, financial condition, results of operations and prospects:

 

We operate in a competitive industry with a limited market characterized by changing technology, frequent introductions of new service offerings, service enhancements, and evolving industry standards.

 

We compete with many other vendors of products and services designed for tracking cattle and other livestock and for herd management and crop production practices. Our competitors range from small start-up companies to multi-national firms. Our competitors may have significantly more financial, technical and marketing resources than we do. Competition is likely to intensify as current competitors expand their service offerings and as new companies enter the market. Additionally, competition may intensify as our competitors enter into business combinations or alliances, and established companies in other market segments expand to become competitive with our business. Increasing competition may result in reduced margins and the loss of market share. Our competitors may offer broader service offerings or technologies that are more commercially attractive and gain greater market acceptance than our current or future products. Additionally, new technology may render our products and services obsolete.

 

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The success of our business model depends on the broad acceptance of our technologies into markets that are continuing to develop as a result of the increasing focus on food safety and assurance.

 

We are currently benefiting from a slow but growing movement among the agriculture, livestock and food industry to source and/or age verify products. This emerging trend is fueled in part by consumers’ focus on food safety and assurance. However, we can offer no assurances that there will be market acceptance of our technologies. Furthermore, some of our primary target segments within the agriculture, livestock and food industry are experiencing unpredictable economic conditions and are expected to continue to struggle with supply, trade and profitability issues in the near term. Although we believe that our products, if adopted on a wide-scale basis, would have a significant impact on improving the safety, quality and confidence in the world’s food supply, our customers for these products historically have been very slow to change and reluctant to adopt new technologies and business practices.

 

We face risks of rapidly changing regulations which may negatively impact our programs.

 

Regulations and standards are continually evolving and present a challenging risk. For example, in January 2013, the Japanese government announced a change to its import requirements on US beef. Because the change enabled a significant increase in the amount of product qualifying for export to Japan, it negatively impacted the premiums typically seen in the marketplace for source and age verified cattle. As a result, it negatively impacted our source and age verification business by approximately 68% from 2012 to 2013. Due to the diversification of our product offerings and our strategy of managing to profitability, we were able to quickly minimize the impact of these adverse changes. While we attempt to mitigate these risks by creating innovative programs that mitigate the risk of rapidly changing regulations, we can give no assurance that we will be successful in overcoming the potential negative impact to the results of our operations.

 

We face risks that highly contagious diseases or viral outbreaks may negatively impact the source of product we are able to verify.

 

Today, infectious disease and viral outbreaks appear to be emerging more quickly than ever. For example, Porcine Epidemic Diarrhea Virus (PEDv) negatively impacted the pork/sow industry in 2014 and Highly Pathogenic Avian Influenza, more commonly known as Bird Flu, is currently impacting poultry operations. Additionally, contagious disease or viral outbreaks create increased bio-exclusion considerations in our business. While we have created innovative solutions that mitigate the risk of transferring disease, we can give no assurance that we will be successful in overcoming the potential negative impact to the results of our operations.

 

In the event that market demand for third-party verified products declines, our customers may not be able to generate sufficient revenues to justify the purchase of our verification solutions and consulting services.

 

Public attitudes towards food production practices may be influenced by claims that these products are unsafe for consumption or pose unknown health risks. For example, decreased demand for beef and other livestock products could have a material adverse effect on the operating results and financial condition of our existing or prospective customers. If operating results of our customers are impaired, the resources that our customers can devote to building information systems for tracking cattle and other livestock and herd management are reduced, which in turn may limit purchases of our verification solutions and consulting services. Therefore, our ability to generate revenue is subject to the risks and uncertainties relating to the financial condition of our customers.

 

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We look for opportunities to expand our presence in international markets in which we may have limited experience, and inherently international operations are subject to increased risks which could harm our business, operating results and financial condition.

 

We continually seek to expand our product and service offerings in international markets. As we expand into new international markets, we will have only limited experience in marketing and operating our products and services in such markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets. Certain international markets may develop more slowly than domestic markets, and our operations in international markets may not develop at a rate that supports our level of investment.

 

In addition to uncertainty about our ability to expand into international markets, there are certain risks inherent in doing business internationally, including, but not limited to:

 

● trade barriers and changes in trade regulations;

● difficulties in developing, staffing and simultaneously managing a large number of varying foreign operations as a result of distance, language and cultural differences;

● stringent local labor laws and regulations;

● longer payment cycles;

● currency exchange rate fluctuations;

● political or social unrest or economic instability;

● import or export restrictions;

● seasonal volatility in business activity;

● risks related to government regulation or required compliance with local laws in certain jurisdictions, including those more fully described above; and

● potentially adverse tax consequences.

 

One or more of these factors could harm our future international operations and consequently could harm our brand, business, operating results and financial condition.

 

Our business could suffer if we are unsuccessful in making, integrating, and maintaining our acquisitions and investments.

 

We have acquired and invested in a number of companies, and we may acquire or invest in or enter into joint ventures with additional companies. These transactions create risks such as:

 

● disruption of our ongoing business, including loss of management focus on existing businesses;

● problems retaining key personnel;

● additional operating losses and expenses of the businesses we acquired or in which we invested;

● the potential impairment of tangible and intangible assets and goodwill, including as a result of acquisitions;

● the potential impairment of customer and other relationships of the company we acquired or in which we invested or our own customers as a result of any integration of operations;

● the difficulty of incorporating acquired technology and rights into our offerings and unanticipated expenses related to such integration;

● the difficulty of integrating a new company’s accounting, financial reporting, management, information and information security, human resource, and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;

● for investments in which an acquired company’s financial performance is incorporated into our financial results, either in full or in part, the dependence on such company’s accounting, financial reporting, and similar systems, controls, and processes;

 

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● the difficulty of implementing at companies we acquire the controls, procedures, and policies appropriate for a public company; and

● potential unknown liabilities associated with a company we acquire or in which we invest.

 

As a result of future acquisitions or mergers, we might need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortization expenses related to intangible assets, any of which could reduce our profitability and harm our business. In addition, valuations supporting our acquisitions and strategic investments could change rapidly given the current global economic climate. We could determine that such valuations have experienced impairments or other-than-temporary declines in fair value which could adversely impact our financial results.

 

Our future success depends upon our ability to obtain and enforce patents; prevent others from infringing on our patents, trademarks and other intellectual property rights; and operate without infringing upon the patents and proprietary rights of others.

 

We will be able to protect our intellectual property from unauthorized use of third parties only to the extent that it is covered by valid and enforceable patents and trademarks. Patent protection generally involves complex legal and factual issues and, therefore, the enforceability of patent rights cannot be predicted with certainty. Moreover, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. In the event that patents owned by us do not provide adequate protection, we may not be able to prevent competitors from offering substantially similar products and services.

 

In the event that third parties claim that our current or future products or services infringe upon their intellectual property, we may face litigation and be prevented from selling the products and services at issue. Infringement or other claims could be asserted or prosecuted against us in the future, and it is possible that past or future assertion or prosecutions could harm our business. Litigation either in defense of our intellectual property rights or in response to infringement claims made by others may be both expensive and time consuming, which in turn would adversely affect our business.

 

We could be harmed by data loss or other security breaches.

 

As a result of our services being web-based and the fact that we process, store, and transmit large amounts of data, including personal information, for our customers, failure to prevent or mitigate data loss or other security breaches, including breaches of our vendors’ technology and systems, could expose us or our customers to a risk of loss or misuse of such information, adversely affect our operating results, result in litigation or potential liability for us, and otherwise harm our business. We use third-party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, and other functions. We have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third-party vendor. Nevertheless, such measures cannot provide absolute security, and there can be no assurance that there may not be a material adverse effect on our operating results in the future.

 

We face risks related to system interruption and lack of redundancy.

 

We experience occasional system interruptions and delays that make our websites and services unavailable or slow to respond and prevent us from efficiently providing services to third parties, which may reduce our net sales and the attractiveness of our services. If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure, and take other steps to improve the efficiency of our systems, we could experience system interruptions or delays that adversely affect our operating results.

 

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Our computer and communications systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins, and similar events or disruptions. Any of these events could cause system interruption, delays, and loss of critical data, and could prevent us from providing timely services, which could make our service offerings less attractive and subject us to liability. Our systems are not fully redundant and our disaster recovery planning may not be sufficient. In addition, we may have inadequate insurance coverage to compensate for any related losses. Any of these events could damage our reputation and be expensive to remedy.

 

Our future success depends to a significant degree upon the continued service of key senior management personnel, in particular, John and Leann Saunders.

 

Both John and Leann Saunders’ reputation and prominence in the field provide us with a strong competitive advantage. While they are currently bound by employment agreements, we can offer no assurance that John and/or Leann Saunders will be able to continue to work for us in the event of an unforeseen accident, severe injury or major disease, or on a long-term basis. The loss of key personnel could have a material adverse effect on our business and operating results.

 

Directors, executive officers, principal stockholders and affiliated entities beneficially own or control a significant amount of our outstanding common stock and together meaningfully influence our activities.

 

As of February 20, 2017, John Saunders, our Chairman and CEO, and Leann Saunders, our President, beneficially owned in the aggregate approximately 30% of our common stock. These officers, if they determine to vote in the same manner, would have a significant impact on the outcome of any matter requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions or terms of any liquidation. This concentration of ownership may have the effect of delaying or preventing a change in control of our company that may be favored by other stockholders. This could prevent transactions in which stockholders might otherwise recover a premium for their shares over current market prices.

 

Because we are not presently subject to the same corporate governance standards as companies listed on registered stock exchanges or NASDAQ, our officers and directors may have interests adverse to those of the shareholders.

 

Registered stock exchanges and NASDAQ have enhanced corporate governance requirements that apply to issuers that list their securities on those exchanges. For example, we are not required to have any independent directors or to adopt a code of ethics. In certain circumstances, management may not have the same interests as the shareholders’ and conflicts of interest may arise. Notwithstanding the exercise of their fiduciary duties as directors and executive officers and any other duties that they may have to us or our shareholders in general, these persons may have interests different than yours which could adversely affect your investment.

 

We do not currently intend to pay cash dividends.

 

We have not declared or paid any cash dividends on our common stock since our incorporation and do not anticipate that we will do so in the foreseeable future. Our present policy is to retain all available funds for use in our business development, operations and expansion. Payment of future cash dividends, if any, will be at the discretion of the Board of Directors and will depend on our financial condition, results of operations, contractual restrictions, business prospects and other factors that the Board of Directors considers relevant. In the absence of dividends, investors will only see a return on their investment if the value of our common stock appreciates.

 

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Future sales of our securities in the public or private markets could adversely affect the trading price of our common stock and our ability to continue to raise funds in new stock offerings.

 

It is likely that we will sell common stock or securities exercisable or convertible into common stock in order to finance our future growth plans. Future sales of substantial amounts of our securities in the public or private markets would dilute our existing shareholders and potentially adversely affect the trading prices of our common stock and could impair our ability to raise capital through future offerings of securities. Alternatively, we may rely on debt financing and assume debt obligations that require us to make substantial interest and principal payments that could adversely affect our business and future growth potential.

 

Price volatility of our publicly traded securities could adversely affect investors’ portfolios.

 

In recent months and years, the securities markets in the United States have experienced high levels of price and volume volatility, and the market prices of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operating performance or prospects of such companies. It is likely that continual fluctuations in market and share price will occur. Our shares of common stock trade on the OTCQB marketplace, which may not provide as much liquidity for our common stock as would a registered stock exchange. The price of our common stock has been subject to price and volume volatility in the past and will likely continue to be subject to such volatility in the future. In addition, unlike the registered stock exchanges, there are few corporate governance requirements imposed on OTCQB quoted companies.

 

Because our common stock is deemed a “penny stock”, an investment in our common stock should be considered high risk and subject to marketability restrictions.

 

Since our common stock is a penny stock, as defined in Rule 3a51-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), it will be more difficult for investors to liquidate their investment even if and when a market develops for our common stock. Until the trading price of our common stock rises above $5.00 per share, if ever, trading in our common stock is subject to the penny stock rules of the Exchange Act specified in Rules 15g-1 through 15g-10. Those rules require broker-dealers, before effecting transactions in any penny stock, to:

 

● Deliver to the customer, and obtain a written receipt for, a disclosure document;

● Disclose certain price information about the stock;

● Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer;

● Send monthly statements to customers with market and price information about the penny stock; and

● In some circumstances, approve the purchaser’s account under certain standards and deliver written statements to the customer with information specified in the rules.

 

Consequently, the penny stock rules may restrict the ability or willingness of broker-dealers to sell our common stock and may affect the ability of holders to sell their common stock in the secondary market and the price at which such holders can sell any such securities. These additional procedures could also limit our ability to raise additional capital in the future.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None

 

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ITEM 2. PROPERTIES

 

The Company relocated its headquarters within Castle Rock, Colorado, during the third quarter 2016 and entered into a new lease agreement for approximately 8,000 square feet of office space. This space is being leased from a company in which our CEO and president, each a related party to the Company, have a 27% ownership interest. The lease agreement has an initial term of five years plus two renewal periods. The office space lease term commenced August 1, 2016. Rental payments are approximately $19,000 per month, which includes common area charges, and provides for escalating rental payments annually over the term of the lease.

 

In September 2013, the Company entered into a lease agreement for our Urbandale, Iowa office space. The lease is for a period of three years, expired on October 31, 2016, and required rental payments of approximately $2,600 per month. There was no renewal feature. Currently, the space is being leased month-to-month under the same terms as the original agreement. In addition to primary rent, the lease requires additional payments for operating costs and other common area maintenance costs.

 

The Company also owns approximately ¾ acre on which a 2,300 square foot building is located in Medina, North Dakota. The Company leases space in this building under a five-year lease with an expiration date of March 1, 2018. One additional option to renew for a five-year term exists and is deemed to automatically renew unless written notice is provided 60 days before the end of the term. The Company is charged a monthly rental rate of approximately $150 plus all insurance, taxes and other costs based on actual expenses to maintain the building.

 

In connection with our acquisition of SureHarvest, we added two locations in California, Soquel and Modesto. Our office space in Soquel expires on November 30, 2017 and requires rental payments of approximately $2,700 per month. In addition to primary rent, this lease requires additional payments for operating costs and other common area maintenance costs. The monthly rental payments for our leased space in Modesto is approximately $600 and the lease agreement is month-to-month.

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various legal actions, administrative proceedings and claims in the ordinary course of business. We generally record losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable.

 

There are currently no pending proceedings against the Company.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information for Common Stock

 

Since the inception of the public trading of our securities in November 2006 until June 2012, our common stock traded over-the-counter under the symbol “INMG.” In June 2012, we changed our stock ticker symbol to “WFCF” to better reflect our brand strategy and to raise awareness in the investor community. The following table sets forth the range of high and low bid prices over the past two years. The quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions.

 

    2016     2015  
    High     Low     High     Low  
First quarter   $ 2.35     $ 1.96     $ 3.68     $ 2.62  
Second quarter   $ 2.75     $ 2.03     $ 3.10     $ 2.50  
Third quarter   $ 2.70     $ 2.22     $ 2.83     $ 2.50  
Fourth quarter   $ 2.40     $ 1.89     $ 3.00     $ 1.80  

 

Stockholders

 

As of February 20, 2017, we estimate that there were approximately 120 record holders of our common stock. A significant number of the outstanding shares of common stock which are beneficially owned by individuals and entities are registered in the name of Cede & Co. A nominee of The Depository Trust Company, Cede & Co. is a securities depository for banks and brokerage firms.

 

Dividends

 

We have not declared or paid any cash dividends on our common stock. We presently do not have plans to pay any cash dividends in the foreseeable future.

 

Recent Sales of Unregistered Securities

 

None.

 

Issuer Purchases of Equity Securities

 

On January 7, 2008, we announced our intention to buy back up to one million shares of our common stock from the open market. Activity under the Stock Buyback Plan is as follows:

 

    Number of Shares     Cost of Shares     Average Cost per Share  
Shares purchased prior to 2015     546,697     $ 150,849     $ 0.28  
Retirement of shares purchased     (546,697 )   $ (150,849 )   $ 0.28  
Shares purchased during 2015     85,808     $ 177,916     $ 2.07  
Shares purchased during 2016     157,127       346,976     $ 2.21  
   Total     242,935     $ 524,892     $ 2.16  

 

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Our Stock Buyback Plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. In the future, we may consider additional share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, and planned investment and financing needs.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Note Regarding Forward-Looking Statements

 

This annual report on Form 10-K and other publicly available documents, including the documents incorporated herein and therein by reference, contain, and our officers and representatives may from time to time make, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding:

 

● our expectations and beliefs about the market and industry and competitive landscape;

● our goals, plans, and expectations regarding our operations and properties and results;

● our beliefs about our competitive advantages, the diversification of our product offerings, and the keys to our success;

● plans regarding our Stock Buyback Plan;

● our beliefs and expectations regarding our financial position, ability to finance operations and growth, and pay dividends;

● the amount of financing necessary to support operations; and

● our beliefs regarding the impact of the adoption of certain accounting standards on our financial statements.

 

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

● Changing technology and evolving standards in the livestock and food industry;

● Consumer focus on food safety and assurance;

● Competition from other providers serving the food and agriculture industry;

● Economic and financial conditions in the livestock and food industry;

● International export market activities, including trade barriers to certain beef and other livestock exports;

● Market demand for beef and other livestock products;

● Seasonal volatility in business activity;

 

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● Developments and changes in laws and regulations, including increased regulation of the livestock and food industry through legislative action and revised rules and standards;

● Strategic actions, including acquisitions and our success in integrating acquired businesses;

● Enforceability of our patents, trademarks and other intellectual property rights;

● Continued service of key senior management personnel; and

● Such other factors as discussed throughout Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Part I, Item 1A. Risk Factors.

 

Any forward-looking statement made by us in this Annual Report on Form 10-K is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

 

RESULTS OF OPERATIONS

 

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

Revenues

 

Total revenues for the year ended December 31, 2016 increased 11.7% over the year ended December 31, 2015.

 

Service revenues include sales of our US Verified solutions and related consulting, program development and web-based development services. Service revenues for the year ended December 31, 2016 increased 13.6% compared to the year ended December 31, 2015. Overall, this increase is due to both an increase in new verification customers, as well as an increase in new product offerings.

 

Product sales are primarily sales of cattle identification ear tags. Product sales for the year ended December 31, 2016 decreased 2.4% compared to the year ended December 31, 2015. As further discussed under “Current Concerns in Our Industry,” product sales have mostly decreased in response to a slowing NHTC beef export market due to the strength of the US dollar.

 

Other revenue primarily represents the fees earned from our WhereFoodComesFrom® labeling program. Other revenue for the year ended December 31, 2016 increased 12.7% compared to the year ended December 31, 2015. The increase is partly due to the addition of new customers and new product lines for our existing customers.

 

Cost of Revenues and Gross Margin

 

Cost of revenues for the year ended December 31, 2016 were approximately $6,202,200 compared to approximately $5,540,700 for the year ended December 31, 2015. Gross margin for 2016 decreased slightly to 46.6% of revenues compared to 46.7% for 2015. Overall, the decrease in our margin is due to a slight change in product mix offset by with bundling opportunities where we can provide multiple verifications and/or certifications with one site visit.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the year ended December 31, 2016 were approximately $4,778,400, an increase of approximately $718,900, or 17.7% over the year ended December 31, 2015. Included in this expense is approximately $305,500 related to legal and broker contingency fees in connection with the SureHarvest acquisition. Excluding the acquisition costs, the dollar increase in our selling, general and administrative expenses is due in part to higher head count, increased sales and marketing costs, higher costs related to being a publicly held company, and increased rent expense due to the August 2016 relocation into a significantly larger corporate office. In addition, the Company is making significant investments in Information Technology (IT) process redesigns related to the integration and standardization of differing field audit and accounting systems used by IMI Global, ICS and Validus. However, selling, general and administrative expenses as a percentage of revenue held steady at 39% in 2016 and 2015.

 

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Income Tax Expense

 

The effective income tax rate for the year ended December 31, 2016 decreased to 37.0% compared to 37.5% in the prior year.

 

Net Income and Per Share Information

 

As a result of the foregoing, net income attributable to WFCF shareholders for the year ended December 31, 2016 was approximately $433,200 or $0.02 per basic and diluted common share, compared to approximately $533,900 or $0.02 per basic and diluted common share for the year ended December 31, 2015. Excluding the acquisition costs of $305,500 in the 2016 period as discussed previously in “Selling, General and Administrative Expenses,” net income for the year ended December 31, 2016 would have been approximately $738,700, or $0.03 per basic and diluted common share.

 

Liquidity and Capital Resources

 

At December 31, 2016, we had cash and cash equivalents of approximately $2,489,985 compared to approximately $3,529,680 of cash and cash equivalents at December 31, 2015. Our working capital at December 31, 2016 was approximately $3,494,700 compared to approximately $4,251,600 at December 31, 2015.

 

Net cash provided by operating activities during 2016 was approximately $986,100 compared to net cash provided by operating activities of $862,100 during the same period in 2015. Net cash provided by operating activities is driven by our net income and adjusted by non-cash items. Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock based compensation expense, and deferred taxes. Fluctuations are primarily due to the timing of cash receipts and cash disbursements offset by operating performance.

 

Net cash used in investing activities during 2016 was approximately $1,718,600 compared to net cash used in investing activities of $26,300 during 2015. Net cash used in the 2016 period was primarily attributable to the acquisition of a 60% interest in SureHarvest LLC for $1,122,000 in cash, and the acquisition of the remaining 40% interest in Validus for which we paid $162,700 in cash. Additionally, we spent approximately $445,900 towards property and equipment in 2016, primarily due to relocating our corporate headquarters. Net cash used in 2015 was attributable to the purchases of property and equipment.

 

Net cash used in financing activities during 2016 was approximately $307,200 compared to net cash provided of $110,800 in the 2015 period. Net cash used in the 2016 period predominately related to approximately $347,000 in purchases of our common stock from the open market under our Stock Buyback Plan. Net cash provided in the 2015 period was predominately due to the release of a certificate of deposit previously classified as restricted cash of $250,000, offset by approximately $177,900 in purchases of our common stock from the open market under our Stock Buyback Plan.

 

Historically, our growth has been funded through a combination of convertible debt from private investors and private placement offerings. We continually evaluate all funding options including additional offerings of our securities to private, public and institutional investors and other credit facilities as they become available.

 

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The primary driver of our operating cash flow is our third-party verification solutions, specifically the gross margin generated from services provided. Therefore, we focus on the elements of those operations including revenue growth and long-term projects that ensure a steady stream of operating profits to enable us to meet our cash obligations. On a weekly basis we review the performance of each of our revenue streams focusing on third-party verification solutions compared with prior periods and our operating plan. We believe that our various sources of capital, including cash flow from operating activities, overall improvement in our performance, and our ability to obtain additional financing are adequate to finance current operations as well as the repayment of current debt obligations. We are not aware of any other event or trend that would negatively affect our liquidity. In the event such a trend develops, we believe that there are sufficient financing avenues available to us and from our internal cash generating capabilities to adequately manage our ongoing business.

 

The culmination of all our efforts has brought significant opportunities to us including: increased investor confidence and renewed interest in our company, as well as the potential to develop business relationships with long-term strategic partners. In keeping with our core business, we will continue to review our business model with a focus on profitability, long-term capital solutions and the potential impact of acquisitions or divestitures, if such an opportunity arises.

 

Our plan for continued growth is primarily based upon acquisitions, as well as, intensifying our focus on international markets. We believe that there are significant growth opportunities available to us because often the only way to access various restrictions as imposed on international market imports/exports is via a quality verification program.

 

Debt Facility

 

The Company has a revolving line of credit (LOC) agreement with Unison Bank which was renewed on April 1, 2014, and matures April 1, 2017. The LOC provides for $70,050 in working capital. The interest rate is the New York prime rate plus 2.250% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due on maturity. The LOC is collateralized by all the business assets of ICS. As of December 31, 2016, there were no amounts outstanding on this LOC.

 

Off Balance Sheet Arrangements

 

As of December 31, 2016, we had no off-balance sheet arrangements of any type.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Our significant accounting policies are discussed in Note 2 to our financial statements as set forth in Item 8 of this Form 10-K.

 

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Revenue Recognition

 

We offer a range of products and services to deploy and maintain identification, traceability, and verification systems and to facilitate customers’ participation in and compliance with USDA’s Quality System Assessment, Process Verification and Export Verification Programs. We generate revenue primarily from the sale of our verification solutions, consulting services and hardware sales. We sell our products and services directly to customers at various levels in the livestock supply chain.

 

Revenue is recognized when persuasive evidence of an agreement with the customer exists, delivery has occurred or services have been provided, the sales price is fixed or determinable, collectability is reasonably assured, and risk of loss and title have transferred to the customer.

 

Service revenues primarily consist of fees charged for verification audits and other verification services that the Company performs for customers. Revenue from verification audits is recognized upon completion of the audits. Contracts for these services are cancelable only for non-performance.

 

In connection with certain arrangements, reimbursable expenses are incurred and billed to customers and such amounts are recognized as both revenue and cost of revenue.

 

Deferred revenue represents payments received in advance from our customers for annual customer support services not yet performed as of December 31st, and revenue is recognized as services are performed, generally over the one-year contract term.

 

Customer deposits represent down-payments made in advance of a verification audit to be performed for a customer. Deposits are initially recorded as current liabilities until services are performed and applied to the customer’s accounts when invoiced.

 

Revenues under contracts for consulting services are recognized when completed (for short-term projects). On occasion, we may enter into long-term projects, for which we use the percentage of completion method. No such long-term projects occurred during 2016 and 2015.

 

Product sales are primarily generated from the sale of cattle identification ear tags. Revenue is recognized when goods are shipped and after title has transferred to the customer.

 

Other revenue primarily represents the fees earned from our “WhereFoodComesFrom®” labeling program. Revenue is recognized when our customer, who has been granted a right to use our WhereFoodComesFrom® label, places this label on their product and ships their product. Revenue is billed based on pounds of product shipped.

 

Generally, we do not provide right of return or warranty on product sales or services performed.

 

Stock-Based Compensation

 

The Company recognizes all equity-based compensation as stock-based compensation expense based on the fair value of the compensation measured at the grant date. For stock options, fair value is calculated using the Black-Scholes-Merton option pricing model. For restricted stock awards, fair value is the closing stock price for the Company’s common stock on the grant date. The expense is recognized over the vesting period of the grant.

 

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Calculating stock-based compensation expense using the Black-Scholes-Merton option pricing model requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and the pre-vesting option forfeiture rate. Under this pricing model, which incorporates ranges of assumptions for inputs, our assumptions are as follows:

 

● Dividend yield is based on our historical and anticipated policy of not paying cash dividends.

● Expected volatility assumptions were derived from our actual volatilities.

● The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant with maturity dates approximately equal to the expected term at the grant date.

● The expected term of options represents the period of time that options granted are expected to be outstanding giving consideration to vesting schedules, based on historical exercise patterns, which we believe are representative of future behavior.

 

The assumptions used in calculating the fair value of stock options represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment.

 

There is a risk that our estimates of the fair values may differ from the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. It is possible that employee stock options may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of our stock options are determined in accordance with U.S. GAAP and the SEC’s Staff Accounting Bulletin No. 107 using the Black-Scholes-Merton option-pricing model, the value calculated may not be indicative of the fair value observed in a willing buyer / willing seller market transaction.

 

Estimates of share-based compensation expense are highly subjective as to value and have an impact on our financial statements, but these expenses will never result in the payment of cash by us. For this reason, and because we do not view share-based compensation as being related to our operational performance, we exclude estimated share-based compensation expense when internally evaluating our performance.

 

In the fourth quarter of 2016 we adopted new accounting guidance from the Financial Accounting Standards Board (“FASB”) on stock compensation, or ASU 2016-09, as described in “Recently Adopted Accounting Pronouncements.” Refer to “Note 2— Stock Based Compensation” in the notes to our consolidated financial statements in Item 8 for further information on our equity award activity.

 

Income Taxes

 

We record income taxes under the asset and liability method. Deferred tax assets and liabilities reflect our estimation of the future tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to be in effect when we realize the underlying items of income and expense. We consider all relevant factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction, expectations of future taxable income and the carryforward periods available to us for tax reporting purposes, as well as assessing available tax planning strategies. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes in income tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.

 

We record liabilities to address uncertain tax positions we have taken in previously filed tax returns or that we expect to take in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more likely than not that our tax position, based on technical merits, will be sustained upon examination. For those positions for which we conclude it is more likely than not it will be sustained, we recognize the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded. Management believes there are no current uncertain tax positions that would result in an asset or liability being recognized in the accompanying financial statements.

 

23

 

 

Business Combinations

 

A component of our growth strategy has been to acquire businesses that complement our existing operations. We account for business combinations in accordance with the guidance for business combinations and related literature. Accordingly, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the date of purchase. The excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill.

 

In determining the fair values of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods including present value modeling and referenced market values (where available). Further, we make assumptions within certain valuation techniques including discount rates and timing of future cash flows. Valuations are performed by management or independent valuation specialists under management’s supervision, where appropriate. We believe that the estimated fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates.

 

As part of our accounting for business combinations we are required to determine the useful lives of identifiable intangible assets recognized separately from goodwill. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the acquired business. An intangible asset with a finite useful life shall be amortized; an intangible asset with an indefinite useful life shall not be amortized.

 

Additionally, when acquiring a company who has recorded deferred revenue in its historical, pre-acquisition financial statements, we are required as part of purchase accounting to re-measure the deferred revenue as of the acquisition date. Deferred revenue is re-measured to represent solely the cost that relates to the associated legal performance obligation which we assumed as part of the acquisition, plus a normal profit margin representing the level of effort or assumption of risk assumed. Legal performance obligations that simply relate to the passage of time would not result in recognized deferred revenue as there is little to no associated cost.

 

Definite Lived Intangible Assets

 

Our definite lived intangible assets consist of customer lists, accreditations, a beneficial lease arrangement, trade names/trademarks and patents related to our acquisitions, recorded at estimated fair value. It also consists of our trademark rights and the related costs incurred to obtain the trademark rights recorded at cost. These definite lived assets are subject to amortization using the straight-line method over the estimated useful lives of the respective assets, which range from two to fifteen years.

 

Assumptions and estimates about future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as consumer spending habits and general economic trends, and internal factors such as changes in our business strategy and our internal forecasts. We review intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. If our qualitative analysis indicates that there could be an impairment, we then determine whether an impairment loss occurred which requires a comparison of the carrying amount to the sum of the undiscounted cash flows expected to be generated by the asset, or the expected proceeds, net of costs to sell, upon sale of the asset. If an impairment exists, the amount of impairment is measured as the excess of the carrying amount of the asset over its fair value. During 2015 and 2016, we completed a qualitative analysis, and based upon the work performed, we concluded that no impairment existed.

 

24

 

 

Goodwill and Other Non-Amortizable Intangible Assets

 

Goodwill relates to our acquisitions of ICS, Validus and SureHarvest. All other non-amortizable intangible assets relate to the trademarks/trade name acquired in the Validus acquisition and have an indefinite life. Pursuant to ASC Topic 350, if an intangible asset is determined to have an indefinite useful life, it shall not be amortized until its useful life is determined to no longer be indefinite. Accordingly, we evaluate the remaining useful life of an intangible asset that is not being amortized each reporting period to determine whether events or circumstances continue to support an indefinite useful life. As of December 31, 2016, there have been no changes to the indefinite life determination pertaining to these intangible assets.

 

In addition, an intangible asset that is not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss equal to the excess is recorded. However, entities testing an indefinite-lived intangible asset for impairment have the option of performing a qualitative assessment before calculating the fair value of the asset. If entities determine, on the basis of qualitative factors, that the likelihood of the indefinite-lived intangible asset being impaired is below a “more-likely-than-not” threshold (i.e., a likelihood of more than 50 percent), the entity would not need to calculate the fair value of the asset.

 

During the fourth quarter, we assessed the carrying value of goodwill and other intangible assets of each of ICS, Validus and SureHarvest, our three reporting units. At December 31, 2016, goodwill assigned to ICS, Validus and SureHarvest was approximately $533,000, $746,800, and $1,372,500 respectively.

 

We performed a qualitative assessment on our ICS and Validus reporting units for our 2016 annual test and concluded that it was more-likely-than-not that the fair value of the reporting unit exceeded its carrying value and, therefore, a two-step impairment test was not necessary. The qualitative assessment compares current performance, expectations and other indicators against what was expected as part of the most recent Step 1 valuation. Consequently, the key estimates and assumptions related to the most recent Step 1 valuation pertaining to this reporting unit had not changed since our previous annual report.

 

With respect to our SureHarvest reporting unit, fair value for goodwill and other intangibles assets is discussed in detail in Note 3 to the Consolidated Financial Statements.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

See Note 2 to our financial statements set forth in Item 8 of this Form 10-K for a detailed description of recent accounting pronouncements.

 

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

25

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Financial Statements

 

  Page
Financial Statements:  
Reports of Independent Registered Public Accounting Firms 28
Consolidated Balance Sheets as of December 31, 2016 and 2015 30
Consolidated Statements of Income for the years ended December 31, 2016 and December 31, 2015  

31

Consolidated Statements of Cash Flows for the years ended December 31, 2016 and December 31, 2015

32

Consolidated Statements of Equity for the years ended December 31, 2016 and December 31, 2015

33

Notes to Financial Statements 34

 

26

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and

Stockholders of Where Food Comes From, Inc.

 

We have audited the accompanying consolidated balance sheet of Where Food Comes From, Inc. and subsidiaries (the “Company”) as of December 31, 2016, and the related consolidated statements of income, equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Where Food Comes From, Inc. and subsidiaries as of December 31, 2016, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

EKS&H, LLLP

Denver, Colorado

February 28, 2017

 

27

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of Where Food Comes From , Inc.:

 

We have audited the accompanying consolidated balance sheet of Where Food Comes From, Inc. and its subsidiaries (the “Company”) as of December 31, 2015 and the related consolidated statements of income, equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2015, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 3 to the consolidated financial statements, in February 2014, the Company acquired the remaining 40% interest of International Certification Services, Inc., and in October 2014, the Company acquired assets of Sterling Solutions, LLC.

 

/s/ GHP Horwath, P.C.

Denver, Colorado

February 16, 2016

 

28

 

 

Where Food Comes From, Inc.

Consolidated Balance Sheets

             
    December 31,     December 31,  
    2016     2015  
Assets          
Current assets:                
Cash and cash equivalents   $ 2,489,985     $ 3,529,680  
Accounts receivable, net of allowance (Note 2)     1,344,646       1,110,052  
Short-term investments     733,104       251,717  
Prepaid expenses and other current assets     203,744       154,912  
Total current assets     4,771,479       5,046,361  
Property and equipment, net     1,229,350       157,950  
Intangible and other assets, net     4,228,228       1,760,199  
Goodwill     2,652,250       1,279,762  
Deferred tax assets, net     —       231,452  
Total assets   $ 12,881,307     $ 8,475,724  
                 
Liabilities and Equity                
Current liabilities:                
Accounts payable   $ 333,784     $ 417,836  
Accrued expenses and other current liabilities     480,047       92,574  
Customer deposits     80,832       77,784  
Deferred revenue     443,564       194,087  
Current portion of notes payable     —       7,846  
Current portion of capital lease obligations     4,067       4,634  
Total current liabilities     1,342,294       794,761  
Capital lease obligations, net of current portion     15,735       1,776  
Notes payable and other long-term liabilities, net of current portion     —       8,365  
Lease incentive obligation     158,025       —  
Deferred tax liabilities     49,440       —  
Total liabilities     1,565,494       804,902  
                 
Commitments and contingencies (Note 12)                
                 
Contingently redeemable non-controlling interest     1,888,135       936,370  
                 
Equity:                
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
none issued or outstanding 		    —       —  
Common stock, $0.001 par value; 95,000,000 shares authorized;
24,890,121 (2016) and 23,822,295 (2015) shares issued, and
24,647,186 (2016) and 23,736,487 (2015) shares outstanding 		    24,890       23,822  
Additional paid-in-capital     10,052,597       7,446,634  
Treasury stock of 242,935 (2016) and 85,808 (2015) shares     (524,892 )     (177,916 )
Accumulated deficit     (124,917 )     (558,088 )
Total equity     9,427,678       6,734,452  
Total liabilities and stockholders’ equity   $ 12,881,307   $ 8,475,724  

 

The accompanying notes are an integral part of these financial statements.

 

29

 

 

Where Food Comes From, Inc.

Consolidated Statements of Income

             
    Year ended December 31,  
    2016     2015  
Revenues:            
Service revenues   $ 10,308,670     $ 9,074,516  
Product sales     1,180,919       1,209,619  
Other revenue     125,444       111,334  
Total revenues     11,615,033       10,395,469  
Costs of revenues:                
Labor and other costs of services     5,518,024       4,810,737  
Costs of products     684,121       729,979  
Total costs of revenues     6,202,145       5,540,716  
Gross profit     5,412,888       4,854,753  
Selling, general and administrative expenses     4,778,389       4,059,520  
Income from operations     634,499       795,233  
Other expense (income):                
Interest expense     1,517       1,585  
Other income, net     (4,131 )     (770 )
Income before income taxes     637,113       794,418  
Income tax expense     235,547       298,150  
Net income     401,566       496,268  
Net loss attributable to non-controlling interest     31,605       37,649  
Net income attributable to Where Food Comes From, Inc.   $ 433,171     $ 533,917  
             
Per share - net income attributable to Where Food Comes From, Inc.:                
Basic   $ 0.02     $ 0.02  
Diluted   $ 0.02     $ 0.02  
                 
Weighted average number of common shares outstanding:                
Basic     23,818,762       23,797,236  
Diluted     23,964,026       23,974,374  

 

The accompanying notes are an integral part of these financial statements.

 

30

 

 

Where Food Comes From, Inc.

Consolidated Statements of Cash Flows

             
    Year ended December 31,  
    2016     2015  
             
Operating activities:                
Net income   $ 401,566     $ 496,268  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization     267,645       256,272  
Stock-based compensation expense     121,871       117,696  
Common stock issued for services rendered     78,750       —  
Deferred tax expense     169,994       298,150  
Bad debt expense     5,345       7,742  
Loss on disposal of property and equipment     7,482       —  
Changes in operating assets and liabilities, net of effect from acquisitions:                
Accounts receivable     50,753       (240,762 )
Prepaid expenses and other assets     (48,832 )     8,481  
Short-term investments     (481,387 )     (251,717 )
Accounts payable     (222,614 )     16,705  
Accrued expenses and other current liabilities     382,958       35,419  
Customer deposits and deferred revenue     252,525       117,863  
Net cash provided by operating activities     986,056       862,117  
                 
Investing activities:                
Acquisition of Validus Verification Services, Inc., remaining 40% interest     (162,707 )     —  
Acquisition of 60% interest in SureHarvest LLC     (1,121,990 )     —  
Purchases of property and equipment     (445,847 )     (26,312 )  
Proceeds from sale of property and equipment     11,990       —
Net cash used in investing activities     (1,718,554 )     (26,312 )
                 
Financing activities:                
Repayments of notes payable     (16,211 )     (7,459 )
Repayments of capital lease obligations     (9,047 )     (4,397 )
Restricted cash for line of credit collateral     —       250,000  
Proceeds from stock option exercise     65,037       50,589  
Stock repurchase under Buyback Plan     (346,976 )     (177,916 )
Net cash provided by (used in) financing activities     (307,197 )     110,817  
Net change in cash     (1,039,695 )     946,622  
Cash at beginning of year     3,529,680       2,583,058  
Cash at end of year   $ 2,489,985     $ 3,529,680  

 

The accompanying notes are an integral part of these financial statements.

 

31

 

 

Where Food Comes From, Inc.
Consolidated Statement of Equity
Years ended December 31, 2016 and 2015
                                     
                Additional                    
    Common Stock     Paid-in     Treasury     Accumulated        
    Shares     Amount     Capital     Stock     Deficit     Total  
                                     
Balance at January 1, 2015     23,720,130     $ 24,266     $ 7,428,754     $ (150,849 )   $ (1,092,005 )   $ 6,210,166  
Stock based compensation expense     —       —       117,696       —       —       117,696  
Issuance of common shares upon exercise of options     93,165       93       50,496       —       —       50,589  
Issuance of common shares to employees     9,000       9       (9 )     —       —       —  
Retirement of treasury shares             (546 )     (150,303 )     150,849       —       —  
Repurchase of common shares under Buyback Plan     (85,808 )     —       —       (177,916 )     —       (177,916 )
Net income     —       —       —       —       533,917       533,917  
Balance at December 31, 2015     23,736,487       23,822       7,446,634       (177,916 )     (558,088 )     6,734,452  
                                                 
Stock based compensation expense     —       —       121,871       —       —       121,871  
Issuance of common shares upon exercise of options     86,417       86       64,951       —       —       65,037  
Repurchase of common shares under Buyback Program     (157,127 )     —       —       (346,976 )     —       (346,976 )
Issuance of common shares for remaining interest in Validus     93,057       93       199,979       —       —       200,072  
Acquisition of non-controlling interest in Validus, net of tax effect     —       —       431,088       —       —       431,088  
Issuance of common shares for 60% interest in SureHarvest     850,852       851       1,709,362       —       —       1,710,213  
Issuance of common shares for acquisition-related consulting fees     37,500       38       78,712       —       —       78,750  
Net income     —       —       —       —       433,171       433,171  
Balance at December 31, 2016     24,647,186     $ 24,890     $ 10,052,597     $ (524,892 )   $ (124,917 )   $ 9,427,678  

 

The accompanying notes are an integral part of these financial statements.

 

32

 

 

Where Food Comes From, Inc.

Notes to the Consolidated Financial Statements

  

Note 1 - The Company and Basis of Presentation

 

Business Overview

 

Where Food Comes From, Inc. is a Colorado corporation based in Castle Rock, Colorado (“WFCF”, the “Company,” “our,” “we,” or “us”). We provide verification and certification solutions for the agriculture, livestock and food industry. Most of our customers are located throughout the United States.

 

On September 16, 2013, we acquired a 60% interest in Validus Verification Services LLC (“Validus”) which consisted of the auditing business of Praedium Ventures, LLC (“Praedium”), previously known as Validus Ventures LLC. On February 29, 2016, the Company exercised its call option to acquire the remaining 40% interest in Validus (Note 3).

 

On December 28, 2016, we acquired a 60% interest in SureHarvest Services LLC (“SureHarvest”) which consisted of all the business assets of SureHarvest Inc. (Note 3)

 

We operate in one segment.

 

Basis of Presentation

 

Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues, costs and expenses during the reporting period. Actual results could differ from the estimates.

 

Our consolidated financial statements include the accounts of all majority-owned or controlled subsidiaries, and all significant intercompany transactions and amounts have been eliminated. The results of businesses acquired are included in the consolidated financial statements from the date of the acquisition.

 

Note 2 - Summary of Significant Accounting Policies

 

Cash and Cash Equivalents

 

We place our cash with high quality financial institutions. At times, cash balances may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit; however, we have not experienced any losses related to balances that exceed such FDIC insurance limits, and we believe our credit risk is minimal. At times, we may also invest in short-term investments with original maturities of three months or less, which we consider to be cash and cash equivalents, since they are readily convertible to cash.

 

Short-Term Investments

 

Certificates of deposit with original maturities greater than three months and remaining maturities less than one year are classified as “Short-term investments.”

 

33

 

 

Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

Revenue Recognition

 

We offer a range of products and services to deploy and maintain identification, traceability, and verification systems and to facilitate customers’ participation in and compliance with the USDA’s Quality System Assessment, Process Verification and Export Verification Programs. We generate revenue primarily from the sale of our verification solutions, consulting services and hardware sales. We sell our products and services directly to customers at various levels in the livestock supply chain.

 

Revenue is recognized when persuasive evidence of an agreement with the customer exists, delivery has occurred or services have been provided, the sales price is fixed or determinable, collectability is reasonably assured, and risk of loss and title have transferred to the customer.

 

No single customer generated more than 10% of total net revenue in 2016 or 2015.

 

Service revenues primarily consist of fees charged for verification audits and other verification services that the Company performs for customers. Revenue from verification audits is recognized upon completion of the audits. Contracts for these services are cancelable only for non-performance.

 

In connection with certain arrangements, reimbursable expenses are incurred and billed to customers and such amounts are recognized as both revenue and cost of revenue.

 

Deferred revenue represents payments received in advance from our customers for annual customer support services not yet performed as of December 31st, and revenue is recognized as services are performed, generally over the one-year contract term.

 

Customer deposits represent down-payments made in advance of a verification audit to be performed for a customer. Deposits are initially recorded as current liabilities until services are performed and applied to the customer’s accounts when invoiced.

 

Revenues under contracts for consulting services are recognized when completed (for short-term projects). On occasion, we may enter into long-term projects, for which we use the percentage of completion method. No such long-term projects occurred during 2016 and 2015.

 

Product sales are primarily generated from the sale of cattle identification ear tags. Revenue is recognized when goods are shipped and after title has transferred to the customer.

 

Other revenue primarily represents the fees earned from our “WhereFoodComesFrom®” labeling program. Revenue is recognized when our customer, who has been granted a right to use our WhereFoodComesFrom® label, places this label on their product and ships their product. Revenue is billed based on pounds of product shipped.

 

Generally, we do not provide right of return or warranty on product sales or services performed.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Our receivables are generally due from trade customers. Credit is extended based on our evaluation of the customer’s financial condition and generally, collateral is not required. Accounts receivable are generally due approximately 30 days from the invoice date and are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts receivable that are outstanding longer than the contractual payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss and payment history, the customer’s current ability to pay its obligations to us and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The allowance for doubtful accounts was approximately $17,900 and $18,100, at December 31, 2016 and 2015, respectively.

 

34

 

 

Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

No single customer accounted for greater than 10% of our accounts receivable balances at December 31, 2016 and 2015.

 

Cost of Revenues

 

Cost of revenues includes the cost of products sold, which consists of livestock ear tags generally used in connection with our verification programs. Salaries and related fringe benefits directly associated with our verification services are allocated to cost of revenues.

 

Livestock identification ear tags sold in connection with our verification offerings are purchased primarily from one supplier. However, there are numerous other companies which manufacture and market such ear tags.

 

Fair Value Measurements

 

ASC Topic 820, Fair Value Measurements and Disclosure, establishes a hierarchy for inputs used in measuring fair value for financial assets and liabilities that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

 

● Level 1: Quoted prices available in active markets for identical assets or liabilities;

 

● Level 2: Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability;

 

● Level 3: Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash or valuation models.

 

The financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

 

The Company’s non-recurring fair value measurements include purchase price allocations for the fair value of assets and liabilities acquired through business combinations. Please refer to Note 3 for further discussion of business combinations.

 

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

The acquisition of a group of assets in a business combination transaction requires fair value estimates for assets acquired and liabilities assumed. The fair value of assets and liabilities acquired through business combinations is calculated using a discounted future cash flows method. The discounted cash flows are developed using the income approach in which a value (based on management’s expectations for the future) is determined by converting anticipated benefits. The fair value measurements are based on significant inputs not observable in the market and thus represent fair value measurements which are designated as Level 3 inputs within the fair value hierarchy. Key assumptions and considerations include:

 

a) A discount rate range of 19-22 percent;

b) Terminal value based on long-term sustainable growth rates of 3 percent;

c) Financial data of comparable companies for market participant assumptions; and

d) Consideration of the marketability that market participants would consider when measuring the fair value of non-controlling interest in our acquisition.

 

Other Financial Instruments

 

The carrying value of cash and restricted cash, accounts receivable, and accounts payable approximate their fair value due to their short maturities. The carrying values shown for short-term investments, debt and notes payable also approximate fair value because current interest rates and terms offered to us for similar instruments are substantially the same (Level 2 inputs).

 

Property and Equipment

 

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets. Land is not depreciated. Buildings are depreciated over 20 years. Leasehold improvements are amortized over the shorter of the lease term, which generally includes reasonably assured option periods, or the estimated useful lives of the assets. All other property and equipment have depreciable lives which range from two to seven years. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss is reflected in earnings.

 

Impairment of Long-Lived Assets

 

We review all of our long-lived assets (including intangible assets) for impairment at least annually or whenever impairment indicators are determined to be present. If an impairment exists, the amount of impairment is measured as the excess of the carrying amount of the asset over its fair value as determined utilizing estimated discounted future cash flows, or some other fair value measure, or the expected proceeds, net of costs to sell, upon sale of the asset.

 

Significant judgments are required to estimate the fair value of intangible assets including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or impairment at future reporting dates. No impairment was identified on the Company’s long-lived assets through December 31, 2016.

 

Definite Lived Intangible Assets

 

Our definite lived intangible assets consist of customer relationships, accreditations, a beneficial lease arrangement, tradenames/trademarks and patents related to our acquisitions, recorded at estimated fair value. It also consists of our trademark rights and the related costs incurred to obtain the trademark rights recorded at cost. These definite lived assets are subject to amortization using the straight-line method over the estimated useful lives of the respective assets, which range from two to fifteen years. (Note 5).

 

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

Assumptions and estimates about future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as consumer spending habits and general economic trends, and internal factors such as changes in our business strategy and our internal forecasts. We review intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. If our qualitative analysis indicates that there could be an impairment, we then determine whether an impairment loss occurred which requires a comparison of the carrying amount to the sum of the undiscounted cash flows expected to be generated by the asset, or the expected proceeds, net of costs to sell, upon sale of the asset. If an impairment exists, the amount of impairment is measured as the excess of the carrying amount of the asset over its fair value. During 2015 and 2016, we completed a qualitative analysis, and based upon the work performed, we concluded that no impairment existed.

 

Goodwill and Other Non-Amortizable Intangible Assets

 

Goodwill relates to our acquisitions of ICS, Validus and SureHarvest. All other non-amortizable intangible assets relate to the trademarks/tradenames acquired in the Validus acquisition and have an indefinite life. Pursuant to ASC Topic 350, if an intangible asset is determined to have an indefinite useful life, it shall not be amortized until its useful life is determined to no longer be indefinite. Accordingly, we evaluate the remaining useful life of an intangible asset that is not being amortized each reporting period to determine whether events or circumstances continue to support an indefinite useful life. As of December 31, 2016, there have been no changes to the indefinite life determination pertaining to these intangible assets.

 

In addition, an intangible asset that is not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss equal to the excess is recorded. However, entities testing an indefinite-lived intangible asset for impairment have the option of performing a qualitative assessment before calculating the fair value of the asset. If entities determine, on the basis of qualitative factors, that the likelihood of the indefinite-lived intangible asset being impaired is below a “more-likely-than-not” threshold (i.e., a likelihood of more than 50 percent), the entity would not need to calculate the fair value of the asset.

 

During the fourth quarter, we assessed the carrying value of goodwill and other intangible assets of each of ICS, Validus and SureHarvest, our three reporting units. At December 31, 2016, goodwill assigned to ICS, Validus and SureHarvest was approximately $533,000, $746,800, and $1,372,500 respectively.

 

We performed a qualitative assessment on our ICS and Validus reporting units for our 2016 annual test and concluded that it was more-likely-than-not that the fair value of the reporting unit exceeded its carrying value and, therefore, a two-step impairment test was not necessary. The qualitative assessment compares current performance, expectations and other indicators against what was expected as part of the most recent Step 1 valuation. Consequently, the key estimates and assumptions related to the most recent Step 1 valuation pertaining to this reporting unit had not changed since our previous annual report.

 

With respect to our SureHarvest reporting unit, fair value for goodwill and other intangibles assets is discussed in detail in Note 3 to the Consolidated Financial Statements.

 

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

Research and Development and Software Development Costs

 

Research and development costs are charged to operations as incurred. We did not incur any research and development expense in 2016 and 2015.

 

Internal use software development costs represent the capitalization of certain external and internal computer software costs incurred during the application development stage. The application development stage is characterized by software design and configuration activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality.

 

Website software development costs related to certain planning and training costs incurred in the development of website software are expensed as incurred, while application development stage costs are capitalized.

 

In 2013, we acquired certain assets of Validus, which included internally-developed software with an estimated fair value of $129,000. During 2016 and 2015, the amortization of capitalized costs totaled approximately $43,000 each year, included in depreciation expense (Note 4). Capitalized costs are included in property and equipment.

 

Software development costs for external sale are capitalized once technological feasibility is achieved. Capitalized costs are amortized over the expected benefit period. We generally expense a significant portion of software development costs because technological feasibility occurs very late in the software development process. In connection with our SureHarvest acquisition on December 28, 2016, software developed for external sale with an estimated fair value of approximately $558,000 has been included in property and equipment (Note 3).

 

Advertising Expenses

 

Advertising costs are expensed as incurred. Total advertising expense for the years ended December 31, 2016 and 2015, were approximately $79,400 and $31,600, respectively.

 

Income Taxes

 

We record income taxes under the asset and liability method. Deferred tax assets and liabilities reflect our estimation of the future tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to be in effect when we realize the underlying items of income and expense. We consider all relevant factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction, expectations of future taxable income and the carryforward periods available to us for tax reporting purposes, as well as assessing available tax planning strategies. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes in income tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.

 

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

We record liabilities to address uncertain tax positions we have taken in previously filed tax returns or that we expect to take in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more likely than not that our tax position, based on technical merits, will be sustained upon examination. For those positions for which we conclude it is more likely than not it will be sustained, we recognize the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded. Management believes there are no current uncertain tax positions that would result in an asset or liability being recognized in the accompanying financial statements.

 

We file income tax returns in the US federal jurisdiction and various state jurisdictions. We are no longer subject to US federal tax examination for years beginning before January 1, 2013, and the state tax returns that remain subject to examination include those for the years ended December 31, 2012 through the years ended December 31, 2016.

 

Stock-Based Compensation

 

The Company recognizes all equity-based compensation as stock-based compensation expense based on the fair value of the compensation measured at the grant date. For stock options, fair value is calculated using the Black-Scholes-Merton option pricing model. For restricted stock awards, fair value is the closing stock price for the Company’s common stock on the grant date. The expense is recognized over the vesting period of the grant. See Note 9 for additional information.

 

Deferred Rent and Lease Incentives

 

For leases that contain fixed escalations of the minimum annual lease payment during the original term of the lease, we recognize rental expense on a straight-line basis over the lease term and record the difference between rent expense and the amount currently payable as deferred rent. Deferred lease incentives include construction allowances received from landlords, which are amortized on a straight-line basis over the lease term.

 

Recently Adopted Accounting Standards

 

Going Concern

 

In August 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40)”, which requires an entity’s management to evaluate, for each reporting period, including interim periods, of whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. Additional disclosures are required if management concludes that conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The new guidance was effective for the Company in the fourth quarter of 2016. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.

 

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

Measurement Period Adjustments

 

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805)”, which simplify the accounting for measurement period adjustments by eliminating the requirements to restate prior period financial statements for these adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new standard, which should be applied prospectively to measurement period adjustments that occur after the effective date, was effective for the Company in the first quarter of 2016. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.

 

Stock-Based Compensation

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Stock Compensation. The objective of this amendment is part of the FASB’s Simplification Initiative as it applies to several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.

 

The Company elected early adoption of ASU 2016-09 in the in the fourth quarter of 2016 which required us to reflect any adjustments as of January 1, 2016. Upon adoption, excess tax benefits or deficiencies from share-based award activity are reflected in the consolidated statements of operations as a component of the provision for income taxes, whereas they previously were recognized in equity. The adoption resulted in approximately $14,900 income tax benefit recognized as of December 31, 2016. The previously unrecognized excess tax benefit of approximately $13,700 as of January 1, 2016 was recorded as an increase to deferred tax asset. The Company did not change its policy with respect to the treatment of forfeitures; and, the Company continues estimating the number of forfeitures. As such, this has no cumulative effect on retained earnings upon adoption. With the early adoption of 2016-09, the Company has elected to present the cash flow statement on a prospective transition method where no prior periods have been adjusted.

 

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

  

Recently Issued Accounting Standards

 

Lease Accounting

 

In February 2016, the FASB issued ASU 2016-02, “Leases”, which will require lessees to recognize a right-of-use asset and a lease liability for all leases that are not short-term in nature. For a lessor, the accounting applied is also largely unchanged from previous guidance. The new rules will be effective for the Company in the first quarter of 2019. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations and cash flows. Although the evaluation is ongoing, the Company expects that the adoption will impact the Company’s financial statements as the standard requires the recognition on the balance sheet of a right of use asset and corresponding lease liability. The Company is currently analyzing its contracts to determine whether they contain a lease under the revised guidance and has not quantified the amount of the asset and liability that will be recognized on the Company’s balance sheet.

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which supersedes current revenue recognition requirements and industry-specific guidance. The codification was amended through additional ASUs and, as amended, requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company is required to adopt the new standard in 2018 and may adopt either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption using one of two retrospective application methods. The Company is continuing to evaluate the provisions of this new guidance and has not determined the impact this standard may have on its financial condition, results of operations, cash flows and related disclosures or decided upon the method of adoption.

 

We have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the current year presentation. Net income and shareholders’ equity were not affected by these reclassifications.

  

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

Note 3 – Business Acquisitions

 

Validus Acquisition

 

On September 16, 2013, we entered into an Asset Purchase and Contribution Agreement (the “Purchase Agreement”), by and among the Company, Validus, and Praedium. In connection with this transaction, Praedium was issued a 40% interest in Validus, with the Company holding a 60% interest. The Company had the first right of refusal on the remaining 40% of the outstanding stock and a call option to acquire the remaining 40% interest.

 

Effective February 29, 2016, the Company exercised its call option to purchase the remaining 40% interest of Validus in exchange for cash consideration of approximately $162,700, and 93,057 shares of common stock valued at approximately $200,100, pursuant to the Purchase Agreement, dated September 16, 2013. The carrying amount of the contingently redeemable non-controlling interest was adjusted to $0 to reflect the change in the Company’s ownership interest up to 100%. The difference between the fair value of the consideration paid and the carrying value of the non-controlling interest on the date of the transaction, which totaled approximately $542,000, net of taxes of $110,900, was adjusted to equity.

 

SureHarvest Acquisition

 

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 60% of 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. 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.

 

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

Because SureHarvest, Inc. at its option, can require the Company to purchase its 40% interest in SureHarvest, the SureHarvest non-controlling interest meets the definition of a contingently redeemable non-controlling interest. Redeemable non-controlling interests are presented at the greater of their carrying amount or redemption value at the end of each reporting period and are shown as a separate caption between liabilities and equity (mezzanine section) in the accompanying balance sheet.

 

The purchase price allocation is preliminary and subject to change, as an analysis has not been completed as of the date of this report. We are still reviewing all of the underlying assumptions and calculations used in the allocation. However, the table below summarizes the provisional estimated fair values assigned to the assets and liabilities acquired in addition to the excess of the purchase price over the net assets acquired:

 

    Dec. 28, 2016  
Accounts receivable     290,692  
Property and equipment     572,620  
Accounts payable and accrued expenses     (138,562 )
Indentifiable intangible assets     2,623,100  
Excess attributable to goodwill     1,372,488  
Total fair value     4,720,338  
Fair value of non-controlling interest     (1,888,135 )
Total consideration   $ 2,832,203  

 

On the acquisition date, the provisional fair value of the non-controlling interest was estimated to be $1,888,135. This amount was based upon the gross consideration that would have been paid assuming 100% of the outstanding stock had been acquired. Excess attributable to goodwill reflects the excess over the identifiable intangible assets acquired based on the preliminary provisional allocation of the purchase price. Goodwill is primarily attributable to the operational and financial benefits expected to be realized from the acquisition, including cost saving synergies from operating efficiencies, future growth in bundling opportunities across divisions and brands, realized savings from a more sophisticated information technology infrastructure, and strategic advances from expansion of our intellectual property.

 

The provisional amounts of the components of intangible assets have been estimated as follows:

 

    Dec. 28, 2016  
Indentifiable intangible assets and goodwill:        
Trademarks   $ 218,000  
Patents     970,100  
Customer relationships     1,435,000  
Goodwill     1,372,488  
Total intangible assets and goodwill   $ 3,995,588  

 

Estimated provisional amortization expense related to such intangible assets was not considered material for the period from December 28, 2016 (the acquisition date) through December 31, 2016. The useful lives for intangible assets are expected to be between 3 and 15 years.

 

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

The following unaudited pro forma information presents the results of operations for the year ended December 31, 2016 and 2015, as if the acquisition of SureHarvest had occurred on January 1, 2016 and 2015. This pro forma information does not reflect any integration activities or cost savings from operating efficiencies, synergies, asset dispositions or other restructurings that could result from the acquisition, nor does it purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.

 

    Unaudited  
    2016     2015  
Total revenue   $ 13,292,825     $ 11,771,317  
Net income attributable to Where Food Comes From, Inc.   $ 275,553     $ 292,830  
Basic and diluted earnings per share   $ 0.01     $ 0.01  

 

Note 4 - Property and Equipment

 

The major categories of property and equipment are as follows as of December 31st:

 

    2016     2015  
             
Automobiles   $ 76,676     $ 47,397  
Furniture and office equipment     203,797       139,918  
Software and tools     952,081       375,257  
Website development and other enhancements     183,385       183,385  
Building and leasehold improvements     476,274       50,747  
Land     2,436       2,436  
      1,894,649       799,140  
Less accumulated depreciation     665,299       641,190  
Property and equipment, net   $ 1,229,350     $ 157,950  

 

Depreciation expense for the years ended December 31, 2016 and 2015, was approximately $112,600 and $100,200, respectively.

 

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

Note 5 – Intangible and Other Assets

 

The following table summarizes our intangible assets as of December 31st:

 

          Estimated
    2016     2015     Useful life
Intangible assets subject to amortization:                    
Tradenames and Trademarks   $ 282,307     $ 64,307     2.5  - 8.0 years
Accreditations     88,663       88,663     5.0 years
Customer Relationships     2,836,330       1,401,330     8.0 - 15.0 years
Beneficial Lease Arrangement     120,200       120,200     11.0 years
Patents     970,100       —     4.0 years
      4,297,600       1,674,500      
Less accumulated amortization     547,917       392,846      
      3,749,683       1,281,654      
Tradenames/trademarks (not subject to amortization)     465,000       465,000      
      4,214,683       1,746,654      
Deposit     13,545       13,545      
    $ 4,228,228     $ 1,760,199      

 

At December 31, 2016 and 2015, the deposit represents funds deposited with a property management company related to the Castle Rock corporate office. The funds will be released at the end of the term of the lease agreement.

 

Amortization expense for the years ended December 31, 2016 and 2015, was approximately $155,100 and $156,000, respectively.

 

Future scheduled amortization of intangible assets is as follows:

 

Fiscal year ending December 31:  
         
  2017     $ 519,759  
  2018     $ 514,473  
  2019     $ 503,848  
  2020     $ 482,035  
  2021     $ 235,414  
   Thereafter        1,494,154  
        $ 3,749,683  

 

Note 6 - Notes Payable

 

Equipment Note

 

    December 31,  
    2016     2015  
             
Equipment Note Payable   $ —     $ 16,211  
Less current portion of notes payable and other long-term debt     —       7,846  
Notes payable and other long-term debt   $ —     $ 8,365  

 

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

In 2012, we purchased a vehicle and entered into a note payable for $37,407 with interest and principal payments due in equal monthly installments of $715 over five years beginning January 2013. This note bears an interest rate of 5.5% per annum and is collateralized by the vehicle. During the quarter ended September 30, 2016, the Company paid the note in full upon trade-in of the vehicle. The new vehicle was paid for in cash.

 

Unison Revolving Line of Credit

 

The Company has a revolving line of credit (LOC) agreement which matures April 1, 2017. The LOC provides for $70,050 in working capital. The interest rate is at the New York prime rate plus 2.25% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due on maturity. As of December 31, 2016, the effective interest rate was 6.0%. The LOC is collateralized by all the business assets of ICS. As of December 31, 2016, there were no amounts outstanding under this LOC.

 

Capital Lease

 

The Company had a capital lease for certain office equipment with a base rent of $405 per month. This 63-month lease was due to expire in April 2017. Approximately $22,300 in asset cost was included in property and equipment and is being amortized over 63 months. Imputed interest of 5.25% was used in determining the minimum lease payments. During the second quarter 2016, the Company traded in the office equipment under a new capital lease agreement. The new lease expires in July 2021. Approximately $22,400 in asset cost was included in property and equipment and is being amortized over the lease term of 63 months. Imputed interest of 3.33% was used in determining the minimum lease payments.

 

Future minimum lease payments for capital leases are as follows:

 

Years Ending December 31st,     Amount  
2017     $ 4,664  
2018       4,664  
2019       4,664  
2020       4,664  
2021       2,723  
Thereafter       —  
Future minimum lease payments       21,379  
Less amount representing interest       (1,577 )
Present value of net minimum lease payments       19,802  
Less current portion       (4,067 )
Capital lease obligations     $ 15,735  

 

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Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

Note 7 - Income Taxes

 

The provision for income taxes consists of the following:

 

    December 31,  
    2016     2015  
Current income tax expense:                
Federal   $ 63,586     $ —  
State     1,967       —  
Total current income tax expense     65,553       —  
Deferred income tax expense:                
Federal     164,894       289,205  
State     5,100       8,945  
Total deferred income tax expense     169,994       298,150  
                 
Total income tax expense   $ 235,547     $ 298,150  

 

The reconciliation of income taxes calculated at the statutory rates to our effective tax rate is as follows:

 

    December 31,  
    2016     2015  
Expected tax expense   $ 216,618     $ 270,102  
State tax provision, net     18,812       26,656  
Permanent differences     (3,419 )     13,278  
Business tax credit applied     —       (33,408 )
Other, net     3,536       21,522  
                 
Income tax expense   $ 235,547     $ 298,150  

 

The income tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) as of December 31, 2016 and 2015 are as follows:

 

    December 31,  
    2016     2015  
Deferred tax assets (liabilities):                
Net operating loss carryforwards   $ —     $ 296,543  
Accruals, stock based compensation and other     134,298       11,149  
Property and equipment     (107,189 )     (3,123 )
Intangibles assets     (76,549 )     (81,666 )
Charitable contributions     —       8,549  
Net deferred tax assets (liabilities)     (49,440 )     231,452  

 

At December 31, 2015, we had net operating loss carryforwards of $801,500 which begin to expire in 2026. Our net operating loss carryforwards were fully utilized against taxable income for the year ended December 31, 2016.

 

47

 

 

Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

Note 8 – Stock Buyback Plan

 

On January 7, 2008, we announced our intention to buy back up to one million shares of our common stock from the open market at the quoted market price on the date of repurchase. Activity under the Stock Buyback Plan by are as follows:

 

    Number of Shares     Cost of Shares     Average Cost per Share  
                   
Shares purchased prior to 2015     546,697     $ 150,849     $ 0.28  
Retirement of shares purchased     (546,697 )   $ (150,849 )   $ 0.28  
Shares purchased during 2015     85,808     $ 177,916     $ 2.07  
Shares purchased during 2016     157,127       346,976     $ 2.21  
   Total     242,935     $ 524,892     $ 2.16  

 

The repurchased shares are recorded as part of treasury stock and are accounted for under the cost method.

 

Our Stock Buyback Plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. In the future, we may consider additional share repurchases under our plan based on seral factors, including our cash position, share price, operational liquidity, and planned investment and financing needs.

 

Note 9 – Stock-Based Compensation

 

In addition to cash compensation, the Company may compensate certain service providers, including employees, directors, consultants, and other advisors, with equity based compensation in the form of stock options and restricted stock awards. The Company records an expense related to equity compensation by pro-rating the estimated grant date fair value of each grant over the period of time that the recipient is required to provide services to the Company (the “vesting phase”). The calculation of fair value is based, either directly or indirectly, on the quoted market value of the Company’s common stock. Indirect valuations are calculated using the Black-Scholes-Merton option pricing model. For the periods presented, all stock-based compensation expense was classified as a component within selling, general and administrative expense in the Company’s statements of income.

 

The amount of stock-based compensation expense is as follows:

 

    2016     2015  
Stock options   $ 34,620     $ 68,350  
Restricted stock awards     87,251       49,346  
Total   $ 121,871     $ 117,696  

 

48

 

 

Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

As of December 31, 2016, the estimated unrecognized compensation cost from unvested awards which will be recognized ratably over the remaining vesting phase is as follows:

 

Years ended December 31st:     Unvested stock options     Unvested
restricted stock
awards 		    Total
Unrecognized
Compensation
Expense 		 
2017     $ 58,814     $ 118,043     $ 176,857  
2018       58,695       81,001       139,696  
2019       53,552       25,046       78,598  
      $ 171,061     $ 224,090     $ 395,151  

 

The Company estimated the fair value of stock options using the Black-Scholes-Merton option pricing model with the following assumptions:

 

    2016     2015  
Number of options awarded to purchase common shares     94,000 shares       —  
Risk free interest rate     1.90%     —  
Expected volatility     163.7%     —  
Assumed dividend yield     0%     —  
Expected life of options from the date of grant      9.8 years       —  

 

Equity Incentive Plans

 

Our 2006 Equity Incentive Plan (the “2006 Plan”) and 2016 Equity Incentive Plan (the “2016 Plan,” and together with the 2006 Plan, the “Plans”) provide for the issuance of stock-based awards to employees, officers, directors and consultants. The Plans permit the granting of stock awards and stock options. The vesting of stock-based awards is generally subject to the passage of time and continued employment through the vesting period.

 

Our 2006 Plan provided for the issuance of a maximum of 3,000,000 shares of our common stock. The 2006 Plan terminated in September 2016. As of December 31, 2016, the 2006 Plan had 282,086 awards outstanding.

 

Our 2016 Plan was ratified by our shareholders in May 2016 and provides for the issuance of a maximum of 5,000,000 shares of our common stock, of which 4,873,000 shares were still available for issuance as of December 31, 2016.

 

49

 

  

Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

Stock Option Activity

 

The Company generally grants stock options to persons directors, eligible employees and officers as a part of its equity incentive plan. Restrictions and vesting periods for the stock option grants are set forth in the award agreements. Each stock option grant represents one share of the Company’s common stock to be released from restrictions upon completion of the vesting period. The awards typically vest in equal increments over one to three years. Stock option activity during 2016 and 2015 is summarized as follows:  

                                 
                        Weighted Avg.        
            Weighted Avg.     Weighted Avg.     Remaining        
      Number of     Exercise Price     Fair Value     Contractual Life     Aggregate  
      Awards     per Share     per Share     (in years)     Intrinsic Value  
Outstanding, January 1, 2015     359,168     $ 0.76     $ 0.71     6.58     $ 768,869  
Granted       —     $ —     $ —       —          
Exercised       (93,165 )   $ 0.54     $ 0.33       3.49          
Expired/Forfeited       —     $ —     $ —       —          
Outstanding, December 31, 2015       266,003     $ 0.84     $ 0.85       6.43     $ 416,278  
Granted       94,000     $ 1.89     $ 1.87       9.96          
Exercised       (86,417 )   $ 0.75     $ 0.76       5.22          
Expired/Forfeited       —     $ 0.93     $ 1.97       3.63          
Outstanding, December 31, 2016       273,586     $ 1.22     $ 1.22       7.05     $ 217,892  
Exercisable, December 31, 2016       172,331     $ 0.83     $ 0.85       5.46     $ 204,438  
Unvested, December 31, 2016       101,255     $ 1.89     $ 1.87       9.75     $ 13,454  

 

The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of our common stock on December 31, 2016 and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on December 31, 2016.

 

During the year ended December 31, 2015, no stock-based awards were forfeited. During the year ended December 31, 2016, a total of 500 options issued under the 2006 Plan were forfeited, all of which were unvested. The options were forfeited upon the employees’ termination from the Company.

 

Restricted Stock Activity

 

The Company grants shares of restricted stock to directors, eligible employees and officers as a part of its equity incentive plan. Restrictions and vesting periods for the awards are set forth in the award agreements. Each share of restricted stock represents one share of the Company’s common stock to be released from restrictions upon completion of the vesting period. The awards typically vest in equal increments over one to three years. Shares of restricted stock are valued at the closing price of the Company’s common stock on the grant date and are recognized as selling, general and administrative expense over the vesting period of the award.

 

50

 

 

Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

  

The following table summarizes activity for restricted stock awards for the fiscal years presented:

 

            Weighted Avg  
      Number of     Grant Date  
      Options     Fair Value  
Non-vested restricted shares, December 31, 2014     —     $ —  
Granted       83,000     $ 2.68  
Vested       (9,000 )   $ 3.08  
Forfeited       —     $ —  
Non-vested restricted shares, December 31, 2015       74,000     $ 2.63  
Granted       62,500     $ 2.22  
Vested       —     $ —  
Forfeited       (500 )   $ 2.10  
Non-vested restricted shares, December 31, 2016       136,000     $ 2.44  

 

Note 10 - Basic and Diluted Net Income per Share

 

Basic net income per share was computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

 

The following is a reconciliation of the share data used in the basic and diluted income per share computations:

 

    Year ended December 31,  
    2016     2015  
Basic:            
Weighted average shares outstanding     23,818,762       23,797,236  
                 
Diluted:                
Weighted average shares outstanding     23,818,762       23,797,236  
Weighted average effects of dilutive securities     145,264       177,138  
Total     23,964,026       23,974,374  
                 
Antidilutive securities:     152,168       95,834  

 

The effect of the inclusion of the antidilutive shares would have resulted in an increase in earnings per share. Accordingly, the weighted average shares outstanding have not been adjusted for antidilutive shares.

 

51

 

 

Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

  

Note 11 - Related Party Transactions

 

In 2016 and 2015, we recorded total net revenue of approximately $12,000 and $16,000, respectively, from related parties. The related parties consisted of a business owned by the father of Leann Saunders, our President, and businesses owned by members of our Board of Directors.

 

The Company leases its corporate headquarters from a company in which our CEO and President have a 27% ownership interest (Note 12). U nder the related party arrangement, a pproximately $88,100 in rent expense for our corporate headquarters was recorded for the year ended December 31, 2016.

 

Note 12 – Commitments and Contingencies

 

Operating Leases & Lease Incentive Obligation

 

The Company relocated its headquarters within Castle Rock, Colorado, during the third quarter 2016 and entered into a new lease agreement for approximately 8,000 square feet of office space. This space is being leased from a company in which our CEO and President, each a related party to the Company, have a 27% ownership interest. The lease agreement has an initial term of five years plus two renewal periods, which the Company is more likely than not to renew. The office space lease term commenced August 1, 2016. Rental payments are approximately $19,000 per month, which includes common area charges, and provides for escalating rental payments annually over the term of the lease. The Company recognizes rent expense on a straight-line basis over the non-cancelable lease term and option renewal periods. The resulting deferred rent of approximately $21,000 is included in liabilities on the consolidated balance sheet. The Company recorded leasehold improvements of approximately $406,400, which included approximately $163,000 in lease incentives. Leasehold improvements are included in property and equipment on the consolidated balance sheet. Lease incentives have been included in other long-term liabilities and will reduce rent expense on a straight-line basis over 15 years. Lease incentives are excluded from minimum lease payments in the schedule below.

 

In September 2013, the Company entered into a lease agreement for our Urbandale, Iowa office space. The lease is for a period of three years, expired on October 31, 2016, and required rental payments of approximately $2,600 per month. There was no renewal feature. Currently, the space is being leased month-to-month under the same terms as the original agreement. In addition to primary rent, the lease requires additional payments for operating costs and other common area maintenance costs.

 

The Company also owns approximately ¾ acre on which a 2,300 square foot building is located in Medina, North Dakota. The Company leases space in this building under a five-year lease with an expiration date of March 1, 2018. One additional option to renew for a five-year term exists and is deemed to automatically renew unless written notice is provided 60 days before the end of the term. The Company is charged a monthly rental rate of approximately $150 plus all insurance, taxes and other costs based on actual expenses to maintain the building.

 

In connection with our acquisition of SureHarvest, we added two locations in California, Soquel and Modesto. Our office space in Soquel expires on November 30, 2017 and requires rental payments of approximately $2,700 per month. In addition to primary rent, this lease requires additional payments for operating costs and other common area maintenance costs. The monthly rental payments for our leased space in Modesto is approximately $600 and the lease agreement is month-to-month.

 

52

 

 

Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

  

Rent expense for the years ended December 31, 2016 and 2015, was approximately $204,200 and $121,300, respectively. Future minimum lease payments are as follows:

 

Years ended December 31st:     Total  
2017     $ 245,098  
2018       220,749  
2019       227,060  
2020       233,871  
2021       240,888  
Thereafter       2,707,132  
Total lease commitments     $ 3,874,797  

 

Legal proceedings

 

From time to time, we may become involved in various legal actions, administrative proceedings and claims in the ordinary course of business. We generally record losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable.

 

Employee Benefit Plan

 

The Company has established a 401(K) plan for the benefit of our employees. The plan covers substantially all of our employees who have attained age 21. We may make a discretionary matching contribution in an amount that is determined by our Board of Directors. If a matching contribution is made, the amount cannot exceed the elective deferral contributions. For the years ended December 31, 2016 and 2015, we made aggregate matching contributions of approximately $45,300 and $26,300, respectively.

 

Redeemable Non-Controlling Interest

 

Redeemable non-controlling interest on our consolidated balance sheets represents the non-controlling interest related to the Validus and SureHarvest acquisitions (see Note 3). Below reflects the activity of the redeemable non-controlling interest as of and for the years ended December 31, 2016 and 2015.

 

Balance, January 1, 2015   $ 974,019  
Net loss attributable to non-controlling interest in Validus for the year ended December 31, 2015     (37,649 )
Balance, December 31, 2015     936,370  
Net loss attributable to non-controlling interest in Validus for the year to date period ended February 29, 2016     (31,605 )
Acquisition of non-controlling interest in Validus on March 1, 2016        
Cash paid     (162,707 )
Fair market value of stock     (200,072 )
Adjustment to additional paid-in-capital     (541,986 )
Fair value of non-controlling interest in SureHarvest on December 28, 2016     1,888,135  
         
Balance, December 31, 2016   $ 1,888,135  

 

53

 

 

Where Food Comes From, Inc.  

Notes to the Consolidated Financial Statements

 

Note 13 – Supplemental Cash Flow Information

 

    Year to date ended December 31,  
    2016     2015  
Cash paid during the year:                
Interest expense   $ 1,517     $ 1,585  
Income taxes   $ —     $ —  
                 
Non-cash investing and financing activities:                
Common stock issued for remaining interest in Validus Verification Services LLC   $ 200,072     $ —  
Common stock issued for 60% interest in SureHarvest Services LLC   $ 1,710,213     $ —  
Equipment acquired under capital lease   $ 22,439     $ —  
Lease Incentive Obligation   $ 162,540     $ —  

 

54

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of our principal executive and principal financial officers, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles and that receipts and expenditures are being made only in accordance with authorization of management and the Board of Directors; and (iii) provide reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.

 

Our management evaluated the effectiveness of our internal control over financial reporting. Based upon that evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016.

 

Attestation Report of the Registered Public Accounting Firm

 

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.

 

Internal Control over Financial Reporting

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

55

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information relating to directors required by Item 10 will be included in our definitive proxy statement with respect to our 2017 Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed within 120 days after the close of the 2016 fiscal year, and is hereby incorporated by reference.

 

Information relating to compliance with Section 16(a) of the Exchange Act required by Item 10 will be included in our Proxy Statement, which will be filed within 120 days after the close of the 2016 fiscal year, and is hereby incorporated by reference.

 

Information regarding executive officers is included in Part I of this Form 10-K under the caption “Executive Officers of the Registrant.”

 

Our Board of Directors has adopted a code of conduct, which is posted on our website at http://wherefoodcomesfrom.com/. Our Code of Conduct applies to all employees, including our Chief Executive Officer, Chief Financial Officer and Controller. The Code of Conduct sets forth specific policies to guide the designated officers in their duties. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver from, a provision of this Code of Ethics by posting such information on our website, at the address and location specified above.

 

ITEM 11. EXECUTIVE COMPENSATION

 

This information will be included in our Proxy Statement, which will be filed within 120 days after the close of the 2016 fiscal year, and is hereby incorporated by reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

 

This information will be included in our Proxy Statement, which will be filed within 120 days after the close of the 2016 fiscal year, and is hereby incorporated by reference.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

This information will be included in our Proxy Statement, which will be filed within 120 days after the close of the 2016 fiscal year, and is hereby incorporated by reference.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

This information will be included in our Proxy Statement, which will be filed within 120 days after the close of the 2016 fiscal year, and is hereby incorporated by reference.

 

56

 

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
         
Exhibit
Number 		  Document Name    
2.1   Asset Purchase Agreement, dated as of December 28, 2016, by and among Where Food Comes From, Inc., SureHarvest Services LLC, SureHarvest, Inc. and Jeff Dlott   Incorporated by reference from Registrant’s Form 8-K filed December 30, 2016
         
3.1   Articles of Incorporation   Incorporated by reference from Registrant’s Registration Statement on Form SB-2 filed April 28, 2006
         
3.2   Articles of Amendment   Incorporated by reference from Registrant’s Form 8-K filed December 5, 2012
         
3.3   By-laws of the Registrant   Incorporated by reference from Registrant’s Registration Statement on Form SB-2 filed April 28, 2006
         
4.1   Form of the Registrant’s Common Stock Certificate   Incorporated by reference from Registrant’s Registration Statement on Form SB-2 filed June 22, 2006
         
10.1   2005 Stock Option Plan*   Incorporated by reference from Registrant’s Registration Statement on Form SB-2 filed June 22, 2006
         
10.2   2006 Equity Incentive Plan*   Incorporated by reference from Registrant’s Registration Statement on Form SB-2 filed April 28, 2006
         
10.3   2016 Equity Incentive Plan*   Incorporated by reference from Registrant’s Form 8-K filed May 10, 2016
         
10.4   Lease dated June 27, 2005 for offices in Platte City, Missouri   Incorporated by reference from Registrant’s Registration Statement on Form SB-2 filed April 28, 2006
         
10.5   Employment Agreement dated January 1, 2006 between the Registrant and John K. Saunders *   Incorporated by reference from Registrant’s Registration Statement on Form SB-2 filed April 28, 2006
         
10.6   Employment Agreement dated January 1, 2006 between the Registrant and Leann Saunders *   Incorporated by reference from Registrant’s Registration Statement on Form SB-2 filed April 28, 2006
         
10.7   Purchase and Exchange Agreement, dated as of February 29, 2012, by and among Integrated Management Information, Inc. and International Certification Services, Inc.   Incorporated by reference from Registrant’s Form 8-K filed March 2, 2012
         
10.8   Shareholders’ Agreement, dated as of February 29, 2012, by and among Integrated Management Information, Inc. and International Certification Services, Inc. and the selling shareholders.   Incorporated by reference from Registrant’s Form 8-K filed March 2, 2012
         
10.9   Asset Purchase and Contribution Agreement, dated as of September 16, 2013 by and among Praedium Ventures, LLC; the Members of Praedium Ventures LLC; Where Food Comes From, Inc. and Validus Verification Services, LLC   Incorporated by reference from Registrant’s Form 8-K filed September 19, 2013
         
10.10   Amended and Restated Operating Agreement of Validus Verification Services LLC, dated as of September 16, 2013   Incorporated by reference from Registrant’s Form 8-K filed September 19, 2013
         
10.11   Employment Agreement, effective September 16, 2013, by and between Validus Verification Services LLC and Earl Dotson   Incorporated by reference from Registrant’s Form 8-K filed September 19, 2013
         
10.12   Business Loan Agreement and Promissory Note by and between Castle Rock Bank, as Lender, and Where Food Comes From, Inc., as Borrower, dated September 2, 2014   Incorporated by reference from Registrant’s Form 8-K filed September 5, 2014
         
10.13   Lease with commencement date of August 1, 2016 for office space in Castle Rock, Colorado   Filed herewith
         
10.14   Employment Agreement, effective December 28, 2016, by and between SureHarvest Services, LLC and Jeff Dlott *   Incorporated by reference from Registrant’s Form 8-K filed December 30, 2016
         
16.1   Letter of GHP Horwath, P.C. dated December 22, 2016   Incorporated by reference from Registrant’s Form 8-K filed December 22, 2016
         
21.1   Subsidiaries of the Registrant   Filed herewith
         
23.1   Consent of EKS&H LLLP   Filed herewith

 

57

 

 

23.2   Consent of GHP Horwath, P.C.   Filed herewith
         
31.1   Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
         
31.2   Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
         
32.1   Certification Pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002   Filed herewith
         
32.2   Certification Pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002   Filed herewith
         
101.INS   XBRL Instance Document   Furnished herewith
         
101.SCH   XBRL Taxonomy Extension Schema Document   Furnished herewith
         
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document   Furnished herewith
         
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document   Furnished herewith
         
101.LAB   XBRL Taxonomy Extension Label Linkbase Document   Furnished herewith
         
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document   Furnished herewith
         
 * Indicates a management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate.

 

58

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      Date: February 28, 2017 Where Food Comes From, Inc.
     
    By: /s/ John K. Saunders
     

Name: John K. Saunders

Title: Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signatures   Title   Date
         
/s/ John K. Saunders   Chairman and CEO   February 28, 2017
John K. Saunders   (Principal Executive Officer)    
         
/s/ Leann Saunders   President and Director   February 28, 2017
Leann Saunders        
         
/s/ Dannette Henning   Chief Financial Officer   February 28, 2017
Dannette Henning   (Principal Financial Officer)    
         
/s/ Tom Heinen   Director   February 28, 2017
Tom Heinen        
         
/s/ Pete Lapaseotes   Director   February 28, 2017
Pete Lapaseotes        
         
/s/ Adam Larson   Director   February 28, 2017
Adam Larson        
         
/s/ Graeme P. Rein   Director   February 28, 2017
Graeme P. Rein        
         
/s/ Michael D. Smith   Director   February 28, 2017
Michael D. Smith        
         
/s/ Dr. Gary Smith   Director   February 28, 2017
Dr. Gary Smith        
         
/s/ Robert VanSchoick   Director   February 28, 2017
Robert VanSchoick        

 

59

 

Where Food Comes From, Inc. - 10-K

Exhibit 10.13

 

LEASE AGREEMENT

 

thE movE

 

202 SIXTH STREET  

CASTLE ROCK, CO 80104

 

THE MOVE, LLC, A COLORADO LIMITED LIABILITY COMPANY

LANDLORD

 

AND

 

WHERE FOOD COMES FROM INC., A COLORADO CORPORATION.

TENANT

 

 

 

LEASE AGREEMENT

 

thE movE

202 SIXTH STREET, CASTLE ROCK, CO 80104

 

THE MOVE, LLC, LANDLORD, AND

WHERE FOOD COMES FROM INC, TENANT

 

TABLE OF CONTENTS

        Page  
         
Article 1 - Fundamental Lease Provisions 1
         
Article 2 - Construction of the Premises 2
         
Article 3 - Lease Term 2
         
Article 4 - Rent 2
         
Article 5 - Taxes 3
         
Article 6 - Indemnification of Landlord - Insurance 3
         
Article 7 - Utilities 4
         
Article 8 - Common Areas 5
         
Article 9 - Use of Premises 6
         
Article 10 - Good Merchandising Standards 6
         
Article 11 - Rules and Regulations 7
         
Article 12 - Advertising and Signs 7
         
Article 13 - Mechanic’s Liens 7
         
Article 14 - Maintenance and Alterations 7
         
Article 15 - Assigning or Subleasing 8
         
Article 16 - Condemnation 9
         
Article 17 - Casualty to Premises 10
         
Article 18 - Defaults 10
         
Article 19 - Bankruptcy 11
         
Article 20 - Landlord’s Lien 11
         
Article 21 - Notices 12
         
Article 22 - Security Deposit 12
         
Article 23 - Mandatory Execution of Documents by Tenant 12
         
Article 24 - Construction and Effect 13
         
Article 25 - Miscellaneous Provisions 13

 

EXHIBITS AND ADDENDUM

    Page  
     
Exhibit A Site Plan A-1
Exhibit B Description of Premises B-1
Exhibit C Provisions Relating to the Construction of Premises C-1-4
Exhibit D Tenant’s Estoppel Certificate D-1
Exhibit E Mechanic’s Lien Notice E-1
Exhibit F Rules and Regulations F-1-4
Exhibit G Hazardous and/or Toxic Wastes, Substances and Materials G-1
Exhibit H Commencement Date Certificate H-1
Addendum Option to Renew A-1A-2A

 

 

 

LEASE AGREEMENT

 

In consideration of the rents and covenants hereinafter set forth, Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, upon the terms and conditions set forth herein, the commercial space referred to herein as the Premises.

 

ARTICLE 1 - FUNDAMENTAL LEASE PROVISIONS

 

1.01 Landlord . THE MOVE, LLC, a Colorado Limited Liability Company with its principle place of business at 18 South Wilcox Street, Suite 100, Castle Rock, CO 80104

 

1.02 Tenant . WHERE FOOD COMES FROM, INC, a Colorado Corporation authorized to conduct business in the State of Colorado, with its principal place of business at 221 Wilcox St., Castle Rock, CO, 80104 prior to possession, then 202 Sixth Street, Castle Rock, CO, 80104. .

 

1.03 Premises . Approximately 8,127 rentable square feet on the fourth (4 th ) floor identified as Unit TBD as generally shown on the Site Plan attached hereto as Exhibit A and as described on Exhibit B. The precise square footage will be specified in the Commencement Date Certificate, Exhibit H, upon completion of the construction in accordance to BOMA standards.

 

1.04 Building: thE movE, 202 Sixth Street, Castle Rock, CO 80104

 

1.05 Lease Term . Sixty (60) Months following the Commencement Date.

 

1.06 Renewal Option: Two (2) options to extend the Lease Term for an additional Five (5) years each. Such Renewal Option shall be governed as per the terms of the attached Addendum.

 

1.07 Possession Date : Estimated to be November 1, 2015, which actual date shall be confirmed in the Commencement Date Certificate attached hereto as Exhibit H. For the purpose of determining the Commencement Date, possession of the Premises shall be deemed to be the date in which Landlord provides Tenant with access to the Premises for the purpose of constructing Tenant improvements within the Premises.

 

1.08 Commencement Date : The Lease shall commence one hundred and fifty days (150) days following the Possession Date, or when Tenant opens for business, whichever occurs first. Tenant shall have no obligation to pay Rent during the period between Possession Date and open for business date or 150 days after commencement, whichever occurs first.

 

1.09 Security Deposit : The security deposit shall be equal to the first month’s Minimum Rent.

 

1.10 Rent : The term “Rent” shall include the following:

 

(a) Minimum Rent Schedule: $20.00/rentable square feet with three percent (3%) annual increases, as further defined in Exhibit H, Commencement Date Certificate.

 

(b) Additional Rent . Common Area Expenses, association dues, taxes, and insurance estimated to be an additional $8.00 per square foot for 2015
i. Taxes are estimated to be $4.00 per square foot
ii. Common Area Expenses and Insurance are estimated to be $4.00 per square foot
iii. On Commencement Date, or when Tenant opens for business, whichever occurs first, Tenant will make first monthly installment of the estimated Additional Rent.

 

1.11 Tenant’s Use . Tenant may use the Premises for any use reasonably related to general office purposes for the conduct of generally acceptable office of work including all purposes consistent with the zoning of the Premises, the design of the Premises, and all applicable state and federal laws and regulations.

 

1.12 Construction Allowance : Landlord shall provide Tenant a Tenant Improvement allowance equal to $20.00 per rentable square foot in the Premises. Such allowance shall be paid to Tenant by Landlord as described in Exhibit C, this allowance is offered as an incentive to take possession of the Premises not as a loan or to be in anyway repaid except in the event of default of the Lease during the initial Lease Term.

 

1.13 Notice Addresses .

 

(a) Landlord’s Notice Address : P.O. Box 97, Castle Rock, CO 80104 or such other address that Landlord determines and provides written notice to Tenant of such change.

 

(c) Tenant’s Notice Address : Prior to Commencement Date at 221 Wilcox St., Castle Rock, CO 80104, and at the Premises after Commencement Date, unless otherwise changed via written notice by Tenant to Landlord.

 

1.14 Maintenance : Landlord shall be responsible for the maintenance of the structural components and all Common Areas. Tenant shall maintain all other components that serve exclusively Tenants leased office space which may include, without limitation, HVAC, plumbing, electrical, interior walls, doors, floor covering, wall coverings, store front, windows, etc

 

1.15 Signage : Tenant, at its sole cost and expense, shall have the right to install signage above Tenant’s Premises and to install or place interior window signs on the Premises in accordance with all local codes and ARTICLE 12 and Exhibit F of this agreement.

 

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1.16 Continuous Use : If, at any time during this Lease, Tenant vacates, abandons, or closes its business operation at the Premises for more than ten (10) days (except as a result of casualty, condemnation or remodeling) and Tenant has not entered into an assignment or sublease for the Premises with an assignee or subtenant who will be reoccupying the Premises, this shall constitute a default and the Landlord shall have all of the remedies for default provided for herein.

 

1.17 Pro Rata Share : Tenant’s Pro Rata Share shall be determined by dividing the rentable square footage of the Premises by the actual rentable square footage of the Building and multiplying the quotient by 100. Tenant’s pro rata share shall be confirmed in the Commencement Date Certificate, Exhibit H, following approval of the final space plan for the Premises.

 

ARTICLE 2 - CONSTRUCTION OF THE PREMISES

 

Landlord shall construct the Building in accordance with the general site plan attached hereto as Exhibit A (the “Site Plan”), as it may be amended by the Landlord in its discretion from time to time provided that, in its amendment of the Site Plan, Landlord uses reasonable efforts to minimize any interference with Tenant’s use and occupancy of, visibility of, or access to the Premises. The Premises are to be generally constructed in accordance with the specifications entitled “Description of Landlord’s Work” in Provisions Relating to the Construction of Premises set forth in Exhibit C, attached hereto. Following the walk-through inspection and the creation of a punch list as described in Exhibit C paragraph 3, the Premises will be considered Substantially Completed on the date Landlord’s Work as described in Exhibit C, Schedule 1, is substantially completed enabling Tenant at Tenant’s reasonable discretion to accept delivery of the Premises in a condition to allow Tenant to immediately begin Tenant Improvements. Tenant shall take possession of the Premises as soon as possible after Landlord’s Work is complete, shall commence the construction of Tenant’s Improvements, shall diligently prosecute such construction to completion, and shall open the Premises for business as soon as reasonably possible thereafter. If the Possession Date has not occurred by April 1, 2016, then Tenant may terminate this Lease upon delivery of notice to Landlord and shall have no remaining liability with respect to this Lease. Upon receipt of Tenant’s notice of termination, Landlord shall immediately return Tenant’s Security Deposit and prepaid rent.

 

Landlord and Tenant shall execute a Commencement Date Certificate, substantially in the form attached to this Lease as Exhibit H, within fifteen (15) days after the Commencement Date. The Commencement Date Certificate shall amend the terms of this Lease as specified therein and shall be binding throughout the Term, unless subsequently amended in writing by Landlord and Tenant.

 

ARTICLE 3 - LEASE TERM

 

The term of this Lease shall commence on the Commencement Date. The Term shall continue for the period designated as the Lease Term in Article 1 hereof. Except as provided below, the term “Lease Year,” whenever used herein, shall mean a period of twelve (12) consecutive full calendar months. The first Lease Year shall commence on the Commencement Date. If the Commencement Date is other than the first day of a calendar month, the first Lease Year shall consist of the remaining part of such month, and the next consecutive twelve (12) calendar months. Each succeeding Lease Year shall commence on the day after the conclusion of the previous Lease Year. The parties hereto acknowledge that certain obligations under various Articles hereof may commence prior to the Lease Term (i.e. construction, hold harmless, liability insurance, etc.), and the parties agree to be bound by these Articles prior to commencement of the Lease Term.

 

Pursuant to Section 1.06 and as modified by the Addendum signed simultaneously with this agreement Tenant shall have two (2) options to renew for a term of five (5) years each.

 

Tenant shall not have the right to holdover possession of the Premises after the expiration or termination of this Lease without Landlord’s prior written consent, which consent may be withhold in Landlord’s sole and absolute discretion. If Tenant retains possession of any part of the Premises after the expiration or termination of this Lease without Landlord’s prior written consent, Tenant shall become a month-to-month tenant (for the part of the Premises then leased by Tenant) in accordance with all of the terms of this Lease as might be applicable to such month-to-month tenancy, except that Tenant shall pay Base Rent at the greater of (a) one hundred twenty-five percent (125%) of the rate in effect for the month immediately prior to such holdover, or (b) fair market rent, as reasonably determined by Landlord. Tenant shall pay its Proportionate Share of Operating Cost Share Rent and Tax Share Rent during any holdover period in accordance with the terms of this Lease, and shall be responsible for its Proportionate Share of any increases thereto. No acceptance of Rent or other payments by Landlord under these holdover provisions shall operate as a waiver of Landlord’s right to regain possession based on breach of lease or any other Landlord remedy.

 

ARTICLE 4 - RENT

 

The Tenant agrees to pay as rent for the use and occupancy of the Premises, at the times and in the manner hereinafter provided.:

 

4.01          Minimum Rent . The Minimum Rent specified in Article 1, Section 1.10(a) and Exhibit H, hereof shall be payable in twelve (12) equal monthly installments during each year, in advance, on the first day of each calendar month (the “Due Date”), without setoff or deduction. If the Commencement Date is other than the first day of a month, then the rental for the first fractional month shall be computed on a daily basis for the period from the Lease Commencement Date to the end of such calendar month and at an amount equal to one three hundred sixty-fifth (1/365) of the Minimum Rent for each such day, and thereafter shall be computed and paid as aforesaid.

 

4.02          Additional Rent . Tenant shall pay its pro rata share of the Common Area Expenses which shall include the costs of insurance, association dues, and real estate taxes of thE movE as set forth in Articles 5, 6, and 8.

 

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4.03        Payment of Rent . All Minimum Rent and Additional Rent payable under this Lease shall be paid by Tenant without notice or demand at such place as designated by Landlord in writing. If Tenant shall fail to pay any Minimum Rent and/or Additional Rent within five (5) days after the same is due and payable, a late charge of ten percent (10%) of such delinquent amount shall be due and payable to Landlord immediately, together with reimbursement to Landlord for any returned check charges incurred by Landlord in connection with the delinquency. In the event Tenant tenders any payment of Rent or Additional Rent to Landlord, and said payment check is returned to Landlord due to insufficient funds in Tenant’s account, then Landlord may thereafter request any or all such future payments to be remitted by Tenant to be in “Certified Funds.” Acceptance of such late charges by the Landlord shall in no event constitute a waiver of Tenant’s default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. Landlord’s acceptance of any late payment(s) without opting to assess a late charge in no way shall constitute a waiver of Landlord’s rights, including the right to assess such charges in the future nor Tenant’s obligations hereunder.

 

ARTICLE 5 - TAXES

 

5.01        Real Property Taxes .

 

(a)            Upon the Commencement Date, Tenant will pay to Landlord, in accordance with ARTICLE 1, Section 1.10(b), Tenant’s estimated pro rata share the taxes and assessments levied and assessed for that year. Subsequently, Tenant will pay Tenant’s pro rata share of the estimated taxes as defined as Additional Rent to thE movE, including the cost of any mutually agreed additional professional services rendered to Landlord (or any other expenses incurred by Landlord) in connection with any action to reduce the assessed valuation of thE movE or any portion thereof. If the Premises and underlying realty are not separately assessed, Tenant’s share of such taxes and assessments shall be determined by multiplying the total amount due by a fraction, the numerator of which is the floor area of the Premises and the denominator of which is the total floor area of the improvements covered by the tax bill. For the purposes of this Lease, floor area shall be measured from the exterior surface of exterior walls (and from the extensions thereof, in the case of openings) and from the center of interior demising partitions, including mezzanines, warehousing or storage areas, clerical or office areas and employee areas. Such taxes shall be paid in equal monthly installments as determined in subpart 5.01(b) below.

 

(b)            The amount of each such installment shall be determined by Landlord in accordance with the provisions of subparagraph (a) above on the basis of Landlord’s good faith estimate of the total taxes and assessments which will be due and payable in regard to thE movE for the calendar year concerned. Such estimate may be revised by Landlord from time to time as additional information becomes available, and the amount of the monthly installment due from Tenant hereunder shall be increased or decreased accordingly. Notwithstanding the foregoing, Tenant is obligated to pay Tenant’s Pro Rata Share as determined in accordance with subparagraph (a) above. Any deficiency between the amount of Tenant’s actual share of such taxes and assessments for any calendar year and the total amount paid by Tenant in installments during such year shall be paid to Landlord by Tenant within fifteen (15) days after receipt by Tenant of notice of such deficiency which notice may be given by Landlord at any time prior to June 1 of the subsequent year (or later in the event Landlord is delayed by the taxing authorities, or is pending information from tax assessment appeal, etc.). Any surplus of installments paid over amount due shall be credited by Landlord to the first installment of Rent coming due from Tenant after the date of such accounting recognizing the credit or shall be refunded to Tenant if the Lease Term has ended.

 

(c)            If at any time during the Lease Term under the Laws of the United States government, state, county, city, or any political subdivision or owners association thereof in which the Premises are situated, a tax or excise on rent or any other tax or assessment described is levied or assessed against Landlord on account of rentals payable to Landlord hereunder, such tax, excise or assessment shall be considered “taxes” for the purposes of this Article, excluding, however, from such tax or excise all general income taxes, gift taxes, inheritance taxes estate taxes, transfer tax, gains tax, and any charges, penalties, or interest imposed as the result of Landlord’s failure to comply with the law.

 

5.02        Personal Property Taxes . Tenant shall pay all taxes on its personal property and trade fixtures located in the Premises. In the event any or all of the Tenant’s leasehold improvements, equipment, furniture, fixtures and other personal property shall be assessed and taxed with the real property, Tenant shall pay to Landlord its share of such taxes within thirty (30) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant’s property.

 

ARTICLE 6 - INDEMNIFICATION –AND INSURANCE

 

6.01        Indemnification .

 

(a)              Tenant shall indemnify and hold Landlord harmless from and against all costs, claims, expenses, penalties, liens and liabilities of whatsoever nature arising from any act, omission or gross negligence of Tenant and its employees, agents, guests and invitees, in connection with Tenant’s use or occupancy of the Premises, or arising from any accident, injury or damage to person or property during the term hereof in or about except as provided in this Lease. Such indemnification shall only extend to the limits of Tenants insurance. Such indemnification shall not extend to any damages that are the result of the gross negligence or willful misconduct of Landlord or its employee or agents. Landlord shall not be responsible or liable to Tenant or to those claiming by, through or under Tenant for any loss or damage occasioned by or through the acts, omissions or gross negligence of the occupants of adjoining premises or any part of thE movE.

 

(b)             Landlord shall indemnify and hold Tenant harmless from and against all costs, claims, expenses, penalties, liens and liabilities of whatsoever nature arising from any act, omission or gross negligence of Landlord and its employees, agents, guests and invitees, or arising from any accident, injury or damage to person or property during the term hereof in or about except as provided in this Lease. Such indemnification shall only extend to the limits of Landlord’s insurance. Such indemnification shall not extend to any damages that are the result of the gross negligence or willful misconduct of Tenant or its employee or agents. Tenant shall not be responsible or liable to Landlord or to those claiming by, through or under Landlord for any loss or damage occasioned by or through the acts, omissions or gross negligence of the occupants of adjoining premises or any part of thE movE.

 

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6.02        Tenant’s Insurance . Tenant will, from and after the earlier of Tenant entering into the Premises or Commencement Date and until the expiration or earlier termination of the Term, at Tenant’s sole expense, keep any Leasehold Improvements and other alterations or improvements to the Premises made by Tenant and all of Tenant’s machinery, equipment, furniture, fixtures, personal property (including also property under the care, custody, or control of Tenant) and business interests which may be located in, upon or about the Premises insured for the benefit of Tenant in an amount equivalent to the full replacement value or insurable value thereof against:

 

(a)            loss or damage by fire; and

 

(b)           such other risk or risks of a similar or dissimilar nature as are now, or may in the future be, customarily covered with respect to a tenant’s machinery, equipment, furniture, fixtures, personal property and business located in a building similar in connection, general location, use, occupancy and design to the Building, including, but without limiting the generality of the foregoing, windstorms, hail, explosions, vandalism, theft, malicious mischief, civil commotion and such other coverage as Tenant may deem appropriate or necessary.

 

(c)              Tenant covenants and agrees to maintain throughout the Lease Term, a policy or policies of insurance providing insurance coverage for Tenant’s liability for damage to the Building and its indemnification requirement under this Lease to be insured under standard hazard, fire, and extended coverage, plate glass insurance, comprehensive general liability insurance, and including coverage for bodily injury and death, property damage, personal injury (employee and contractual liability exclusions deleted), and broad form property damage insurance, with a replacement coverage of not less than ninety percent (90%), and with regard to liability insurance, insuring both Landlord and Tenant against all claims, demands, or actions arising out of or in connection with Tenant’s use or occupancy of the Premises, or by the condition of the Premises, fire legal liability, and medical payment coverage issued by an insurance company qualified to do business in the state of Colorado. Coverage shall be written on an occurrence basis., and such insurance will be on a commercial general liability form including, without limitation, personal injury and contractual liability for the performance by Tenant of the indemnity agreements set forth in this Lease and shall contain the following minimum limits of liability: One Million and 00/100 Dollars ($1,000,000.00) for injury (or death) to any person, One Million and 00/100 Dollars ($1,000,000.00) for injury (or death) to any two or more persons, and Five Hundred Thousand and 00/100 Dollars ($500,000.00) with respect to property damage. All such policies shall name Landlord and the property manager (if any) as additional insureds, and shall provide that the same may not be canceled or altered except upon thirty (30) days prior written notice to Landlord. All insurance maintained by Tenant shall be primary to any insurance provided by Landlord. Tenant shall provide copies of such policies, or duly executed certificate(s) of such insurance, along with all corresponding endorsements, to Landlord upon the Commencement Date of the Lease term and at least thirty (30) days prior to any annual renewal date thereof. Such One Million Dollar ($1,000,000.00) limit may be increased from time to time in the reasonable discretion of Landlord. If Tenant should fail to comply with the foregoing requirement relating to insurance, Landlord may obtain such insurance and Tenant shall pay to Landlord on demand as Additional Rent hereunder the premium cost thereof plus interest at the maximum contractual rate (but in no event to exceed 1½% per month) from the date of payment by Landlord until repaid by Tenant.

 

(d)            Each party shall include in each of its policies insuring against loss, damage, or destruction by fire or other casualty a waiver of the insurer’s right of subrogation against the other party.

 

6.03        Fire and Casualty Insurance. Landlord shall keep the building of which the Premises are part and thE movE insured against loss or damage by fire or other casualty to the extent of at least eighty percent (80%) of the full insurable value thereof, including all improvements, alterations, additions and changes made by the Landlord. All proceeds of such insurance shall belong solely to the Landlord. Tenant shall not be named as an insured party in any such insurance policies procured by Landlord; however, Landlord shall cause its insurance policy or policies pursuant hereto to be written in a manner so as to provide that the insurance company waives all rights of recovery by way of subrogation against Tenant in connection with any loss or damage covered by the policy unless caused by Tenant, its licenses, agents, invitees, servants or employees. Tenant shall not be liable to Landlord for any loss or damage covered by such insurance unless caused by Tenant, its licenses, agents, invitees, servants or employees. Landlord and Tenant agree that in the event the building of which the Premises are part, thE movE, the Premises or its contents are damaged or destroyed by fire or other insured casualty, the right, if any, of either party against the other (including its officers, directors, shareholders, partners, employees and agents) with respect to such damage or destruction are hereby waived so long as such party maintained the insurance required in this Lease. All policies of fire and/or extended coverage or other insurance covering the Premises or its contents shall contain a clause or endorsement providing in substance that the insurance shall not be prejudiced if the insureds have waived right of recovery from any person or persons prior to the date and time of loss or damage, if any.

 

ARTICLE 7 - UTILITIES

 

Landlord, at Landlord’s expense, shall deliver the Premises with 1 ton of HVAC for every 300 rentable square feet within the Premises and 3-Phase, 200 amp electrical service stubbed to the Premises. Tenant shall pay for all electricity, gas, water, telephone or any other utilities used by it in connection with the Premises effective as of the Possession Date and shall not permit any utilities to be discontinued or disconnected without the prior written consent of Landlord. Landlord may install re-registering or allocation meters and collect any and all charges aforesaid from Tenant, making returns to the proper public utility companies, governmental units or other suppliers of such public utilities. For all such services that are separately metered to Tenant, Landlord shall ensure that such payments and costs are excluded from the calculations of Common Area expenses charged to Tenant.

 

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ARTICLE 8 - COMMON AREAS

 

8.01        Definition of Common Areas . The term “Common Areas” applies to all areas which are now or hereafter made available for general use, convenience and benefit of Landlord and all tenants of thE movE, including, without limiting the generality of the foregoing, automobile parking areas, driveways, sidewalks, open and enclosed courts, restrooms, roofs and canopy areas and landscaped and planted areas. The Common Areas may be altered, reduced or added to by Landlord at any time in its sole discretion, provided that Landlord uses reasonable efforts to minimize any interference with Tenant’s use and occupancy of, visibility of or access to the Premises. Landlord grants Tenant, its employees, invitees, licensees and other visitors a nonexclusive license for the Lease Term to use the Common Areas in common with others entitled to use the Common Areas, subject to the terms and conditions of this Lease.

 

8.02        Use of Common Areas . Tenant and its employees and invitees are, except as otherwise specifically provided in this Lease, authorized, empowered and privileged to use the Common Areas in common with other persons during the term of this Lease. Landlord shall maintain and operate, or cause to be maintained and operated, the Common Areas at all times following completion thereof for the benefit and use of the customers and patrons of the Tenant, and of other tenants, owners and occupants of thE movE.

 

8.03        Maintenance of Common Areas . The Landlord shall keep, or cause to be kept, the common areas owned by Landlord in a neat, clean, and orderly condition, properly lighted and landscaped, and shall repair any damage to the facilities thereof. Such maintenance may include, by way of example but not as a limitation or obligation: (i) general maintenance and repairs; (ii) maintenance, resurfacing, painting and restriping of parking areas, drive lanes and driveways; (iii) cleaning, steam cleaning, sweeping and janitorial services; (iv) maintenance, repair and replacement of sidewalks, curbs, and fascia of the shops and buildings constituting thE movE; (v) maintenance and repair of sprinkler systems, planting, pruning and landscaping; (vi) maintenance, repair and restoration of lighting and utilities; (vii) maintenance and improvement of signs, directional signs and other markers and bumpers; (viii) snow removal; (ix) maintenance and repair of any roofs, roof drain systems, fire protection systems (if applicable), lighting systems, storm drainage systems and any other utility systems; (x) employment of personnel to implement such services, including, if Landlord deems necessary, the cost of security guards; (xi) timely payment of real and personal property taxes and assessments or surcharges relating to the Common Areas; (xii) installation and maintenance of a security alarm system for the tenants in the Building (if Landlord deems necessary); (xiii) maintenance of adequate public liability and property damage insurance on the Common Areas; and (xiv) reasonable improvement of the Common Areas undertaken from time to time by Landlord all of the above in its sole discretion. Landlord may cause any or all of said services to be provided by an independent contractor or contractors. Landlord may also perform such maintenance and services in relation to any part of the Common Areas not owned by Landlord. Landlord is not required to perform any particular maintenance or service in regard to all or any part of the Common Areas if in its judgment such service is inappropriate, not sufficiently beneficial or unnecessary.

 

8.04        Payment of Common Area Expenses . Pursuant to Article 4, Tenant shall pay to Landlord Tenant’s Pro Rata Share of all expenses incurred by Landlord in connection with the maintenance and operation of the Common Areas together with Tenant’s Pro Rata Share of the reasonable management fees Landlord pays to the manager of thE movE, and a reasonable allowance for Landlord’s overhead costs not to exceed two and one-half percent (2.5%) of the costs described in this Section 8.04 (collectively “Common Area Expenses” or “CAM”). Payment of Common Area Expenses shall be made in accordance with the provisions of this paragraph (and following applicable paragraphs). Notwithstanding the foregoing, Operating Costs shall not include: costs of a capital nature except as provided in Section 8.04(e); costs resulting from the gross negligence or willful misconduct of Landlord, its employees, agents and/or contractors; penalties or costs for late payment or violations of leases, agreements, tax obligations, or other legal obligations of Landlord costs related to validated parking programs; legal, auditing, consulting, brokerage or other professional fees paid or incurred in connection with negotiations or disputes related to financings, refinancing, development, construction, leasing or sales of thE movE or any portion thereof; services, items and benefits for which Tenant or any other tenant or occupant of thE movE specifically reimburses Landlord or for which Tenant or any other tenant or occupant of thE movE pays third persons; tenant allowance or concessions incurred in completing, fixturing, furnishing, renovating or otherwise improving, decorating or redecorating space for tenants or other occupants of thE movE, or vacant, leasable space in thE movE; cost of work performed exclusively for any other tenant in thE movE; work performed on other properties by employees of Landlord or Landlord’s agents; any other costs incurred by Landlord its employees or agents to the extent not for the benefit of thE movE or otherwise not fairly and equitably allocable to thE movE in accordance with generally accepted accounting principles and sound property management practices. Landlord agrees to limit Tenant’s controllable Common Area Expense increases to no more than one hundred five percent (105%) of the Common Area Expenses of the prior calendar year (calculated on a cumulative basis). Controllable Common Area Expenses are all costs included in Additional Rent with the exception of costs of snow and ice removal from Building Common Areas such as Building sidewalks, entry ways and other adjacent areas, costs of water, sewer, electricity, natural gas and other Building utilities, taxes, to include any association fees, charges and assessments and insurance.

 

(a)            Tenant’s pro rata share of CAM (“Tenant’s Common Area Share”) shall be that portion of all of such estimated expenses that is equal to the proportion thereof which the Floor Area of the Premises bears to the Floor Area of the Building.

 

(b)             From and after the Lease Commencement Date, but subject to adjustment as provided in subsection 8.04(c), Tenant shall pay to Landlord concurrently with the monthly installments of Minimum Rent payable pursuant to paragraph 4.01 above, an amount estimated by Landlord to be Tenant’s Common Area Share for such month.

 

(c)            Within thirty (30) days following the end of each calendar quarter, Landlord shall furnish Tenant a statement covering the calendar quarter, certified as correct by an authorized representative of Landlord, showing the actual amount of Tenant’s Common Area Share for such calendar quarter and the payments made by Tenant with respect to such period pursuant to subsection 8.04(b). If Tenant’s Common Area Share exceeds Tenant’s payments during such calendar quarter, Tenant shall pay Landlord the deficiency within thirty (30) days after receipt of such statement. If said payments exceed Tenant’s Common Area Share, the excess shall be credited against the next due Additional Rent payment or paid to Tenant if the Lease Term has then ended.

 

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(d)              If Tenant disputes an adjustment submitted by Landlord or a proposed increase or decrease in the Common Area Expenses, Tenant shall give Landlord notice of such dispute within thirty (30) days after Tenant’s receipt of the adjustment. If Tenant does not give Landlord timely notice, Tenant waives its right to dispute the particular adjustment. If Tenant timely objects, Tenant may engage its own certified public accountants (“Tenant’s Accountants”) to verify the accuracy of the statement complained of or the reasonableness of the estimated increase or decrease. Tenant’s Accountants shall be required to enter into a reasonable confidentiality agreement satisfactory to Landlord. If Tenant’s Accountants determine that an error has been made, Landlord’s Accountants and Tenant’s Accountants shall endeavor to agree upon the corrective measures for same, failing which, such matter shall be submitted to an independent certified public accountant selected by Landlord and Tenant for a determination which will be conclusive and binding upon Landlord and Tenant. Notwithstanding the foregoing, should Tenant be successful in disputing Landlord’s proposed Common Area Expense charges Landlord shall be responsible for Tenant’s costs incurred in the action in an amount that is equal to the lesser of the amount found to be in error in the most recent year or $750 and should Tenant’s claim fail Tenant shall be responsible to Landlord to Landlord’s costs associated with defending the action in an amount not to exceed $750. Such costs shall be refunded to Tenant should it be determined that Landlord’s proposed increase or decrease was in error. Notwithstanding the pendency of any dispute, Tenant shall continue to pay Landlord the amount of the Estimated Payment or adjustment determined by Landlord’s Accountants until the adjustment has been determined to be incorrect. If it is determined that any portion of the Common Area Expenses were not properly chargeable to Tenant, Landlord shall credit the overage against the next due Additional Rent or refund the appropriate sum to Tenant.

 

(e)              Operating Costs may not include capital improvements and structural repairs and replacements to the Building and the Common Areas to conform to changes subsequent to the date of issuance of the shell and core certificate of occupancy for the Building in any Applicable Laws (herein “Required Capital Improvements”); and the costs of any capital improvements and structural repairs and replacements designed primarily to reduce Operating Expenses (herein “Cost Savings Improvements”).

 

8.05        Landlord Liability . Nothing contained in this article shall be deemed to create any liability upon Landlord for any damage to motor vehicles of customers or employees or for loss of property from within such motor vehicles while located on the Common Areas, unless caused by the gross negligence of the Landlord, its agents, servants or employees.

 

ARTICLE 9 - USE OF PREMISES

 

9.01       Tenant shall use the Premises solely for Tenant’s Use under the name specified in Article 1. Tenant shall not use or permit the Premises to be used for any other purpose or purposes or under any other name whatsoever without the written consent of the Landlord being first obtained. The Tenant further covenants and agrees that it will not suffer or permit any use of the Premises or any part thereof for any use or purpose in violation of the laws of the United States of America, or the laws, ordinances, regulations and requirements of the state, county and city or owners association where thE movE is situated, or other lawful authorities, and that the Premises, and every part thereof, shall be kept by Tenant in a clean and wholesome condition, free of any objectionable noises, odors or nuisances at all times during the Lease Term. Tenant shall bear sole responsibility to ensure that music/sound will not objectionably permeate into adjacent tenants premises or Common Areas, and in such event agrees to remedy and rectify such “permeation” to the satisfaction of said adjacent tenant(s) by any means necessary including if necessary installing additional insulation/wall/sound barriers. All trash shall be contained within the Premises or in an appropriate outside receptacle as directed by Landlord, and unless contracted for by Landlord and reimbursed to Landlord as part of CAM, shall be collected regularly at Tenant’s expense. All health, safety and police regulations shall, in all respects and at all times be fully complied with by Tenant, and Tenant shall defend Landlord from all charges for such.

 

9.02        Reserved Rights . Landlord reserves (i) subject to the terms and provisions of this Lease, the use of the exterior rear and side walls and roof of the Premises and the exclusive use of any space between the ceiling of the Premises and the floor above or the roof of the Building; (ii) the right to install, maintain, use, repair and replace pipes, ducts, conduits and wires leading into or running through the Premises (in locations which will not materially interfere with Tenant’s use of the Premises); (iii) the right to cause or permit the Building to be expanded, enlarged or altered, (so long as such does not materially or substantively adversely impact or inconvenience Tenant’s use of the Building or the Premises); (iv) the right to name the Building and to change the name or street address of the Building; (v) the right to install and maintain a sign or signs on the exterior or interior of the Building; (vi) the right to designate all sources furnishing sign painting, and lettering, ice, drinking water, towels, toilet supplies, shoe shining, vending machines, mobile vending service, catering, and like services used on the Premises; (vii) the right during the last 90 days of the Term, if during or prior to that time Tenant vacates the Premises, to decorate, remodel, repair, alter or otherwise prepare the premises for reoccupancy, without affecting Tenant’s obligation to pay rental for the Premises;); (viii) the right to constantly have pass keys to the Premises (so long as such does not materially or substantively adversely impact or inconvenience Tenant’s use of the Building or the Premises; (ix) the right at any time in the event of an emergency, or otherwise at reasonable time, to take any and all measures, including inspections, repairs, alterations, additions and improvements to the Premises, as may be necessary or desirable for the safety, protection or preservation of the Premises, , or as may be necessary or in order to comply with all Laws; (x) the right to show the Building to prospective purchasers, lenders or tenants.

 

ARTICLE 10 - GOOD MERCHANDISING STANDARDS

 

During the term of this Lease, Tenant agrees to take all means necessary to prevent any manner of operation or use of the Premises not in accordance with good merchandising standards, including, but without limitation, the use thereof for solicitation, demonstrations, itinerant vending, or any other activity inconsistent with such standard or any operation or use thereof or activity therein that would interfere with the performance or observance of this Lease or the rights referred to herein or the rights and easements of other tenants in thE movE. Without limitation, Tenant expressly covenants and agrees that Tenant will not use or suffer or permit any person to use in any manner whatsoever, the Premises or thE movE or any parts thereof, for any purpose calculated to injure the reputation of the Premises or of thE movE or of adjoining property, or for any immoral or unlawful purposes whatsoever, or for any use, trade, business, occupation or vocation whatsoever that may in any way be illegal, disreputable or immoral.

 

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ARTICLE 11 - RULES AND REGULATIONS

 

The Rules and regulations attached hereto as Exhibit F, as well as such reasonable rules and regulations as may be hereafter adopted by Landlord or Owner upon at least ten (10) days prior notice to Tenant relating to the Common Areas and the operation of thE movE (generally the “Rules and Regulations”), are hereby expressly made a part hereof. Tenant shall abide by the Rules and Regulations and shall use its best efforts to assure that the Rules and Regulations are observed by its employees, patrons and invitees; however, in the event of a conflict between this Lease and any of the Rules and Regulations, the terms of the Lease shall control.

 

ARTICLE 12 - ADVERTISING AND SIGNS

 

Tenant shall not erect any signs on or about the Premises beyond those permitted in Section 1.16, nor utilize any form of advertising, without the prior written consent of Landlord and in accordance with Exhibit F, Rules and Regulations.

 

Tenant, upon Lease signature shall immediately hire a reputable sign company to design Tenant’s illuminated neon storefront sign in compliance with paragraphs 11 and 12 of the Rules and Regulations. Two (2) sign drawings shall be submitted for Landlord’s written approval, prior to construction. Signs must be completed and installed within forty five (45) days following the Commencement Date. Unauthorized signs, banners, window placards, A-frames and sidewalk signs and other advertising media installed without the prior written consent of Landlord, shall be subject to removal by Landlord at Tenant’s sole cost and expense, plus an additional twenty percent (20%) administration charge.

 

ARTICLE 13 - MECHANIC’S LIENS

 

Tenant shall keep the Premises at all times during the Lease Term free of mechanic’s and materialmen’s liens and other liens of like nature, other than liens created and claimed by reason of any work done by or at the instance of Landlord, and at all times shall fully protect and indemnify Landlord against all such liens or claims and against all attorneys’ fees and other costs and expenses growing out of or incurred by reason or on account of any such liens or claims. Should any lien be attached to the Premises claiming any debt by Tenant, Tenant shall cause such lien to be released within ten (10) days from the filing thereof. Tenant shall have the right to contest in good faith the validity of any such lien, provided, at Landlord’s option, (a) Tenant shall give Landlord such security as may be reasonably requested to insure the payment of the amount claimed and to prevent the sale, foreclosure, or forfeiture of any interest in the Premises on account of such lien, or (b) Tenant shall cause any such lien to be replaced by a bond in the amount equal to one hundred fifty (150%) percent of the amount of the lien or such greater amount as may be required by Colorado Statutes to release such lien, and provided that in any event on final determination of the lien Tenant shall immediately pay any judgment rendered and will cause the lien to be released. 

During the continuance of any construction of the Premises, Tenant shall permit Landlord to post such notices as Landlord elects to prevent the attachment of mechanic’s liens to the Premises, including, but not limited to, the notice attached hereto as Exhibit E.

 

ARTICLE 14 - MAINTENANCE AND ALTERATIONS

 

14.01        Maintenance by Tenant . Tenant shall at all times from and after the Commencement Date and at its own cost and expense, repair, replace, maintain, and clean in good and tenantable condition all components of the Premises that serve exclusively the Premises including, without limitation, floor covering, all fixtures, air conditioning and heating equipment serving the Premises, and other equipment therein the Premises, all Tenant’s signs, locks and closing devices, and all window sash, casement or frames, door and door frames, security grills or similar enclosures, and all such items of repair, maintenance and improvement or reconstruction as may at any time or from time to time be required by a governmental agency having jurisdiction thereof. Glass within the entry door to the Premises and any glass sidelights at the entry to the Premises shall exist at the sole risk of Tenant and shall be regularly cleaned inside and outside by Tenant, and any glass broken or damaged shall be promptly replaced by Tenant with glass of the same kind, size and quality. Tenant shall also repair any damage in connection with any burglary or forcible entry into the Premises at the Tenant’s sole expense. If Tenant refuses or neglects to make repairs and/or maintain the Premises, or any part thereof, in a manner reasonably satisfactory to Landlord, Landlord shall have the right, after giving Tenant fifteen (15) days written notice of its election to do so, to make or cause to be made such repairs or perform such maintenance/replacement/repair(s) on behalf of and for the account of Tenant. In such event, such work shall be paid for by Tenant immediately upon receipt of a bill therefore, plus an additional twenty percent (20%) administration charge payable by Tenant to Landlord. Any damage to adjacent premises or the Common Areas caused by Tenant’s use of the Premises shall be repaired at the sole cost and expense of Tenant.

 

14.02        Maintenance by Landlord. Landlord shall keep and maintain in clean and good tenantable condition and repair the roof, exterior walls, windows, pipes and conduits outside the Premises for the furnishing to the Premises of various utilities (except to the extent that the same are the obligation of the appropriate utility company or Tenant); provided, however, that Landlord shall not be required to make repairs necessitated by reason of the negligence of Tenant or anyone claiming under Tenant or by reason of the failure of Tenant to perform or observe any conditions or agreements in this Lease contained, or caused by alterations, additions or improvements made by Tenant or anyone claiming under Tenant, and shall maintain in good condition and repair the Common Areas as well as all other structural components of the building in which the Premises is located. Except as provided in Article 16 hereof, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant’s business arising from the making of any repairs, alterations or improvements in or to any portion of the Building, the Common Areas or the Premises or in or to fixtures, appurtenances and equipment therein. Notwithstanding anything to the contrary contained in this Lease, Landlord shall not in any way be liable to Tenant for failure to make repairs as herein specifically required of it unless Tenant has previously notified Landlord, in writing, of the need for such repairs and Landlord has failed to commence and complete said repairs within fifteen (15) days following receipt of the Tenant’s written notification, or in the case of force majeure.

 

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It is understood and agreed that the Landlord shall be under no obligation to make any repairs, alterations, renewals, replacements or improvements to and upon the Premises or the mechanical equipment exclusively serving the Premises at any time except as expressly provided in this Lease.

 

14.03       Access to Premises . Landlord or Landlord’s agents may enter the Premises at any time for emergency purposes or following at least one (1) business day advance notice to Tenant (which may be verbal) for examination and inspection, or to perform, if Landlord elects, any obligations of Tenant that Tenant fails to perform or such cleaning, maintenance, janitorial services, repairs, replacements, additions, or alterations as Landlord deems necessary for the safety, improvement, or preservation of the Premises or thE movE or other portions of the Building or as required by Applicable Laws. Landlord or Landlord’s agents may also show the Premises to prospective tenants, purchasers and mortgagees. Any such reentry does not constitute an eviction or entitle Tenant to abatement of Rent. Notwithstanding anything to the contrary herein, upon any entry into the Premises, Landlord shall take all commercially reasonable efforts to minimize disruption to the business in the Premises and not to interfere with the Tenant’s permitted use therein.

 

14.04       Alterations . Tenant shall not make any alterations, additions or improvements in the Premises without the prior written consent of Landlord.

 

14.05       Surrender of Premises . Upon any surrender of the Premises, the Tenant shall redeliver the Premises to the Landlord in good order, condition and state of repair, ordinary wear and tear excepted, and excepting such items of repair as may be the Landlord’s obligation hereunder. All permanent alterations, additions or improvements, including but not limited to all fixtures, (except for trade fixtures) partitions, counters, venetian blinds, linoleum and carpet made or installed by either of the parties hereto (or by previous Tenant or Assignor, etc.) upon the Premises shall be the property of the Landlord and shall remain upon and be surrendered with the Premises as a part thereof, at the termination of this Lease, without disturbance, molestation or injury, provided that if Landlord so elects, Landlord may, after no less than thirty (30) days notice prior to the expiration of the then-current Lease Term, require Tenant to remove any or all such items at Tenant’s sole cost and expense, without damage to the Premises. In the event the Premises are damaged from said removal, and/or Tenant surrenders the Premises in poor condition and/or in need of repairs which are the obligation of Tenant, Landlord’s costs in causing said repairs/restoration shall be first paid by Tenant through its Security Deposit funds (unless already applied by Landlord against other sums, rents, etc. due hereunder) pursuant to Article 22, and any deficiency due by Tenant shall be paid to Landlord by Tenant within ten (10) days following Tenant’s receipt of Landlord’s statement of amounts due. In addition, Tenant acknowledges that during the time in which Landlord or Landlord’s contractor performs such repairs, replacement/restoration on behalf of Tenant, Landlord may be delayed in delivering the Premises to a replacement tenant, and therefore delayed in receiving the replacement tenant’s rents. Therefore, Tenant agrees to pay within ten (10) days from receipt of same notice, Landlord an amount equal to Tenant’s then current Minimum and Additional Renton a per diem basis, for the time it takes Landlord/Landlord’s contractor to restore the Premises on behalf of Tenant.

 

ARTICLE 15 - ASSIGNING OR SUBLEASING

 

(a)            Tenant covenants and agrees not to make or permit a Transfer by Tenant, as hereinafter defined, without Landlord’s prior written consent, which consent shall not be unreasonably withheld. A “Transfer” by Tenant shall include an assignment of this Lease, a sublease of all or any part of the Premises or any assignment, sublease, transfer, mortgage, pledge or encumbrance of all or any part of the Premises or of Tenant’s interest under this Lease or in the Premises, by operation of law or otherwise, or the use or occupancy of all or any part of the Premises by anyone other than Tenant. Any such Transfer by Tenant without Landlord’s written consent shall be void and shall constitute a Default by Tenant under this Lease. Notwithstanding any Transfer by Tenant, Tenant shall not be relieved of its obligations under this Lease and Tenant shall remain liable, jointly and severally, and as a principal, not as a guarantor or surety, under this Lease, to the same extent as though no Transfer by Tenant had been made, unless specifically provided to the contrary in Landlord’s prior written consent. The acceptance of rent by Landlord from any person other than Tenant shall not be deemed to be a waiver by Landlord of the provisions of this Section or of any other provision of this Lease and any consent by Landlord to a Transfer by Tenant shall not be deemed a consent to any subsequent Transfer by Tenant.

 

(b)            If Tenant requests Landlord’s consent to a Transfer, Tenant shall submit to Landlord in writing the name of the proposed transferee, the effective date of the Transfer, the terms of the proposed Transfer, a copy of the proposed form of sublease or assignment, and such information as to the business, reputation, responsibility, and financial capacity of the transferee as Landlord shall reasonably require to evaluate the request. It shall be reasonable for Landlord to withhold its consent to any Transfer where: (i) in the case of a sublease, the subtenant has not acknowledged that the provisions of this Lease control over any inconsistent provision in the sublease; or (ii) in Landlord’s opinion, the proposed transferee does not have the ability to perform its obligations under the assignment or sublease; or (iii) the intended use by the transferee would damage the goodwill or reputation of the Building; or (iv) the intended use is not compatible with other uses of the Building, conflicts with another tenant’s right to exclusive use, or is not permitted by applicable law or covenant. The foregoing criteria are not exhaustive, and Landlord may withhold consent to a Transfer on any other reasonable grounds. Tenant shall reimburse Landlord for all of Landlord’s costs incurred in connection with any request for consent to a Transfer, including, without limitation, a reasonable sum for attorneys’ fees.

 

(c)            Notwithstanding the foregoing, Landlord shall, at Landlord’s option, have the right in lieu of consenting to a Transfer by Tenant, to terminate this Lease as to the portion of the Premises that is the subject of the proposed Transfer, and to enter into a new lease with the proposed transferee and receive directly from the proposed transferee the consideration agreed to be given by such transferee to Tenant for the Transfer by Tenant. Alternatively, at the request of Landlord, Tenant shall pay over to Landlord all sums received by Tenant in excess of the rent payable by Tenant hereunder which is attributable on an equally allocable Floor Area basis, to any subletting of all or any portion of the Premises so subleased, and all consideration received on account of or attributable to any assignment of this Lease.

 

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(d)            In the event of a Transfer by Tenant, then any option to renew this Lease, right to extend the Lease Term, or option or right of refusal to expand the Premises shall automatically terminate.

 

(e)            Tenant covenants and agrees to pay to Landlord the amount of $250.00 as an administrative charge to compensate Landlord for processing such request and any other reasonable costs and expenses incurred by Landlord in connection with such request (including, without limitation, reasonable attorneys’ fees), whether or not the consent of Landlord is given to the Transfer requested by Tenant. Tenant shall pay such $250.00 administrative charge and an estimated amount of the other costs and expenses, as determined by Landlord, which shall be due and payable to Landlord at the time that Tenant submits such request for consent to the Transfer to Landlord; provided, however, that upon request from Tenant, Landlord shall provide Tenant with the estimated amount of such other costs and expenses. When the actual amount of such costs and expenses are known by Landlord, then if such estimated amount paid by Tenant is greater than the actual amount of such costs and expenses, Landlord shall refund any such excess to Tenant. If such estimated amount paid by Tenant is less than the actual amount of such costs and expenses, Tenant shall pay to Landlord, within ten (10) days after demand by Landlord, any such additional actual costs and expenses. The payment of such administrative charge and other costs and expenses by Tenant shall be a condition precedent to the effectiveness of any consent by Landlord to such Transfer.

 

(f)             Notwithstanding anything to the contrary, Tenant shall not be entitled to make a Transfer to an existing tenant of Landlord or its Related Parties (as herein defined), or any subtenant or assignee thereof, or any person or entity with whom Landlord or its Related Parties negotiated or had contact or to whom Landlord has given, or received therefrom, any written or oral proposal regarding a lease of space in the Building or the Project within the six (6) month period preceding Tenant’s request for such Transfer. Tenant shall not publicly advertise the rate or other terms upon which Tenant is willing to Transfer the Premises, and all other public advertisements of a Transfer shall be subject to the prior written approval of Landlord, which approval shall not be unreasonably withheld. Public advertisement shall include, without limitation, the placement or displays of any signs or lettering on or above the Premises. If at the time of the proposed Transfer there is any vacant or unoccupied space in the Building or the Project, Tenant shall not be entitled to Transfer or offer to Transfer the Premises at a rental rate less than the prevailing fair market rental then offered by Landlord, in its sole and absolute discretion, for such other space.

 

(g)            For the purposes of this Lease, the term “Transfer” shall also include: the transfer or change, whether voluntary, involuntary or by operation of law, of twenty-five percent (25%) or more of the control or ownership, whether legal or beneficial, in Tenant within a twelve (12) month period; the dissolution, merger, consolidation or other reorganization of Tenant; or the withdrawal, resignation or termination of the majority of any general partners, managers or board of directors of Tenant.

 

(h)           As a condition to any Transfer by Tenant, Tenant shall acknowledge in writing to Landlord that Tenant shall remain obligated and liable under this Lease, any assignee or other transferee (other than a subtenant) shall expressly assume all the obligations of Tenant under this Lease, and any subtenant shall covenant to Landlord to comply with all obligations of Tenant under this Lease as applied to the portion of the Premises so sublet and to attorn to Landlord, at Landlord’s written election, in the event of any termination of this Lease prior to the expiration date of the Lease Term; all of which shall be in a written instrument satisfactory to Landlord and furnished to Landlord not later than fifteen (15) days prior to the effective date of such Transfer.

 

ARTICLE 16 - CONDEMNATION

 

16.01       Taking of Entire Premises . If the whole or a material portion (as determined by Tenant) of the Premises shall be taken by condemnation or eminent domain, then the term hereof shall cease as of the day of the vesting of title or as of the day possession shall be so taken, whichever is earlier. If this Lease is so terminated, all rent or other charges payable by Tenant shall be prorated to the date of termination.

 

16.02       Partial Taking . If only a non-material portion of the Premises, the Building of which they are a part or thE movE shall be taken by condemnation or eminent domain, Landlord shall be entitled to terminate this Lease as of the day of the vesting of title or as of the day possession shall be so taken, whichever is earlier, upon giving notice thereof to Tenant not later than ninety (90) days prior to such taking.

 

If Landlord does not elect to so terminate this Lease, it shall restore the Premises to as nearly like its condition prior to such taking as shall be practicable; but such work shall not exceed the scope of the work done by Landlord in originally constructing the Premises. Tenant shall, upon the completion by Landlord of the restoration of the Premises, do all work required of Tenant in accordance with Exhibit C, including the restoration or replacement of all trade equipment, furniture, furnishings and other installations theretofore installed by Tenant and necessary for Tenant’s business. Minimum Rent, or a fair and just proportion thereof, according to the nature and extent of the damage to the Premises, shall be suspended or abated during any such construction.

 

16.03       Ownership of Damages . As between the parties to this Lease, Landlord will be entitled to receive, and Tenant assigns to Landlord, all of the compensation awarded upon taking of any part or all of the Building or Premises, including any award for the value of the unexpired Term. However, Tenant may assert a claim in a separate proceeding against the condemning authority for any damages resulting from the taking of Tenant’s trade fixtures or personal property, or for moving expenses, business relocation expenses or damages to Tenant’s business incurred as a result of such condemnation providing such award does not have the effect or impact to reduce Landlord’s award.

 

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ARTICLE 17 - CASUALTY TO PREMISES

 

17.01       Major Damage to Premises . If during the last two (2) years of the original or any extension thereof the Premises shall be so damaged by fire or casualty as to be untenantable as to fifty percent (50%) or more of the Premises floor space, Landlord or Tenant may cancel this Lease by written notice of cancellation given to the other within thirty (30) days after such damage, and rent and other charges shall be prorated to the date of such damage. In any other cases of damage to the Premises, Landlord shall, within thirty (30) days of any casualty affecting the Premises, consult an architect and general contractor regarding the rebuilding or repair of the Premises to return it to substantially the same condition as on the Lease Commencement Date and the time such it will take for such rebuilding or repair, and Landlord shall provide Tenant with notice of the plans for rebuilding (the “Rebuild Notice”). If the Rebuild Notice reveals that the Premises cannot be restored to substantially the same condition within one hundred eighty (180) days from the date of the casualty, Tenant shall have the right to terminate this Lease by providing a written termination notice to Landlord within thirty (30) days following Tenant’s receipt of the Rebuild Notice and the Minimum Rent and Additional Rent owing hereunder shall be abated for the unexpired portion of the Lease.

 

17.02       Damage to thE movE . If any or all of the Buildings, parking facilities, Common Areas, or common or public facilities comprising thE movE are damaged by fire or other casualty to such an extent that thE movE cannot, based on a reasonable business decision, be operated as an office building, then Landlord may cancel this Lease (even though the Premises may not themselves be damaged) on at least thirty (30) days written notice of cancellation given to Tenant within thirty (30) days after such damage, and thereupon this Lease shall cease and terminate and the rent and other charges payable by Tenant shall be prorated to the date of such termination.

 

17.03       Other Casualty. In all cases of destruction or casualty to the Premises which do not result in termination of this Lease pursuant to the foregoing paragraphs, Landlord shall restore the Premises at its expense. The obligation of the Landlord hereunder shall be limited to reconstruction of the building and completion of Landlord’s Work. Tenant shall, upon completion of restoration or rebuilding by Landlord, perform Tenant’s Work and shall replace or restore forthwith any trade fixtures, equipment or other installation theretofore installed by Tenant. Tenant agrees during any period of reconstruction or repair of the Premises and/or said building to continue the operation of its business in the Premises to the extent reasonably practicable. Minimum Rent shall be abated or reduced proportionately during any period in which, by reason of any such damage or destruction, there is a substantial interference with the operation of Tenant’s business.

 

ARTICLE 18 - DEFAULTS

 

18.01       Events of Default . The following occurrences shall constitute default under this Lease:

 

(a)            Tenant fails to pay Minimum Rent, Additional Rent or any other sums payable by Tenant under the terms of this Lease when due, and such failure continues for three days after notice from Landlord to Tenant of such failure; provided that with respect to monthly installments of Minimum Rent and Additional Rent, Tenant will be entitled to only two notices of such failure during any Lease Year and if, after two such notices are given in any Lease Year, Tenant fails, during such Lease Year, to pay any such amounts when due, such failure will constitute an Event of Default without further notice by Landlord or additional cure period.

 

(b)            Tenant shall violate or fail to perform any provision of this Lease and shall fail to correct or perform the same within five (5) days after notice from Landlord;

 

(c)           Tenant vacates, abandons, or closes its business operation at the Premises for more than ten (10) consecutive days (except as a result of casualty, condemnation or remodeling) and;

 

(d)            Tenant has not entered into an assignment or sublease for the Premises with an assignee or subtenant who will be reoccupying the Premises, and Landlord has provided Tenant 14 days written notice of its intent to terminate the Lease and provided Tenant the opportunity to cure.

 

(e)            Tenant’s interest under this Lease or in the Premises is taken upon execution or by other process of law directed against Tenant, or is subject to any attachment by any creditor or claimant against Tenant and such attachment is not discharged or disposed of within 15 days after levy or Landlord shall determine, on the basis of all reasonable evidence available to it, that Tenant is at the time of such determination unable to pay its debts as they become due.

 

(f)             Tenant’s interest under this Lease or in the Premises is transferred or passes to, or devolves upon, any other party in violation of this Lease or Tenant attempts to transfer its interest under this Lease or in the Premises in violation of the terms of this Lease.

 

18.02        Remedies on Default . Upon the occurrence of an event of default and at any time thereafter, Landlord, subject to all applicable laws, may take any or all of the following actions:

 

(a)            In the case of abandonment, Landlord may at its option re-enter, take possession of the Premises and remove all persons and property therefrom (such property as may be removed may be stored in a public warehouse or elsewhere at the cost of, and for the account of Tenant). Landlord shall not be deemed guilty of trespass or liable for the loss or damage occasioned thereby.

 

(b)           Should Landlord elect to re-enter the Premises, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, Landlord may, without terminating this Lease make such alterations and repairs as may be necessary in order to relet the Premises, and relet the Premises or any part thereof upon such terms and conditions as Landlord in its sole discretion may deem advisable. The rentals resulting from such reletting shall be applied first, to the payment of any costs and expenses of reletting, including brokerage fees and attorneys’ fees, and of costs of such alterations and repairs; second, to the payment of Minimum Rent and Additional Rent, together with interest thereon at twelve percent (12%) per annum, due and unpaid hereunder; and the residual, if any, shall be held by Landlord and applied in payment of future rent or damage as the same may become due and payable hereunder. If rentals received from such reletting during any month are less than that to be paid during that month by Tenant hereunder, Tenant shall forthwith pay any such deficiency to Landlord. No such re-entry or taking possession of said premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. If Tenant shall, after default, voluntarily give up possession to Landlord, deliver to Landlord the keys to the Premises, or both, such actions shall be deemed to be in compliance with Landlord’s rights and the acceptance thereof by Landlord shall not constitute a surrender of the Premises or a termination of this Lease.

 

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(c)           Landlord may at any time after default elect to terminate this Lease. Upon such termination, Landlord may recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the Premises, reletting commissions and expenses, costs of repair to the Premises, reasonable attorneys’ fees, and including the worth at the time of such termination of the excess, if any, of the amount of Minimum Rent and Additional Rent reserved in this Lease for the remainder of the Lease Term over the then reasonable rental value of the Premises for the remainder of the Lease Term, all of which amounts shall be immediately due and payable from Tenant to Landlord. In determining the amount which would be payable pursuant to this subparagraph, the annual rent for each year remaining in the Lease Term shall be equal to the average of the total annual Minimum Rent and Additional Rent paid by Tenant from the Lease Commencement Date to the time of default, or during the preceding three (3) full calendar years, whichever period is shorter.

 

(d)           Nothing contained in this Lease will limit or prejudice Landlord’s right to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization, or dissolution proceeding, an amount equal to the maximum allowable by any Laws governing such proceeding in effect at the time when such damages are to be proved, whether or not such amount be greater, equal or less than the amounts recoverable, either as damages or Rent, under this Lease.

 

18.03       Recovery of Attorneys’ Fees and Costs . In the case: suit shall be brought for recovery of possession of the Premises, for the recovery of Rent or any other amount due under the provisions of this Lease, or because of any breach of any other covenant herein contained on the part of the Tenant to be kept or performed, and a breach shall be established; then the prevailing party shall be responsible for and shall pay to the other party all expenses incurred therefore, including all reasonable attorneys’ fees and costs, subject to the limitations contained in section 8.4(d) as such is applied to that section.

 

18.04       No Waiver . No waiver of any covenant or condition of this Lease by Landlord shall be deemed to imply or constitute a further waiver of the same covenant or condition or of any other covenant or condition of this Lease. Whenever in this Lease Landlord reserves or is given the right and power to give or withhold its consent to any action on the part of Tenant, such right and power shall not be exhausted by the exercise on one or more occasions, but shall be continuing right and power for the entire term of this Lease. The acceptance of any sums of money from Tenant following an event of default shall be taken to be a payment on account by Tenant and shall not constitute a waiver by Landlord of any rights, nor shall it reinstate this Lease or cure a default on the part of Tenant.

 

18.05       Liability of Landlord on Default . If, during the Term, Landlord defaults in fulfilling any of its covenants, obligations or agreements set forth in this Lease, Tenant shall give Landlord (and any mortgagees and/or trust deed holders, provided that prior to such notice, Tenant has been notified in writing of the address of such mortgagees and/or trust deed holders) notice of such default and, if at the expiration of 30 days after delivery of such notice, such default will continue to exist, or in the event of a default which cannot with due diligence be cured within a period of 30 days, if Landlord fails to proceed promptly after the delivery of such notice and with all due diligence to commence to cure the same and thereafter to prosecute the curing of such default with all due diligence to completion as soon as reasonably possible, then the mortgagees and/or trust deed holders shall have an additional thirty (30) days after the expiration of such thirty (30) days within which to cure such default. If such default cannot reasonably be cured within that time, then such mortgagees and/or trust deed holders shall have such additional time as may be necessary to cure such default, including, but not limited to, commencement of foreclosure proceedings, if necessary to effect such cure. If such default is not cured as provided for, then Tenant will be entitled to terminate the Lease and the remaining obligations of Tenant and Landlord under the Lease thereafter. In no event will Tenant have the right to any right to offset against, or any abatement of, any monies owing by Tenant hereunder, as a result of Landlord’s default, and Tenant’s remedies will, subject to the terms of this Lease, be limited to termination of the Lease. Such exculpation and limitation of liability and tenant’s remedies shall be absolute and without any exception whatsoever.

 

ARTICLE 19 - BANKRUPTCY

 

Landlord may, at its option, terminate this Lease upon the filing of any petition in bankruptcy or insolvency or for reorganization under the Bankruptcy Act by or against Tenant, or the making of a voluntary assignment by Tenant for the benefit of its general creditors, or the filing by Tenant of any petition for an arrangement or composition under the Bankruptcy Act, or the appointment of a receiver or trustee after notice and hearing to take charge of Tenant’s business, or of any other petition or application seeking relief under any other federal or state laws now or hereafter providing for the relief of debtors. If such petition be filed by a third party against Tenant, who desires in good faith to defend against the same, and Tenant is not in any way in default of any obligation hereunder at the time of the filing of such petition, and Tenant within ninety (90) days thereafter procures a final adjudication that it is solvent and a judgment dismissing such petition, this Lease shall be fully reinstated as though such petition had never been filed. In the event of termination as provided for in this Article, Tenant shall pay forthwith to Landlord as damages the amount provided in paragraph 18.02 (c).

 

ARTICLE 20 – LANDLORD’S LIEN

 

Landlord is hereby granted a subordinated security interest in all goods, wares, equipment, fixtures, furniture and other personal property of Tenant situated on the Premises (the “Collateral”) to secure all rentals and other sums of money becoming due hereunder from Tenant, subject to any superior third party creditors, including but not limited to Heritage Bank. The Collateral shall not be removed from the Premises without the consent of Landlord until all Minimum and Additional Rent have been paid. Upon the occurrence of any event of default by Tenant, Landlord may, in addition to any other remedies provided herein or by law, enter the Premises and take possession of the Collateral without liability for trespass or conversion, and sell the same in accordance with the provisions of Article 9 (or other successor and/or applicable Articles) of the Uniform Commercial Code as it is then in effect in Colorado. Tenant shall execute from time to time such financing statements or such other instruments evidencing Landlord’s subordinated security interest in the Collateral as Landlord may request.

 

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ARTICLE 21 - NOTICES

 

All notices under this Lease shall be given in writing and shall be deemed to be properly served only if sent, postage prepaid, by certified mail with return receipt requested, or by Fed Ex, UPS or similar courier overnight mail, to Landlord at Landlord’s Notice Address, or to Tenant at the Premises or at Tenant’s Notice Address. Such notice shall be deemed to have been given three (3) days after the date upon which the same is deposited in the United States mail with postage prepaid. Either party may, by written notice to the other, change its Notice Address.

 

ARTICLE 22 - SECURITY DEPOSIT

 

Upon execution of the Lease, Tenant shall deposited with Landlord the sum specified in Article 1 hereof as the “Security Deposit,” which shall be held by Landlord without liability for interest as security for the faithful performance by Tenant of all of the terms of this Lease. Landlord may co-mingle the Security Deposit with Landlord’s other funds and may be used for the day-to-day operations of the Building. Upon the occurrence of an event of default, the Security Deposit shall be applied against the amounts which Landlord is entitled to recover from Tenant pursuant to Article 18 (and as otherwise provided in Article 14 and other applicable Articles herein) unless earlier applied in accordance with the foregoing sentence, the Security Deposit (or so much thereof as is not necessary to restore the Premises to the condition required by Article 14) shall be returned to Tenant within sixty (60) days after the end of the Lease Term. In the event of the termination of this Lease pursuant to Article 18 above, such Security Deposit shall be deemed to be applied first to the payment of rent and other charges due to Landlord for all periods prior to filing of such proceedings.

 

The Security Deposit shall not be mortgaged, assigned, transferred or encumbered by Tenant without the written consent of Landlord. Landlord shall deliver the Security Deposit to any purchaser of Landlord’s interest in the Premises, and, upon receipt of a written receipt by Landlord’s successor in interest, Landlord shall thereupon be discharged from any further liability with respect to the Security Deposit. If any portion of said deposit is so used or applied in accordance with the foregoing paragraph, Tenant shall, within five (5) days after written demand therefore, deposit with Landlord an amount sufficient to restore the Security Deposit to its original amount and Tenant’s failure to do so shall be a default under this Lease.

 

ARTICLE 23 - MANDATORY EXECUTION OF DOCUMENTS BY TENANT

 

23.01       Subordination . This Lease is subordinate, junior and inferior to first mortgages and deeds of trust which may now or hereafter affect the Premises and to any and all advancements to be made thereunder and to all renewals modifications, consolidations, replacements and extensions thereof; provided that the holder of any such mortgage or deed of trust shall agree in writing that this Lease shall not be terminated or otherwise affected by the enforcement of any such mortgage, deed of trust, or other encumbrance if at the time thereof Tenant is not in default under this Lease. Tenant, if requested by Landlord, shall execute and return to Landlord within ten (10) days such instruments evidencing such agreements regarding subordination, non-disturbance and attornment as Landlord may from time to time submit to Tenant for signature and if not returned within the ten (10) days, it shall be conclusively deemed that Tenant consented to the terms of the instrument provided to Tenant. 

 

23.02       Lender’s Requirements . Anything in this Lease to the contrary notwithstanding, it is agreed that in the event the lender or lenders which Landlord selects to provide construction or permanent loan financing (or both ) in connection with the construction and permanent loan financing of thE movE request non-material modifications of any of the provisions of this Lease (except concerning the size and location of the Premises, the term hereof, the provisions of Exhibit C, and the rental and other charges payable by Tenant under this Lease or those that increase Tenant’s obligations or decrease its rights), Tenant shall agree to any such modification in writing within ten (10) days after Landlord’s request therefore.

 

23.03       Estoppel Certificates . Tenant shall, without charge, at any time and from time to time, execute and deliver to Landlord, or any other person, firm or corporation specified by Landlord, within ten (10) days after receipt, a certificate substantially in the form of Exhibit D or such other form provided by Landlord relating to the status of this Lease certifying, among other things, that this Lease is unmodified and in full force and effect, or if there has been any modification, that the same is in full force and effect as so modified, and identifying any such modifications; whether or not there are then existing any set-offs or defenses in favor of Tenant against the enforcement of any of the terms, covenants and conditions of this Lease by Landlord, and if so, specifying the same, and also whether or not Landlord has observed and performed all of the terms, covenants and conditions on the part of Landlord to be observed and performed, and if not, specifying the same; and the dates to which Minimum Rent and all other charges hereunder have been paid; and if not returned within the ten (10) days, it shall be conclusively deemed that Tenant consented to the terms of the estoppel certificate provided to Tenant.

 

23.04       Property Covenants . This Lease will be subject to all easements, restrictions and covenants presently existing or hereafter created for thE movE. Tenant has no right of enforcement of any real property covenants and restrictions affecting the use of thE movE. If requested by Landlord, Tenant will consent in writing to any modification, repeal or amendment of any covenant or restriction by Landlord. Landlord shall comply with any real property covenants and restrictions affecting the use of thE movE, and Landlord agrees to cooperate with Tenant to represent Tenant’s interests regarding any covenants or restrictions affecting the use of the Premises.

 

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ARTICLE 24 - CONSTRUCTION AND EFFECT

 

24.01         Integrated Agreement . It is understood that there are no oral agreements between the parties hereto affecting this Lease. This Lease supersedes and cancels any and all previous negotiations, arrangement, brochures, agreements and understandings, if any, between the parties hereto or displayed by Landlord to Tenant with respect to the Premises and thE movE and none thereof shall be used to interpret or construe this Lease. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto.

 

24.02         Severability . Each covenant, agreement and provision of this Lease shall be construed to be a separate covenant, agreement and provision. If any covenant, agreement or provision of this Lease or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such covenant, agreement or provision to any person or circumstance other than those as to which such covenant, agreement or provision is invalid or unenforceable, shall not be affected thereby and each covenant, agreement and provision of this Lease shall be valid and enforceable to the extent permitted by law.

 

24.03        Governing Law . The laws of the State of Colorado shall govern the validity, performance and enforcement of this Lease.

 

24.04        Relationship of the Parties . Nothing herein contained shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint venture between the parties hereto, it being understood and agreed that neither the method of computation of rent, nor any other provision contained herein, nor any acts of the parties hereto, shall be deemed to create any relationship between the parties hereto other than the relationship of Landlord and Tenant. No party other than Landlord and Tenant is intended to be a direct beneficiary of any provision contained in this Lease, and no right of action shall accrue hereunder to any such third party.

 

24.05        Binding Effect . The covenants and agreements hereof shall be binding upon the parties and their respective heirs, executors, administrators, successors and permitted assigns.

 

24.06        Counterparts . This Lease may be executed in a number of identical counterparts which, taken together, shall constitute collectively one agreement. In making proof of this Lease Agreement, it shall not be necessary to produce or account for more than one such counterpart with each party’s signature.

 

ARTICLE 25 - MISCELLANEOUS PROVISIONS

 

25.01        Authority and Corporate Standing . In the event Tenant is a corporation, the persons executing this Lease on behalf of Tenant hereby covenant and warrant that they are duly authorized to execute and deliver this Lease on behalf of Tenant; Tenant is a duly qualified corporation and all steps have been taken prior to the date hereof to qualify Tenant to do business in the state where the Building is situated; all franchise and corporate taxes have been paid to date; and all future forms, reports, fees and other documents necessary to comply with applicable laws will be filed when due.

 

25.02        No Warranties . Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or number or tenants shall during the term of this Lease occupy any space in thE movE; Landlord, subject to Tenant’s Exclusive Use, reserves the absolute right to effect such other tenancies in thE movE as Landlord, in the exercise of its sole business judgment, shall determine to best promote the interests of thE movE. There are no other representations or warranties between the parties except, and all reliance with respect to representations is solely upon, the representations and agreements contained in this Lease.

 

25.03        Waiver of Redemption . The rights given to Landlord herein are in addition to any rights that may be given to Landlord by any statute or otherwise.

 

25.04        Tenant’s Hours of Operation. Tenant shall keep the Premises open for business during those days and hours as are customary and usual for Tenant Use, which may include, but is not limited to, closures for vacations, holidays, and continuing education and may include operation during early mornings, late evenings, weekends and holidays as determined necessary and appropriate by Tenant.

 

25.05        Exhibits . All exhibits and addenda attached hereto are incorporated herein. Any capitalized term not otherwise defined in such exhibits or addenda shall have the meaning set forth in this Lease.

 

25.06        Marijuana and Adult-Oriented Business Prohibition . Landlord shall prohibit the cultivation, processing or use of marijuana, as well as the sale of marijuana, products containing marijuana or products designed for the facilitation of the use of marijuana in thE movE. Furthermore, Landlord shall not lease any space in the building where the Premises is located to any businesses involved with the sale or cultivation of adult-oriented products or services, tobacco or any other product or services restricted from persons under the age of 18.

 

25.07        Telecommunication Services and Satellites . Tenant shall have the right to select its own providers for telephone, internet and cable services and to erect on the roof of the Building aerials, antenna or a satellite dish, subject to Landlord’s approval of the location for such devices, which shall not be unreasonably withheld, conditioned or delayed.

 

25.08        Brokers . Landlord and Tenant represent and warrant that no broker or agent negotiated or was instrumental in negotiating or consummating this Lease. Neither party knows of any other real estate broker or agent who is or might be entitled to a commission or compensation in connection with this Lease. Tenant and Landlord will indemnify and hold each other harmless from all damages paid or incurred by the other resulting from any claims asserted against either party by brokers or agents claiming through the other party.

 

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25.09        Waiver of Jury Trial . LANDLORD AND TENANT WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY LANDLORD OR TENANT AGAINST THE OTHER WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, TENANT’S USE AND OCCUPANCY OF THE PREMISES, OR THE RELATIONSHIP OF LANDLORD AND TENANT.

 

25.10        Recording; Confidentiality . Tenant will not record this Lease or a short form memorandum of this Lease. Tenant agrees to keep the Lease terms, provisions and conditions confidential and will not disclose them to any other person without Landlord’s prior written consent. However, Tenant may disclose Lease terms, provisions and conditions to Tenant’s accountants, attorneys, managing employees and others in contractual privity with Tenant (“Permitted Recipients”), as reasonably necessary for Tenant’s business purposes, without such prior consent; provided, that Tenant agrees to inform such Permitted Recipients of the confidential nature of this Lease and the confidentiality agreements of Tenant set forth herein will apply to and bind such parties. Tenant acknowledges that any breach by Tenant or any Permitted Recipient of the agreements set forth in this Section will cause Landlord irreparable harm and Landlord will have the right to seek equitable remedies to stop any breach of this section. The terms and provisions of this section will survive the expiration or earlier termination of this Lease.

 

25.11        Covenant of Quiet Enjoyment . Landlord covenants and agrees that, provided a breach by Tenant has not occurred, and provided that Tenant keeps, observes and performs its covenants and agreements contained in this Lease, Tenant shall have quiet possession of the Premises and such possession shall not be disturbed or interfered with by Landlord. Landlord will use reasonable efforts to minimize any such restriction or disruption in connection with any entry or work by Landlord in the Premises to the extent practical under the circumstances.

 

25.12        Parking . Landlord agrees to grant Tenant and its employees and invitees, at no additional cost, a parking license for use of the attached parking garage.  The parking license is a non-exclusive license for the use of the number of parking spaces as designated in Exhibit B, which represents a proportional amount of the total parking spaces equal to the proportional amount for the leased square footage versus the total rentable square footage of the building as defined in Exhibit B and H.  Landlord shall designate specific spaces for the use of Tenant and Tenant’s employees and invitees.

 

IN WITNESS WHEREOF, the Landlord and Tenant have duly executed this Lease this ______ day of ______________________, 2015.

 

  LANDLORD:
  THE MOVE, LLC, a Colorado Limited Liability Company
   
  By:  
   
  (Print Name and Title)
   
  TENANT:
  WHERE FOOD COMES FROM INC,
  a Colorado Corporation
   
  By:  
   
  (Print Name and Title)

 

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EXHIBIT A

 

SITE PLAN

 

(MAP)  

 

This exhibit is for informational and premises/site locational purposes only. No tenant, traffic, parking, egress or ingress, improvement or configurational representations are expressed or implied.

 

  INITIALS
   
   
   

 

 A- 1

 

 

EXHIBIT B

 

DESCRIPTION OF THE PREMISES

 

Approximately 8,127 square foot fourth (4 th ) floor space located at the southeast corner of Jerry Street and Sixth Street in Castle Rock, Colorado as marked on the attached Site Plan (Exhibit A). As well as ____ dedicated parking spaces located in the parking garage of the building.

 

  INITIALS
   
   
   

 

 B- 1

 

  

EXHIBIT C

 

Provisions Relating to Construction of the PREMISES
(the “WORK LETTER”)

 

This Work Letter is dated ___________________, 20___, between THE MOVE, LLC, a Colorado Limited Liability Company (“Landlord”), and WHERE FOOD COMES FROM INC, a Colorado Corporation, authorized to conduct business in the State of Colorado (“Tenant”).

 

RECITALS:

 

A.          This Work Letter is part of the Lease Agreement Lease dated ____________, 2015 (the “Lease”), pursuant to which Landlord has leased to Tenant office space in thE movE. Any capitalized term not defined herein shall have the meaning set forth in the Lease.

 

B.          Tenant desires to make improvements to the Premises, and Landlord desires to have Tenant make such improvements according to this Work Letter.

 

1. Definitions .

 

In this Work Letter, these defined terms are:

 

(a)           Base Building : Those elements of the core and shell construction that are completed in preparation for the Improvements to the Premises. This includes Building structure, envelope, and systems as indicated on Schedule 1 . This defines the existing conditions to which Improvements are added.

 

(b) Improvements :

 

i. The development of plans and documents, including supporting engineering studies, structural design or analysis, lighting or acoustical evaluations, or others as determined by Tenant’s architect or consultants.

 

ii. All construction work necessary to augment the Base Building, creating the details and partitioning shown on the plans. The work will create finished ceilings, walls, and floor surfaces.

 

iii. The Improvements will NOT include personal property items, such as decorator items or services, art work, plants, furniture, equipment, or other fixtures not permanently affixed to the Premises.

 

(c) Landlord’s Representative : Doug Decker

 

(d)          Tenant Construction Allowance : Of up to Twenty and 00/100 Dollars ($20.00) per rentable square foot, which equals approximately $241,900.00 and is to be applied by Tenant to the cost of the Improvements. Tenant will not be entitled to cash payment, credit against Rent, or any other consideration if the Tenant Construction Allowance is not completely used.

 

(e)           Tenant’s Contractor : An experienced, licensed general contractor that is hired to construct and manage the Tenant’s Improvements at the Premises.

 

(f)           Tenant’s Representative : _______________, unless Landlord is notified in writing by Tenant that another person should serve as Tenant’s Representative.

 

2. Representatives.

 

Landlord appoints Landlord’s Representative to act for Landlord in all matters associated with this Work Letter. Tenant appoints Tenant’s Representative to act for Tenant in all matters associated with this Work Letter. All inquiries, requests, instructions, authorizations, and other communications with respect to the matters covered by this Work Letter will be made to Landlord’s Representative or Tenant’s Representative, as the case may be. Tenant will not make any inquiries of or requests to, and will not give any instructions or authorizations to, any employee or agent of Landlord, including, without limitation, Landlord’s architect, engineers, and contractors or any of their agents or employees, with regard to matters associated with this Work Letter. Either party may change its Representative at any time by providing three (3) days prior written notice to the other party.

 

3. DESCRIPTION OF LANDLORD’S WORK

 

(a)           Landlord will deliver the Premises to Tenant improved to the conditions listed on Schedule 1 attached hereto prior to the Commencement Date. Within ten (10) days following Landlord’s request, Tenant will conduct a walk-through inspection of the Premises with Landlord and prepare a punch list of items needing additional work by Landlord. Other than the items specified in the punch list and “latent defects” (as defined in this paragraph), by taking possession of the Premises, Tenant will be deemed to have accepted the Premises in their condition on the date of delivery of possession, and to have acknowledged that Landlord has installed the Improvements as required by this Work Letter and that there are no items needing additional work or repair. The punch list will not include any damage to the Premises caused by Tenant’s move-in or early access, if permitted. The damage caused by Tenant will be repaired or corrected by Landlord at Tenant’s expense. Landlord’s contractor will complete all reasonable punch list items within fifteen (15) days after the walk-through inspection or as soon as practicable after such walk-through. Landlord’s work will be “substantially complete” when the conditions listed on Schedule 1 attached hereto remain subject to only minor punch list items.

 

 C- 1

 

 

(b)            A “latent defect” is a defect in the condition of the Premises caused by Landlord’s failure to construct the Improvements in a good and workmanlike manner and in accordance with the Construction Documents, which defect may not ordinarily be observed during a walk-through inspection. If Tenant notifies Landlord of a latent defect within one (1) year following the Commencement Date, then Landlord, at its expense, will repair such latent defect as soon as practicable.

 

4. DESCRIPTION OF TENANT’S WORK

 

All items of work not provided in the Lease or this Work Letter as the responsibility of Landlord shall be done by Tenant at Tenant’s expense. This work shall include, but not be limited to the following:

 

(a)             Tenant shall construct the Tenant Improvements in accordance with the plans approved by Landlord pursuant to Section 7 below.

 

(b)             Tenant will furnish and install all fixtures, equipment, furnishings, items of interior decor, and personal property.

 

5. Tenant’s CONTRACTOR

 

Tenant is responsible for identifying Tenant’s Contractor to be approved by Landlord, which approval shall not be unreasonably withheld. Upon selection of the contractor, Tenant shall develop a written schedule to guide the Tenant Improvement construction process, and shall provide a copy to Landlord.

 

6. TENANT’S CONSTRUCTION ALLOWANCE

 

Landlord shall reimburse Tenant up to the Tenant’s Construction Allowance for Tenant’s actual out-of-pocket expenses incurred to third parties in the construction of Tenant’s Improvements to the Premises according to this Work Letter. Landlord shall reimburse Tenant through progress payments made on a monthly basis, to the extent of the amounts billed by the Tenant’s Contractor for construction/installation of the Tenant Improvements, up to the maximum amount of the Tenant’s Construction Allowance. Each month, Tenant shall deliver to Landlord, or its representative, for approval an application for payment (“Application”) for the work completed as of the end of the prior month, reflecting the amounts properly billed by Tenant’s Contractor for that purpose. With each Application Tenant shall present to Landlord: (i) written approval that the work for which payment has been requested and has been completed in a satisfactory manner; (ii) copies of all invoices, purchase agreements, work agreements or related documents evidencing the services rendered; and (iii) conditional lien waivers from any contractor or supplier who has constructed or supplied materials for the Tenant Improvements during the period. Within ten (10) business days following receipt of each Application, Landlord shall pay directly to Tenant’s Contractor, Landlord’s pro-rata share of the entire amount of the payment requested by the Tenant’s Contractor until the Tenant’s Construction Allowance is paid in full. Landlord’s pro-rata share of the progress payments paid to the Tenant’s Contractor shall be the percentage that is equal to the Tenant Finish Allowance divided by the total cost estimate to construct Tenant’s Improvements (“Total Cost”). The resulting percentage is Landlord’s pro-rata share and shall be multiplied by the total Application amount to determine the Landlord’s then-current progress payment amount. Tenant shall pay all such costs in excess of the Allowance and Landlord’s pro-rata share, and Tenant agrees to keep the Premises and the real property free and clear of any liens arising out of the non-payment of such costs. In no event shall Landlord be obligated to make a disbursement pursuant to this Exhibit for Tenant Improvements in a total amount that exceeds the Tenant’s Construction Allowance. Any additional costs or expenses which arise in connection with the construction or development of the Tenant Improvements shall be solely the responsibility of Tenant.

 

7. DESIGN AND CONSTRUCTION TIMETABLE

 

(a) PLAN SUBMISSION AND REVIEW:

 

i. After notification of Tenant’s anticipated Possession date and thirty (30) days prior to that anticipated Possession Date, Tenant shall notify Landlord of the identity (and the appropriate contact information) of the individual or firm hired by Tenant to prepare Tenant’s plans.

 

ii. After notification of Tenant’s anticipated Possession date and thirty (30) days prior to that anticipated Possession Date or within thirty (30) days after Landlord’s delivery of the schematic building shell drawings to Tenant, whichever occurs later, Tenant, at its sole cost and expense, shall cause delivery to Landlord, for Landlord’s review and approval, two (2) sets of blueline prints and one (1) set of electronic drawings describing Tenant’s proposed Improvements.

 

iii. Within ten (10) days after receipt of Tenant’s plans, Landlord will review the plans and reply, either “approving”, “approving with notations” or “disapproving” the proposed plans for Tenant Improvements, such refusal to approve plans shall not be unreasonable and any denial requires an accompanying reasoning. If Tenant’s plans (or portions of them) are not approved by Landlord for any reason, the plans must be corrected and re-submitted for approval by Landlord, but Tenant’s changes shall only be required to address Landlord’s notations or aspects where Tenant failed to comply with Landlord’s earlier requests. If Landlord does not respond to Tenant’s submission within such ten (10) day period, the plans shall be deemed accepted by Landlord.

 

(b) CONSTRUCTION

 

i. Once Possession has been delivered to Tenant at the completion of Landlord’s work as described in para 3 above, Tenant shall begin and diligently pursue completion of construction of the Tenant Improvements described by Tenant’s plans, as approved by Landlord.

 

 C- 2

 

 

ii. Throughout the construction of the Tenant’s Improvements, Tenant shall be responsible for the following:

 

1. Obtaining all permits and licenses necessary for the construction of Tenant’s Improvements.

 

2. Compliance with all codes and ordinances which govern the construction of the Tenant’s Improvements.

 

3. Compliance by Tenant’s Contractor with all construction regulations which may be imposed by Landlord or its agents.

 

4. Submission of an acceptable waiver of liens by Tenant’s Contractor not less frequently than monthly, along with an acceptable final waiver of lien by Tenant’s Contractor at the completion of his work.

 

 C- 3

 

 

SCHEDULE 1 

Base Building

 

FLOOR – 4” concrete slab on metal deck – floor flatness and levelness to comply with standard tolerances outlined in ACI 117.

 

EXTERIOR WALLS – all exterior walls will be delivered ready to receive drywall – drywall to be installed, taped and finished by Tenant.

 

CORE & DEMISING WALLS – all structural core walls will be delivered ready to receive framing / furring and drywall – framing / furring and drywall to be installed by Tenant – all non-structural core walls and demising walls will be delivered ready to receive primer and paint – non-structural walls will be taped and finished by Tenant.

 

RESTROOMS – ADA compliant restrooms provided on the second, third and fourth floor by Landlord.

 

ELEVATOR LOBBIES – Landlord will install one pair of doors and door hardware at the entrance to elevator lobby on 1st floor – all mechanical, electrical, and lighting and finishes in elevator lobby are by Landlord.

 

VERTICAL TRANSPORTATION – 1-ea traction elevators with 3,500-lb per cab capacity

 

MECHANICAL – The mechanical system will be a Variable Refrigerant Flow (VRF) with an Energy Recovery Ventilator (ERV) to supply fresh air for the building. Each tenant space will be provided with a controller all distribution lines/ ducting, and control boxes will be provided by the tenant. All equipment provided by the tenant will need to be by the same manufacturer as the building equipment.

 

ELECTRICAL – Landlord to provide 1-ea 100 amp 3 phase 120/208 volts panel for each tenant. All sub metering will be provided by the tenant.

 

FIRE PROTECTION – the Landlord will provide a wet pipe fire protection system with sprinkler heads turned up for minimal, code-required coverage in an un-finished space – all other fire protection work will be designed, furnished and installed by Tenant – all new sprinkler heads must be compatible with building standards and installed by Landlord approved fire protection subcontractor.

 

FIRE ALARM – Landlord will provide a central fire alarm control panel (FACP) and any code required horn strobes within the unfinished space – all devices provided by Landlord will be wired and programmed to the central FACP - any modifications to the fire alarm system necessary to accommodate the Tenant’s improvements must be designed, furnished and installed by the Landlord’s approved fire alarm subcontractor (TBD) at Tenant’s expense.

 

CEILING – clearance from the surface of the concrete floor slab to bottom of steel roof deck above will be approximately 12’-6”’. All ductwork will be installed below the bottom of the steel beams near the core of the building – no ceiling will be provided by Landlord – all ceiling components will be designed, furnished and installed by Tenant.

 

TELE / DATA / CATV – provided by Tenant.

 

  INITIALS
   
   
   

 

 C- 4

 

 

EXHIBIT D

 

TENANT’S ESTOPPEL CERTIFICATE

 

REFERENCE IS MADE to that certain Lease or Lease Agreement between THE MOVE, LLC, a Colorado limited liability company, as Landlord, and the undersigned, WHERE FOOD COMES FROM INC, a Colorado Corporation, as Tenant, as the same was amended and/or supplemented by ____________________________________ (said Lease or Lease Agreement, as affected by said other instrument(s), being hereinafter referred to merely as the “Lease”), covering space in thE movE located at approximately:

 

The undersigned hereby certifies and declares as follows:

 

1.             The undersigned has accepted the Premises covered by the Lease and currently is in occupancy thereof and is conducting its business therein.

 

2.             The Lease is in full force and effect and has not been modified, supplemented, or amended except as is indicated below. Except for what is stated below, there are no agreements between the undersigned Tenant and the Landlord under the Lease in any way concerning the subject matter of the Lease or the Premises covered by the Lease. The interests of the Tenant under the Lease have not been assigned, and no part of the Premises covered by the Lease has been sublet except as is indicated below.

 

[If none, state so on the following lines.] ______________________________________________________________________________________________

__________________________________________________________________________________________________________________________________

 

3.             As of the date hereof all conditions or obligations under the Lease to be satisfied or performed by the undersigned have been satisfied or performed, except as follows:

 

[If none, state so on the following lines.] ______________________________________________________________________________________________

__________________________________________________________________________________________________________________________________

 

4.             To the best of the undersigned’s knowledge, as of the date hereof all conditions or obligations under the Lease to be satisfied or performed by the Landlord have been satisfied or performed, except as set forth below, and except as set forth below, as of the date hereof the undersigned does not assert, and to the best of the undersigned’s knowledge is not entitled to assert, any claim against the Landlord or any defense to or offset against the enforcement of the Lease or any of the provisions thereof against the undersigned.

 

[If none, state so on the following lines.] ______________________________________________________________________________________________

__________________________________________________________________________________________________________________________________

 

5.             The term of the Lease ( ignoring any options to renew or extend which have not yet been exercised) commenced on ___________________, 20__, and is scheduled to expire on _______________, 20____.

 

6.             (Strike whichever of the following statements is not the case):

 

(a) Full rental is currently accruing and payable under the Lease.

 

(b) Full rental is not currently accruing and payable under the Lease, for the reason that an initial period of abated rent has not yet expired. Full rental will begin to accrue and be payable under the Lease as of ___________________, 20____.

 

The monthly fixed Minimum Rent currently payable by the undersigned under the Lease is $______________________. No rent under the Lease beyond the current month has been paid in advance by the undersigned.

 

7.             The amount of the Security Deposit given by the undersigned and held by the Landlord under the Lease is the sum of $________________.

 

8.             Any notice, demand, request, or other instrument given by the Landlord under the Lease to the undersigned may be addressed to the undersigned at the Premises covered by the Lease, at the address specified in the Lease, or at the following address:

 

The undersigned disclaims all right, title or interest in the Premises except the rights granted by the Lease.

 

IN WITNESS WHEREOF, the undersigned has executed this Estoppel Certificate on this ______ day of ________________________, 20_____. 

     
  WHERE FOOD COMES FROM INC,
  a Colorado Corporation
     
  By:
   
  (Print Name and Title)

 

  INITIALS
   
   
   

 

FOR INFORMATIONAL PURPOSES ONLY; TO BE SIGNED AT A LATER DATE

 

 D- 1

 

 

EXHIBIT E

 

MECHANIC’S LIEN NOTICE

 

NOTICE TO ALL PERSONS PROVIDING

LABOR, SERVICES, MACHINERY, TOOLS,

EQUIPMENT AND MATERIALS FOR THE

ERECTION, CONSTRUCTION, ALTERATION,

REMOVAL, ADDITION, REPAIR, OR OTHER

IMPROVEMENT OF THIS PROPERTY

 

BE ADVISED that the interest of ___________________________________________________the owner of this property, shall not be subject to a mechanic’s lien by any person who provides labor, services, machinery, tools, equipment and materials for the erection, construction, alteration, removal, addition, repair or other improvements to this property known as Unit_______ at _________________________________________, City of _________________________, State of Colorado.

 

  By:
     
    Owner

 

CERTIFICATE OF SERVICE

 

I hereby certify that a true and correct copy of this notice was posted in a conspicuous place in Unit ______, at__________________________________________, City of ____________________, State of Colorado, on the _____day of _________________________, 20______.

 

  By:
    Agent for Owner

 

Subscribed and Sworn to before me this ______ day of _______________________, 20_____.

 

 
  Notary Public

 

My Commission Expires_______________________

 

  INITIALS
   
   
   

 

FOR INFORMATIONAL PURPOSES ONLY; TO BE SIGNED AT A LATER DATE

 

 E- 1

 

 

EXHIBIT F

 

RULES AND REGULATIONS
OF thE movE

 

THESE RULES AND REGULATIONS (the “Rules”) have been established by THE MOVE, LLC, a Colorado Limited Liability Company, as Landlord under the leases relating to thE movE (the “Leases”). Under the terms of the Leases, the Landlord is authorized to establish these Rules and such additional rules and regulations as are necessary or advisable in its judgment for the proper and efficient operation and maintenance of the buildings and common areas which make up 202 Sixth Street (such buildings and common areas are herein collectively referred to as “thE movE”). These rules may be changed, altered or amended by Landlord at any time in its sole discretion.

 

1.       Tenant shall not obstruct the sidewalks, entries, passages, corridors, stairways, and elevators of thE movE or interfere with the rights of other tenants of thE movE, or of persons having business in thE movE or in any way injure or annoy such tenants or personal. Tenant shall not disturb the other occupants of thE movE or adjoining buildings or premises by the use of any radio, sound equipment, or musical instrument or by making of loud or improper noise.

 

2.       Tenant shall not commit any act or permit anything in or about thE movE which shall or might subject Landlord to any liability or responsibility for injury to any person or property by reason of any business or operation being carried on in or about thE movE or for any other reason.

 

3.       Tenant shall not use the Building for lodging, sleeping, or for any illegal purposes or for any purpose that will damage thE movE, or the reputation thereof, or for any purposes other than those specified in the Lease.

 

4.        Tenant shall not bring or keep within the Building or in any Common Area any animal except helping animals allowed by law.

 

5.       Tenant shall move all freight, supplies, furniture, fixtures, and other personal property into, within and out of thE movE only at such times and through such entrances as may be reasonably designated by Landlord. Tenant shall not move or install such objects in or about thE movE in such a fashion as to unreasonably obstruct the activities of other tenants, and all such moving shall be at the sole expense, risk and responsibility of Tenant. In the event Tenant or Tenant’s movers damage the elevator or any part of thE movE, Tenant shall forthwith pay to Landlord the amount required to repair said damage. Any moving contractor of Tenant must carry insurance in amounts reasonably approved by Landlord. Each Tenant shall use its best efforts to complete, or cause to be completed, all deliveries, loading, unloading and services to the Premises prior to 10:00 a.m. of each day. Each Tenant shall attempt to cause no delivery trucks or other vehicles servicing thE movE to park or stand in front of thE movE from 10:00 a.m. to 9:00 p.m. of each day.

 

6.       Tenant shall not deposit any trash, refuse, cigarettes, or other substances of any kind within or out about thE movE except in refuse containers. Tenant shall exercise its best efforts to keep the sidewalks, entrances, passages, courts, lobby areas, parking areas, vestibules, restrooms, public corridors and halls in and about thE movE (“Common Areas”) clean and free from Tenant’s rubbish. Tenant shall not allow anything to be placed on or outside the Building, nor shall anything be thrown by Tenant out of the windows or doors or down the corridors, elevator shafts or ventilation ducts or shafts of the Building.

 

7.       Landlord reserves the right to exclude or expel from thE movE any person who, in the reasonable judgment of Landlord, is intoxicated or under the influence of liquor or drugs or who shall in any manner act in violation of the rules and regulations of thE movE.

 

8.       Tenant shall not use the washrooms, restrooms and plumbing fixtures of the Building, appurtenances thereto, for any other purposes than the purposes for which they were construed, and Tenant shall not deposit any sweepings, rubbish, rags or improper substances therein. Tenant shall not waste water by interfering or tampering with the faucets or otherwise. If Tenant or Tenant’s employees, contractors, jobbers, agents, licensees, invitees, guests or visitors, cause any damage to such washroom, restrooms, plumbing fixtures or appurtenances, such damage shall be repaired at Tenant’s expense, and Landlord shall not be responsible therefore.

 

9.       Subject to applicable fire or other safety regulations, all doors opening into Common Ares and all doors upon the perimeter of the Premises shall be kept closed and, during non-business hours, locked, except when in use for ingress or egress. If Tenant uses the Premises after regular business hours or non-business days, Tenant shall lock any entrance doors to the Building or to the Premises used by Tenant immediately after using such doors.

 

10.       All keys to the exterior doors of the Premises shall be obtained by Tenant from Landlord, and Tenant shall pay to Landlord a reasonable deposit determined by Landlord from time to time for such keys. Tenant shall not make duplicate copies of such keys. Except for Tenant’s security systems, Tenant shall not install additional locks or bolts of any kind upon any of the doors or windows of, or within the Building, nor shall Tenant make any changes in existing locks or the mechanisms thereof, without Landlord’s prior consent. Tenant shall, upon the termination of its tenancy, provide Landlord with the combinations to all combination locks on safes, safe cabinets, and vaults which are not removed from the Premises by Tenant and deliver interior doors, cabinets, and other key-controlled mechanisms therein, whether or not such keys were furnished to Tenant by Landlord. In the event of the loss of any key furnished to Tenant by Landlord, Tenant shall pay to Landlord the cost of replacing the same or of changing the lock or locks opened by such lost key if Landlord shall deem it necessary to make such a change. Landlord and/or Landlord’s agent shall at all times keep a passkey to the Premises.

 

 F- 1

 

 

11.       Landlord shall provide Tenant access to the Premises, the Building and the parking facilities, subject to such security card system as Landlord may establish from time to time, twenty-four (24) hours per day, seven (7) days per week. Tenant shall be responsible for all persons from whom Tenant obtains any pass for entry into the Premises, Building or parking facility. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to thE movE for the safety of tenants and protection in thE movE.

 

12.       Landlord shall not be responsible for, and Tenant hereby indemnifies and holds Landlord harmless from any liability in connection with the loss, theft, misappropriation or the disappearance of furniture, furnishings, fixtures, machine, equipment, money, jewelry or other items or personal property from the Premises or other parts of the Building regardless of whether the Premises or Building are locked at the time of such loss, unless caused by the gross negligence or willful misconduct of Landlord, its agents, employees or contractors.

 

13.       Except for areas specifically designated by Landlord in its sole discretion, no smoking is permitted by any person, including employees of Tenant, in on or about thE movE, including lobby, the stairwells, parking areas, landscaped areas and Building entrances.

 

14.       Tenant shall not, nor shall it permit any of its employees, officers, contractors, jobbers, licensees, invitees, guests, visitors, agents or independent contractors to keep or bring onto the Premises, the Building or thE movE any deadly weapon, including but not limited to firearms of any kind.

 

15.        Outside Sales and Storage . No tenant may display, sell merchandise, allow carts, portable signs, devices or any other objects to be stored or to remain outside the defined exterior walls or roof and permanent doorways of thE movE, or in hallways.

 

16.        Antenna and Aerials . No aerial, antenna or satellite dish shall be erected on the roof or exterior walls of thE movE without first obtaining, in each instance, the written consent of Landlord. Any aerial, antenna or satellite dish so installed without such written consent shall be subject to removal without notice at any time, plus the Tenant will be charged for Landlord’s cost of said removal plus a twenty percent (20%) administration fee.

 

17.        Parking Lot Solicitation . No Tenant may solicit in any manner in any of the automobile parking and sidewalk areas of thE movE.

 

18.        Vending Machines . No Tenant shall, without the prior consent of Landlord, sell merchandise from vending machines or allow any coin-operated vending or gaming machines on the Premises.

 

19.        Validated Parking. Landlord may, if in its opinion the same be advisable, establish a system or systems of validation or other type operation, including a system of charges against non-validated parking checks of users, and the Tenant must abide by all such rules and regulations in its use and the use of its customers and patrons with respect to said automobile parking area; provided, however, that all such rules and regulations and such types of operation or validation of parking checks and other matters affecting the customers and patrons of the Tenant shall apply equally and without discrimination to all persons entitled to the use of said automobile parking facilities.

 

20.        Control of Common Areas . Landlord shall at all times have the sole and exclusive control of the Common Areas, and may at any time and from time to time during the term hereof, exclude and restrain any person from use or occupancy thereof, excepting, however, bona fide customers, patrons and service-suppliers of Tenants who make use of Common Areas in accordance with these Rules. It shall be the duty of each Tenant to keep all Common Areas free and clear of any obstructions created or permitted by such Tenant or resulting from such Tenant’s operation. Any cost to keep all Common Areas free and clean incurred by Landlord as a result of Tenant’s operation will be billed back to said Tenant, plus a twenty percent (20%) administration fee.

 

21.        Employee Parking . Tenant and its employees shall park their cars only in the areas provided behind the Premises, or in those portions of the Common Areas, if any, designated for the purpose by Landlord, and any such designation may be changed from time to time. No overnight parking of any vehicles shall be permitted in any of the Common Areas. If requested by Landlord, each Tenant shall furnish Landlord with its and its employees’ license numbers within fifteen (15) days of such request and shall thereafter notify Landlord of any changes within five (5) days after such change occurs. Landlord may charge Tenants Twenty Five Dollars ($25.00) per car for each day or partial day any of such cars are parked in any areas other than those designated, or for each and every car (per day) which is parked overnight in the Common Areas; provided, however, Landlord agrees to give Tenant written notice of the first violation of this provision and Tenant shall have two (2) days thereafter within which to cause the violation to be discontinued; and if not discontinued within said two-day period then the $25.00 per day fine shall commence. After notice of such first violation, no prior written notice of any subsequent violation shall be required and in addition to the fine levied by Landlord, Landlord may tow any such vehicle from the Common Areas and charge Tenant for all costs so incurred.

 

22.        Prohibited Advertising . No Tenant shall affix or maintain upon the glass panes and supports of the show windows, and within twelve (12) inches of any window, doors and the exterior walls of its Premises, any signs, advertising placards, names, insignia, trademarks, descriptive material or any other such like item or items, except such as shall have first received the written approval of Landlord. No Tenant shall affix any sign to any roof of thE movE. In addition, no advertising medium shall be utilized by any Tenant which can be heard or experienced outside Tenant’s Premises, including, without limiting the generality of the foregoing, flashing lights, searchlights, loudspeakers, phonographs, radios, balloons or television. No Tenant shall display, paint or place or cause to be displayed, painted or placed, any handbills, bumper stickers or other advertising devices on any vehicle parked in the parking area of thE movE, whether belonging to such Tenant or to any other person; nor shall any Tenant distribute, or cause to be distributed, in thE movE, any handbills or other advertising devices, and such Tenant shall pay to Landlord the cost and expense necessary to remove any such unauthorized material from thE movE, plus a twenty percent (20%) administration fee.

 

 F- 2

 

 

23.        Approval of Signs . Each Tenant shall not less than thirty (30) days prior to fabrication of any sign submit two (2) copies of drawings of such sign to Landlord for approval. Such drawings must include location, size and style of lettering, color, material, type of illumination, installation details, color selections and logo design. Approval of such sign by Landlord will not be unreasonably withheld or delayed, and will be based upon the standards set forth below. In any event, all signs must also be approved, if necessary, by the appropriate governmental agency prior to fabrication, and all permits for signs and their installation shall be obtained and paid for by the Tenant.

 

In no event shall any sign be approved by Landlord if the size, location, design, color, texture, lighting and materials of such sign detracts in any way from the design of thE movE and the surrounding properties.

 

a.   Signs shall consist of internal illuminated individual letters (either neon or LED) with flat plastic faces in metal retainers mounted to aluminum or channellume type letters. Signs shall have no audible, flashing or animated figures.

 

b.   No fascia sign or wall sign shall exceed 30% of the total fascia or signable area (or percentage allowable by county/city zoning, if larger, subject to final sentence limitations herein below), excluding windows and storefront area. Letter sizes shall be governed by the amount of signable area used. In no event shall any sign be less than eight feet (8’) above the ground as measured to the lowest edge of the sign. No sign may project higher than the height of the structure to which it is attached. Notwithstanding, the sign border(s) must stay within eight (8) inches of the top and bottom edges of the fascia.

 

c.   Logo signs will be considered provided that they are a nationally registered trademark or identification sign. Landlord shall review all logo designs for final approval and compliance. The logo sign shall be considered part of the allowable 30% signed area.

 

d.   Vertical copy of signs projecting perpendicular to any building are not permitted.

 

e. Manufacturer’s decals, hours of business, telephone number, etc. are limited to a total of 144 square inches per single door entrance. No “sale” signs, special announcements, etc. shall be permitted on exterior or interior glass; such advertising material must be set back at least twelve inches (12”) from glass surface and suspended from the ceiling.

 

f.   Advertising devices such as attraction boards, posters, banners and flags shall not be permitted, unless for a temporary use with the prior written consent of Landlord.

 

g.   Painted, flashing, animated, audible, revolving or similar signs that create the illusion of animation shall not be permitted.

 

h.   Exposed bulb signs shall not be permitted without Landlord’s consent in Landlord’s sole discretion.

 

i.   No sign may include the product sold except as part of the Tenant’s name or insignia.

 

j.   The Tenant’s name and address may be applied to that Tenant’s non-customer door, if any, for receiving merchandise, as directed by Landlord and in two-inch (2”) high block letters.

 

k.   If required by the U. S. Postal Service, the Tenant may install on the storefront the number only for the street address of size, type, color and location determined by Landlord.

 

24.        Construction of Signs

 

a.   The Tenant is required to obtain any and all building and electrical permits.

 

b.   Location of all openings for conduit or sign panels of building walls shall be indicated on drawings submitted to Landlord for approval.

 

c.   All mounting holes must be sealed off and touched up after installation, and the Tenant’s Premises, and the Common Areas must be left free of debris.

 

d.   The Tenant is responsible for the actions of its sign contractor.

 

e.   Letter fastening and clips shall be concealed and shall be of galvanized, stainless or aluminum metals.

 

f.   Electric service to signs shall be included in the Tenant’s metered service and shall include an automatic timer to illuminate the sign. Signs must be illuminated from the hours of sundown, until at least 11:00 p.m. or Tenant shall be subject to a fee of $25.00 per day for each and every day that the sign is not illuminated after five (5) days from Tenant’s receipt of Landlord’s notice.

 

g.   No exposed raceway, crossovers, transformers or conduit will be permitted, except for stub out through the wall. All signs shall use P.K. Housings and bear the U.L. Label, or other similar U.L. approved housings approved by Landlord, and installation of each sign shall comply with all local building codes and electrical codes.

 

h.   No labels shall be permitted on the exposed surface of signs, except those required by local ordinance, which shall be placed in an inconspicuous location and manner.

 

 F- 3

 

 

i.   Design, layout and material for Tenant signs shall conform in all respects with the design drawings provided by Tenant. The height and dimensions for letters in the body of the signs shall be pursuant to approved plans and specifications.

 

j.   All penetrations of the building structure required for sign installation shall be sealed in a watertight condition and shall be patched to match the adjacent finish.

 

k.   Internally illuminated, individual lettered pan channel, storefront fascia signs of the specifications provided for herein, are required by the Landlord of all Tenants (though individual tenant’s signs may vary at Landlord’s sole discretion) of thE movE. And all such signs shall be constructed and installed, including electrical hook-ups, at the Tenant’s expense.

 

l.   This sign criteria may be changed to reflect the code of governing bodies involved.

 

m.   Upon Surrender of the Premises, unless otherwise directed by Landlord, Tenant shall remove its illuminated store front fascia sign, and replace damaged fascia wood, caulk, prime and paint to match the existing fascia, after said removal.

 

  INITIALS
   
   
   

 

 F- 4

 

 

EXHIBIT G

 

HAZARDOUS AND/OR TOXIC WASTES, SUBSTANCES, AND MATERIALS

 

WHERE FOOD COMES FROM INC , a Colorado Corporation, Tenant, strictly warrants to THE MOVE, LLC , a Colorado Limited Liability Company, Landlord, that Tenant shall not, without the express prior written consent of Landlord, bring or allow to be brought onto the Property/Building/Premises, or store or use upon the Property/Building/Premises, or discard or dump in any drain or trash receptacle, or introduce into ground water, any hazardous and/or toxic substances, wastes, materials, pollutants or contaminants (including, without limitation, asbestos and raw materials which include hazardous constituents) or any other substance or materials which are included under or regulated by any local, state or federal law, rule, regulation or ordinance pertaining to environmental regulation, contamination or clean up (“Hazardous Substance”) except in small quantities (or approved quantities relative to and consistent with Tenant’s Use) which are stored in compliance with all applicable environmental laws, including any federal, state or municipal law, decision, state, rule, ordinance or regulation, in existence or hereinafter enacted or rendered.

 

EXPRESSLY UNDERSTOOD, ACKNOWLEDGED AND AGREED TO THIS _____ DAY OF ______________________, 2015.

 

  TENANT:
   
  WHERE FOOD COMES FROM INC,
  a Colorado Corporation
     
  By:
   
  (Print Name and Title)

 

 G- 1

 

 

EXHIBIT H

 

COMMENCEMENT DATE CERTIFICATE

 

THIS COMMENCEMENT DATE CERTIFICATE shall set forth, reaffirm and amend certain terms and provisions contained in the Lease Agreement dated April 14, 2015 , (“Lease”) by and between THE MOVE, LLC, a Colorado limited liability company (“Landlord”) and WHERE FOOD COMES FROM INC, a Colorado Corporation (“Tenant”).

 

1.            All capitalized terms not otherwise defined herein shall have the same meaning as set forth in the Lease.

 

2.            By signing the acknowledgement at the end of this memorandum, Landlord and Tenant acknowledge and agree that the statements set forth in this Commencement Date Certificate are true and accurate.

 

3.            The Possession Date was March 1, 2016 . The Commencement Date of the Lease is August 1, 2016 , and the Lease will expire at midnight July 31, 2021 , if not extended or renewed or terminated earlier pursuant to the Lease.

 

4.            The Premises consists of 8,127 rentable square feet measured in accordance with Standard Method of Measuring Floor Areas in Office Buildings (ANSI/BOMA Z-65.1-2010) (“BOMA”) and nine (9) dedicated parking spaces located in the parking garage of the building.

 

5.            The Move currently consists of 50,088 rentable square feet measured in accordance BOMA standards.

 

6.            The Minimum Rent shall be as set forth below:

 

    Price per SF   Monthly Minimum Rent   Annual Minimum Rent
  08/01/2016 – 07/31/2017     $ 20.00     $ 13,545.00     $ 162,540.00  
  08/01/2017 – 07/31/2018     $ 20.60     $ 13,951.35     $ 167,416.20  
  08/01/2018 – 07/31/2019     $ 21.22     $ 14,371.25     $ 172,454.94  
  08/01/2019 – 07/31/2020     $ 21.86     $ 14,804.69     $ 177,656.22  
  08/01/2020 – 07/31/2021     $ 22.52     $ 15,251.67     $ 183,020.04  

 

7.            Tenant’s Pro Rata Share shall be 16.2% .

 

8.             Tenant has delivered a Security Deposit in the amount of $13,545.00 .

 

9.             The amount of the Tenant’s Construction Allowance shall be $20.00 / RSF = $162,540.00

 

10.           Landlord’s Work is Substantially Completed, or the following work remains to be completed: ____________________________________________

___________________________________________________________________________________________________________________________________________

 

11.           Except as may be amended herein, all terms and conditions of the Lease shall continue in full force and effect and are hereby republished, ratified, and reaffirmed in their entirety. This Commencement Certificate shall be binding upon and may be relied upon by the parties hereto and their respective legal representatives, successors, and assigns.

 

Landlord and Tenant have executed this Commencement Date Certificate as of the dates set forth below. 

     
  LANDLORD:
  THE MOVE, LLC,
  a Colorado Limited Liability Company
     
  By:  
   
  (Print Name and Title)

     
  TENANT:
  WHERE FOOD COMES FROM INC,
  a Colorado Corporation
     
  By:  
   
  (Print Name and Title)

 

 H- 1

 

 

ADDENDUM

 

TO THAT CERTAIN LEASE AGREEMENT DATED ________________________, 2015 

BY AND BETWEEN THE MOVE, LLC, A COLORADO LIMITED LIABILITY COMPANY, 

AS LANDLORD, 

AND WHERE FOOD COMES FROM INC, A COLORADO CORPORATION, 

AS TENANT

 

As a supplement to that certain Lease of Premises at thE movE, Landlord and Tenant further agree as follows:

 

1)       Whenever the term “Lease” is used in this supplement, unless the context otherwise requires, it shall mean the Lease above referred to, and any Addendum thereof, including this Addendum.

 

2)       

 

Option to Extend . Landlord grants to Tenant the right to extend the Lease Term (“Renewal Option”) for two (2) consecutive periods of five (5) years each (“Option Term”), upon the following terms and conditions:

 

(a)       Tenant must exercise each Renewal Option, if at all, by providing Landlord with written notice thereof at least six (6) months but not more than twelve (12) months prior to the expiration date of the then-current Lease Term (“Renewal Notice”); provided, that Tenant may not exercise such option, or commence occupancy under any extended term if, upon any date any written notice of election to extend is given, or upon the date any extended term would otherwise commence if Tenant is in default under any of the provisions of the Lease beyond all applicable notice and cure periods. If Tenant does not provide Landlord with the Renewal Notice as and when herein specified, the Renewal Option shall terminate and be of no further force or effect. If Tenant exercises a Renewal Option, the Lease Term shall be extended for an additional period of three (3) years upon the same terms and conditions as set forth in the Lease, except the Basic Rent and this Renewal Option. The Basic Rent for such Option Term shall be at the then-current “Market Rate” as defined below. Each of the two Renewal Options may be exercised only once and once exercised, such Renewal Option shall not be effective during any subsequent Option Term.

 

(b)       The Renewal Option shall apply to the entire Demised Premises, as amended or expanded as of the commencement date of each Option Term, and may not be exercised as to only a portion of the Demised Premises. Upon exercise of a Renewal Option, Landlord and Tenant shall enter into an amendment to the Lease memorializing the Basic Rent Amount and any other changed terms and/or conditions of the Lease during such Option Term. If there is a Default by Tenant at any time between the date it exercises a Renewal Option and the date upon which such Option Term is to commence, then Landlord at its option may elect to treat the exercise of such Renewal Option as ineffective in which case this Lease shall terminate upon expiration of the then-current Lease Term.

 

(c)       The Renewal Option is personal to Tenant and in the event of any Transfer by Tenant, whether or not with the consent of Landlord, any Renewal Options which have not been exercised as of the date of such Transfer shall automatically terminate.

 

(d)       The “Market Rate” is a price a willing tenant would pay to a willing landlord in an arms-length transaction if both had the same knowledge of the facts and reasonable market exposure. Here, Landlord and Tenant shall, in good faith, negotiate and attempt to determine a mutually acceptable Market Rate relying on the rental rate for similar properties within the same local area and taking into account adjustments for the differences in the properties and the value to a prospective tenant as of the commencement date of such Option Term, taking into consideration the uses permitted under the Lease, the quality, size, design and location of the Demised Premises.

 

(e)       If, a mutually agreed upon Market Rate is not determined before Tenant provides Landlord with a written Renewal Notice, Landlord shall notify Tenant of his Market Rate offer for the Option Term (“Landlord’s Rate”) within twenty (20) days after receiving the Renewal Notice. If Tenant does not agree that Landlord’s offered Rate is the Market Rate, Tenant shall provide written notice thereof to Landlord within twenty (20) days of Landlord’s Market Rate offer, rejecting Landlord’s Market Rate offer and indicating the amount that Tenant asserts is the proper Market Rate for the Option Term (“Tenant’s Rate”). If Tenant fails to provide written notice within such twenty (20) day period, Tenant shall be deemed to have accepted Landlord’s Market Rate offer as the agreed upon Market Rate. If Tenant timely provides notice rejecting Landlord’s Market Rate offer, then each party shall, within ten (10) days after Tenant’s rejection notice, designate by written notice to the other party one (1) licensed Colorado real estate broker, who is not affiliated with nor has had an economic relationship with the designating party within the last five (5) years, having at least five (5) years’ experience in the Castle Rock commercial real estate market (“Broker(s)”). The two Brokers shall each determine the Market Rate for the Demised Premises. Each Broker will be paid for the Broker’s Price Opinion by the party designating him or her. Landlord and Tenant shall each require the Brokers to make such determination and report it in writing to Landlord and Tenant within twenty (20) days after such selection. The two Broker’s price opinions shall be averaged to create a Market Rate which will set the and the Initial Base rate for the first year of the renewal.

 

 A- 1 A

 

 

EXECUTED THIS ______ DAY OF __________________, 2015

     
  LANDLORD:
  THE MOVE, LLC,
  a Colorado Limited Liability Company
     
  By:  
   
  (Print Name and Title)

     
  TENANT:
  WHERE FOOD COMES FROM INC,
  a Colorado Corporation
     
  By:  
   
  (Print Name and Title)

 

 A- 2 A

 

 

Where Food Comes From, Inc. - 10-K

EXHIBIT 21.1

 

Subsidiaries of the Registrant

 

International Certification Services, Inc.

Validus Verification Services LLC

Sterling Solutions LLC

SureHarvest Services LLC

 

60  

 

 

Where Food Comes From 10-K

EXHIBIT 23.1

 

 

 

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

We hereby consent to incorporation by reference in the Registration Statement on Form S-8 (No. 333-212061) of our report dated February 28, 2017, relating to the consolidated financial statements of Where Food Comes From, Inc. and Subsidiaries included in the Annual Report on Form 10-K as of and for the year ended December 31, 2016.

 

 

EKS&H LLLP

 

February 28, 2017

Denver, Colorado

 

 

61

 

Where Food Comes From, Inc. - 10-K

EXHIBIT 23.2

 

  

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-212061) of our report dated February 16, 2016, (which expresses an unqualified opinion and includes an explanatory paragraph relating to the Company’s March 2014 acquisition of the remaining 40% interest of International Certification Services, Inc., and its October 2014 acquisition of assets of Sterling Solutions, LLC.) on the consolidated financial statements of Where Food Comes From, Inc. and subsidiaries for the year ended December 31, 2015, which report appears in this Annual Report on Form 10-K of Where Food Comes From, Inc.

 

 

/s/ GHP Horwath, P.C.

 

Denver, Colorado
February 28, 2017

 

 

62  

 

 

Where Food Comes From, Inc. - 10-K

EXHIBIT 31.1

 

I, John Saunders, certify that:

 

1. I have reviewed this annual report on Form 10-K of Where Food Comes From, Inc.

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 28, 2017

/s/ John Saunders  
John Saunders, Chief Executive Officer  
   

 

63  

 

 

Where Food Comes From, Inc. - 10-K

EXHIBIT 31.2

 

I, Dannette Henning, certify that:

 

1. I have reviewed this annual report on Form 10-K of Where Food Comes From, Inc.

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 28, 2017 

/s/ Dannette Henning  
Dannette Henning, Chief Financial Officer  

 

64  

 

 

Where Food Comes From, Inc. - 10-K

EXHIBIT 32.1

 

Certification of Periodic Financial Report

Pursuant to 18 U.S.C. Section 1350

 

For purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, John Saunders the Chief Executive Officer of Where Food Comes From, Inc. (the “Company”), hereby certifies that, to his knowledge:

 

  (i) the Annual Report on Form 10-K of the Company for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: February 28, 2017

/s/ John Saunders  
John Saunders, Chief Executive Officer  

 

65  

 

 

Where Food Comes From, Inc. - 10-K

EXHIBIT 32.2

 

Certification of Periodic Financial Report  

Pursuant to 18 U.S.C. Section 1350

 

For purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Dannette Henning, the Chief Financial Officer of Where Food Comes From, Inc. (the “Company”), hereby certifies that, to her knowledge:

 

  (i) the Annual Report on Form 10-K of the Company for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: February 28, 2017 

/s/ Dannette Henning  
Dannette Henning, Chief Financial Officer  

 

66