Where Food Comes From (OTC: WFCF): A Balanced Opinion


The next post I have written is on Where Food Comes From (OTCMKTS: WFCF). I have took a little bit of a different approach in writing this post. I have not completed my work on the company, but I think I have got to an important junction where it would be helpful for both myself and my readers to express my thoughts. The goal is to start an open dialogue. I have grown very sick of a lot of both sell side and hedge fund research that is totally one-sided (based on whatever position they are taking). My aim here is to provide balanced commentary that acknowledges opportunities and threats. It has always been my intention to be balanced, but something I will strive to do even more so in the future.

Why I started looking at WFCF?

The root of the idea came from listening to a podcast between Meb Faber and Dan Rasmussen found here. Rasmussen is an interesting speaker. His primary thesis is that ‘private equity’ only did well in the 80s and 90s because they bought assets very cheap and leveraged them up; private equity’s ability to provide operational expertise and increase business value is limited. Rasmussen believes assets being bid on by private equity are no longer cheap; there are too many bidders. Therefore, future private equity returns will not match what the asset class has done historically. His belief is that you can instead earn excess returns by instead buying publicly traded small cap companies that have attractive valuations and high leverage, as long as they use all of their excess cash flow to reduce leverage.

While the strategy makes some sense to me, my view is that the downside risk is much too high for me to be able to justify it at this point in the cycle. I do not have the appetite to buy heavily indebted stocks with low levels of liquidity. However, it did get me thinking… My thinking was along the lines of while I do not necessarily want to try to replicate a private equity strategy with publicly traded micro to small cap equities, are there any other types of strategies that could be worthwhile replicating? My thoughts turned to venture capital. Maybe there is a group of publicly traded micro to small cap companies that are aggressively growing the top-line, but have not yet reached profitability. Since they are likely underfollowed, they could trade at attractive valuations.

WFCF seemed to fit this bill quantitatively. The chart below shows WFCF’s history of sales, EBIT and free cash flow. While sales have grown strongly, WFCF appeared to be driving all of its profit back into further sales growth.

What does WFCF do?

WFCF provides third party verification and certification solutions for agriculture, livestock and food industry. Claims like gluten-free, non-GMO, non-hormone treated, humane handling require verification for credibility. WFCF provides this verification through onsite and “desk” audits to verify that claims being made are accurate.

In 2017, WFCF’s revenue mix was ~80% verification/certification, ~10% software (from acquisition of SureHarvest) and 10% product (mainly ear tags for cattle).

Market Cap

WFCF has 25 million shares outstanding and most recently traded at $2.15 per share, giving it a market capitalization of $53 million.


The opportunity that WFCF has is fairly clear. Consumers are increasingly demanding transparency in all facets of their life, food included. They want to know where their food came from and if suppliers along the value chain act in a sustainable manner. This has opened up lots of opportunities for WFCF to certify claims made by suppliers. Additionally, food has faced increasing regulatory burdens – an area where WFCF can again assist.

Another opportunity lays in the structure of the industry. According to Bureau Veritas, the testing, inspection and certification (TIC) markets related to agriculture and food are highly fragmented (see table below). Bureau Veritas also discloses a TIC market size for Food & Agriculture of 23 bn EUR. All this to say, WFCF operates in a market that is both large and highly fragmented. This could present an opportunity for WFCF to continue to use M&A to drive consolidation in the industry.

The last opportunity I will mention is that WFCF currently spends 40-45% of sales on SG&A. This is high. As WFCF increasingly becomes larger, it could be possible that its sales force becomes more productive. As WFCF grows, their presence and reputation also grow, meaning they could potentially begin seeing more inbound inquiries. This would likely result in higher productivity per sales person as more time could be spent on real prospects rather than cold calling. And as a result SG&A as a % of sales would decrease.


There are some large public companies that operate in the broader testing, inspection and certification industry (“TIC”) that can act as a comparable to WFCF. They are SGS, Bureau Veritas, and Intertek. Given the nature of the industry, the major expense for each company is its employees. In the case of WFCF, their service is for one of their employees to show up at a farm or call the farm (depending on the audit type) to verify that the requirements for a third party certification are being met. In this business model, the amount of sales/employee is critical. The more the better.

The amount of sales that each WFCF employee produces relative to the three major comparable public companies is striking (WFCF at >$250K vs Big 3 at <$100K). One driver of the large difference is where the employee base is located. All of WFCF employees are in the United States versus a mix of developed and developing countries for the three comparables. Employees in developing countries earn much less so it makes sense that they can also produce less revenue on a per employee basis and still be profitable.

We can correct for this ‘location of employee’ bias by looking at recent acquisitions the Big 3 have made in developed countries.

  • Intertek. Acquired FIT Italia in Dec 2015. 15 Employees and 2M EUR (USD $2.37M) of sales. Sales / Employee = $156,000.
  • SGS. Acquired Vanguard Science in Jan 2018. Sales of US$11M and 95 employees. Sales / Employee = $115,789.
  • Bureau Veritas. Acquired Maxxam in 2013. Sales of CAD240M and 2500 employees. Sales / Employee = C$96,000.

The magnitude is reduced, but WFCF still earns much higher sales/employee than the recent acquisitions of the Big 3. This could be a good thing. But in order for it to be a good thing, we must believe that WFCF is able to do something that the big 3 is not.

For example, it’s possible that WFCF operates much ‘leaner’ than the big 3 and has a very skinny overhead structure. This is likely true, although I find it difficult to believe that it could account for such a large magnitude. I’d note that in general businesses whose major expense is ‘service employees’ are much easier to run when they are smaller. The founder/owner mindset or culture is much easier to transmit to frontline employees when the company is very small and there are not many layers. I’d note WFCF has a husband/wife team that run the company as well as own a large chunk of the shares.

Another possibility is that WFCF has better IT and systems allowing its employees to be more productive. While this could also be true, I have a harder time believing it will be sustainable. Any advantage from WFCF likely stems from a first mover advantage. WFCF’s Big 3 competitors have a very large resource in terms of their capacity to spend on technology/software and I would expect them to catch up.

Another possibility is that WFCF is better at ‘bundling’ certifications and selling more than one certification per site visit or audit. This would result in sales per employee being higher. I also question sustainability here for the reason that the Big 3 competitors own all of their own testing labs. This means that WFCF services are limited to visual inspection or what the human eye can see. Their Big 3 competitors can go a layer deeper and offer services involving analysis beyond visual inspection (ie. DNA testing, identification of microbes, nutritional labeling, etc.). To me this would mean WFCF could be susceptible to being “out bundled” by their larger competitors who can offer both lab analysis and visual inspection/certification as part of the same package.

There is also a threat that could explain the large difference in revenue/employee. It could be that WFCF charges a too high a price for their services and will be forced to lower it in the future to retain its customers. My impression is that many retailers and suppliers have been scrambling to get their food certified as ‘organic’ or ‘hormone free’. In this scramble, they have prioritized speed over cost. Most retailers now have access to organic foods that were previously only offered in a specific vertical (ie. Whole Foods). Now that they have figured out the availability issue (ie. they have figured out how to get supply), they will likely start slowly turning the screws on price and suppliers including WFCF could get squeezed.



  • Tailwind from consumers demanding transparency and greater regulations;
  • Large, fragmented market provides consolidation opportunities;
  • Sales force could become more productive once brand becomes better known;
  • Operators are also owners;
  • Labor intensive businesses are easier to operate/execute when small;
  • First mover advantage leads to better IT/systems;
  • Leveraged strength in beef verification to cross-sell other certifications.


  • WFCF may have taken advantage of their customers with high prices while they were prioritizing speed to market over cost.
  • Large competitors have resources to catch up and eliminate any first mover advantages (ie. there is not a feedback loop that improves WFCF product because they have more data).
  • There is a risk that WFCF’s “bundle” is not large enough as they do not own laboratories. Big customers who own labs could offer a better “bundle”.


WFCF is currently trading at 3.5x revenue with limited profitability. This multiple may actually be a bargain if WFCF can turn into a software company that can show increasing returns as it scales up. However, this would be a big leap given 80% of sales are still coming from certification/verification which is a very labor intensive business. In the certification/verification business, WFCF cannot add sales without adding cost (ie. employees). This is not true in software where code is written once and has only very small costs to scale. For more on software and increasing returns to scale, here is a great podcast.

Author Ownership: NO OTCMKTS: WFCF

Read Disclaimer:

This article is for informational purposes only. This article is based on the author’s independent analysis and judgment and does not guarantee the information’s accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

Qualitysmallcaps.com is not engaged in an investor relations agreement with Where Food Comes From, Inc. nor has it received any compensation from Where Food Comes From, Inc.  for the preparation or distribution of this article.

The author may trade shares of Where Food Comes From, Inc. through open market transactions and for investment purposes only.

CCA Industries (NYSE:CAW): Undemanding Valuation; But I Lack Confidence in Growth Outlook

Company Overview

CCA Industries, Inc. (CCA) is a consumer products company with the following sales mix:

As can be seen, CCA’s key categories are Skin Care and Oral Care.

CCA’s Oral Care category comprises solely of the Plus+ White brand. The main Plus+ White product is a gel used to whiten teeth which is priced an order of magnitude below Crest Whitestrips (ie. $5-6 vs $40).

The annual sales trend of Oral Care can be seen in the chart below. The declines in recent years are largely attributable to CCA discontinuing the production of toothpaste. CCA has cited intense price competition between Colgate and Crest in toothpaste.

CCA’s Skin Care category is comprised of multiple brands. The two largest brands are Bikini Zone and Sudden Change. Bikini Zone’s main benefit is to prevent razor burn in “sensitive” areas. Sudden Change promises to reduce under eye circles. Porcelana (a licensed brand) is also included in the category and growing at a high rate. Porcelana’s main benefit is to even skin tone and reduce the appearance of “age spots”.

The annual sales trend in the Skin Care category is in the chart below. Recent declines can be attributed to discontinuing to Solar Sense (due to lack of profitability) and reducing the number of Sudden Change SKUs.

Why I looked at CCA

I got interested in looking at CCA Industries because it operates in a noncyclical industry (a prerequisite for me at this stage in the cycle) and has a very undemanding valuation.


The key factor in determining CCA’s future share price will be the trajectory of its top-line growth. This is something I struggle with given CCA’s low price positioning and threat of private label substitution in an increasingly competitive retail environment. I wrote out my thoughts in some detail – you may disagree… If you disagree, the valuation definitely seems undemanding and could be a set up for good returns in the future. I have some trouble trusting management given the obsession with share price and why it is not higher (makes me wonder what they would say / selectively disclose in order to try and increase the share price).


The Chairman and CEO of CCA Industries (CCA) is Lance Funston. Funston was named Chairman in Aug 2015 and became CEO in Jan 2016. Funston has a control ownership position in CCA which stems back to a transaction in Sept 2014 in which he: 1) acquired 100% of the Class A common shares, 2) a warrant to purchase 1.9M shares of common stock (exercise price $3.17), 3) Lent CCA a $1M term loan (LIBOR +6%), and 4) provided CCA with a $5M line of credit (LIBOR +6%). In March 2018, Funston exercised 450,000 of his warrants providing the company with $1.4M in cash which is intended to help launch new products. (Note: Class A and common shares are equal in nature other than the stipulation that Class A common shares separately elect 4 directors and common shares separately elect 3 directors).

Sardar Biglari (Lion Fund and Biglari Holdings) owns 776,259 shares of CCA common stock. Shortly after the 2014 transaction, Funston entered into an agreement with Biglari giving Biglari the right to sell him his shares at $6.00. Funston did this in an attempt to lock-up the largest shareholder and prevent further selling pressure on the stock. The right becomes exercisable on Jan 1, 2019 and is very likely to be exercised given CCA’s current share price of ~$3.00 (ie. Funston is on the hook to buy shares at $6.00 even though the current share price is only $3.00).

Funston is currently 75 years old and as he says himself, “it’s not my first rodeo.” Some of his past successes include Larami Toys which developed the Super Soaker, and TelAmerica which was sold to Cross MediaWorks (85% in 2008) and Lee Group (15% in 2013). Funston also founded Ultimark in 2000 which sold the Prell, Denorex and Zincon brands to Scott’s Liquid Gold in 2016 for $9.0 million. Ultimark continues to own the Porcelana brand which is currently being licensed to CCA (CCA pays Ultimark a 10% royalty on gross sales).

One unsettling claim from Funston is that he sold the Prell, Denorex, and Zincon brands for 3x sales to Scott’s Liquid Gold. Based on SLGD disclosure, the brands were actually sold for only 1.4x sales ($9 million purchase price on $6.5 million of sales).

The dealing/licensing between Ultimark and CCA also raises an eyebrow as Funston is Chairman of Ultimark and control owner of CCA. This is compounded by more self-dealing as Funston also earns fees for CCA Industries advertising (through Funston Media Management) and owns a building that CCA rents.

The other named officers are Douglas Haas who is COO and Stephen Heit who is CFO. Heit has been at the company since 2005 and provides Funston with some “institutional knowledge” that he may otherwise be lacking. Funston brought Haas into CCA in 2015. Haas previously worked with Funston at Ultimark since 2015.

What concerns me the most is Funston’s obsession with the share price on the conference calls. When management is too concerned with the short-term share price, they may take actions that hurt the sustainability of the business over the long-term. They also become difficult to trust and take their word at face value; as demonstrated by Funston’s claim that he sold the brands to SLGD at a higher multiple than he did.

Balance Sheet

As at 28 Feb 2018, CCA Industries had $1.5M of debt outstanding and a cash balance of $1.1 million. Net debt of $0.4 million. This is down from net debt of $1.9 million at year end 2017 and $3.0 million at year end 2016. Note that CCA Industries saw a $1.4 million cash inflow from Funston exercising warrants in Q1/18 which accounts for the majority of the change in net debt between y/e 2017 and Q1/18.

In the years 2013 and prior, CCA industries typically operated with a large net cash balance. This changed in 2014 largely from fallout related to returns in two of their product lines: 1) Gel Perfect nail care products, and 2) Mega-T diet supplements.

It is important to note the trend in CCA’s debt agreements. Over time, terms have become less punitive. Most recently, CCA went from paying LIBOR +6% on an agreement with CNH Finance to paying LIBOR + 2.75% with PNC bank. In other words, debtors have re-rated the credit risk associated with CCA industries. This is in large part due to CCA’s increased profitability and associated cash flow in 2016 and 2017.


While I wholly disagree with blindly extrapolating growth rates forward to forecast target share prices, it is still very useful to know the historical performance of a company. CCA’s Net Sales and EBIT are displayed in the chart below. Two things to note:

  1. The displayed results do not include the Gel Perfect nail care brand or the Mega-T dietary brand; both of which were discontinued in 2014.
  2. While net sales have been in decline, CCA has done an impressive job at increasing profitability. This has been done by outsourcing all manufacturing and order processing. Payroll at CCA has gone from $11 million at its peak to $2 million currently. CCA has also trimmed the number of SKUs it carries to focus on its most profitable lines.

The key question in my mind is whether or not CCA can return its top-line to growth. This is obviously not a unique insight given that nearly all “turnaround” situations face this dilemma. But nevertheless, it is still very important to analyze…

One important note in making this assessment is that CCA does have major customers with Walmart at 36% of sales, Walgreen at 13% of sales, and Target at 7% of sales. It’s also important to note that sales have been on a decreasing trend at each of these major customers. The implication being that CCA is losing shelf space.

In my view, the positioning of CCA’s brands as low cost leaders within their categories is troublesome. Brands at the low end of the price spectrum are most susceptible to private label competition. I would note for example that CVS Pharmacy has a “store brand” for teeth whitening that looks to have a similar function to CCA’s Plus+ White brand. Private label is playing an increasing role in US retail due to the entrance of Aldi and Lidl.

In order to reverse the trend and sell more to its large customers, CCA needs to innovate and introduce new products. There are some promising developments on this front: 1) CCA’s Bikini Zone brand has four new products (exfoliating gel, ingrown hair syrum, medicated pad, depilatory), 2) CCA plans to extend its Bikini Zone product to males with a trademark known as “Manscape Grooming”, 3) Porcelana brand is introducing a new hand cream, and 4) Plus+ White has a new product specifically targeting sensitive teeth.

If CCA is not able to convince retailers to carry its new products, the company does have potential to sell direct to consumer through e-commerce. On a related note, CCA has committed to increasing digital advertising to 50% of its media spend in 2018.

I estimate CCA’s largest brands are: 1) Plus+ White at $7.5 million of sales, 2) Bikini Zone at $3-5 million of sales, 3) Sudden Change at $3-5 million of sales, and 4) Porcelana at $2 million of sales. Add it all up, and these brands represent nearly 90% of CCA’s sales. Further, CCA has noted Plus+ White and Bikini Zone are “Millennial” brands where things like social media presence matter.

We can take a look Plus+ White and Bikini Zone’s online presence to gauge their likelihood for e-commerce success.

Amazon Star Rating

Like it or not, the star rating generated by consumer reviews on Amazon matters.  Depending on the exact product, both Plus+ White and Bikini Zone have reviews that range between 3.5 and 4.0 stars on Amazon. I would classify this as “okay”. Generally, you need at least a 4-star product to show up on the first page of Amazon search results.

Instagram Followers

Both Plus+ White and Bikini Zone have about 20,000 Instagram followers. This is good when compared to a brand like Crest which also happens to have about 20,000 followers, but small relative to brands that have been built on social media like Quest Nutrition (813K followers), The Honest Company (812K followers) and StichFix (654K followers). The engagement of both brands seems relatively limited. Plus+ White averages 50 to 100 likes per post, while Bikini Zone can get up to 200 likes (which still seems low given over ½ of its posts are attractive females in bikinis).

YouTube Influencers

Plus+ White has better traction than Bikini Zone on YouTube.

There are three Plus+ White “influencers” I found on YouTube promoting Plus+ White. The videos have 5.2 million views (https://www.youtube.com/watch?v=u_M5MaxLL5U), 709 thousand (https://www.youtube.com/watch?v=2pFAr6hgIEM&t=2s), and 252 thousand views respectively (https://www.youtube.com/watch?v=jtlI4nUuPf8).

I found one Bikini Zone “influencer” whose video has 1.5 million views. (https://www.youtube.com/watch?v=glRP_kq3CDg).


While promising, CCA’s online presence still appears to be in its early stages. It will be interesting to see how numbers increase in 2018 as CCA puts more dollars behind digital ad spending. It is worth pointing out that Funston’s expertise is in aggregating local cable operator TV spots in order to reach a national audience. I am not entirely sure that this will translate into the digital world (while also noting that CCA continues to use Funston Media Management – owned by Lance Funston – as its advertising agency).

A couple of final points on growth which I have yet to mention:

  • CCA recently announced a change to its third party sales and distribution organization. CCA is switching from Emerson to Advantage because Advantage has a larger presence in grocery and internet channels. The grocery channel represented $3-4 million in sales for CCA at one point; most of which has been lost.
  • CCA is hopeful it can reinvigorate the nail care category which used to sell $4-6 million annually. CCA recently signed a new trademark agreement for the Nutra Nail brand with a 10% royalty and an option to buy. CCA plans to go back to market with Nutra Nail’s six core products which includes things like nail strengthener and cuticle remover.


According to Funston, the going price for CPG companies in M&A transactions is 3x net sales. Using his metric, CCA is undervalued at around 1x net sales. No need to do any further work right? If only it were that easy… I would view Scott’s Liquid Gold (OTCMKTS:SLGD) as one of CCA’s closest comparables. In 2017, SLGD earned revenue of $42M and EBIT of $7.6M. At a share price of $3.35, SLGD currently has a market capitalization of $40.3M and an enterprise value of $37.3M, or a P/S ratio of 0.95x and a EV/EBIT ratio of 4.9x. Based on 2017 sales of $19.8M, EBIT of $3.5M, CCA currently trades at a P/S ratio of 1.2x and EV/EBIT of 6.9x.

One possibility is that both SLGD and CCA are undervalued because of their size. For example, Church and Dwight currently trades at 3.5x P/S and 18.2 EV/EBIT.

Another important note is that while SLGD has grown, CCA has shrunk. SLGD increased revenues from $16M in 2012 to $42M in 2017. Over the same period, CCA Industries revenue went from $53M to $20M (or from $33M to $20M if you exclude CCA’s discontinued Gel Perfect and dietary supplement products). It is possible that the difference in valuation is implying that CCA is expected to outgrow SLGD in the future. This seems reasonable given a significant portion of SLGD’s growth has come from their agreement to distribute Batiste Dry Shampoo. This could provide a headwind in the future as the ownership of Batiste changed in 2011 to Church and Dwight (from Vivalis who is based in the UK). It made more sense for SLGD to distribute the brand when it was owned by a UK-based company. Now that it is owned by a US company (Church and Dwight), the terms have already become more difficult. SLGD has been restricted to only selling in the specialty retail channel, and has also had the definition of what constitutes the specialty retail channel changed (ie. TJ Maxx was excluded from being considered “specialty” in 2017).

Another source of value for CCA relative to SLGD is tax loss carry forward. The carry forward should allow CCA to avoid paying cash taxes over the next 3-4 years (assuming profitability stays roughly the same). As of yearend 2017, SLGD did not have any tax loss carry forwards.

One last point to mention is that there could be some significant dilution if the CCA share price appreciates. There are 871,500 options outstanding with a strike price of $3.27 and 1,442,794 warrants with an exercise price of $3.17. This is significant relative to CCA’s total shares A (common + Class A) of 7.9 million.

The Company’s website: www.shopcca.com/

Author Ownership: NO NYSE: CAW

Read Disclaimer:

This article is for informational purposes only. This article is based on the author’s independent analysis and judgment and does not guarantee the information’s accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

Qualitysmallcaps.com is not engaged in an investor relations agreement with CCA Industries, Inc. nor has it received any compensation from CCA Industries, Inc.  for the preparation or distribution of this article.

The author may trade shares of CCA Industries, Inc. through open market transactions and for investment purposes only.