ITEM 1A. RISK FACTORS 10
ITEM 1B. UNRESOLVED STAFF COMMENTS 17
ITEM 2. PROPERTIES 17
ITEM 3. LEGAL PROCEEDINGS 17
ITEM 4. MINE SAFETY DISCLOSURES 17
PART II
ITEM 6. SELECTED FINANCIAL DATA 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
ITEM 9A. CONTROLS AND PROCEDURES 65
ITEM 9B. OTHER INFORMATION 65
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 66
ITEM 11. EXECUTIVE COMPENSATION 66
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 66
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 67
SIGNATURES 69
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 15,000 farmers, ranchers, vineyards, wineries, processors, retailers, distributors, trade associations,
consumer brands and restaurants with a wide variety of value-added services provided through its family of verifiers, including
IMI Global, International Certification Services, Validus Verification Services, Sterling Solutions, and A Bee Organic. 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.
Through
our more recent acquisitions, including SureHarvest Services LLC; Sow Organic, LLC; and Postelsia Holdings, Ltd. (“Postelsia”),
we provide sustainability programs, compliance management and farming information management solutions to drive sustainable value
creation. We employ 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.
Finally,
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 2006. The Company’s shares
of common stock trade on the OTCQB under the stock ticker symbol, “WFCF.” In late 2020, the Company formally submitted
its application for listing on the NASDAQ Capital Market (“NASDAQ”), which is still under review by NASDAQ.
The
Company’s original name – Integrated Management Information, Inc. (d.b.a. IMI Global) – 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 that 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
over 50 programs and organizations. 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 traceability and verification providers.
We
use rigorous verification processes on food production processes to ensure that claims made by food producers and processors are
accurate. We care about food and other agricultural products, how it is grown and raised, the quality of what we eat, what farmers
and ranchers do, and authentically telling that story to the consumer. Our team visits farms and ranches and looks at their plants,
animals, and records, and compares the information we collect to specific standards or claims that farms and ranches want to make
about how they are producing food. Our customers include top-tier players in the food and wine space.
The
Company also provides sustainability programs, compliance management and farming information management solutions to drive sustainable
value creation. We employ 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 consulting 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.
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: Regulations including the U.S. Department of Agriculture’s Animal Disease Traceability program, international
export requirements, non-GMO and 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 $20.0 million in 2020, a 14-year compounded annual growth rate (“CAGR”) of approximately 23%,
slightly down from our prior year’s CAGR of 25%, due to the Coronavirus Pandemic as further discussed in Part I, Item 1A,
“Risk Factors” below.
Our
growth strategy is as follows:
Acquisition
of SureHarvest Services, LLC
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 (the “Seller”).
We
purchased the business assets of the Seller in exchange for total consideration of approximately $2.7 million, comprised
of approximately $1.1 million in cash and 212,713 shares of common stock of WFCF valued at approximately $1.5 million on
December 28, 2016 (all share and dollar amounts have been adjusted to reflect the 1-for-4 reverse split that occurred in December
2020). Additionally, we issued the Seller a 40% membership interest in SureHarvest.
On
December 17, 2019 the Company exercised its option to acquire the remaining 40% membership interest in SureHarvest for $1.0 million
in cash and 75,988 shares of common stock of WFCF valued at approximately $0.5
million based on the closing price of our stock on December 17, 2019 of $7.20 per share (all share and dollar amounts have been
adjusted to reflect the 1-for-4 reverse split that occurred in December 2020).
SureHarvest
provides services related to sustainability measurement and benchmarking, traceability, verification and certification to the
food and agriculture industries. Its patented sustainability software solutions support more than 6,000 agri-food operations,
including growers, packers, shippers, processors, wineries and trade associations. We believe that SureHarvest provides us with
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 SaaS model bundles annual software subscriptions with professional services to provide predictable,
recurring revenue.
Acquisition
of Postelsia Holdings, Ltd.
On
February 21, 2020 we acquired all of the stock of privately held Postelsia Holdings, Ltd. (“Postelsia”) for $0.3 million
in cash. We believe the transaction expands our services into a new market food group, seafood. Postelsia, based in Victoria,
British Columbia, is a leader in the emerging field of environmental and social sustainability programs for the seafood industry.
Postelsia provides a range of programs and consulting services designed to improve and promote sustainable practices, including
environmental conservation, worker care, and food safety compliance.
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 practices. We continue to see a growing interest from consumers regarding how their food is produced. We are 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 in 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 practices
around sustainability. As the agriculture, livestock and food industries continue to mature and expand internationally, there
is an increasing need to record, manage, report and verify information regarding the source, age, genetic background, animal husbandry,
environmental stewardship, practices surrounding the people and community, 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
Market
Driver #2 - Global competitiveness and risk mitigation among producers and retailers
Market
Driver #3 - Government regulation
REVENUES
We
offer a wide array of services, including verification, certification, consulting and SaaS, to help food producers, brands and
consumers differentiate certain attributes and production methods in the marketplace. We sell our services directly to customers
at various levels in the agriculture, food and livestock supply chain. 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. 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 the Company’s consolidated revenue
in 2020 or 2019.
With
each acquisition, we assess the need to disclose discrete information related to our operating segments. Because of the similarities
of certain of our acquisitions that provide certification and verification services, we aggregate operations into one verification
and certification reportable segment. The operating segments included in the aggregated verification and certification segment
include IMI Global, ICS and Validus. The factors considered in determining this aggregated reporting segment include the economic
similarity of the businesses, the nature of services provided, production processes, types of customers and distribution methods.
The
Company also determined that it has a software sales and related consulting reportable segment. SureHarvest, which includes Postelsia,
is the sole operating segment under the software sales and related consulting reportable segment. This segment includes software
license, maintenance, support and software-related consulting service revenues.
The
Company’s chief operating decision maker (the Company’s CEO) allocates resources and assesses the performance of its
operating segments. Segment management makes decisions, measures performance, and manages the business utilizing internal operating
segment information. Performance of operating segments are based on net sales, gross profit, selling, general and administrative
expenses and most importantly, operating income.
Verification
and Certification Segment
Our
verification and certification service revenues consist of fees charged for verification audits and other verification and certification
related services that the Company performs for customers. We include fees earned from our WFCF labeling program and consulting/program
development services in our verification and certification revenues due to the immateriality of the revenue stream and because
it represents a value-added extension of our source verification. 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. For the years ended December 31, 2020 and 2019, our third-party verification programs provided 71.0% and 74.9%
of our total revenue, respectively.
Our
product sales are an ancillary part of our verification and certification services and represent sales of cattle identification
ear tags. While our product sales have lower profit margins than do our proprietary offerings, the products allow us to offer
our customers a comprehensive solution. Approximately 19.2% and 15.9% of our total revenue was generated by the sale of product
during the years ended December 31, 2020 and 2019, respectively.
Software
Sales and Related Consulting Segment
Software
license, maintenance and support services represents a SaaS revenue model that bundles annual software licenses with ongoing software
customizations, enhancements and upgrades and a wide range of professional services that generate incremental revenue specific
to the food and agricultural industry.
Software-related
consulting service revenue represents fees earned from professional appearances, industry data analysis, customer education and
training related services.
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.
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, licensors
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 industries.
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, 2020, we estimate that there are approximately eight 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 focus 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 verification and certification service revenue is typically
realized during late May through early October when the calf marketings and the growing seasons 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, 2020, we had 68 total employees, of which 60 were full-time 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 (the “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.
EXECUTIVE
OFFICERS OF THE REGISTRANT
John
Saunders, 49, 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, 50, began working for the Company in 2003 and 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 currently sits on the Colorado State University Agriculture
Dean’s Advisory Board, the University of Nebraska’s Engler Agribusiness Entrepreneurship Program Advisory Board, the
Board of Directors for the International Stockmen’s Education Foundation and was the Chair for the United States Meat Export
Federation for the 2015-2016 year.
Dannette
Henning, 51, 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 beginning in November 2007. From 2004 to 2007, Mrs. Henning
was the Corporate 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:
Coronavirus
Pandemic (COVID-19)
In
March 2020, the World Health Organization declared the outbreak of novel coronavirus disease (“COVID-19”) as a pandemic.
The recent global outbreak of COVID-19 and the resulting government-mandated closures and
social distancing measures have disrupted economic markets, potentially triggering a global recession. Continued closures and
social distancing measures could have a detrimental effect in which the prolonged economic impact is uncertain. This could result
in a variety of risks to our business including the inability to perform audits at our customers locations due to social distancing,
supplier disruptions as a result of business closures, food systems that are in disarray resulting in global food shortages, euthanasia
of animals and dumping of dairy products because farmers have no distribution channel, all of which could negatively influence
our revenue and costs. The government may introduce healthcare reform measures for which we cannot predict the financial implication
of on our business. A weak or declining economy could cause our customers to delay purchases or payments for our services and
products. Additionally, COVID-19 may introduce additional challenges including our ability to produce sufficient cash flows from
operations or to raise capital when needed at acceptable terms, if at all.
All
of our locations have been affected. We have adjusted certain aspects of our operations to protect our employees while avoiding
business interruption. As an essential business to the food and agriculture industries, we have maintained standard business operations
while under stay at home (and similar) guidelines from various states, by allowing a majority of employees work remotely until
government mandates allow for normal business operations. Employees essential to operations, management and the accounting function
remain on-site at our corporate headquarters. Internal controls over financial reporting have not been impacted by employees working
remotely. Management is continuously monitoring to ensure controls are effective and properly maintained.
The
Company generally performs onsite audits in connection with its verification and certification activity. Due to safety and social
distancing reasons, some customers have requested postponement of onsite visits. At this time, we are uncertain of the material
impact that continued social distancing measures will have upon our business. We continue to work with standard setting bodies
and identify innovative solutions to offer our customers. We believe that our transformative approach will help further differentiate
us from competitors. Additionally, we believe third party verification is an essential component to the food and agricultural
supply chain and ensures our future as a high quality provider of assurance services, thereby increasing the value of products
in the food supply chain.
We
will continue to monitor the situation closely and react accordingly to any future restrictions or limitations, while keeping
the interest of our customers and business in mind. Due to the uncertainty in the severity and duration of the pandemic, the impact
on our revenues, profitability and statement of financial position is uncertain at this time.
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.
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 industries 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 industries 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 U.S. 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,
impacted poultry operations in 2016. The Coronavirus is causing financial panic in China and has caused GDP growth to hit a wall
and imports of food related products to be halted. 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.
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 do 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;
● 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;
● 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:
● problems retaining key personnel;
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.
Federal,
state or local laws and regulations, or our failure to comply with such laws and regulations, could increase our expenses and
expose us to legal risks.
We
are subject to a wide range of general and industry-specific laws and regulations imposed by federal, state and local authorities
such as sales tax, intellectual property infringement, zoning and occupancy matters. In addition, various federal and state laws
govern our relationship with, and other matters pertaining to, our employees, including wage and hour laws, laws governing independent
contractor classifications, requirements to provide meal and rest periods or other benefits, family leave mandates, requirements
regarding working conditions and accommodations to certain employees, citizenship or work authorization and related requirements,
insurance and workers’ compensation rules and anti-discrimination laws. We believe that we have complied with these laws
and regulations; however, there is a risk that we will become subject to claims that allege we have failed to do so. Any claim
that alleges a failure by us to comply with any of the foregoing laws and regulations may subject us to fines, penalties, injunctions,
litigation and/or potential criminal violations, which could adversely affect our reputation, business, financial condition and
operating results.
Any
changes to the foregoing laws or regulations or any new laws or regulations that are passed or go into effect may make it more
difficult for us to operate our business and in turn adversely affect our operating results.
We
may also be subject to audits by various taxing authorities. Similarly, changes in tax laws in any of the multiple jurisdictions
in which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate,
could result in an unfavorable change in our effective tax rate, which could adversely affect our business, financial condition
and operating 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 by 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 do 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 assertions 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.
A
significant data breach or information technology system disruption could adversely affect our business, financial results, or
reputation, and we may be required to increase our spending on data and system security.
We
rely heavily on information technology networks and systems, including the Internet, to manage or support a wide variety of important
business processes and activities throughout our operations.
Our
information technology systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading
or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, cyber-attacks, ransomware
attacks, malware attacks, malicious employees or other insiders, telecommunications failures, human errors or catastrophic events.
Hackers, foreign governments, cyber-terrorists and cyber-criminals, acting individually or in coordinated groups, may launch distributed
denial of service attacks or other coordinated attacks that may cause service outages, gain inappropriate or block legitimate
access to systems or information, or result in other interruptions in our business. In addition, breaches in security could expose
us and our customers, or the individuals affected, to a risk of loss or misuse of proprietary information and sensitive or confidential
data, including personal information of customers, employees and others. The techniques used to obtain unauthorized access, disable
or degrade service or sabotage systems change frequently, may be difficult to detect for a long time and often are not recognized
until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventive
measures.
We
also depend on and interact with the information technology networks and systems of third parties for many aspects of our business
operations, including our customers and service providers such as cloud service providers and third-party delivery services. These
third parties may have access to information we maintain about our company, operations, customers, employees and vendors, or operating
systems that are critical to or can significantly impact our business operations. Like us, these third parties are subject to
risks imposed by data breaches and cyber-attacks and other events or actions that could damage, disrupt or close down their networks
or systems. Security processes, protocols and standards that we have implemented and contractual provisions requiring security
measures that we may have sought to impose on such third parties may not be sufficient or effective at preventing such events,
which could result in unauthorized access to, or disruptions or denials of access to, or misuse of, information or systems that
are important to our business, including proprietary information, sensitive or confidential data, and other information about
our operations, customers, employees and suppliers, including personal information.
Any
of these events that impact our information technology networks or systems, or those of acquired businesses, customers, service
providers or other third parties, could result in disruptions in our operations, the loss of existing or potential customers,
damage to our brand and reputation, regulatory scrutiny, and litigation and potential liability for the Company. Among other consequences,
our customers’ confidence in our ability to protect data and systems and to provide services consistent with their expectations
could be impacted, further disrupting our operations. Similarly, an actual or alleged failure to comply with applicable U.S. or
foreign data protection regulations or other data protection standards may expose us to litigation, fines, sanctions or other
penalties.
We
have invested and continue to invest in technology security initiatives, information technology risk management and disaster recovery
plans. The cost and operational consequences of implementing, maintaining and enhancing further data or system protection measures
could increase significantly to overcome increasingly intense, complex and sophisticated global cyber threats. Despite our best
efforts, we are not fully insulated from data breaches and system disruptions. There is no assurance that such impacts will not
be material in the future, and our efforts to deter, identify, mitigate and/or eliminate future breaches may require significant
additional effort and expense and may not be successful.
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 5, 2021, John Saunders, our Chairman and CEO, and Leann Saunders, our President, beneficially owned in the aggregate
approximately 28% 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 shareholders, 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 shareholders. This
could prevent transactions in which shareholders 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
have not paid any cash dividends.
We
have not declared or paid any cash dividends on our common stock since our incorporation 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.
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.
We
have historically used 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 prices
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.
As
a public company, we are subject to complex legal and accounting requirements that require us to incur substantial expenses, and
our financial controls and procedures may not be sufficient to ensure timely and reliable reporting of financial information,
which, as a public company, could materially harm our stock price and listing on the OTCQB marketplace.
As
a public company, we are subject to numerous legal and accounting requirements that do not apply to private companies. The cost
of compliance with many of these requirements is substantial, not only in absolute terms but, more importantly, in relation to
the overall scope of the operations of a small company. Failure to comply with these requirements can have numerous adverse consequences,
including, but not limited to, our inability to file required periodic reports on a timely basis, loss of market confidence, delisting
of our securities and/or governmental or private actions against us. We cannot assure you that we will be able to comply with
all of these requirements or that the cost of such compliance will not prove to be a substantial competitive disadvantage as compared
with privately held and larger public competitors.
The
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) requires, among other things, that we maintain effective internal controls
over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation
and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal
control over financial reporting, as required by Section 404 of Sarbanes-Oxley (“Section 404”). Our compliance with
Section 404 of Sarbanes-Oxley requires that we incur substantial accounting expenses and expend significant management efforts.
The effectiveness of our controls and procedures may in the future be limited by a variety of factors, including:
● faulty human judgment and simple errors, omissions or mistakes;
● fraudulent action of an individual or collusion of two or more people;
● inappropriate management override of procedures; and
If
we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public
accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses,
we may be subject to delisting, investigations by the SEC and civil or criminal sanctions.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The
Company leases approximately 15,700 square feet of office space for its corporate headquarters. Total rental payments are approximately
$40,900 per month as of December 31, 2020, which includes common area charges, and are subject to annual increases over the term
of the lease. The lease agreement has an initial term of five years plus two renewal periods. The Company has exercised the first
renewal period and is likely to renew for the second period. This space is being leased from a company in which our CEO and President,
each a related party to the Company, have a 24.3% jointly held ownership interest.
In
September 2017, the Company entered into a lease agreement for our Urbandale, Iowa office space. The lease is for a period of
two years and expired on August 31, 2019. This lease was extended for an additional 3 years, terminating on August 31, 2022. Rental
payments are approximately $3,400 per month, which includes common area charges, and are not subject to annual increases over
the term of the lease.
The
Company owns approximately 3⁄4 acre on which a 2,300-square foot building is located, in Medina, North Dakota.
In
December 2018, the Company entered into a new lease agreement in San Ramon, California for SureHarvest office space. The lease
is for a period of sixty-six months and expires on May 1, 2024. Rental payments are approximately $6,300 per month as of December
31, 2020, which includes common area charges, and are subject to annual increases over the term of the lease.
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 material pending proceedings against the Company.