ITEM 1A. RISK FACTORS 10
ITEM 1B. UNRESOLVED STAFF COMMENTS 17
ITEM 2. PROPERTIES 17
ITEM 3. LEGAL PROCEEDINGS 18
ITEM 4. MINE SAFETY DISCLOSURES 18
PART II
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
ITEM 9A. CONTROLS AND PROCEDURES 64
ITEM 9B. OTHER INFORMATION 64
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 64
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 65
ITEM 11. EXECUTIVE COMPENSATION 65
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 65
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 66
SIGNATURES 68
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 estimates that
is supports more than approximately 17,500 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
(“IMI”), Where Food Comes From Organic (“WFCFO” - previously International Certification Services and A Bee Organic),
Validus Verification Services (“Validus”), and Sterling Solutions. 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
SureHarvest Services LLC (“SureHarvest”) and Postelsia Holdings, Ltd. (“Postelsia”), we primarily provide a wide
range of professional services and technology solutions that generate incremental revenue specific to the food and agricultural industry
and drive sustainable value creation.
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 NASDAQ Capital Market (“NASDAQ”), under the stock ticker symbol, “WFCF.”
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 a wide range of professional consulting services and technology solutions that generate incremental revenue specific
to the food and agricultural industry and drive sustainable value creation.
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 social responsibility and sustainability, food safety, 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 $21.9 million in 2021, a 15-year compounded annual growth rate (“CAGR”) of approximately 22%.
Our
growth strategy is as follows:
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 social
responsibility, sustainability and food safety 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, restaurants, and retailers
Market
Driver #3 - Government regulation
REVENUES
We
offer a wide array of services, including verification, certification, consulting and software as a service (“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 2021
or 2020.
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, WFCFO 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 and related consulting reportable segment. SureHarvest, which includes Postelsia, is the
sole operating unit under the software and related consulting reportable segment. This segment includes a wide range of professional
consulting services and technology solutions that generate incremental revenue specific to the food and agricultural industry and drive
sustainable value creation.
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, 2021 and 2020, our third-party verification programs provided 73.2% and 71.0% 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 17.5% and 19.2% of our total revenue was generated by the sale of product during the years ended December 31,
2021 and 2020, respectively.
We
purchase most of our electronic identification (“EID”) tags from one significant supplier and source the remainder of our
EID tags from alternate smaller suppliers. We have been informed by our key tag supplier that materials are becoming scarcer and their
ability to meet our need is becoming more difficult. In anticipation of this risk, we have worked with all our tag suppliers to build
our inventory by purchasing excess supply. Should material shortages continue to impact our tag suppliers, we may be unable to meet the
needs of our customers which could have an impact on our costs and margins. Due to the overall uncertainty in our EID tag supply, we
are uncertain of the material impact that it may have on our business.
Software
and Related Consulting Segment
Software
and related consulting includes a wide range of professional consulting services and technology solutions that support our verification
business and generate incremental revenue specific to the food and agricultural industry.
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, 2021, 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, 2021, we had 87 total employees, of which 80 were full-time employees. Approximately 78% of our workforce is comprised
of minority and female 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.
INFORMATION
ABOUT OUR EXECUTIVE OFFICERS
John
Saunders, 50, 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, 51, 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, 52, 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 30 years of professional experience. She received a B.B.A. degree in Accounting
from the University of Texas at Arlington.
Jason
Franco, 45, has been the Chief Technology Officer of the Company since August 2021. Previously,
Mr. Franco served as Senior Vice President of Technology since September 2018 when WFCF acquired JVF Consulting, LLC, the consulting
firm Mr. Franco founded in 2004 serving as President. From 2000 to 2004, Mr. Franco worked as a technical application consultant and
integration specialist with Peoplesoft / Oracle. He began his career in 1998 as a software developer with John Deere Special Technologies
Group, where he specialized in traceability applications. He received his B.S. degree in Computer Science from the University of the
Pacific in Stockton, CA.
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 global outbreak of COVID-19 and the resulting government-mandated closures and social distancing
measures have disrupted economic markets, triggering a global recession. Continued closures and social distancing measures have had a
detrimental effect in which the prolonged economic impact is uncertain. While our business has not been significantly impacted by the
COVID-19 pandemic, continued uncertainty has resulted in a variety of risks to our business including the inability to perform audits
at our customers locations due to social distancing and tag supplier disruptions as a result of material shortages. We also continue
to see food systems that are in disarray resulting in global food shortages and euthanasia of animals and dumping of dairy products because
farmers have no distribution channel. All of these risks could negatively influence our revenue and costs. Additionally, the government
may introduce healthcare reform measures, including vaccination mandates, for which we cannot predict the financial implication of on
our personnel and 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 by allowing
a majority of our employees to work remotely. 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 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. However, should social distancing measures continue extensively, we are uncertain of the material impact that it will have upon
our business and financial results.
We
purchase most of our EID tags from one significant supplier and source the remainder of our EID tags from alternate smaller suppliers.
We have been informed by our key tag supplier that materials are becoming scarcer and their ability to meet our need is becoming difficult.
In anticipation of this risk, we have worked with all our tag suppliers to build our inventory by purchasing excess supply. Should material
shortages continue to impact our tag suppliers, we may be unable to meet the needs of our customers which could materially impact our
revenues. Additionally, as demand increases and supply decreases, shortages could have an impact our costs and margins. Due to the overall
uncertainty in our EID tag supply, we are uncertain of the material impact that it may have on our business.
We
will continue to monitor the COVID-19 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 extent and
effectiveness of containment actions and the impact of these and other factors on our employees, customers and suppliers, the full impact
of the COVID-19 pandemic on our business revenues, profitability and financial condition 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, for herd management, for crop
production practices and other verification of marketing claims over processed foods. 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, and bundle with other marketing claims such as non-genetically modified foods and beverages. 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. Due to
the diversification of our product offerings and our strategy of managing to profitability, we believe we are able to quickly minimize
the impact of any adverse changes in regulations or verification standards. While we attempt to mitigate these risks by creating innovative
programs that mitigate the risk of rapidly changing regulations and verification standards, 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. As discussed above, COVID-19 impacted our business resulting in some customers requesting postponement of onsite
visits. 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;
● differing 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 (“IP”) from unauthorized use by third parties only to the extent that it
is covered by valid and enforceable patents and trademarks. IP protection generally involves complex legal and factual issues and, therefore,
the enforceability of IP 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 IP owned by us does 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 IP 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 25, 2022, John Saunders, our Chairman and CEO, and Leann Saunders, our President, beneficially owned in the aggregate
approximately 29% of our common stock. The Saunders, together with the rest of our Board, beneficially own approximately 55%
of our common stock. These directors and 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.
We
have not paid any regular cash dividends.
We
have not declared or paid any regular cash dividends on our common stock since our incorporation. A special cash dividend was paid on
August 16, 2021 to shareholders of record at the close of business on July 27, 2021. 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 regular 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.
Our
common stock has traded in low volumes. We cannot predict whether an active trading market for our common stock will ever develop.
Historically,
our common stock has experienced a lack of trading liquidity. In the absence of an active trading market:
Price
and volume 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 NASDAQ Stock Market LLC. 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.
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 NASDAQ 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
$42,600 per month as of December 31, 2021, 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 renewal 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.
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 $6,600 per month as of December 31, 2021,
which includes common area charges, and are subject to annual increases over the term of the lease.
In
June 2021, the Company entered into a new lease agreement in Victoria, British Columbia, Canada for Postelsia office space. The lease
is for a period of two years and expires on May 31, 2023. Rental payments are approximately Canadian $1,700 or US$1,340 per month as
of December 31, 2021, which includes common area charges, and are not subject to annual increases over the term of the lease.
In
December 2021, the Company sold the 2,300-square foot building located in Medina, North Dakota. In December 2021, the Company entered
into a lease agreement for the Medina, North Dakota office space. The lease is for sixty-one months and expires on December 31, 2026.
Rental payments are approximately $1,000 per month, which includes common area charges, and are not 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.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information for Common Stock
The
Company’s common stock is traded on the NASDAQ Stock Market LLC under the symbol “WFCF.”
Stockholders
As
of February 25, 2022, we estimate that there were 121 record holders of our common stock. A