ITEM 1A.RISK FACTORS
In
addition to the other information included in this report and our other public filings and releases, the following factors should be
considered when evaluating our business, financial condition, results of operations and prospects:
We
are in a period of increasing inflation and economic uncertainty
The
economy is facing inflationary pressures which has resulted in a few challenges for our business, most notably in the form of a tight
labor market where job candidates have considerable bargaining power which has driven wages up. Additionally, we are experiencing higher
labor and benefit related costs to retain our existing personnel. We believe we will continue to see significant pressure in our labor
and benefit related costs which impacts both our gross margins and net income.
We
also continue to monitor for weakened demand in our software and related consulting business segment due to significant customer concentration.
Increased inflation could place pressure on our customers’ timing of approval for consulting projects to move forward. Currently,
it is difficult to estimate the financial impact to our software and related consulting revenue, if any. We actively market our sustainability
solutions and services to new types of customers. We believe the growing awareness of environmental, social and governance (“ESG”)
matters creates a key opportunity for us because we have the expertise and technology needed to help companies achieve ESG objectives
within the food supply chain.
We
face risks due to changing weather patterns and other environmental factors
Over
the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency of natural
disasters, such as drought, hailstorms, wildfires and wind, snow and ice storms. Any such extreme weather condition can
negatively impact a significant portion of our customers who produce food (including all major species of animal-based protein or edible
plant variety) in various regions. For example, the drought conditions that impacted nearly one-half of the United States in the first
half of 2022 predominately affected our ranch customers resulting in fewer cattle subject to verification. While this example doesn’t
directly affect our audit related revenue, it does impact our product sales and other related supply chain fees due to smaller herd sizes.
We cannot anticipate changes in
weather patterns/conditions, and we cannot predict their impact on our customer’s operations if they were to occur.
If
the operating results of our customers are impaired, the financial resources of our customers 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
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. In March
2020, the World Health Organization declared the outbreak of novel coronavirus disease (“COVID-19”) as a pandemic which negatively
impacted certain aspects of our business due to government-mandated closures and social distancing
measures. Due to our commitment to innovation, diversification of our product offerings, and our strategy of managing profitability,
we believe we can quickly minimize the impact of any adverse changes in regulations or verification standards. While we attempt to mitigate
these risks, we can give no assurance that we will be successful in overcoming the potential negative impact to the results of our operations.
Increased
scrutiny and changing expectations from stakeholders with respect to the Company’s ESG practices may result in additional costs
or risks.
Companies
across many industries are facing increasing scrutiny related to their environmental, social and governance (ESG) practices. Investor
advocacy groups, certain institutional investors, investment funds and other influential investors are also increasingly focused on ESG
practices and in recent years have placed increasing importance on the non-financial impacts of their investments. We take social responsibility
very seriously. It’s the entire reason we spend day in and day out helping farmers, ranchers and brands around the world provide
transparency to their consumers by communicating authentic, sustainable and traceable stories that directly impact our future. However,
if our ESG practices do not meet investor or other industry stakeholder expectations, which continue to evolve, we may incur additional
costs. Also, our brand, ability to attract and retain qualified employees and business may be harmed.
We
face risks that highly contagious diseases or viral outbreaks may negatively impact the source of product we are able to verify and/or
impact the efficiency in which we conduct ongoing business operations.
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 and continues to impact poultry operations today in 2022/2023. In March 2020, the Global Health Organization declared
the outbreak of the Corona Virus as a pandemic in human populations. Contagious diseases or viral outbreaks create increased bio-exclusion
and social distancing considerations in our business.
These
diseases and viral outbreaks frequently impact our business resulting in some customers requesting postponement of onsite visits. We
work closely with our customers and standard setting bodies to identify innovative solutions and reschedule onsite visits as timely as
possible. We also closely monitor the situation and react accordingly to any future restrictions or limitations, while keeping the interests
of our customers, employees, and business operations in mind.
We
have created innovative solutions that mitigate the risk of transferring disease but due to uncertainty in the severity and duration
of various diseases and viral outbreaks, we can give no assurance that we will be successful in overcoming the impact to our business
operations, employees, customers, and suppliers which could negatively impact our business revenues, profitability and financial condition.
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 17, 2023, John Saunders, our Chairman and CEO, and Leann Saunders, our President, beneficially owned in the aggregate approximately
30.4% of our common stock. The Saunders, together with the rest of our Board, beneficially own approximately 57.7% 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 could adversely affect the trading prices of our common stock and 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 create internal controls and strategies to ensure
those controls are effective at producing accurate financial reports. Our compliance with 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 Sarbanes-Oxley 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
$43,800 per month as of December 31, 2022, 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 twice (2) for additional 3 year terms, with the current extension terminating
on August 31, 2025. Rental payments are approximately $3,500 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 $6,750 per month as of December 31, 2022,
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 $1,850 or US$1,400 per month as
of December 31, 2022, 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 16, 2023, we estimate that there were 87 record holders of our common stock. A significant
number of the outstanding shares of common stock which are beneficially owned by individuals and entities are registered in the name
of Cede & Co. A nominee of The Depository Trust Company, Cede & Co. is a securities depository for banks and brokerage firms.
Dividends
For
the year ended December 31, 2022, there have been no cash dividends declared or paid. For the year ended December 31, 2021, we declared
a special cash dividend of $0.15 per share for shareholders of record on July 27, 2021, with a payment date of August 16, 2021.
Recent
Sales of Unregistered Securities
There
have been no unregistered sales of securities for the years ended December 31, 2022 and 2021.
Issuer
Purchases of Equity Securities
On
September 30, 2019, our Board of Directors approved a plan to buy back up to 2.5 million additional shares of our common stock from the
open market (“Stock Buyback Plan”). Our Stock Buyback Plan has been and will be used to return capital to shareholders and
to minimize the dilutive impact of stock options and other share-based awards. In the future, we may consider additional share repurchases
under our plan based on several factors, including our cash position, share price, operational liquidity, and planned investment and
financing needs. Our Board of Directors did not specify an expiration date for repurchases under the Stock Buyback Plan.
Activity
for the quarter ended December 31, 2022 is as follows:
Number of Shares Cost of Shares (in thousands) Average Cost per Share
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary
Note Regarding Forward-Looking Statements
This
Annual Report on Form 10-K and other publicly available documents, including the documents incorporated herein and therein by reference,
contain “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation
Reform Act of 1995. Additionally, our officers and representatives may from time to time make forward-looking statements. Forward-looking
statements can be identified by words such as “anticipate,” “intend,” “plan,” “goal,”
“seek,” “believe,” “project,” “estimate,” “expect,” “strategy,”
“future,” “likely,” “may,” “should,” “will” and similar references to future
periods. Examples of forward-looking statements include, among others, statements we make regarding:
● plans regarding our Stock Buyback Plan;
● the amount of financing necessary to support operations; and
Forward-looking
statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations
and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy
and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks
and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial
condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these
forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those
indicated in the forward-looking statements include, among others, the following:
● changing technology and evolving standards in the livestock and food industry;
● competition from other providers serving the food and agriculture industry;
● economic and financial conditions in the livestock and food industry;
● market demand for beef and other livestock products;
● seasonal volatility in business activity;
● continued service of key senior management personnel;
● the impact of COVID-19 on our business, customers, suppliers and employees;
Any
forward-looking statement made by us in this Annual Report on Form 10-K is based only on information currently available to us and speaks
only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written
or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
RESULTS
OF OPERATIONS
Year
Ended December 31, 2022 Compared to Year Ended December 31, 2021
The
following table shows information for reportable operating business segments:
Assets:
Revenues:
Costs of revenues:
Other items to reconcile segment operating income/(loss) to net income/(loss):
Income tax benefit/(expense) - - (822 ) (822 ) - - (659 ) (659 )
Verification
and Certification Segment
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. Fees earned from our WFCF labeling program are also included in our verification and certification
revenues as it represents a value-added extension of our source verification. Verification and certification service revenue for the
year ended December 31, 2022 increased approximately $1.6 million, or 9.7% compared to 2021. Overall, the increase is due primarily to
increased customer awareness and demand for our product offerings.
Our
product sales are an ancillary part of our verification and certification services and represent sales of cattle identification ear tags.
Product sales for the year ended December 31, 2022 increased approximately $0.5 million or 13.9% compared to 2021, primarily due to increased
pricing reflective of the market, and limited supply elsewhere in the market.
Costs
of revenues (for services and product sales) for the verification and certification segment for the year ended December 31, 2022 were
approximately $12.1 million compared to approximately $10.8 million in 2021. Gross margin for the year ended December 31, 2022 decreased
slightly to 45.0% compared to 45.5% in 2021. The decline is primarily due to increases in compensation related costs due to a tight labor
market and inflation, offset by increased margins for our product sales. Our margins are generally impacted by various costs such as
cost of products, salaries and benefits, insurance and taxes.
Selling,
general and administrative expenses for the year ended December 31, 2022 increased 6.7% compared to 2021. Overall, the increase in our
selling, general and administrative expenses is due to increased compensation related costs due to a tight labor market and inflation,
as well as, an increase in headcount.
Software
and Related Consulting Segment
Software
and related consulting revenue is a revenue stream specific to our acquisitions of SureHarvest and Postelsia. Offerings include 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. For the year ended December 31, 2022, software and related consulting service revenue
increased approximately 40.5% over 2021, due to a significant short-term engagement with a Japanese party to promote Japanese seafood
products into the American supply chain. While we do not believe this engagement will be an annual recurring source of revenue for our
consulting segment, we are hopeful that it is a long-term potential opportunity for our verification and certification segment. Additionally,
because this was a short-term engagement, it is not necessarily indicative of the results that may be achieved for any other quarter
or for the full fiscal year.
Costs
of revenues for our software and related consulting segment for the years ended December 31, 2022 and 2021 were approximately $2.3 and
$1.4 million, respectively. For the year ended December 31, 2022, gross margin had decreased to 20.0% from 33.9% in 2021. The decrease
in gross margin is due primarily to increased cost of contract labor to support the short-term consulting engagement mentioned above.
Selling,
general and administrative expenses for the year ended December 31, 2022 decreased 16.4% compared to 2021. The decrease is predominately
due to the decrease in depreciation and personnel costs, slightly offset by increased travel related expenses.
Dividend
Income from Progressive Beef, LLC
On
August 9, 2018, the Company purchased a ten percent membership interest in Progressive Beef, LLC (“Progressive
Beef”) for an aggregate purchase price of approximately $1.0 million. The Company received dividend income of $250,000 and $200,000
for the years ended December 31, 2022 and 2021, respectively, from Progressive Beef representing a distribution of their earnings.
Income
Tax Expense
For
the years ended December 31, 2022 and 2021, we recorded income tax expense of approximately $0.8 million and $0.7 million, respectively.
The effective tax rate for the year ended December 31, 2022 and 2021 was 28.8% and 24.6%, respectively, compared to a federal corporate
rate of 21.0%. The effective tax rate for 2021 was favorably impacted by the non-taxability of the Paycheck Protection Program (“PPP)
loan forgiveness income.
Net
Income and Per Share Information
As
a result of the foregoing, net income for the year ended December 31, 2022 was approximately $2.0 million or $0.34 per basic and $0.33
per diluted common share, compared to approximately $3.0 million or $0.49 per basic and $0.48 per diluted common share in 2021.
Liquidity
and Capital Resources
At
December 31, 2022, we had cash and cash equivalents of approximately $4.4 million compared to approximately $5.4 million at December
31, 2021. Our working capital at December 31, 2022 was approximately $4.9 million compared to approximately $5.7 million at December
31, 2021.
Net
cash provided by operating activities during 2022 was approximately $2.7 million compared to $3.0 million during the same period in 2021.
Net cash provided by operating activities is driven by a decrease in our net income and adjusted by non-cash items and changes in current
assets and liabilities. Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock-based compensation
expense, forgiveness of Paycheck Protection Program loan, and deferred taxes. Fluctuations are primarily due to operating performance
offset by the timing of cash receipts and cash disbursements. The cash provided by operating activities for 2022 was primarily driven
by a decrease in deferred revenue and cash used for inventory, offset by an increase in prepaid expenses and accounts payable. The cash
provided by operating activities for 2021 was primarily driven by an increase in deferred revenue, decrease in accounts receivable and
prepaid expenses and other assets, offset by cash used for inventory.
Net
cash used in investing activities during 2022 was approximately $0.3 million compared to $3,000 during 2021. Net cash used in the 2022
period was $0.2 million for the purchase of digital assets and $0.1 million for the purchase of a vehicle, equipment and software development.
Net cash used in the 2021 period was $0.2 million for the purchase of a vehicle, equipment and software development offset by $0.2 million
in proceeds from the sale of the Medina land and building.
Net
cash used in financing activities during 2022 was approximately $3.4 million compared to net cash used of $2.0 million in the 2021 period.
Net cash used in the 2022 period was primarily for the repurchase of common shares under the Stock Buyback Plan. Net cash used in the
2021 period was $1.1 million for the repurchase of common shares under the Stock Buyback Plan and $0.9 million in dividends paid to shareholders.
Over
the past several years, our growth has been funded primarily through cashflows from operations. We continually evaluate all funding options,
including additional offerings of our securities to private, public and institutional investors and other credit facilities as they become
available.
The
primary driver of our operating cash flow is our third-party verification solutions, specifically the gross margin generated from services
provided. Therefore, we focus on the elements of those operations, including revenue growth, gross margin and long-term projects that
ensure a steady stream of operating profits to enable us to meet our cash obligations. On a weekly basis, we review the performance of
each of our revenue streams focusing on third-party verification solutions compared with prior periods and our operating plan. We believe
that our various sources of capital, including cash flow from operating activities, overall improvement in our performance, and our ability
to obtain additional financing, are adequate to finance current operations as well as the repayment of current debt obligations. We are
not aware of any other event or trend that would negatively affect our liquidity. In the event such a trend develops, we believe that
there are sufficient financing avenues available to us and from our internal cash-generating capabilities to adequately manage our ongoing
business.
The
culmination of all our efforts has brought significant opportunities to us, including increased investor
confidence and renewed interest in our company, as well as the potential to develop business relationships with long-term strategic
partners. In keeping with our core business, we will continue to review our business model with a focus on profitability, long-term capital
solutions and the potential impact of acquisitions or divestitures, if such an opportunity arises.
Our
plan for continued growth is primarily based on diversification in our product offerings within national and international markets, as
well as, potential acquisitions. We believe that there are significant growth opportunities available to us because of growing consumer
awareness and demand on a national level. Internationally, a quality verification program is often the only way to overcome import or
export restrictions.
Debt
Facility
The
Company has a revolving line of credit (“LOC”) agreement which matures April 12, 2025. The LOC provides for $75,080 in working
capital. The interest rate is at the Wall Street Journal prime rate plus 1.50% and is adjusted daily. Principal and interest are payable
upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due upon maturity.
As of December 31, 2022, and 2021, the effective interest rate was 9.0% and 4.75%, respectively. The LOC is collateralized by all the
business assets of Where Food Comes From Organic, Inc. (“WFCFO”), a subsidiary of WFCF. As of December 31, 2022, and 2021,
there were no amounts outstanding under this LOC.
On
April 17, 2020, the Company received a $1.0 million loan under the Paycheck Protection Program (“PPP”) with a maturity date
of April 17, 2022 and an annual interest rate of 1.00%. The Company received notification the loan and accrued interest amount was forgiven
on March 4, 2021.
Off
Balance Sheet Arrangements
As
of December 31, 2022, we had no off-balance sheet arrangements of any type.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Below
is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding our consolidated
financial statements, financial condition and results of operations and which require complex management judgments, uncertainties and/or
estimates. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts
of revenues and expenses during a reporting period; however, actual results could differ from those estimates. Management has discussed
the development, selection and disclosure of the critical accounting policies and estimates with the Audit Committee of the Board of
Directors. Information regarding our other accounting policies is included in Note 2 to our consolidated financial statements set forth
in Item 8 of this Annual Report on Form 10-K.
Revenue
Recognition
Verification
and Certification Segment
We
offer a range of products and services to maintain identification, traceability, and verification systems. We conduct both on-site and
desk audits to verify that claims being made about livestock, food, other high-value specialty crops and agricultural products are accurate.
We generate revenue primarily from the sale of our verification solutions, consulting services and hardware sales. We sell our products
and services directly to customers at various levels in the livestock and agricultural supply chains.
Verification
and certification service revenue primarily consists of fees charged for verification audits and other verification services that the
Company performs for customers. We recognize revenue utilizing an input method to measure over-time progress of each verification audit
based on the number of audit days performed.
For
certain of our third-party crop and other processed product audits, we assess a fixed fee for the annual certification period. We recognize
revenue utilizing an input method to measure progress toward satisfaction of the annual assessment based on the percentage of activities/phases
or input reviews completed under the annual assessment.
Product
sales are primarily generated from the sale of cattle identification ear tags. Revenue for product sales is recognized upon delivery
of the goods to customer, at which point title, custody and risk of loss transfer to the customer.
We
had deferred revenue of approximately $1.2 million and $1.0 million at December 31, 2022 and 2021, respectively, primarily related to
the annual certification period for certain of our third-party crop and other processed product audits. The balance of these contract
liabilities at the beginning of the period is expected to be recognized as revenue during 2023.
Software
and Related Consulting Segment
Consulting
services fees are derived from a standard rate card by employee level, and we invoice for consulting services monthly on a time-incurred
basis. We recognize revenue over time utilizing the practical expedient that allows us to recognize revenue in the amount to which we
have a right to invoice.
We
also offer software products via a SaaS model, which is an annual subscription-based model. Support services and web-hosting are generally
included in the subscription.
We
recognize revenue related to the SaaS arrangement over an annual subscription period utilizing a time-based output measure of progress
that results in a straight-line attribution of revenue. We had deferred revenue of approximately $0.1 and $0.5 million at December 31,
2022 and 2021, respectively, primarily due to the SaaS arrangements.
In
connection with web-hosting services under our SaaS arrangements, we present revenue on a gross basis, with consideration received from
our customer for the web-hosting service recorded as revenue and the cost paid to the third-party to provide those web-hosting services
recorded as an expense.
Other
Generally,
we do not provide right of return or warranty on product sales or services performed.
In
connection with the provision of on-site audits, reimbursable expenses are incurred and billed to customers, and such amounts are recognized
on a gross basis as both revenue and cost of revenue.
Any
amounts collected on behalf of a third-party and remitted in full to that third-party are excluded from the transaction price and, thus,
revenue.
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. Although this seasonality
does not impact our policies for revenue recognition, it does generally impact our results of operations by potentially causing an increase
in our profit margins during May through October and decreased margins during November through April.
Stock-Based
Compensation
The
Company recognizes all equity-based compensation as stock-based compensation expense based on the fair value of the compensation measured
at the grant date. For stock options, fair value is calculated using the Black-Scholes-Merton option-pricing model. For restricted stock
awards and stock awards, fair value is the closing stock price for the Company’s common stock on the grant date. The expense is
recognized over the vesting period of the grant.
Calculating
stock-based compensation expense using the Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions,
including the expected term of the stock-based awards, stock price volatility, and the pre-vesting option forfeiture rate. We consider