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
many factors when estimating expected forfeitures, including the types of awards, employee classification and historical experience.
Actual forfeitures may differ substantially from our current estimate. Under this pricing model, which incorporates ranges of assumptions
for inputs, our assumptions are as follows:
● Dividend yield is based on our historical policy of not paying cash dividends.
● Expected volatility assumptions were derived from our actual volatilities.
There
is a risk that our estimates of the fair values may differ from the actual values. It is possible that employee stock options may expire
worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported
in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair
values originally estimated on the grant date and reported in our financial statements. The fair value determined using the Black-Scholes-Merton
option-pricing model may not be indicative of the fair value observed in a willing buyer / willing seller market transaction.
Estimates
of share-based compensation expense are highly subjective as to value and have an impact on our financial statements, but these expenses
will never result in the payment of cash by us. For this reason, and because we do not view share-based compensation as being related
to our operational performance, we exclude estimated share-based compensation expense when internally evaluating our performance.
Income
Taxes
We
record income taxes under the asset and liability method. Deferred tax assets and liabilities reflect our estimation of the future tax
consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We determine
deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting.
Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to
be in effect when we realize the underlying items of income and expense.
We
consider the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the
valuation allowance. Significant judgment is involved in this determination, including projections of future taxable income.
Our
liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment
to estimate the exposures associated with our various filing positions.
Our
effective income tax rate is also affected by changes in tax law, our level of earnings and the results of tax audits. As of December
31, 2022, we concluded that a valuation allowance against our deferred tax assets was not considered necessary. As of December 31, 2022
and 2021, the Company did not have an unrecognized tax liability. Changes in these estimates and assumptions could materially affect
the tax provision as recorded.
Goodwill
We
perform an impairment test of our goodwill annually or when events and circumstances indicate goodwill might be impaired. Impairment
testing of goodwill is required at the reporting unit level and involves a two-step process. However, we may first assess the qualitative
factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.
The
first step of the impairment test involves comparing the estimated fair value of our reporting units with the reporting unit’s
carrying amount, including goodwill. If we determine that the carrying value of a reporting unit exceeds its estimated fair value, we
perform a second step to compare the carrying amount of goodwill to the implied fair value of that goodwill. The implied fair value of
goodwill is determined in the same manner as utilized to recognize goodwill in a business combination. If the carrying amount of goodwill
exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.
We
evaluate our reporting units on an annual basis or when events or circumstances indicate our reporting units might change.
Application
of the goodwill impairment test requires judgment, including performing the qualitative assessment, the identification of reporting units,
assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting
unit.
Estimating
the fair value of an individual reporting unit requires us to make assumptions and estimates regarding our future plans, industry and
economic conditions and our actual results and conditions may differ over time. Examples of events or circumstances that could have a
negative effect on the estimated fair value of our reporting units include (i) changes in technology or customer demands that were not
anticipated; (ii) competition or regulatory developments in the industry that may adversely affect profitability; (iii) a prolonged weakness
in general economic conditions; (iv) a sustained decrease in share price; (v) volatility in the equity and debt markets which could result
in a higher discount rate; and (vi) the inability to execute our strategy to grow our growth products.
These
types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry
economic factors and the profitability of future business strategies.
We
have not made any material changes in the accounting methodology used to evaluate impairment of goodwill during the past two years.
As
of December 31, 2022 and 2021, we had approximately $2.9 million of goodwill.
During
the fourth quarter of 2022 and 2021, we performed a qualitative assessment on our WFCF, WFCFO, Validus and SureHarvest units and concluded
that the fair value of the reporting units exceeded their carrying value.
Long-Lived
Assets
Our
definite-lived intangible assets consist of customer relationships, accreditations, tradenames / trademarks and patents related to our
acquisitions, recorded at estimated fair value. It also consists of our trademark rights and the related costs incurred to obtain the
trademark rights recorded at cost. These definite-lived assets are subject to amortization using the straight-line method over the estimated
useful-lives of the respective assets, which range from two to fifteen years. Estimates of useful-lives are based on the nature of the
underlying assets as well as our experience with similar assets and intended use. We periodically review estimated useful-lives for reasonableness.
We
evaluate recoverability of long-lived assets, including property and equipment and definite-lived intangible assets, when events or changes
in circumstances indicate that the carrying amount may not be recoverable.
Assumptions
and estimates about future values and remaining useful-lives can be affected by a variety of factors, including external factors such
as consumer spending habits and general economic trends, and internal factors such as changes in our business strategy and our internal
forecasts.
We
have not made any material changes in the accounting methodology or useful-lives we use to account for long-lived assets during the past
two years.
Pursuant
to Accounting Standards Update 2016-02 (“ASU”) Topic 842, we determine if an arrangement is a lease at inception. Operating
leases are included in the right-of-use (ROU) assets, current operating lease liabilities and noncurrent operating lease liabilities
in our consolidated balance sheet. Finance leases are included in property and equipment, current finance lease obligations and long-term
finance lease obligations in our consolidated balance sheet.
ROU
assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present
value of lease payments over the lease term.
Indefinite-Lived
Assets
Our
non-amortizable intangible assets which have an indefinite life relate to the trademarks/tradenames and digital assets.
Trademarks/tradenames
were acquired in the Validus acquisition. Pursuant to Accounting Standards Codification (“ASC”) Topic 350, if an intangible
asset is determined to have an indefinite useful life, it shall not be amortized until its useful life is determined to no longer be
indefinite. Accordingly, we evaluate the remaining useful life of an intangible asset that is not being amortized each reporting period
to determine whether events or circumstances continue to support an indefinite useful life.
In
addition, an intangible asset that is not subject to amortization shall be tested for impairment annually, or more frequently if events
or changes in circumstances indicate that the asset might be impaired. Entities testing an indefinite-lived intangible asset for impairment
have the option of performing a qualitative assessment before calculating the fair value of the asset. If entities determine, on the
basis of qualitative factors, that the likelihood of the indefinite-lived intangible asset being impaired is below a “more-likely-than-not”
threshold (i.e., a likelihood of more than 50 percent), the entity would not need to calculate the fair value of the asset.
As
of December 31, 2022, there have been no changes to the indefinite life determination pertaining to the trademarks/tradenames intangible
assets. Based on the qualitative assessment on Validus reporting unit, we concluded that the likelihood of the indefinite lived asset
being impaired was below a “more-likely-than-not” threshold.
Digital
assets or “cryptocurrency” are held as indefinite-lived intangible assets in accordance with ASC Topic 350. We have ownership
of and control over our digital assets and may use a third-party custodial service to secure it. The digital assets are initially recorded
at cost and are subsequently remeasured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition,
if applicable.
We
determine the fair value of our digital assets on a quarterly basis in accordance with ASC Topic 820, Fair Value Measurement,
based on quoted prices on the active exchange(s) that we have determined is the principal market for such assets (Level 1 inputs). We
perform an analysis each quarter to identify whether significant events or changes in circumstances, indicate that it is more likely
than not that our digital assets are permanently impaired. In determining if an impairment has occurred, we consider the lowest market
price of one unit of digital asset quoted on an active exchange since acquiring the digital asset. If the current carrying value of a
digital asset significantly exceeds the fair value so determined, a permanent impairment loss has occurred with respect to the digital
assets in the amount equal to the difference between their carrying values and the price determined.
As
of December 31, 2022, we have not sold any digital assets and have recognized an impairment loss of $62,000. As of December 31, 2022,
the carrying value of our digital assets held was $0.1 million.
Business
Combinations
A
component of our growth strategy has been to acquire businesses that complement our existing operations. We account for business combinations
in accordance with the guidance for business combinations and related literature. Accordingly, we allocate the purchase price of acquired
companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the date of
purchase. The excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill.
In
determining the fair values of assets acquired and liabilities assumed in a business combination, we use various recognized valuation
methods, including present value modeling and referenced market values (where available). Further, we make assumptions within certain
valuation techniques, including discount rates and the timing of future cash flows. Valuations are performed by management or independent
valuation specialists under management’s supervision, where appropriate. We believe that the estimated fair values assigned to
the assets acquired and liabilities assumed are based on reasonable assumptions that marketplace participants would use. However, such
assumptions are inherently uncertain and actual results could differ from those estimates.
RECENT
ACCOUNTING PRONOUNCEMENTS
See
Note 2 to our consolidated financial statements set forth in Item 8 of this Annual Report on Form 10-K for a detailed description of
recent accounting pronouncements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
to Financial Statements
Page
Financial Statements:
Report of Independent Registered Public Accounting Firm 29
Consolidated Balance Sheets as of December 31, 2022 and 2021 31
Notes to Consolidated Financial Statements 35
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders of
Where
Food Comes From, Inc.
Castle
Rock, Colorado
OPINION
ON THE FINANCIAL STATEMENTS
We have audited the accompanying consolidated balance sheets of Where Food Comes From, Inc. and its subsidiaries
(the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, equity, and cash flows,
for the years ended December 31, 2022 and 2021, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2022 and 2021 and the results of its operations and its cash flows for the years ended December 31, 2022 and 2021, in conformity with
accounting principles generally accepted in the United States of America.
BASIS
FOR OPINION
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
CRITICAL
AUDIT MATTER
The
critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial
statements and (2) involved especially challenging, subjective, or complex judgments. The communication of a critical audit matter does
not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter
below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue
Recognition – Refer to Note 2 to the financial statements
Critical
Audit Matter Description
The
Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration
the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple
licenses of software products and services, in its customer agreements through its service and licensing programs.
Significant
judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
Given
these factors and due to the volume of transactions, the related audit effort in evaluating management’s judgments in determining
revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
How
the Critical Audit Matter Was Addressed in the Audit
Our
principal audit procedures related to the Company’s revenue recognition for these customer agreements included the following:
– Tested management’s identification and treatment of contract terms.
/s/
Causey Demgen & Moore, P.C.
We
have served as the Company’s auditors since 2019.
Auditor Firm ID 647
Denver,
Colorado
February
23, 2023
Where
Food Comes From, Inc.
Consolidated
Balance Sheets
December 31, December 31,
(Amounts in thousands, except per share amounts) 2022 2021
Assets
Current assets:
Cash and cash equivalents $ 4,368 $ 5,414
Accounts receivable, net of allowance 2,172 2,178
Prepaid expenses and other current assets 463 325
Property and equipment, net 998 1,295
Investment in Progressive Beef 991 991
Intangible and other assets, net 2,340 2,581
Deferred tax assets, net 523 464
Liabilities and Equity
Current liabilities:
Accrued expenses and other current liabilities 769 710
Current portion of finance lease obligations 9 13
Current portion of operating lease obligations 341 313
Finance lease obligations, net of current portion 37 19
Operating lease obligation, net of current portion 2,745 3,020
Commitments and contingencies - -
Equity:
Total liabilities and stockholders’ equity $ 18,296 $ 19,784
The
accompanying notes are an integral part of these consolidated financial statements.
Where
Food Comes From, Inc.
Consolidated
Statements of Income
(Amounts in thousands, except per share amounts) 2022 2021
Year ended December 31,
(Amounts in thousands, except per share amounts) 2022 2021
Revenues:
Verification and certification service revenue $ 17,610 $ 16,058
Software and related consulting revenue 2,871 2,044
Costs of revenues:
Costs of verification and certification services 9,748 8,402
Costs of software and related consulting 2,296 1,352
Selling, general and administrative expenses 7,816 7,434
Other income/(loss):
Dividend income from Progressive Beef 250 200
Gain on sale of assets 12 95
Loan forgiveness from Paycheck Protection Program - 1,037
Other income, net 5 2
Loss on foreign currency exchange (38 ) (11 )
Impairment expense (62 ) -
Interest expense (3 ) (6 )
Per share - net income
Weighted average number of common shares outstanding:
The
accompanying notes are an integral part of these consolidated financial statements.
Where
Food Comes From, Inc.
Consolidated
Statements of Cash Flows
Year ended December 31,
Operating activities:
Depreciation and amortization 765 799
Impairment of digital assets 62 -
Gain on sale of assets (12 ) (95 )
Stock-based compensation expense 154 291
Deferred tax benefit (59 ) (21 )
Bad debt expense 26 -
Forgiveness of note payable from Paycheck Protection Program - (1,037 )
Changes in operating assets and liabilities, net of effect from acquisitions:
Accounts receivable (20 ) 330
Prepaid expenses and other assets (138 ) 267
Accrued expenses and other current liabilities 59 108
Right of use assets and liabilities, net (14 ) 5
Net cash provided by operating activities 2,654 3,020
Investing activities:
Purchase of digital assets (178 ) -
Proceeds from sale of assets - 210
Purchases of property, equipment and software development costs (89 ) (213 )
Net cash used in investing activities (267 ) (3 )
Financing activities:
Repayments of finance lease obligations (13 ) (10 )
Proceed from stock option exercise 36 52
Dividends paid to shareholders - (914 )
Stock repurchase under Stock Buyback Plan (3,456 ) (1,105 )
Net cash used in financing activities (3,433 ) (1,977 )
The
accompanying notes are an integral part of these consolidated financial statements.
Where
Food Comes From, Inc.
Consolidated
Statements of Equity
Years
ended December 31, 2021 and 2022
(Amounts in thousands) Shares Amount Capital Stock Earnings Total
Additional
Common Stock Paid-in Treasury Retained
(Amounts in thousands) Shares Amount Capital Stock Earnings Total
Stock-based compensation expense 15 - 291 - - 291
Stock options exercised 19 - 52 - - 52
Dividends paid - - - - (914 ) (914 )
Stock-based compensation expense 4 - 154 - - 154
Stock options exercised 8 - 36 - - 36
The
accompanying notes are an integral part of these consolidated financial statements.
Where
Food Comes From, Inc.
Notes
to the Consolidated Financial Statements
Note
1 - The Company and Basis of Presentation
Business
Overview
Where
Food Comes From, Inc. is a Colorado corporation based in Castle Rock, Colorado (“WFCF”, the “Company,” “our,”
“we,” or “us”). We are an independent, third-party food verification company conducting both on-site and desk
audits to verify that claims being made about livestock, food, other high-value specialty crops and agricultural and aquaculture products
are accurate. We care about food and other agricultural and aquacultural 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. We strive to ensure that everyone involved in the food business - from growers and farmers
to retailers and shoppers – can count on WFCF to provide authentic and transparent information about the food we eat and how, where,
and by whom it is produced.
We
also 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.
Most
of our customers are located throughout the United States.