Where Food Comes From Inc

Previous wording

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 programare also included in our verification and certification revenuesas it represents a value-added extension of our source verification. Verification and certification service revenue for the year ended December 31, 2023 increased approximately $1.8 million, or 10.2% compared to 2022. Overall, the increase is due primarily to increased customer awareness and demand for our product offerings. While our verification and certification service revenue continues to improve due to new customer growth and bundling opportunities, we believe we are at a low point of a contraction phase within the cattle cycle which negatively impacts revenue tied directly to price per head of cattle. We also believe inflationary pressure on packers, producers, growers, brands, and retailers is putting downward pressure on verified and certified foods as consumers have switched to lower priced food products.

Current wording

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, 2024 increased approximately $1.1 million, or 5.9% compared to 2023. Overall, the increase is due primarily to increased customer awareness and demand for our product offerings. While our verification and certification service revenue continues to improve due to new customer growth and bundling opportunities, we believe we are at a low point of a contraction phase within the cattle cycle which negatively impacts revenue tied directly to price per head of cattle. We also believe inflationary pressure on packers, producers, growers, brands, and retailers is putting downward pressure on verified and certified foods as consumers have switched to lower priced food products.

Previous wording

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, 2023 decreased approximately $0.4 million or 8.3% compared to 2022. We continue to see some new customer growth, but our customers are ordering less tags due to smaller beef cow herd size. According to the USDA July 2023 statistics, overall beef cow inventories have declined over 3% compared to last year. We believe we are at a low point of a contraction phase within the cattle cycle which is negatively impacting revenue tied directly to price per head of cattle.

Current wording

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, 2024 decreased approximately $0.2 million or 5.0% compared to 2023. We continue to see some new customer growth, but our customers are ordering less tags due to smaller beef cow herd size. According to the USDA statistics, overall beef cow inventories have declined from 28.9 million head on January 1, 2023 to 28.2 million head on January 1, 2024 and is now estimated at less than 28 million head. We believe we are at a low point of a contraction phase within the cattle cycle which is negatively impacting revenue tied directly to price per head of cattle. Additionally, some customers are receiving free tags under the USDA’s program to jumpstart efforts to enable the fastest possible response to a foreign animal disease in connection with its definitive traceability regulation, mandating the use of electronic ID tags for specific interstate movements of cattle and bison.

Previous wording

Costs of revenues (for services and product sales) for the verification and certification segment for the year ended December 31, 2023 were approximately $13.3 million compared to approximately $12.1 million in 2022. Gross margin for the year ended December 31, 2023 decreased slightly to 43.4% compared to 45.0% in 2022. Our margins are generally impacted by various costs such as cost of products, salaries and benefits, insurance and taxes. The decline is primarily due to inflationary increases in the costs of products shipped and increases in compensation related costs due to a tight labor market impacting our margins. New customer growth helps offset to some extent the inflationary impacts on our margins.

Current wording

Costs of revenues (for services and product sales) for the verification and certification segment for the year ended December 31, 2024 were approximately $14.2 million compared to approximately $13.3 million in 2023. Gross margin for the year ended December 31, 2024 decreased slightly to 41.9% compared to 43.4% in 2023. Our margins are generally impacted by various costs such as cost of products, salaries and benefits, insurance and taxes. The decline is primarily due to inflationary increases in the costs of products shipped and increases in compensation related costs due to a tight labor market impacting our margins. New customer growth helps offset the inflationary impacts on our margins, to some extent.

Previous wording

Selling, general and administrative expenses for the verification and certification segment for the year ended December 31, 2023 decreased approximately $36,000 compared to 2022.

Current wording

Selling, general and administrative expenses for the verification and certification segment for the year ended December 31, 2024 increased approximately $0.7 million compared to 2023, due to more participation in tradeshows and increasing marketing activities.

Previous wording

Professional services revenue include a wide range of professional consulting, data analysis, reporting and technology solutions that support our verification business and generate incremental revenue specific to the food and agricultural industry. Our consulting revenue stream is predominantly project based and not recurring in nature. For the year ended December 31, 2023, professional service revenue decreased approximately $1.2 million over 2022. The 2022 period included a significant short-term engagement with a Japanese party to promote Japanese seafood products into the American supply chain during 2022.

Current wording

Professional services revenue include a wide range of professional consulting, data analysis, reporting and technology solutions that support our verification business and generate incremental revenue specific to the food and agricultural industry. Our consulting revenue stream is predominantly project based and not recurring in nature. For the year ended December 31, 2024, professional service revenue decreased approximately $0.3 million over 2023.

Previous wording

Costs of revenues for our professional services segment for the years ended December 31, 2023 and 2022 were approximately $1.4 and $2.3 million, respectively. For the year ended December 31, 2023, gross margin increased to 21.3% from 20.0% in 2022. Because our consulting revenue is predominately project based, margins are greatly impacted by the timing of the project work and the fixed and/or variable labor necessary to complete the project. The 2022 margins were negatively impacted by an increased use of contract labor to support the short-term consulting engagement mentioned above.

Current wording

Costs of revenues for our professional services segment for the years ended December 31, 2024 and 2023 were approximately $1.0 and $1.4 million, respectively. For the year ended December 31, 2024, gross margin improved to 26.5% from 21.3% in 2023. During 2024, because of a reduction in consulting projects, we reallocated staff to other internal departments, as needed. As our consulting revenue is predominately project based, margins are greatly impacted by the timing of the project work and the fixed and/or variable labor necessary to complete the project.

Previous wording

Selling, general and administrative expenses for the professional services segment for the year ended December 31, 2023 increased approximately $45,000 compared to 2022.

Current wording

Selling, general and administrative expenses for the professional services segment for the year ended December 31, 2024 decreased approximately $112,000 compared to 2023.

Previous wording

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 $320,000 and $250,000 for the years ended December 31, 2023 and 2022, respectively, from Progressive Beef representing a distribution of their earnings.

Current wording

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 $400,000 and $320,000 for the years ended December 31, 2024 and 2023, respectively, from Progressive Beef representing a distribution of their earnings.

Previous wording

For the years ended December 31, 2023 and 2022, we recorded income tax expense of approximately $0.9 million and $0.8 million, respectively. The effective tax rate for the year ended December 31, 2023 and 2022 was 29.7% and 28.8%, respectively, compared to a federal corporate rate of 21.0%.

Current wording

For the years ended December 31, 2024 and 2023, we recorded income tax expense of approximately $0.9 million. The effective tax rate for the year ended December 31, 2024 and 2023 was 28.8% and 29.7%, respectively, compared to a federal corporate rate of 21.0%.

Previous wording

As a result of the foregoing, net income for the year ended December 31, 2023 was approximately $2.2 million or $0.39 per basic and per diluted common share, compared to approximately $2.0 million or $0.34 per basic and $0.33 per diluted common share in 2022.

Current wording

As a result of the foregoing, net income for the year ended December 31, 2024 was approximately $2.1 million or $0.40 per basic and per diluted common share, compared to approximately $2.2 million or $0.39 per basic and diluted common share in 2023.

Previous wording

At December 31, 2023, we had cash and cash equivalents of approximately $2.6 million compared to approximately $4.4 million at December 31, 2022. Our working capital at December 31, 2023 was approximately $3.2 million compared to approximately $4.9 million at December 31, 2022.

Current wording

At December 31, 2024, we had cash and cash equivalents of approximately $2.0 million compared to approximately $2.6 million at December 31, 2023. Our working capital at December 31, 2024 was approximately $2.4 million compared to approximately $3.2 million at December 31, 2023.

Previous wording

Net cash provided by operating activities during 2023 was approximately $2.8 million compared to $2.7 million during the same period in 2022. Net cash provided by operating activities is driven by an increase 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, bad debt expense, 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 2023 was primarily driven by a decrease in prepaid expenses and other assets, accounts payable, accrued expenses and other current liabilities and cash used for inventory, offset by an increase in deferred revenue. 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.

Current wording

Net cash provided by operating activities during 2024 was approximately $2.7 million compared to $2.8 million during the same period in 2023. Net cash provided by operating activities is driven by 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, fair market value gains / losses on digital assets, stock-based compensation expense, bad debt expense, and deferred taxes. The decline in cash provided by operating activities for 2024 was primarily due to a decline in the gross margins of our Verification and Certification Segment and increased spending for marketing related activities, offset by the timing of cash receipts and cash disbursements.

Previous wording

Net cash used in investing activities during 2023 was approximately $0.6 million compared to $0.3 million during 2022. Net cash used in the 2023 period was $0.2 million for the acquisition of Blue Trace, $0.3 million for the acquisition of Upcycled Foods and $0.1 million for the purchase of equipment and internal use software development. 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.

Current wording

Net cash used in investing activities during 2024 was approximately $0.2 million compared to $0.6 million during 2023. Net cash used in the 2023 period was $0.2 million for the acquisition of Blue Trace, $0.3 million for the acquisition of Upcycled Foods and $0.1 million for the purchase of equipment and internal use software development.

Previous wording

Net cash used in financing activities during 2023 was approximately $3.9 million compared to net cash used of $3.4 million in the 2022 period. Net cash used in the 2023 period was primarily for the repurchase of common shares under the Stock Buyback Plan. Net cash used in the 2022 period was primarily for the repurchase of common shares under the Stock Buyback Plan.

Current wording

Net cash used in financing activities during 2024 was approximately $3.2 million compared to net cash used of $3.9 million in the 2023 period. Net cash used in the 2023 period was primarily for the repurchase of common shares under the Stock Buyback Plan and a private purchase of common shares.

Previous wording

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.

Current wording

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, focused improvements 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 significant 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.

Previous wording

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.

Current wording

The culmination of all our efforts has brought significant opportunities to us, including increased investor confidence 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.

Previous wording

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, 2023 and 2022, the effective interest rate was 10.0% and 9.0%, 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, 2023 and 2022, there were no amounts outstanding under this LOC.

Current wording

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, 2024 and 2023, the effective interest rate was 9.0% and 10.0%, 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, 2024 and 2023, there were no amounts outstanding under this LOC.

Previous wording

We had deferred revenue of approximately $1.4 million and $1.2 million at December 31, 2023 and 2022, 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 2024.

Current wording

We had deferred revenue of approximately $1.7 million and $1.4 million at December 31, 2024 and 2023, 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 2025.

Previous wording

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. Additionally, the cattle industry is cyclical by nature based on factors impacting current and future supplies such as drought-induced feedlot placements, higher cow and heifer slaughter, and lower auction receipts. The production lags inherent to this industry lead to long-lasting impacts of production decisions. For example, increased liquidation implies tighter supplies for next year. Similarly, times of herd expansion are typically a multi-year period. These cycles typically last roughly 10 years. The beginning of 2023 marks the ninth year of the current cycle that began in 2014. We are currently in the contraction phase of the cycle after peaking in 2018-2019. How long we continue to contract will be directly impacted by drought and pasture conditions.

Current wording

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. Additionally, the cattle industry is cyclical by nature based on factors impacting current and future supplies such as drought-induced feedlot placements, higher cow and heifer slaughter, and lower auction receipts. The production lags inherent to this industry lead to long-lasting impacts of production decisions. For example, increased liquidation implies tighter supplies for next year. Similarly, times of herd expansion are typically a multi-year period. Historically, these cycles typically lasted approximately 10 years. The beginning of 2024 marks the tenth year of the current cycle that began in 2014. We are currently in the contraction phase of the cycle after peaking in 2018-2019. How long we will continue to contract will be directly impacted by drought and pasture conditions.

Previous wording

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.

Current wording

Prior to the adoption of ASU 2023-08, digital assets or “cryptocurrency” were held as indefinite-lived intangible assets in accordance with ASC Topic 350*– Intangibles-Goodwill and Other*. The digital assets were initially recorded at cost and subsequently remeasured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition as of December 31, 2023. We determined 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). 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.