Where Food Comes From, Inc.

Greetings. Welcome to the Where Food Comes From 2021 Fourth Quarter and Year-End Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Jay Pfeiffer, Investor Relations. Thank you. You may begin.

Good morning and welcome to the Where Food Comes From 2021 Fourth Quarter and Full Year Earnings Call. Joining me on the call today are CEO John Saunders and Chief Financial Officer Danette Henning. During this call, we'll make forward-looking statements based on current expectations, estimates, and projections that are subject to risk. Statements about current and future financial performance, growth strategy, customers, business opportunities, market acceptance of our products and services, and potential acquisitions are forward-looking statements. Listeners should not place undue reliance on these statements as there are many factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our publicly filed documents as well as our news releases and website for more information. Today, we'll also discuss adjusted EBITDA, a non-GAAP financial measure provided as a complement to GAAP results. Please refer to today's news release for important disclosures regarding non-GAAP measures. I'll now turn the call over to John Saunders. John, please go ahead.

Well, good morning and thanks for joining the call today. This morning we released our fourth quarter and full year of financial results before the market opened. Our results for both periods were consistent with our expectations for steady but increasingly profitable growth as we continue to recover from the effects of the COVID pandemic. Today I'm going to recap our financial results and then highlight a few other accomplishments for the year that position us to continue building value for our shareholders and customers. Beginning with our fourth quarter, revenue grew 5% year-over-year, 5.8 million. We achieved 9% growth in our core verification and certification services category in the period based on solid demand for beef verifications and continuing recovery of our pork, poultry, dairy, and egg businesses, where producers were nearly back to normal in terms of allowing third-party access to their facilities. Partially offsetting that growth was a decline in tag sales in the quarter due to ongoing supply chain issues associated with chip shortages, as well as worker shortages related to vaccine mandates. We believe these issues to be transitory and expect them to dissipate as chip makers rebound and pandemic pressures continue to subside. Nevertheless, we took precautionary steps early in the process to soften the impact of these supply chain challenges. Specifically, in mid-year, we bought a large number of tags into the inventory and began identifying additional tag suppliers to help fill the gaps. We now have multiple sources for tags, so we think we're in pretty good shape moving forward. And in fact, we're experiencing great growth in tag activity thus far in 2022. Net income in the fourth quarter grew 36% year-over-year to $742,000 or 12 cents per diluted share. In addition to 29% growth in operating income, our bottom line benefited from a higher progressive beef dividend and an $86,000 gain on the sale of a building that houses our organic team in North Dakota, a building we're now leasing. Turning now to the full year results, revenue grew 9% to $21.9 million from $20.1 million a year ago. 13% growth in our core verification and certification business more than offset a slight decline in tag sales for the year. Operating income grew 37% to $2.3 million as we experienced only a modest 3% increase in SG&A expenses for the full year. And net income for 2021 more than doubled. to $3 million or $0.48 per diluted share from $1.4 million or $0.22 per diluted share in the prior year. Our net income included $1 million in PPP loan forgiveness, higher progressive dividends, and a nearly $100,000 gain on disposal of assets. Even with the PPP benefit, we still delivered solid double-digit growth on the bottom line. which is a testament to our resiliency as a company during what was obviously a challenging year. On the subject of Progressive Beef, I thought it would make sense to update you on that program because it has quietly become an important contributor to our positive financial performance. Our long-term shareholders may recall that in late 2018, we bought a membership interest in Progressive Beef LLC. which administers one of the beef industry's most important feed yard verification programs, a feedlot quality management system that provides transparency in the animals of animal welfare, food safety, and sustainability. In January, Wendy's announced that 40% of its fresh beef supply was sourced from Progressive Beef. Our initial investment of just under $1 million, since that time, The investment has generated cash dividends in 13 consecutive quarters, aggregating $570,000. In addition, as a primary verifier for Progressive Beef, our IMI Global unit now generates $200,000 annually from various customers enrolled in the program. This has turned out to be a great investment for the company. While the Progressive Beef Program is focused on the feedlot segment of the supply chain, our own Beef Care Certified Program is geared toward cow-calf producers and retailers who seek to differentiate and add value to their products. Care Certified is a suite of sustainability programs that certify entire supply chains to three pillars, animal care, environmental stewardship, and people and community. The CARE program is designed to support farmers, ranchers, and processors in creating and continuously improving sustainable practices as they relate to region, climate, natural resources, production-style workforce, and community interaction. We introduced Beef CARE in 2020 and have achieved good growth with the program, verifying more than 600,000 head of cattle to the standard in 2021, more than double our 2020 level. For most of our producer customers, the CARE certification is bundled with another verification standard so that it is both cost and time effective for the producer. For where food comes from, the bundling capability increases revenue, enhances margins, and strengthens our relationships with customers. So we really view CARE as the definition of a win-win situation of where food comes from in our producer customers. Also in 2021, the Heinen's Grocery Store became the first retail customer to put the Beef Care certified logo on its packaging, implementing the program across not only its beef, but pork and poultry as well. We think Heinen's adoption of care will serve as a model for other retailers who are looking for ways to differentiate their products and address growing consumer interest in animal welfare and sustainability. In summary, we're very pleased with the progress we made in strengthening our core business lines during the year, particularly in light of the challenges and uncertainties presented by the pandemic. We also took other steps to return value to shareholders in 2021. One of them was the one-time $900,000 special dividend paid out to shareholders in the third quarter. The other was continuance of our stock buyback program, which in 2021 saw us take 81,000 shares out of the float. 2021 was also notable for our uplisting to NASDAQ, which has raised our exposure in the investment community and made our shares eligible for purchase by institutional investors that previously were unable to buy unlisted shares. Although our stock, like the broader market, has been under pressure in recent days and months, we feel confident that our equity ultimately will be valued based on the company's solid fundamentals and attractive prospects for sustainable growth and profitability. In conclusion, we are extremely proud of the critical role where food comes from and its operating units are playing throughout the food supply chain, creating value for producers and retailers and inspiring confidence in consumers who are more focused than ever on the issues of sustainability, animal care, and how all of their food is produced. And with that, I will open the call to questions. Operator?