| Summary of Significant Accounting Policies | Note
2 - Summary of Significant Accounting Policies Cash
and Cash Equivalents We
place our cash with high quality financial institutions. At times, cash balances may exceed the Federal Deposit Insurance Corporation
(FDIC) insurance limit; however, we have not experienced any losses related to balances that exceed such FDIC insurance limits,
and we believe our credit risk is minimal. At times, we may also invest in short-term investments with original maturities of
three months or less, which we consider to be cash and cash equivalents, since they are readily convertible to cash. Short-Term
Investments Certificates
of deposit with original maturities greater than three months and remaining maturities less than one year are classified as “Short-term
investments.” Revenue
Recognition We
offer a range of products and services to deploy and maintain identification, traceability, and verification systems and to facilitate
customers’ participation in and compliance with the USDA’s Quality System Assessment, Process Verification and Export
Verification Programs. 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 supply chain. Revenue
is recognized when persuasive evidence of an agreement with the customer exists, delivery has occurred or services have been provided,
the sales price is fixed or determinable, collectability is reasonably assured, and risk of loss and title have transferred to
the customer. No
single customer generated more than 10% of total net revenue in 2016 or 2015. Service
revenues primarily consist of fees charged for verification audits and other verification services that the Company performs for
customers. Revenue from verification audits is recognized upon completion of the audits. Contracts for these services are cancelable
only for non-performance. In
connection with certain arrangements, reimbursable expenses are incurred and billed to customers and such amounts are recognized
as both revenue and cost of revenue. Deferred
revenue represents payments received in advance from our customers for annual customer support services not yet performed as of
December 31st, and revenue is recognized as services are performed, generally over the one-year contract term. Customer
deposits represent down-payments made in advance of a verification audit to be performed for a customer. Deposits are initially
recorded as current liabilities until services are performed and applied to the customer’s accounts when invoiced. Revenues
under contracts for consulting services are recognized when completed (for short-term projects). On occasion, we may enter into
long-term projects, for which we use the percentage of completion method. No such long-term projects occurred during 2016 and
2015. Product
sales are primarily generated from the sale of cattle identification ear tags. Revenue is recognized when goods are shipped and
after title has transferred to the customer. Other
revenue primarily represents the fees earned from our “WhereFoodComesFrom®” labeling program. Revenue is recognized
when our customer, who has been granted a right to use our WhereFoodComesFrom® label, places this label on their product
and ships their product. Revenue is billed based on pounds of product shipped. Generally,
we do not provide right of return or warranty on product sales or services performed. Accounts
Receivable and Allowance for Doubtful Accounts Our
receivables are generally due from trade customers. Credit is extended based on our evaluation of the customer’s financial
condition and generally, collateral is not required. Accounts receivable are generally due approximately 30 days from the invoice
date and are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts receivable that are outstanding
longer than the contractual payment terms are considered past due. We determine our allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, our previous loss and payment history, the customer’s
current ability to pay its obligations to us and the condition of the general economy and the industry as a whole. We write off
accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the
allowance for doubtful accounts. The allowance for doubtful accounts was approximately $17,900 and $18,100, at December 31, 2016
and 2015, respectively. No
single customer accounted for greater than 10% of our accounts receivable balances at December 31, 2016 and 2015. Cost
of Revenues Cost
of revenues includes the cost of products sold, which consists of livestock ear tags generally used in connection with our verification
programs. Salaries and related fringe benefits directly associated with our verification services are allocated to cost of revenues. Livestock
identification ear tags sold in connection with our verification offerings are purchased primarily from one supplier. However,
there are numerous other companies which manufacture and market such ear tags. Fair
Value Measurements ASC
Topic 820, Fair Value Measurements and Disclosure, establishes a hierarchy for inputs used in measuring fair value for financial
assets and liabilities that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing
the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that
reflect the Company’s assumptions of what market participants would use in pricing the asset or liability based on the best
information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs
as follows:
● Level 1: Quoted
prices available in active markets for identical assets or liabilities;
● Level 2: Quoted
prices in active markets for similar assets and liabilities that are observable for the asset or liability;
● Level 3: Unobservable
pricing inputs that are generally less observable from objective sources, such as discounted cash or valuation models. The
financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and
may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The
Company’s non-recurring fair value measurements include purchase price allocations for the fair value of assets and liabilities
acquired through business combinations. Please refer to Note 3 for further discussion of business combinations. The
acquisition of a group of assets in a business combination transaction requires fair value estimates for assets acquired and liabilities
assumed. The fair value of assets and liabilities acquired through business combinations is calculated using a discounted future
cash flows method. The discounted cash flows are developed using the income approach in which a value (based on management’s
expectations for the future) is determined by converting anticipated benefits. The fair value measurements are based on significant
inputs not observable in the market and thus represent fair value measurements which are designated as Level 3 inputs within the
fair value hierarchy. Key assumptions and considerations include:
a) A discount rate
range of 19-22 percent;
b) Terminal value based
on long-term sustainable growth rates of 3 percent;
c) Financial data of
comparable companies for market participant assumptions; and
d) Consideration of
the marketability that market participants would consider when measuring the fair value of non-controlling interest in our
acquisition. Other
Financial Instruments The
carrying value of cash and restricted cash, accounts receivable, and accounts payable approximate their fair value due to their
short maturities. The carrying values shown for short-term investments, debt and notes payable also approximate fair value because
current interest rates and terms offered to us for similar instruments are substantially the same (Level 2 inputs). Property
and Equipment Property
and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the respective
assets. Land is not depreciated. Buildings are depreciated over 20 years. Leasehold improvements are amortized over the shorter
of the lease term, which generally includes reasonably assured option periods, or the estimated useful lives of the assets. All
other property and equipment have depreciable lives which range from two to seven years. Upon retirement or disposal of assets,
the accounts are relieved of cost and accumulated depreciation and the related gain or loss is reflected in earnings. Impairment
of Long-Lived Assets We
review all of our long-lived assets (including intangible assets) for impairment at least annually or whenever impairment indicators
are determined to be present. If an impairment exists, the amount of impairment is measured as the excess of the carrying amount
of the asset over its fair value as determined utilizing estimated discounted future cash flows, or some other fair value measure,
or the expected proceeds, net of costs to sell, upon sale of the asset. Significant
judgments are required to estimate the fair value of intangible assets including estimating future cash flows, determining appropriate
discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events
in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the
determination of fair value and/or impairment at future reporting dates. No impairment was identified on the Company’s long-lived
assets through December 31, 2016. Definite
Lived Intangible Assets Our
definite lived intangible assets consist of customer relationships, accreditations, a beneficial lease arrangement, 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. (Note
5). Assumptions
and estimates about future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective.
They 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 review intangible assets
with finite lives for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not
be recoverable. If our qualitative analysis indicates that there could be an impairment, we then determine whether an impairment
loss occurred which requires a comparison of the carrying amount to the sum of the undiscounted cash flows expected to be generated
by the asset, or the expected proceeds, net of costs to sell, upon sale of the asset. If an impairment exists, the amount of impairment
is measured as the excess of the carrying amount of the asset over its fair value. During 2015
and 2016, we completed a qualitative analysis, and based upon the work performed, we concluded that no impairment existed. Goodwill
and Other Non-Amortizable Intangible Assets Goodwill
relates to our acquisitions of ICS, Validus and SureHarvest. All other non-amortizable intangible assets relate to the trademarks/tradenames
acquired in the Validus acquisition and have an indefinite life. Pursuant to 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. As of December 31, 2016, there have been no changes to
the indefinite life determination pertaining to these intangible assets. 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. The impairment test consists of a comparison
of the fair value of an intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset
exceeds its estimated fair value, an impairment loss equal to the excess is recorded. However, 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. During
the fourth quarter, we assessed the carrying value of goodwill and other intangible assets of each of ICS, Validus and SureHarvest,
our three reporting units. At December 31, 2016, goodwill assigned to ICS, Validus and SureHarvest was approximately $533,000,
$746,800, and $1,372,500 respectively. We
performed a qualitative assessment on our ICS and Validus reporting units for our 2016 annual test and concluded that it was more-likely-than-not
that the fair value of the reporting unit exceeded its carrying value and, therefore, a two-step impairment test was not necessary.
The qualitative assessment compares current performance, expectations and other indicators against what was expected as part of
the most recent Step 1 valuation. Consequently, the key estimates and assumptions related to the most recent Step 1 valuation
pertaining to this reporting unit had not changed since our previous annual report. With
respect to our SureHarvest reporting unit, fair value for goodwill and other intangibles assets is discussed in detail in Note
3 to the Consolidated Financial Statements. Research
and Development and Software Development Costs Research
and development costs are charged to operations as incurred. We did not incur any research and development expense in 2016 and
2015. Internal
use software development costs represent the capitalization of certain external and internal computer software costs incurred
during the application development stage. The application development stage is characterized by software design and configuration
activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrades and enhancements
are capitalized if it is probable that such expenditures will result in additional functionality. Website
software development costs related to certain planning and training costs incurred in the development of website software are
expensed as incurred, while application development stage costs are capitalized. In
2013, we acquired certain assets of Validus, which included internally-developed software with an estimated fair value of $129,000.
During 2016 and 2015, the amortization of capitalized costs totaled approximately $43,000 each year, included in depreciation
expense (Note 4). Capitalized costs are included in property and equipment. Software
development costs for external sale are capitalized once technological feasibility is achieved. Capitalized costs are amortized
over the expected benefit period. We generally expense a significant portion of software development costs because technological
feasibility occurs very late in the software development process. In connection with our SureHarvest acquisition on December 28,
2016, software developed for external sale with an estimated fair value of approximately $558,000 has been included in property
and equipment (Note 3). Advertising
Expenses Advertising
costs are expensed as incurred. Total advertising expense for the years ended December 31, 2016 and 2015, were approximately $79,400
and $31,600, respectively. 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 all relevant factors
when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction,
expectations of future taxable income and the carryforward periods available to us for tax reporting purposes, as well as assessing
available tax planning strategies. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe
is more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes
in income tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments
and estimates. Therefore, actual income taxes could materially vary from these estimates. We
record liabilities to address uncertain tax positions we have taken in previously filed tax returns or that we expect to take
in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position,
taking into consideration whether it is more likely than not that our tax position, based on technical merits, will be sustained
upon examination. For those positions for which we conclude it is more likely than not it will be sustained, we recognize the
largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority.
The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of
these tax positions may be greater or less than the liabilities recorded. Management believes
there are no current uncertain tax positions that would result in an asset or liability being recognized in the accompanying financial
statements. We
file income tax returns in the US federal jurisdiction and various state jurisdictions. We are no longer subject to US federal
tax examination for years beginning before January 1, 2013, and the state tax returns that remain subject to examination include
those for the years ended December 31, 2012 through the years ended December 31, 2016. 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, 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. See Note 9 for additional information. Deferred
Rent and Lease Incentives For
leases that contain fixed escalations of the minimum annual lease payment during the original term of the lease, we recognize
rental expense on a straight-line basis over the lease term and record the difference between rent expense and the amount currently
payable as deferred rent. Deferred lease incentives include construction allowances received from landlords, which are amortized
on a straight-line basis over the lease term. Recently
Adopted Accounting Standards Going
Concern In
August 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-15, “Presentation of Financial
Statements - Going Concern (Subtopic 205-40)”, which requires an entity’s management to evaluate, for each reporting
period, including interim periods, of whether there are conditions and events that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the financial statements are issued. Additional disclosures are required
if management concludes that conditions or events raise substantial doubt about the entity’s ability to continue as a going
concern. The new guidance was effective for the Company in the fourth quarter of 2016. The adoption of the new accounting rules
did not have a material impact on the Company’s financial condition, results of operations or cash flows. Measurement
Period Adjustments In
September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805)”, which simplify the accounting for
measurement period adjustments by eliminating the requirements to restate prior period financial statements for these adjustments.
The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods)
be recognized in the reporting period in which the adjustment is identified. The new standard, which should be applied prospectively
to measurement period adjustments that occur after the effective date, was effective for the Company in the first quarter of 2016.
The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of
operations or cash flows. Stock-Based
Compensation In
March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718,
Stock Compensation. The objective of this amendment is part of the FASB’s Simplification Initiative as it applies to several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. The
Company elected early adoption of ASU 2016-09 in the in the fourth quarter of 2016 which required us to reflect any adjustments
as of January 1, 2016. Upon adoption, excess tax benefits or deficiencies from share-based award activity are reflected in the
consolidated statements of operations as a component of the provision for income taxes, whereas they previously were recognized
in equity. The adoption resulted in approximately $14,900 income tax benefit recognized as of December 31, 2016. The previously
unrecognized excess tax benefit of approximately $13,700 as of January 1, 2016 was recorded as an increase to deferred tax asset.
The Company did not change its policy with respect to the treatment of forfeitures; and, the Company continues estimating the
number of forfeitures. As such, this has no cumulative effect on retained earnings upon adoption. With the early adoption of 2016-09,
the Company has elected to present the cash flow statement on a prospective transition method where no prior periods have been
adjusted. Recently
Issued Accounting Standards Lease
Accounting In
February 2016, the FASB issued ASU 2016-02, “Leases”, which will require lessees to recognize a right-of-use asset
and a lease liability for all leases that are not short-term in nature. For a lessor, the accounting applied is also largely unchanged
from previous guidance. The new rules will be effective for the Company in the first quarter of 2019. The Company is currently
in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations
and cash flows. Although the evaluation is ongoing, the Company expects that the adoption will impact the Company’s financial
statements as the standard requires the recognition on the balance sheet of a right of use asset and corresponding lease liability.
The Company is currently analyzing its contracts to determine whether they contain a lease under the revised guidance and has
not quantified the amount of the asset and liability that will be recognized on the Company’s balance sheet. Revenue
from Contracts with Customers In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which supersedes current
revenue recognition requirements and industry-specific guidance. The codification was amended through additional ASUs and, as
amended, requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects
the consideration the entity expects to be entitled to in exchange for those goods or services. The Company is required to adopt
the new standard in 2018 and may adopt either retrospectively to each prior reporting period presented or as a cumulative-effect
adjustment as of the date of adoption using one of two retrospective application methods. The Company is continuing to evaluate
the provisions of this new guidance and has not determined the impact this standard may have on its financial condition, results
of operations, cash flows and related disclosures or decided upon the method of adoption. We
have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will
have a material impact on our consolidated financial statements. Reclassifications Certain
prior year amounts have been reclassified to conform to the current year presentation. Net income and shareholders’ equity
were not affected by these reclassifications. |
