| 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 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 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. Revenue from verification audits is recognized upon completion of the audits. Contracts for
these services are cancelable only for non-performance. 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. 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. Software
Sales and Related Consulting Segment We
also derive revenue from software licenses, maintenance and services. Our license arrangements generally contain multiple-elements,
including software maintenance services and consulting services. We do not recognize revenue until the following four basic criteria
are met: (i) persuasive evidence of an arrangement exists, (ii) our product has been shipped or, if delivered electronically,
the customer has the right to access the software, (iii) the fee is fixed or determinable, and (iv) collection of the fee is probable. We
predominately offer products via a SaaS model, which is a subscription based model. Subscription revenue derived from these agreements
is generally recognized on a straight-line basis over the subscription term. We
generally sell our software licenses with maintenance services and, in some cases, also with consulting services. For these multiple-element
arrangements, we allocate revenue to the delivered elements of the arrangement using the residual method, whereby revenue is allocated
to the undelivered elements based on vendor specific objective evidence (or “VSOE”) of fair value of the undelivered
elements with the remaining arrangement fee allocated to the delivered elements and recognized as revenue assuming all other revenue
recognition criteria are met. For the undelivered elements, we determine VSOE of fair value to be the price charged when the undelivered
element is sold separately. We determine VSOE for maintenance sold in connection with a software license based on the amount that
will be separately charged for the maintenance renewal period. We determine VSOE for consulting services by reference to the amount
charged for similar engagements when a software license sale is not involved. We review services sold separately on a periodic
basis and update, when appropriate, our VSOE of fair value for such maintenance and services to ensure that it reflects our recent
pricing experience. If payment of the software license fees is dependent upon the performance of consulting services or the consulting
services are essential to the functionality of the licensed software, then we recognize both the software license and consulting
fees using the completed contract method. Revenue
from maintenance is recognized ratably over the service period. Maintenance revenue is deferred until the associated license is
delivered to the customer and all other criteria for revenue recognition have been met. Revenue from consulting services is generally
recognized as the services are delivered to the customer. Other Sales
taxes collected from customers and remitted to government authorities are excluded from revenue. Generally,
we do not provide right of return or warranty on product sales or services performed. 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. 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 $47,600 and $17,900, at December 31, 2017
and 2016, respectively. No
single customer accounted for greater than 10% of our accounts receivable balances at December 31, 2017 and 2016. Cost
of Revenues Salaries
and related fringe benefits directly associated with our verification and certification service revenues are allocated to costs
of verification and certification services. Costs
of products primarily represents the cost of livestock ear tags generally used in connection with our verification programs. 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. Costs
of product support, including web hosting fees, salaries and related fringe benefits directly associated with our software license,
maintenance and support services, are allocated to costs of software license, maintenance and support services. Salaries
and related fringe benefits directly associated with our software-related consulting revenues are allocated to costs of software-related
consulting services. 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 a non-controlling interest in our acquisition. Other
Financial Instruments The
carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair
value due to their short maturities. The carrying values shown for short-term investments 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 depreciated 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 among the Company’s
long-lived assets through December 31, 2017 and 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. Such assets also consist 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 2017
and 2016, we completed a quantitative and qualitative analysis, and based upon the work performed, we concluded that no indicators
of impairment existed. Goodwill
and Other Non-Amortizable Intangible Assets Goodwill
relates to our acquisitions of International Certification Services, Inc. (“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, 2017, 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 of 2017, 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, 2017, 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 2017 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. We
estimate the SureHarvest reporting unit’s fair value using a 13-year projection of discounted cash flows which incorporates
planned growth rates, market-based discount rates and estimates of residual value. Additionally, we used a market-based, weighted-average
cost of capital of 16.3% to discount the projected cash flows of those operations. 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. If the carrying value of a reporting unit’s net assets exceeds its
fair value, the second step is applied to measure the difference between the carrying value and implied fair value of goodwill.
If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied
fair value. In connection with our testing, we noted the SureHarvest reporting unit was more sensitive to near-term changes in
discounted cash flow assumptions. As of December 31, 2017, the fair value exceeded the carrying value of net assets by approximately
3%. While the reporting unit passed the first step of the impairment test, if operating income or another valuation assumption
were to deteriorate significantly in the future, it could adversely affect the estimated fair value. If we are unsuccessful in
our plans to increase the profitability of the SureHarvest reporting unit, the estimated fair value could decline and lead to
a potential goodwill impairment in the future. 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 2017 and
2016. 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 2017 and 2016, the amortization of capitalized costs totaled approximately $0 and $43,000, respectively, 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 (Note 3), software developed for external sale with an estimated fair value of approximately $558,000 has been included in
property and equipment. During 2017, the amortization of capitalized costs totaled approximately $186,000, included in depreciation
expense (Note 4). Advertising
and Marketing Expenses Advertising
and marketing costs are expensed as incurred. Total advertising and marketing expenses for the years ended December 31, 2017 and
2016, were approximately $290,000 and $220,400, 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. The
accounting standard related to income taxes applies to all tax positions and defines the confidence level that a tax position
must meet in order to be recognized in the financial statements. The accounting standard requires that the tax effects of a position
be recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date.
If a tax position is not considered “more-likely-than-not” to be sustained, then no benefits of the position are to
be recognized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as
unrecognized tax benefits. This standard also provides guidance on the presentation of tax matters and the recognition
of potential Internal Revenue Service interest and penalties. As of December 31, 2017 and 2016, the Company did not have an unrecognized
tax liability. The
Company classifies penalty and interest expense related to income tax liabilities as an income tax expense. The Company did not
incur any interest and penalties for the years ended December 31, 2017 and 2016. The
Company files income tax returns in the U.S. and various state jurisdictions, and there are open statutes of limitation for taxing
authorities to audit our tax returns from 2014 through the current period. The
Tax Cuts and Jobs Act (“Tax Act”) was signed into law on December 22, 2017. The Tax Act includes significant changes
to the U.S. corporate income tax system, including a federal corporate rate reduction from 35% to 21%, limitations, the deductibility
of interest expense and executive compensation, eliminating the corporate alternative minimum tax (“AMT”) and changing
how existing AMT credits can be realized, changing the rules related to uses and limitations of net operating loss carryforwards
created in tax years beginning after December 31, 2017, and, the transition of U.S. international taxation from a worldwide tax
system to a territorial tax system. As
a result of the reduction in the federal tax rate, the Company was required to revalue its ending net deferred tax liabilities
and/or assets as of December 31, 2017, as well as evaluate whether a valuation allowance was needed for deferred tax assets. For
2017, the primary impact to the Company is the reduction in the federal corporate tax rate from 35% to 21% which reduced the Company’s
ending deferred tax assets by approximately $40,000. 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 at the date of grant 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 10 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 terms. Recently
Issued Accounting Standards 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 changes the revenue recognition for companies
that enter into contracts with customers to transfer goods or services. The standard is a comprehensive new revenue recognition
model that requires revenue to be recognized in a manner depicting the transfer of goods or services to a customer at an amount
that reflects the consideration expected to be received in exchange for those goods or services. The FASB has also issued a number
of updates to this standard. We adopted the standard on January 1, 2018. Companies may use either a full retrospective or a modified
retrospective approach to adopt this standard. We adopted the standard using a modified retrospective approach. We
are in the final stages of assessing the impact of adoption and evaluating the materiality of that impact on our consolidated
financial statements. We note that our conclusions are subject to change, and we continue to review our implementation documentation,
finalize our impact assessment and perform other implementation activities. In
addition to completing our review of contracts and quantifying the impacts on the consolidated financial statements, we have analyzed
our internal control over financial reporting framework and determined that there will be new controls added around contract inception
and contract modifications, as well as periodic reviews of material contracts. In addition, we have reviewed the impacts of this
standard on our footnote disclosures for periods subsequent to January 1, 2018. We have determined that the adoption of this standard
will result in several additional disclosures, including but not limited to additional information around our performance obligations,
the timing of revenue recognition, remaining performance obligations at period end, contract assets and liabilities and significant
judgments made that impact the amount and timing of revenue from our contracts with customers. Clarifying
the Definition of a Business In
January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business,” which provides guidance on evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU amends ASC 805 to
provide a more robust framework to use in determining when a set of assets and activities is a business. In addition, the amendments
provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more
operable. The new guidance will be effective
for the Company in the first quarter of 2018. The Company has evaluated the provisions of this
new guidance and 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. Simplifying
the Test for Goodwill Impairment In
April 2017, the FASB has issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which removes Step 2
from the goodwill impairment test. As a result, under the Accounting Standards Update (“ASU”), an entity should perform
its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and
should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;
however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The
Company is required to adopt the new standard in 2020. The Company is currently evaluating the
provisions of this new guidance and 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 current year presentation. Net income and shareholders’ equity were
not affected by these reclassifications. |
