Hello, and welcome to the Where Food Comes From First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Jay Pfeiffer, Investor Relations. Please go ahead, Jay. .

Good morning, and welcome to the Where Food Comes From 2023 First Quarter Earnings Call. Joining me on the call today are CEO, John Saunders; President, Leann Saunders; and Chief Financial Officer, Dannette 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 earnings release for important disclosures regarding non-GAAP measures. I'll now turn the call over to John Saunders. .

Good morning, and thanks for joining the call today. This morning, we announced our first quarter financial results for the period ended March 31, 2023. As we detailed in our news release, we encountered a flurry of anomalous circumstances and events in Q1 that negatively impact both revenue and profitability.

The good news is in an economic environment where many companies are focusing on layoffs and hammering down costs wherever they can in the face of inflationary pressures and a potential recession, we believe we are faring comparatively well.

In fact, we believe the combination of verification industry tailwinds, very sticky customer relationships, our lean operating model and the tremendous value we provide our customers will enable us to continue to weather macro headwinds and profitably grow our business over the long haul..

Now to our first quarter results. Revenue in Q1 was $5.3 million, down from $6.2 million in the first quarter last year. But keep in mind, however, that in the year ago first quarter, we booked $850,000 in software and consulting revenue from a one-off consulting contract with a Japanese government agency.

So adjusted for that, year-over-year revenue would have been essentially flat, which isn't too bad, given macro headwinds and the impact of a few unrelated events I referenced earlier..

one, we are still feeling the effects of severe drought conditions that significantly reduced herd sizes last year and had ripple effects this year in the form of fewer cattle for us to verify.

This situation of where fewer cattle moving through the system in the current cycle impacts not only the annual on-site audits but also the revenue we derive from right-to-ship fees each time an animal moves to a new location on its way to the packer.

This cyclical cattle trend could last for some time, but we think we'll see some positive offset to that from the USDA's ADT program, which in the coming years is expected to add up to another 11 million head of cattle annually required to be verified with an RFID tag..

The momentum behind this evolving new standard, which has been in the works for years, is based largely on concerns about how traceability in the event of foreign animal disease enters the United States.

While there is pushback in some circles, the National Cattlemen's Beef Association is fully supporting the program and we believe the transition is relatively inevitable..

Another factor impacting revenue was the severe winter weather events across the country that limited our ability to conduct audits and deliver ear tags in the month of March.

The good news is those audits were delayed, not canceled, so we expect to capture that revenue over the remainder of the year, although not necessarily all in the second quarter.

To put this more into perspective, in all our years as a public company, only recently has weather, be it drought or too much snow, had this kind of impact on our operations and year-over-year financial results..

Yet another issue factoring into our verification activity is a shift in consumer purchasing activity based on food inflation.

We're seeing this not so much in the beef area where consumers continue to pay up for premium products but rather in the other food sectors, where our customers are shrinking their offerings in certain verified product lines to conform to changes based on inflationary pressures. That, in turn, lowers our verification activity with those customers..

Lower revenue due to the events I just described, combined with some continued wage inflation, impacted gross margins for our verification products segment, which came in at 42.1% in the quarter versus 46.3% in the same quarter last year. At the corporate level, SG&A expenses in the first quarter increased to $2 million from $1.8 million last year.

A lot of this increase resulted from the timing of activities that had been late due to COVID shutdowns..

one, we sent teams of -- to a number of industry trade shows around the country; two, we resumed our annual on-site training program that brought some 100 auditors from across the country to Castle Rock and Des Moines for two 2-day sessions.

And we sent a contingent to New York for the NASDAQ bell-ringing ceremony, an event that drew a lot of attention to the company but again is a onetime cost..

As a result of lower gross margins, inflationary pressures and the abnormal concentration of various expenses in the first quarter, Q1 net income was $0.1 million or $0.02 per basic and diluted share compared to net income of $0.5 million or $0.08 per basic and diluted share in the same quarter last year.

Adjusted EBITDA was $0.4 million, down from $0.9 million year-over-year..

one, we invested $200,000 in seafood traceability company, BlueTrace, whose management team we got to know at one of the trade shows I referenced earlier.

Currently a private company, BlueTrace offers a cloud-based solution that helps players across the shellfish supply chain comply with government regulations, manage their inventories and optimize profitability. Our investment was part of an oversubscribed stock offering led by venture capital and angel investors..

Based in Maine, BlueTrace is growing rapidly with more than 350 customers primarily in the shellfish industry in all but 2 coastal U.S. states and most Canadian provinces.

The company's digital traceability solution uses a mobile app and tamper-evident barcode tags to replace outdated paper-based tracking solutions that have become more challenging in light of increasingly stringent traceability standards.

Those standards are established and enforced by the Interstate Shellfish Sanitation Commission (sic) [ Interstate Shellfish Sanitation Conference ], which is particularly focused on safety issues around freshness and temperature..

one, we like the space and BlueTrace's early mover status, and we believe our investment will appreciate in value; two, and more importantly, we plan to work closely with their team in areas that augment our own initiatives in the seafood space, including enhancing our FishCARE sustainability standard and other aquaculture offerings going forward..

On the subject of investments and again speaking to our optimism about the business prospects going forward, we accelerated our share repurchase program in the first quarter, buying back 89,450 shares of Where Food Comes From stock at a cost of $1.2 million.

Over the past 5 quarters, we have repurchased nearly 400,000 shares, reducing our share count by approximately 7%. Your management team, myself and the Board believe our shares represent an excellent value at these levels, and we expect to continue these buybacks as long as our cash flows support it..

So with that, thanks again for joining us on the call today. With that, I'll open the call to questions.

Operator?.

[Operator Instructions].

If there are no questions at this time, I'd like to turn the floor back over for any further or closing comments. .

Kevin, could you re-poll one more time just to make sure there's no questions? Thank you. .

[Operator Instructions].

We do have a question from Chris Brown, a private investor. .

Just was wondering if you could give a little bit more color on how you guys think the ADT regulations play out over the next couple of years. Is that something that's gradual? Is it big? And then I was wondering if you have an idea of like what kind of market share you guys have in the bigger picture of United States cattle verification. .

Sure. I'll answer the first -- the second question first. Today, we verified just under 2.5 million cattle, which is just at about a little bit under 10% of the cattle which are slaughtered in the U.S. every year. So we have it at about just a little bit under 10%. ADT is going through a process.

As I mentioned, this has been a long-term program offered by the USDA. This change specifically, Chris, is the transition from metal clip tags to electronic identification tags. The ruling was set to begin January 1, 2023, or to sunset basically and this new rule to start to move forward with EIDs..

We're currently in a comment period so we're still receiving comments from the industry. But yes, we anticipate that it will be a gradual move.

But as I mentioned, with only 2.5 million cattle that we identified this year, we see this as a real tailwind for us in tags and radio frequency identification in the cattle industry moving forward over the next couple of years. So yes, we see it coming in gradually.

It won't happen all at once but in the next 18 to 24 months, we see it moving in that direction. .

[Operator Instructions] It appears there are no further questions at this time. I'll turn the floor back over for any further or closing comments. .

Thanks, Kevin. And one clarification, Chris, on that question. Leann just pointed out to me that there's roughly 2.5 million, so about 10% of the cattle industry is verified. We have our percentage of that as somewhere north of 90% so we feel we have a very strong control position, so just to answer that finally, Chris. Thanks for the question..

Thanks, everybody, for participating today, and we'll talk to you again in 3 months. Take care. .

That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today..