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BUSINESS
GENERAL
Integrated Management Information, Inc. (“IMI Global,” “IMI,” the “Company,” “our,” “we,” or “us,”) is a leading provider of verification and communication solutions for the agriculture, livestock and food industry.
We were incorporated in 1998 as a Missouri corporation. In March, 2005, we reincorporated in Delaware, and in March 2006, we changed our domicile from Delaware to Colorado. Until December 31, 2004 we were structured as a Subchapter S corporation and on January 1, 2005, we converted to a Subchapter C corporation.
We provide our owned and operated online products and services which specialize in identification and traceability, process, production practice and supply verification, document control for USDA verification programs and third party auditing services. We apply information technology to the agriculture, livestock and food industry by addressing the growing importance of marketing claims such as: source of origin information, genetic background, animal treatment, animal health history, animal age, animal movements, nutrition, carbon credits and other credence attributes. Our solutions provide assurance regarding those claims made that cannot be confirmed by visual inspection once the product reaches the retail food case and is marketed to the consumer. We have developed a range of proprietary web-based applications, consulting methodologies, auditing processes, and other services to allow the livestock and food industry to record, manage, report, and audit this information. Our solutions help our customers establish their own systems, meet government regulations, create their own premium brand identity, gain cost efficiencies and command a higher price for their product.
We stand at the forefront of a rapidly evolving movement to track livestock and verify sources of meat and other livestock products. In the aftermath of the discovery of the first case of mad cow disease in the United States in December, 2003, many of the largest U.S. beef and other livestock export markets were closed resulting in significant losses to the industry. In response to the crisis, several initiatives were enacted to facilitate the reopening of key export markets. Most notably, U.S. suppliers seeking to sell beef and other livestock products to other countries must participate in a pre-approved Quality System Assessment Program so as to have an approved means of verifying specific product requirements. In response, we were the first to develop a USDA Quality System Assessment document management system for auditing the tracking systems used by beef and other livestock producers to verify source and age. We introduced our USVerified Source and Age Verification system in 2005, and over the years we have continued to enhance and further develop programs to address other verification needs including, but not limited to, non-hormone treated cattle (NHTC) and humane handling marketing claims.
In 2009, we worked with compliance programs, and marketing approaches which required meat retailers to display the country of origin labels (COOL) on their meat and produce. Also in 2009, we introduced our VerifiedGreen™ Verification program. This program caters to producers and consumers who are committed to reducing their carbon footprint. Then in March 2010, in response to consumers’ demand of increased transparency regarding the origins and safety of their food, we introduced our “Where Food Comes From” (WFCF) consumer labeling program. This program is a rigorous qualification protocol under which only those farmers, ranchers and processors who meet strict third-party verification requirements may display the distinctive WFCF brand. It is the first of its kind that directly connects the consumer with the food supply chain in a way that fosters confidence at the point of purchase. We believe that as consumers become better educated, they will have more confidence in their food purchase decisions. In addition to building consumer confidence, the WFCF label gives producers and processors a way to enhance, differentiate and even protect their valuable brands.
As part of our business strategy, we regularly evaluate acquisition opportunities as a means of accelerating our growth and achieving our long-term strategic objectives. In February 2012, we completed our acquisition of 60% of the outstanding stock of International Certification Services, Inc. (“ICS”). ICS is one of the leading organic certifiers in the United States. ICS represents an opportunity to extend the range of our existing programs and establish our capabilities in other major food groups, including poultry, grains, fruits and vegetables, dairy, packaged and processed goods. We believe this acquisition has tremendous synergies for both IMI and ICS. As industry leaders in our respective product and service offerings, we are now positioned to offer our customers new solutions across the verification and certification spectrum. We also believe it provides diversification for our company, enables us to better serve our customers, and provides another avenue for our WFCF program.
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INDUSTRY BACKGROUND
As the livestock and food industry has matured and expanded internationally, there has been an increasing need to record, manage, report and audit information regarding the source, age, genetic background, animal treatment, nutrition, and other credence attributes of livestock for the benefit of producers, processors, distributors, retailers, consumers, and regulators.
Demand for livestock identification, traceability and verification solutions further accelerated in recent years due to industry and consumer concerns regarding bovine spongiform encephalopathy (mad cow disease), governmental and industry regulations regarding recordkeeping for livestock, and technology, and technology advances, including radio frequency ID tags for livestock and web-based systems facilitating real-time data entry, reporting, and auditing. The demand for verification continues to grow and present other opportunities for our business in light of the many recent product recalls in fresh produce and country of origin labeling.
Many of the world’s largest beef and other livestock exporting countries, including Brazil, Argentina, and Australia, have established mandatory traceability and verification standards. Other countries have issued voluntary animal identification and traceability standards. Overall, the United States lags with regards to meeting this market demand, as the United States government has not to date established mandatory traceability standards.
Initiatives under the United States Department of Agriculture
To support industry driven marketing programs and to comply with trade agreements established with international export partners, the United States Department of Agriculture (USDA), Agriculture Marketing Service, Audit, Review and Compliance Branch has established the voluntary Quality System Assessment, Non Hormone Treated Cattle (NHTC), and Process Verified programs based on ISO 9001 Instructions. These programs provide guidelines and structure to enable suppliers of agricultural products and services to assure customers of their ability to provide consistent quality products or services by having their processes audited by independent, third-party auditors using USDA approved methodologies and programs.
The USDA’s Quality System Assessment (QSA) program is a documented quality management system and verification trail that can support specific product claims or customer requirements, as well as confirm compliance with export standards. The approved QSA must show that characteristics of the product are being monitored and measured accurately. Approved QSA programs are audited by the USDA at least twice per year.
The USDA’s Process Verified Program (PVP) is similar to the QSA program, but broader in scope. Like the QSA, PVP ensures that companies deliver products that meet stated product claims. In addition, it provides the livestock and food industry with a verifiable marketing tool. Once marketing claims are verified by the USDA, the company may use the “USDA Process Verified” shield on its marketing materials.
Both of the USDA’s QSA and PVP programs are applicable to a company’s entire program or certain portions of its programs where specified producer or product requirements are supported by a document quality management system and the documented delivery processes are verified through an independent, third party audit. To operate an approved program, suppliers must submit a documented quality management system to the Audit Review and Compliance Branch of the USDA Livestock and Seed Program and successfully pass a document review and an on-site audit.
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Within the United States, these USDA programs are voluntary and are primarily useful in providing the industry with a process for demonstrating source, age, and quality attributes as the product moves through the supply chain. In addition, compliance with the programs allows producers to verify claims such as “age verified,” “non-hormone treated,” or “guaranteed tender.”
The USDA also promotes participation in NAIS (National Animal Identification System). The purpose of the NAIS is to protect the health of U.S. livestock and poultry and the economic well-being of those industries by quickly and effectively tracing an animal disease to its source. While the federal program is voluntary, money received by some states, tribes, and non-profit entities from the USDA through cooperative agreements has been used to make parts or the entire program mandatory. Some countries have restricted the importation of some animal products because of the potential for disease. Effectively implemented, NAIS could potentially allow trace back of a disease to its origin within 48 hours, limiting the impact of a potential outbreak. This could have monetary benefits for farmers, who would lose less livestock in the case of disease.
Export Markets/Programs
To market beef and other livestock products outside of the United States, suppliers must comply with the QSA and PVP policies and procedures and address the specified product requirements addressed in the USDA Export Verification (EV) Instructions specific to each country. Regardless of final export destination or specific Export Verification program requirements, US suppliers seeking to sell beef and other livestock products must participate in a pre-approved QSA or PVP program so as to have an approved means of verifying source, age, and other specific product requirements. Therefore, though the program is voluntary, it is mandatory to gain access to many export markets.
Mexico, Canada, South Korea, the Middle East, and Japan are the world’s largest export markets. To market beef and other livestock products in these markets; beef, for example, is required to be sourced from cattle that are of a certain maximum age at the time of slaughter. The USDA’s QSA program is the standard mechanism for verifying source and age for these export markets and, therefore, is a mandatory requirement for producers, packers, and distributors to export to these key markets.
Current Marketplace Conditions
We believe the following marketplace conditions will drive our business forward effectively increasing consumer demand for third party verification services and presenting additional opportunities:
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In 2010, Korea announced a “nationwide hog farm management system” to improve the farming environment and prevent swine fever. Also in 2010, Korea fully implemented a mandatory domestic and imported beef tracing system. We believe this provides significant international verification opportunities in predominately Asian markets which have historically been difficult for US markets to penetrate.
U.S. beef has been largely absent from the European Union (EU) for the past 20+ years due to an EU ban on hormone-treated meat and meat products. In late 2009, the EU announced an annual duty-free quota of 20,000 metric tons for high-quality beef from cattle not treated with growth hormones (NHTC). In March 2012, the EU expanded the annual duty-free quota from 20,000 metric tons to 48,200 metric tons. NHTC requires third party verification, but with duty-free access lowering the cost of doing business in Europe, we believe that it offers significantly more potential for third party NHTC verification services and our product line, High Quality Beef verification services.
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One-fourth of the world’s beef and nearly one-fifth of the world’s grain, milk and eggs are produced in the United States. With increased consumer consciousness, Americans are demanding to know where their food comes from and how they can support development of local and regional food systems. We believe that as consumers become better educated they will have more confidence in their food purchase decisions. This demand should accelerate the growth of our “Where Food Comes From®” labeling program.
Concerns about animal welfare continue to drive retailers to make program decisions based on animal handling, care, well-being and welfare programs. In late 2010 we introduced a new revenue stream for various retailers. We offer animal welfare audits at the supplier level on pork, beef and chicken farmers and ranchers. The service provided to retailers is having a significant impact in our third-party verification revenue and we believe this trend will continue to grow.
The worldwide market for certified organic products is estimated at $59.4 billion in 2010. The U.S. market is estimated at $28.5 billion in 2010 and is expected to reach $42.5 billion by 2015. Increasing consumer demand for healthy, better-for-you products produced chemical free with sustainable agricultural practices is driving growth in the organic market. Additionally, specialty food-store chains, conventional grocery store chains and big box retailers are allocating more shelf space to organic products in order to meet the growing demand. Our acquisition of a 60% ownership investment in ICS creates a strategic transaction offering major participants in the food and agriculture industries a comprehensive range of verification services for the major food groups through a single platform.