16. FreshRealm

Variable Interest Entity

Based on the NMUPA and related Agreements, as described in Note 8, we reconsidered whether FreshRealm is a variable interest entity (VIE) as of October 31, 2018. A VIE refers to a legal business structure in which an investor has a controlling interest in, despite not having a majority of voting rights; or a structure involving equity investors that do not have sufficient resources to support the ongoing operating needs of the business. Due primarily to FreshRealm utilizing substantially more debt to finance its activities, in addition to its existing equity, we believe that FreshRealm should be considered a VIE. In evaluating whether we are the primary beneficiary of FreshRealm, we considered several factors, including whether we (a) have the power to direct the activities that most significantly impact FreshRealm’s economic performance and (b) the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE. We were not the primary beneficiary of FreshRealm at October 31, 2018 because the nature of our involvement with the activities of FreshRealm does not give us the power to direct the activities that most significantly impact its economic performance. We do not have a future obligation to fund losses or debts on behalf of FreshRealm. We may, however, voluntarily contribute funds. In the accompanying statements of income, we have presented the income (loss) from unconsolidated entities, after the provision for income taxes for all periods presented.

We record the amount of our investment in FreshRealm, totaling $19.9 million at October 31, 2018, in “Investment in unconsolidated entities” on our Consolidated Balance Sheets and recognize losses in FreshRealm in “Income/(loss) in unconsolidated entities” on our Consolidated Statement of Income.

For the year ended October 31, 2018, FreshRealm incurred losses totaling $29.4 million, of which we recorded $12.0 million of non-cash losses during fiscal 2018. In periods prior to our fiscal third quarter, Calavo had not recorded losses from FreshRealm since Impermanence (a non-affiliated investor group) invested in FreshRealm and Calavo deconsolidated FreshRealm in fiscal 2014. FASB Accounting Standards Codification (“ASC”) 810, ASC 323, and ASC 970 mandate that the recognition of losses for an unconsolidated subsidiary be handled in a manner consistent with cash distributions upon liquidation of the entity when such distributions are different than the investors percentage ownership. Further, the current FreshRealm LLC operating agreement mandates that losses be recognized first by other investors (“non-option investors”) with positive capital accounts and then by Calavo (the only “option investor” to date) until all such capital accounts are reduced to zero. During our third fiscal quarter of 2018, we estimated that all non-option investor capital accounts were reduced to zero and we were the only investor with a remaining positive capital account balance. As of October 31, 2018, our capital account balance was approximately $1.5 million. Unless we opt to contribute additional funds (i.e. equity or debt), we estimate that our maximum exposure to loss from FreshRealm, as of October 31, 2018, is limited to our total investment balance of approximately $19.9 million, plus $12 million related to the debt Agreements, as described in Note 8.

Unconsolidated Significant Subsidiary

As described in footnote 8, we own approximately 37% of FreshRealm as of October 31, 2018. In accordance with Rules 3-09 and 4-08(g) of Regulation S-X, we must determine if our unconsolidated subsidiaries are considered, “significant subsidiaries”. In evaluating our investments, there are three tests utilized to determine if our subsidiaries are considered significant subsidiaries: the asset test, the income test and the investment test. Rule 3-09 of Regulation S-X requires separate audited financial statements of an unconsolidated subsidiary in an annual report if any of the three tests exceed 20%. Rule 4-08(g) of Regulation S-X requires summarized financial information in an annual report if any of the three tests exceed 10%.

FreshRealm incurred losses totaling $29.4 million, of which we recorded $12.0 million of non-cash losses during our fiscal year 2018. Pursuant to Rule 3-09 of Regulation S-X, this requires separate audited financial statements of FreshRealm in our Form 10-K. However, because Calavo and FreshRealm have different fiscal year-ends, the guidance in Rule 3-09(b)(2), as well our filing status, must be considered in determining the due date for Calavo to file the financial statements of FreshRealm in our Form 10-K. Since we are a large accelerated filer, our 2018 Form 10-K is due by December 30, 2018. Since FreshRealm’s fiscal year-end is December 31, we plan to file the financial statements of FreshRealm as an amendment to our Form 10-K within 90 days after FreshRealm’s year-end (i.e., by April 1, 2019).

Note that since Rule 3-09 of Regulation S-X financial statements are not filed at the same time as our 2018 Form 10-K, we must include Rule 4-08(g) summarized financial information in our 2018 Form 10-K.

The following tables show summarized financial information for FreshRealm (in thousands):

Balance Sheet:


	October 31,		October 31,
	2018		2017

Assets:
Cash and cash equivalents	$	814	$	4,063
Accounts receivable, net of allowances		1,903		1,648
Inventories, net		3,186		1,728
Prepaid expenses and other current assets		1,152		787
Property, plant, and equipment, net		9,152		6,910
Other assets		1,500		—
	$	17,707	$	15,136

Liabilities and equity:
Current liabilities		6,557		3,919
Debt to Calavo		9,000		—
Long-term liabilities		505		995
Equity		1,645		10,222
	$	17,707	$	15,136

Income Statement:


	12 months ended October 31,
	2018		2017		2016

Net sales	$	33,769	$	16,933	$	2,688
Gross loss		(10,868)		(7,275)		(2,153)
Selling, general and administrative		(19,512)		(12,733)		(5,457)
Other		1,023		(13)		(56)
Net loss	$	(29,357)	$	(20,021)	$	(7,666)