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FreshRealm

12 Months Ended

Oct. 31, 2019

FreshRealm

Variable Interest Entity

16. FreshRealm

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Variable Interest Entity

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Based on the NMUPA and related Agreements, as described in Note 8, we reconsidered whether FreshRealm was a variable interest entity (VIE) as of October 31, 2019 and 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 concluded that we were not the primary beneficiary of FreshRealm at October 31, 2019 and 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. 

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We record the amount of our investment in FreshRealm, totaling $5.8 million and $19.9 million at October 31, 2019 and 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.

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For the year ended October 31, 2019 and 2018, FreshRealm incurred losses totaling $30.6 million and $29.4 million, of which we recorded $14.1 million and $12.0 million of non-cash losses during fiscal 2019 and 2018. Effective December 16, 2018, FreshRealm completed a “check the box” tax election to change their entity classification for tax purposes to that of a corporation.  To effect this change, FreshRealm, among other things, amended its operating agreement to eliminate the appropriate language related to the flow-through tax consequences of its prior tax status (Seventh Amended and Restated LLC Agreement) and checked the appropriate box on Form 8832 which it then filed with the Internal Revenue Service (IRS).  As a result, losses incurred by FreshRealm from November 1, 2018 to December 15, 2018 were recorded in accordance with FASB Accounting Standards Codification (“ASC”) 810, ASC 323, and ASC 970, which 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. As such, we recorded 100% of FreshRealm’s losses from November 1, 2018 through December 15, 2018 totaling $4.2 million. Losses incurred by FreshRealm from December 16, 2018 to October 31, 2019 (after the change in tax status was effective) were recorded to reflect our proportionate share of FreshRealm losses. We recorded losses from December 16, 2018 through October 31, 2019 totaling $9.9 million. As a result of FreshRealm’s recent change in tax status (described above), future operating results for FreshRealm will be allocated to its owners based on ownership percentage.

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In fiscal 2019, certain FreshRealm employees left the company surrendering their ownership units. This changed Calavo’s ownership percentage slightly to approximately 38%.

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Unconsolidated Significant Subsidiary

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As described above, we own approximately 38% of FreshRealm as of October 31, 2019. 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%.

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FreshRealm incurred losses totaling $30.6 million, of which we recorded $14.1 million of non-cash losses during our fiscal year 2019. 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 2019 Form 10-K is due by December 30, 2019. 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 March 30, 2019).

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Note that since Rule 3-09 of Regulation S-X financial statements are not filed at the same time as our 2019 Form 10-K, we must include Rule 4-08(g) summarized financial information in our 2019 Form 10-K.

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

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Balance Sheet:

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​	​	​	​	​	​	​
​		October 31,			October 31,
​	​	2019		​	2018
​	​	​	​	​	​	​
Assets:	​	​	​	​	​	​
Cash and cash equivalents		$	961		$	814
Accounts receivable, net of allowances	​	​	1,493	​	​	1,903
Inventories, net	​	​	2,792	​	​	3,186
Prepaid expenses and other current assets	​	​	732	​	​	1,152
Property, plant, and equipment, net	​	​	6,076	​	​	9,152
Other assets	​	​	703	​	​	1,500
​	​	$	12,757	​	$	17,707
​	​	​	​	​	​	​
Liabilities and equity:	​	​	​	​	​	​
Current liabilities	​	$	6,533	​	$	6,557
Debt to Calavo	​	​	35,241	​	​	9,000
Long-term liabilities	​	​	—	​	​	505
Equity	​	​	(29,017)	​	​	1,645
​	​	$	12,757	​	$	17,707

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Income Statement:

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​	​	​	​	​	​	​	​	​
​	​	12 months ended October 31,
​	2019		​	2018		​	2017
​	​	​	​	​		​	​
Net sales	$	24,112		$	33,769		$	16,933
Gross loss		(5,783)	​		(10,868)	​		(7,275)
Selling, general and administrative		(20,196)	​		(19,512)	​		(12,733)
Other		(4,621)	​		1,023	​		(13)
Net loss	$	(30,600)	​	$	(29,357)	​	$	(20,021)

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X

- Definition

The entire disclosure for a variable interest entity (VIE), including but not limited to, judgments and assumptions in determining whether to consolidate and in identifying the primary beneficiary, gain (loss) recognized on the initial consolidation of the VIE, terms of arrangements, amounts and classification of the VIE's assets and liabilities, and the entity's maximum exposure to loss.

+ References

Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 810
-URI http://asc.fasb.org/topic&trid=2197479

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- References

No definition available.

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