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FreshRealm | 9 Months Ended
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Jul. 31, 2020
FreshRealm |
FreshRealm | 12. FreshRealm ​ A VIE refers to a legal business structure in which an investor has a controlling interest, 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 continue to 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 July 31, 2020 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 consolidated condensed statement of operations, we have presented the income (loss) from unconsolidated entities, subsequent to the provision for income taxes for all periods presented. ​ During the quarter ended July 31, 2020, we concluded that there was no longer any value associated with our FreshRealm investment and therefore recognized a $2.8 million impairment charge to fully impair the investment. (see Note 18). Our investment in FreshRealm totaled $5.8 million at October 31, 2019. ​ For the three months ended July 31, 2020 and 2019, FreshRealm incurred losses totaling $4.9 million and $6.2 million. For the nine months ended July 31, 2020 and 2019, FreshRealm incurred losses totaling $19.3 million and $25.0 million. 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 January 31, 2019 (after the change in tax status was effective) were recorded to reflect our proportionate share of FreshRealm losses which totaled $2.7 million. As a result, we realized total losses of $6.9 million in our first fiscal quarter of 2019. During our first and second fiscal quarter of 2020, we recorded losses of approximately $3.5 million and $1.9 million, reflecting our proportionate share of FreshRealm losses. During our three and nine months ended July 31, 2020, we recorded losses of approximately $1.8 million and $7.2 million, reflecting our proportionate share of FreshRealm losses. 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. See Note 18 for more information on the reserve for collectability recorded on FreshRealm’s Note receivable and impairment charge recorded on the investment. ​ As of July 31, 2020, and October 31, 2019, we have note receivables from FreshRealm totaling $34.2 million and $35.2 million. See Note 4 for further information. See Note 18 for further discussion of the reserve for collectability recorded on FreshRealm’s Note receivable. ​ In the first quarter of fiscal 2019, FreshRealm entered into a supply contract with a large multinational, multi-channel retailer. Calavo co-signed an addendum to this agreement to provide assurance to the customer that Calavo will assume responsibility for performance, in the event that FreshRealm cannot perform, provided that the customer must work in good faith to make reasonable adjustments to logistical elements in the contract, if requested by Calavo. ​ Except for the performance guarantee noted above (for which we don’t expect to have a significant impact on operations), our exposure to the obligations of FreshRealm is generally limited to our investment. See Note 4 and Note 18 for more information. Our maximum exposure to loss could increase in the future if FreshRealm receives additional financing (i.e. equity or debt) from Calavo. We are under no obligation to provide FreshRealm additional financing and we currently have no plans to provide any additional financing to FreshRealm. ​ Unconsolidated Significant Subsidiary ​ On May 20, 2020, the SEC issued a final rule regarding the financial statement requirements for acquisitions and dispositions of a business, which included, among other things, amending (1) certain criteria in the significance tests for equity method investees, such as introducing a revenue component when calculating the income test, (ii) related pro forma financial information requirements including its form and content, and (iii) related disclosure requirements, including the number of acquiree financial statement periods required to be presented in SEC filings. The final rule is effective for fiscal years beginning after December 31, 2020, with early application permitted. The Company determined to adopt this SEC final rule as of July 31, 2020, and as a result, the Company’s investment in FreshRealm was no longer considered a significant subsidiary. ​ The following table shows summarized financial information for FreshRealm (in thousands): ​ Income Statement:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three months ended July 31, | ​ | Nine months ended July 31, | ​
​ | ​ | 2020 | ​ | 2019 | ​ | 2020 | ​ | 2019 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Net sales |  | $ | 2,383 |  | $ | 5,428 |  | $ | 16,092 |  | $ | 18,017 | ​
Gross loss | ​ |  | (746) | ​ |  | (617) | ​ |  | (2,505) | ​ |  | (4,988) | ​
Selling, general and administrative | ​ |  | (3,412) | ​ |  | (4,467) | ​ |  | (11,626) | ​ |  | (17,685) | ​
Other | ​ |  | (749) | ​ |  | (1,133) | ​ |  | (5,201) | ​ |  | (2,293) | ​
Net loss | ​ | $ | (4,907) | ​ | $ | (6,217) | ​ | $ | (19,332) | ​ | $ | (24,966) | ​
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- 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 + Details
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