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CVGW Calavo Growers

Filed: 8 Jun 21, 4:32pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2021

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________________ to ______________________

Commission file number: 000-33385

CALAVO GROWERS, INC.

(Exact name of registrant as specified in its charter)

California

33-0945304

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

1141-A Cummings Road, Santa Paula, California   

93060

(Address of principal executive offices)

(Zip Code)

(805) 525-1245

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

   

Trading Symbol(s)

   

Name of each exchange on which registered

Common Stock

 

CVGW

 

Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  No

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  No

Registrant's number of shares of common stock outstanding as of April 30, 2021 was 17,683,930

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains statements relating to future events and results of Calavo Growers, Inc. and its consolidated subsidiaries (Calavo, the Company, we, us or our), including certain projections and business trends, that are "forward-looking statements," as defined in the Private Securities Litigation and Reform Act of 1995, that involve risks, uncertainties and assumptions. These statements are based on our current expectations and are not promises or guarantees. If any of the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Calavo may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, gross profit, expenses, gain/(loss) on Limoneira shares, income/(loss) from unconsolidated entities, earnings, earnings per share, tax provisions, cash flows and currency exchange rates; the impact of COVID-19 on our business, results of operations and financial condition; the impact of acquisitions or debt or equity investments or other financial items; any statements of the plans, strategies and objectives of management for future operations, including execution of restructuring and integration (including information technology systems integration) plans; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Calavo and its financial performance, whether attributable to Calavo or any of its unconsolidated entities; any statements regarding pending investigations, legal claims or tax disputes; any statements of expectation or belief; any risks associated with doing business internationally (including possible restrictive U.S. and foreign governmental actions, such as restrictions on transfers of funds and COVID-19 and trade protection measures such as import/export/customs duties, tariffs and/or quotas); any risks associated with receivables from and/or equity investments in unconsolidated entities; system security risk and cyber-attacks and any statements of assumptions underlying any of the foregoing.

Risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by the forward-looking statements include, but are not limited to, the following: the impact of the COVID-19 pandemic on our business, results of operations, and financial condition, including, but not limited to, disruptions in the manufacturing of our products and the operations of the related supply chains supporting our ability to deliver our products to consumers, impacts on our employees and uncertainty regarding our ability to implement health and safety measures for our employees, uncertainties regarding consumer demand for our products in light of COVID-19, impact on our food service customers, increased costs that we must incur as a result of COVID-19, the impact of governmental trade restrictions imposed as a result of COVID-19 and the possible adverse impact of COVID-19 on our goodwill and other intangible assets; seasonality of our business; sensitivity of our business to changes in market prices of avocados and other agricultural products and other raw materials including fuel, packaging and paper;  potential disruptions to our supply chain; risks associated with potential future acquisitions, including integration; potential exposure to data breaches and other cyber-attacks on our systems or those of our suppliers or customers; dependence on large customers; dependence on key personnel and the ability of our management team to work together successfully; potential for labor disputes; reliance on co-packers for a portion of our production needs; competitive pressures, including from foreign growers; risks of recalls and food-related injuries to our customers; changing consumer preferences; the impact of environmental regulations, including those related to climate change; our ability to develop and transition new products and services and enhance existing products and services to meet customer needs; risks associated with doing business internationally (including possible restrictive U.S. and foreign governmental actions, such as restrictions on transfers of funds and COVID-19 and trade protection measures such as import/export/customs duties, tariffs and/or quotas and currency fluctuations); risks associated with receivables from, loans to and/or equity investments in unconsolidated entities, including FreshRealm; volatility in the value of our common stock; the impact of macroeconomic trends and events; and the resolution of pending investigations, legal claims and tax disputes.

For a further discussion of these risks and uncertainties and other risks and uncertainties that we face, please see the risk factors described in our most recent Annual Report on Form 10-K for the fiscal year ended October 31, 2020 filed with the Securities and Exchange Commission and any subsequent updates that may be contained in our Quarterly Reports on Form 10-Q (including this Quarterly Report on Form 10-Q) and other filings with the Securities and Exchange Commission. Forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

2

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(in thousands)

April 30, 

October 31, 

2021

2020

Assets

    

    

    

    

Current assets:

Cash and cash equivalents

$

5,582

$

4,055

Accounts receivable, net of allowances of $4,338 (2021) and $3,498 (2020)

 

90,112

 

63,668

Inventories, net

 

53,335

 

41,787

Prepaid expenses and other current assets

 

9,418

 

10,733

Advances to suppliers

 

9,521

 

5,061

Income taxes receivable

 

2,419

 

10,591

Total current assets

 

170,387

 

135,895

Property, plant, and equipment, net

 

130,787

 

130,270

Operating lease right-of-use assets

 

58,169

 

60,262

Investment in Limoneira Company

 

30,292

 

23,197

Investments in unconsolidated entities

 

4,779

 

6,065

Deferred income taxes

 

2,689

 

2,486

Goodwill

 

28,653

 

28,568

Intangibles, net

9,536

10,323

Other assets

 

39,018

 

32,558

$

474,310

$

429,624

Liabilities and shareholders' equity

Current liabilities:

Payable to growers

$

31,390

$

11,346

Trade accounts payable

 

14,012

 

9,384

Accrued expenses

 

42,035

 

36,922

Borrowings pursuant to credit facilities, current

 

 

20,550

Dividend payable

 

 

20,343

Current portion of operating leases

 

6,726

 

6,443

Current portion of long-term obligations and finance leases

 

1,421

 

1,343

Total current liabilities

 

95,584

 

106,331

Long-term liabilities:

Borrowings pursuant to credit facilities, long-term

42,250

Long-term operating leases, less current portion

 

55,907

 

58,273

Long-term obligations and finance leases, less current portion

 

5,635

 

5,716

Other long-term liabilities

 

3,192

 

3,302

Total long-term liabilities

 

106,984

 

67,291

Commitments and contingencies

Shareholders' equity:

Common stock ($0.001 par value, 100,000 shares authorized; 17,684 (2021) and 17,661 (2020) shares issued and outstanding)

 

18

 

18

Additional paid-in capital

 

166,709

 

165,000

Noncontrolling interest

 

1,385

 

1,472

Retained earnings

 

103,630

 

89,512

Total shareholders' equity

 

271,742

 

256,002

$

474,310

$

429,624

The accompanying notes are an integral part of these consolidated condensed financial statements.

4

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)

Three months ended

Six months ended

April 30, 

April 30, 

2021

2020

2021

2020

Net sales

    

$

276,821

    

$

281,166

    

$

497,399

    

$

554,516

Cost of sales

 

254,221

 

259,091

 

456,960

 

516,633

Gross profit

 

22,600

 

22,075

 

40,439

 

37,883

Selling, general and administrative

 

13,683

 

14,504

 

27,857

 

30,802

Gain on sale of Temecula packinghouse

 

54

 

54

 

108

 

108

Operating income

 

8,971

7,625

 

12,690

 

7,189

Interest expense

 

(191)

 

(342)

 

(365)

 

(529)

Other income, net

 

411

 

628

 

612

 

1,622

Unrealized net gain (loss) on Limoneira shares

 

3,506

 

(10,349)

 

7,095

 

(9,343)

Income (loss) before income taxes and loss from unconsolidated entities

 

12,697

 

(2,438)

 

20,032

 

(1,061)

Income tax (provision) benefit

 

(2,772)

 

1,208

 

(4,715)

 

1,858

Net loss from unconsolidated entities

 

(1,131)

 

(2,177)

 

(1,286)

 

(5,205)

Net income (loss)  

 

8,794

 

(3,407)

 

14,031

 

(4,408)

Add: Net loss attributable to noncontrolling interest

 

47

 

129

 

87

 

192

Net income (loss) attributable to Calavo Growers, Inc.

$

8,841

$

(3,278)

$

14,118

$

(4,216)

Calavo Growers, Inc.’s net income (loss) per share:

Basic

$

0.50

$

(0.19)

$

0.80

$

(0.24)

Diluted

$

0.50

$

(0.19)

$

0.80

$

(0.24)

Number of shares used in per share computation:

Basic

 

17,619

 

17,550

 

17,609

 

17,543

Diluted

 

17,679

 

17,550

 

17,668

 

17,543

The accompanying notes are an integral part of these consolidated condensed financial statements.

5

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

Six months ended April 30, 

2021

2020

Cash Flows from Operating Activities:

    

    

    

    

Net income (loss)

$

14,031

$

(4,408)

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

Depreciation and amortization

 

8,371

 

7,646

Non-cash operating lease expense

59

104

Net loss from unconsolidated entities

 

1,286

 

5,205

Unrealized net gain on Limoneira shares

 

(7,095)

 

9,343

Interest income on notes to FreshRealm

 

 

(1,489)

Stock-based compensation expense

 

2,264

 

2,717

Gain on sale of Temecula packinghouse

 

(108)

 

(108)

Loss on disposal of property, plant, and equipment

 

 

230

Effect on cash of changes in operating assets and liabilities:

Accounts receivable, net

 

(26,400)

 

(10,388)

Inventories, net

 

(11,579)

 

(9,327)

Prepaid expenses and other current assets

 

2,700

 

(1,755)

Advances to suppliers

 

(4,460)

 

7,329

Income taxes receivable/payable

 

8,172

 

(5,985)

Other assets

 

(5,126)

 

2,844

Payable to growers

 

20,044

 

14,574

Trade accounts payable, accrued expenses and other long-term liabilities

 

8,264

 

(19,554)

Net cash provided (used) by operating activities

 

10,423

 

(3,022)

Cash Flows from Investing Activities:

Purchases of property, plant, and equipment

 

(7,659)

 

(5,937)

Acquisition of SFFI, net of cash acquired of $623

 

 

(18,396)

Investment in FreshRealm

 

 

(1,477)

Infrastructure advance to tomato growers

(1,326)

Net cash used in investing activities

 

(8,985)

 

(25,810)

Cash Flows from Financing Activities:

Payment of dividend to shareholders

 

(20,343)

 

(19,354)

Proceeds from revolving credit facility

 

172,600

 

126,000

Payments on revolving credit facility

 

(150,900)

 

(81,000)

Payments of minimum withholding taxes on net share settlement of equity awards

(602)

(1,179)

Payments on long-term obligations and finance leases

 

(713)

 

(410)

Proceeds from stock option exercises

 

47

 

86

Net cash provided by financing activities

 

89

 

24,143

Net increase (decrease) in cash and cash equivalents

 

1,527

 

(4,689)

Cash and cash equivalents, beginning of period

 

4,055

 

7,973

Cash and cash equivalents, end of period

$

5,582

$

3,284

Noncash Investing and Financing Activities:

Right of use assets obtained in exchange for new financing lease obligations

$

665

$

390

Notes receivable from FreshRealm converted to investment in FreshRealm

$

$

2,761

Property, plant, and equipment included in trade accounts payable and accrued expenses

$

522

$

1,056

The accompanying notes are an integral part of these consolidated condensed financial statements.

6

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands)

    

    

    

    

    

    

Additional

Common Stock

Paid-in

Retained

Noncontrolling

Shares

Amount

Capital

Earnings

Interest

Total

Balance, October 31, 2019

17,595

 

$

18

 

$

161,606

 

$

122,557

 

$

1,688

 

$

285,869

Cumulative effect adjustment on ASC 842 related to leases

1,165

1,165

Exercise of stock options and income tax benefit

2

 

 

47

 

 

 

47

Stock compensation expense

 

 

931

 

 

 

931

Restricted stock issued

17

 

 

 

 

 

Avocados de Jalisco noncontrolling interest contribution

 

 

 

 

(63)

 

(63)

Net loss attributable to Calavo Growers, Inc.

 

 

 

(938)

 

 

(938)

Balance, January 31, 2020

17,614

 

18

 

162,584

 

122,784

 

1,625

 

287,011

Exercise of stock options and income tax benefit

2

 

 

39

 

 

 

39

Stock compensation expense

 

 

667

 

 

 

667

Restricted stock issued

23

 

 

1,119

 

 

 

1,119

Payments of minimum withholding taxes on net share settlement of equity awards

 

 

(1,179)

 

 

 

(1,179)

Avocados de Jalisco noncontrolling interest contribution

 

 

 

 

(129)

 

(129)

Net loss attributable to Calavo Growers, Inc.

 

 

 

(3,278)

 

 

(3,278)

Balance, April 30, 2020

17,639

 

$

18

 

$

163,230

 

$

119,506

 

$

1,496

 

$

284,250

    

    

    

    

    

    

Additional

 

Common Stock

Paid-in

Retained

Noncontrolling

 

Shares

Amount

Capital

Earnings

Interest

Total

Balance, October 31, 2020

17,661

 

$

18

 

$

165,000

 

$

89,512

 

$

1,472

 

$

256,002

Exercise of stock options and income tax benefit

2

 

 

47

 

 

 

47

Payment of min. withholding of taxes on net share settlement

of equity awards

(467)

(467)

Stock compensation expense

 

 

907

 

 

 

907

Restricted stock issued

23

 

 

 

 

 

Avocados de Jalisco noncontrolling interest contribution

 

 

 

 

(40)

 

(40)

Net Income attributable to Calavo Growers, Inc.

 

 

 

5,277

 

 

5,277

Balance, January 31, 2021

17,686

 

18

 

165,487

 

94,789

 

1,432

 

261,726

Exercise of stock options and income tax benefit

Stock compensation expense

1,357

1,357

Payments of minimum withholding taxes on net share settlement of equity awards

(2)

(135)

(135)

Avocados de Jalisco noncontrolling interest contribution

(47)

(47)

Net Income attributable to Calavo Growers, Inc.

8,841

8,841

Balance, April 30, 2021

17,684

 

$

18

 

$

166,709

 

$

103,630

 

$

1,385

 

$

271,742

See accompanying notes to consolidated condensed financial statements.

7

CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1. Description of the business

Business

Calavo Growers, Inc. (Calavo, the Company, we, us or our), is a global leader in the avocado industry and a provider of value-added fresh food. Our expertise in marketing and distributing avocados, prepared avocados, and other perishable foods allows us to deliver a wide array of fresh and prepared food products to retail grocery, foodservice, club stores, mass merchandisers, food distributors and wholesalers on a worldwide basis. We procure avocados from California, Mexico and other growing regions around the world. Through our various operating facilities, we (i) sort, pack, and/or ripen avocados, tomatoes and/or Hawaiian grown papayas, (ii) create, process and package a portfolio of healthy fresh foods including fresh-cut fruit and vegetables, and prepared foods and (iii) process and package guacamole and salsa. We distribute our products both domestically and internationally and report our operations in 3 different business segments: Fresh products, Renaissance Food Group (RFG) and Calavo Foods.

The accompanying unaudited consolidated condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting of adjustments of a normal recurring nature necessary to present fairly the Company’s financial position, results of operations and cash flows. The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

Recently Adopted Accounting Standards

In October 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updated (ASU) 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities. This ASU provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. This ASU was effective for us beginning the first day of our 2021 fiscal year. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

On November 1, 2020, the Company adopted an ASU, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This update provides guidance regarding the capitalization of implementation costs incurred in a cloud computing arrangement that is a service contract. This ASU was adopted prospectively and cloud computing implementation costs incurred on November 1, 2020 or later are included in other noncurrent assets in the consolidated balance sheet and are presented within operating cash flows. As of April 30, 2021, capitalized implementation costs included in other noncurrent assets were less than $0.1 million and there was no accumulated amortization or amortization expense recorded during the three and six months ended April 30, 2021.

In January 2017, the FASB issued an ASU, Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. The ASU permits an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU was effective for us beginning the first day of our 2021 fiscal year. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

8

On November 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This standard requires a financial asset to be presented at the net amount expected to be collected. The financial assets of the Company in scope of ASU 2016-13 were primarily accounts receivable. The Company estimates an allowance for expected credit losses on accounts receivable that result from the inability of customers to make required payments. In estimating the allowance for expected credit losses, consideration is given to the current aging of receivables, historical experience, and a review for potential bad debts. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

2. Information regarding our operations in different segments

We report our operations in 3 different business segments: (1) Fresh products, (2) RFG, and (3) Calavo Foods. These 3 business segments are presented based on how information is used by our Chief Executive Officer to measure performance and allocate resources. The Fresh products segment includes operations that involve the distribution of avocados and other fresh produce products. The RFG segment represents operations related to the manufacturing and distribution of fresh-cut fruit, fresh-cut vegetables, and prepared foods. The Calavo Foods segment represents operations related to the purchase, manufacturing, and distribution of prepared avocado products, including guacamole, and salsa. Selling, general and administrative expenses, as well as other non-operating income/expense items, are evaluated by our Chief Executive Officer in the aggregate. We do not allocate assets, or specifically identify them to, our operating segments. The Sales Data in the following tables is presented in thousands:

Three months ended April 30, 2021

Three months ended April 30, 2020

    

Fresh

    

    

Calavo

    

    

Fresh

    

    

Calavo

    

products

RFG

Foods

Total

products

RFG

Foods

Total

Avocados

$

146,359

$

$

$

146,359

$

149,865

$

$

$

149,865

Tomatoes

 

13,433

 

 

 

13,433

 

19,331

 

 

 

19,331

Papayas

 

2,647

 

 

 

2,647

 

2,363

 

 

 

2,363

Other fresh income

 

126

 

 

 

126

 

112

 

 

 

112

Prepared avocado products

 

 

 

20,915

 

20,915

 

 

 

19,118

 

19,118

Salsa

 

 

 

696

 

696

 

 

 

609

 

609

Fresh-cut fruit & veg. and prepared foods

97,011

97,011

94,186

94,186

Total gross sales

 

162,565

 

97,011

 

21,611

 

281,187

 

171,671

 

94,186

 

19,727

 

285,584

Less sales incentives

 

(879)

 

(722)

 

(875)

 

(2,476)

 

(803)

 

(657)

 

(1,874)

 

(3,334)

Less inter-company eliminations

(717)

(1,173)

(1,890)

(234)

(850)

(1,084)

Net sales

$

160,969

$

96,289

$

19,563

$

276,821

$

170,634

$

93,529

$

17,003

$

281,166

9

Six months ended April 30, 2021

Six months ended April 30, 2020

    

Fresh

    

    

Calavo

    

    

Fresh

    

    

Calavo

    

products

RFG

Foods

Total

products

RFG

Foods

Total

Avocados

$

250,130

$

$

$

250,130

$

267,749

$

$

$

267,749

Tomatoes

 

22,619

 

 

 

22,619

 

32,324

 

 

 

32,324

Papayas

 

5,397

 

 

 

5,397

 

5,007

 

 

 

5,007

Other fresh income

 

454

 

 

 

454

 

237

 

 

 

237

Prepared avocado products

 

 

 

37,753

 

37,753

 

 

 

40,919

 

40,919

Salsa

 

 

 

1,408

 

1,408

 

 

 

1,328

 

1,328

Fresh-cut fruit & veg. and prepared foods

188,262

188,262

215,653

215,653

Total gross sales

 

278,600

 

188,262

 

39,161

 

506,023

 

305,317

 

215,653

 

42,247

 

563,217

Less sales incentives

 

(1,455)

 

(1,667)

 

(1,967)

 

(5,089)

 

(1,259)

 

(1,190)

 

(3,910)

 

(6,359)

Less inter-company eliminations

(1,243)

(2,292)

(3,535)

(700)

(1,642)

(2,342)

Net sales

$

275,902

$

186,595

$

34,902

$

497,399

$

303,358

$

214,463

$

36,695

$

554,516

    

Fresh

    

    

Calavo

    

Interco.

    

products

RFG

Foods

Elimins.

Total

(All amounts are presented in thousands)

Three months ended April 30, 2021

Net sales

$

161,686

$

96,289

$

20,736

$

(1,890)

$

276,821

Cost of sales

146,678

94,001

15,432

(1,890)

254,221

Gross profit

$

15,008

$

2,288

$

5,304

$

$

22,600

Three months ended April 30, 2020

Net sales

$

170,868

$

93,529

$

17,853

$

(1,084)

$

281,166

Cost of sales

156,463

90,793

12,919

(1,084)

259,091

Gross profit

$

14,405

$

2,736

$

4,934

$

$

22,075

Six months ended April 30, 2021

Net sales

$

277,145

$

186,595

$

37,194

$

(3,535)

$

497,399

Cost of sales

248,992

184,329

27,174

(3,535)

 

456,960

Gross profit

$

28,153

$

2,266

$

10,020

$

$

40,439

Six months ended April 30, 2020

Net sales

$

304,058

$

214,463

$

38,337

$

(2,342)

$

554,516

Cost of sales

283,071

208,853

27,051

(2,342)

516,633

Gross profit

$

20,987

$

5,610

$

11,286

$

$

37,883

For the three months ended April 30, 2021 and 2020, intercompany sales and cost of sales of $0.7 million and $0.2 million between Fresh products and RFG were eliminated. For the six months ended April 30, 2021 and 2020, intercompany sales and cost of sales of $1.2 million and $0.7 million between Fresh products and RFG were eliminated. For the three months ended April 30, 2021 and 2020, intercompany sales and cost of sales of $1.2 million and $0.8 million between Calavo Foods and RFG were eliminated. For the six months ended April 30, 2021 and 2020, intercompany sales and cost of sales of $2.3 million and $1.6 million between Calavo Foods and RFG were eliminated.

10

Sales to customers outside the U.S. were approximately $8.8 million, and $5.8 million for the three months ended April 30, 2021 and 2020. Sales to customers outside the U.S. were approximately $16.9 million, and $15.4 million for the six months ended April 30, 2021 and 2020.

Our foreign operations in Mexico are subject to exchange rate fluctuations and foreign currency transaction costs. The functional currency of our foreign subsidiaries in Mexico is the United States dollar (U.S. dollar). As a result, monetary assets and liabilities are translated into U.S. dollars at exchange rates as of the balance sheet date and non-monetary assets, liabilities and equity are translated at historical rates. Sales and expenses are translated using a weighted-average exchange rate for the period. Gains and losses resulting from those remeasurements and foreign currency transactions are recognized within cost of sales. We recognized foreign currency remeasurement losses in the current quarter. These losses were due primarily to certain long-term net peso receivables. The Mexican peso strengthened compared to the U.S. dollar from 20.22 (MX peso to U.S. dollar) at January 31, 2021 to 20.18 (MX peso to U.S. dollar) at April 30, 2021. Foreign currency remeasurement losses, net of gains, for the three months ended April 30, 2021 and 2020 was $0.5 million and $3.4 million. Foreign currency remeasurement gains, net of losses, for the six months ended April 30, 2021 was $0.6 million. Foreign currency remeasurement losses, net of gains, for the six months ended April 30, 2020 was $3.3 million.

Long-lived assets attributed to geographic areas as of April 30, 2021 and October 31, 2020, are as follows (in thousands):

    

United States

    

Mexico

    

Consolidated

April 30, 2021

$

92,668

$

38,119

$

130,787

October 31, 2020

$

95,110

$

35,160

$

130,270

3.

Inventories

Inventories consist of the following (in thousands):

April 30, 

October 31, 

2021

2020

Fresh fruit

    

$

27,169

    

$

14,677

Packing supplies and ingredients

 

14,315

 

12,540

Finished prepared foods

 

11,851

 

14,570

$

53,335

$

41,787

Inventories are stated at the lower of cost or net realizable value. We periodically review the value of items in inventory and record any necessary write downs of inventory based on our assessment of market conditions. Inventory includes reserves of $0.2 million in slow moving and obsolete packing supply inventory as of April 30, 2021 and October 31, 2020. NaN additional inventory reserve was considered necessary as of April 30, 2021 and October 31, 2020.

4.

Related party transactions

Certain members of our Board of Directors market California avocados through Calavo pursuant to marketing agreements substantially similar to the marketing agreements that we enter into with other growers. For the three months ended April 30, 2021 and 2020, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $5.0 million and $5.9 million. For the six months ended April 30, 2021 and 2020, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $5.0 million and $6.1 million. Amounts payable to these Board members were $3.3 million as of April 30, 2021. We did 0t have any amounts payable to these Board members as of October 31, 2020.

During the three months ended April 30, 2021 and 2020, we received $0.1 million as dividend income from Limoneira Company (Limoneira). During the six months ended April 30, 2021 and 2020, we received $0.2 million and $0.1 million as dividend income from Limoneira. In addition, we lease office space from Limoneira for our corporate

11

office. We paid rent expense to Limoneira totaling $0.1 million for the three months ended April 30, 2021 and 2020. We paid rent expense to Limoneira totaling $0.2 million for the six months ended April 30, 2021 and 2020. Harold Edwards, who is a member of our Board of Directors, is the Chief Executive Officer of Limoneira Company. As of April 30, 2021, we own approximately 9% of Limoneira’s outstanding shares.

We currently have a board member who served as a partner in the law firm of TroyGould PC, which has represented Calavo as legal counsel on certain matters, until his retirement in December 2020. During the three months ended April 30, 2021 and 2020, Calavo Growers, Inc. paid fees totaling $0.1 million to TroyGould PC. During the six months ended April 30, 2021 and 2020, Calavo Growers, Inc. paid fees totaling $0.2 million to TroyGould PC.

Calavo and Agricola Belher (“Belher”) have an equal one-half ownership interest in Agricola Don Memo, S.A. de C.V. (“Don Memo”). Pursuant to a management service agreement, Belher, through its officers and employees, has day-to-day power and authority to manage the operations.

As of April 30, 2021, and October 31, 2020, we had an investment of $4.8 million and $6.0 million, representing Calavo’s 50% ownership in Don Memo, which was included as an investment in unconsolidated entities on our balance sheet.  We make advances to Don Memo for operating purposes, provide additional advances as shipments are made during the season, and return the proceeds from tomato sales under our marketing program to Don Memo, net of our commission and aforementioned advances. As of April 30, 2021 and October 31, 2020, we had outstanding advances of $4.2 million and $2.4 million to Don Memo. In October 2020, we entered into an infrastructure loan agreement with Don Memo for $2.4 million secured by certain property and equipment of Don Memo. This infrastructure loan will incur interest at 7.25%. In October 2020, we funded $0.7 million related to this loan agreement, and we funded an additional $0.7 million and $0.6 million in the first and second quarters of fiscal 2021. This infrastructure loan agreement will mature in fiscal 2024. During the three months ended April 30, 2021 and 2020, we recorded $0.4 million and $0.6 million of cost of sales to Don Memo pursuant to our consignment agreement. During the six months ended April 30, 2021 and 2020, we recorded $3.9 million and $4.6 million of cost of sales to Don Memo pursuant to our consignment agreement.

We make advances to Belher for operating purposes, provide additional advances as shipments are made during the season, and return the proceeds from tomato sales under our marketing program to Belher, net of our commission and aforementioned advances. We had grower advances due from Belher totaling $4.5 million as of April 30, 2021 and October 31, 2020, which are netted against the grower payable. In addition, we had infrastructure advances due from Belher of $1.8 million as of April 30, 2021 and October 31, 2020. The remaining principal balance is due in $0.9 million installments on July 2021 and July 2022. Of these infrastructure advances $0.9 million and $0.6 million was recorded as a receivable in prepaid and other current assets as of April 30, 2021 and October 31, 2020. The remaining $0.9 million of these infrastructure advances were recorded in other assets. During the three months ended April 30, 2021 and 2020, we recorded $11.2 million and $15.7 million of cost of sales to Belher pursuant to our consignment agreement. During the six months ended April 30, 2021 and 2020, we recorded $14.5 million and $19.6 million of cost of sales to Belher pursuant to our consignment agreement.

In August 2015, we entered into a Shareholder’s Agreement with various Mexican partners and created Avocados de Jalisco, S.A.P.I. de C.V. (“Avocados de Jalisco”). Avocados de Jalisco is a Mexican corporation created to engage in procuring, packing and selling avocados. As of April 30, 2021, this entity was approximately 83% owned by Calavo and was consolidated in our financial statements. Avocados de Jalisco built a packinghouse located in Jalisco, Mexico, which began operations in June of 2017. During the three months ended April 30, 2021 and 2020, we purchased approximately $1.0 million and $1.5 million of avocados from the partners of Avocados de Jalisco. During the six months ended April 30, 2021 and 2020, we purchased approximately $3.2 million and $1.9 million of avocados from the partners of Avocados de Jalisco.

FreshRealm is a start-up company, engaged in activities relating to the marketing of food products directly to consumers or other entities. On February 3, 2021, Calavo and FreshRealm entered into a Limited Liability Company Member Separation and Release Agreement (the Separation Agreement). See Note 12 for more information. Prior to the Separation Agreement, we had an equity investment in FreshRealm representing approximately 37% ownership of FreshRealm. We recorded an impairment of 100% of this equity investment, or $2.8 million, in the third quarter of fiscal

12

2020. We had a note receivable and trade receivables of approximately $34.5 million at October 31, 2020 (which includes accrued interest) from FreshRealm. We recorded a reserve of $34.5 million during fiscal 2020 for which the receivables continue to be fully reserved as of April 30, 2021.

NaN officer and 5 members of our board of directors have investments in FreshRealm as of April 30, 2021 and October 31, 2020. Prior to the Separation Agreement, three members of our board of directors served as board members of FreshRealm.

We provide storage services to FreshRealm from select Value-Added Depots and RFG facilities. We have recorded and received $0.2 million and $0.1 million in storage services revenue from FreshRealm in the three months ended April 30, 2021 and 2020. We have recorded and received $0.3 million and $0.3 million in storage services revenue from FreshRealm in the six months ended April 30, 2021 and 2020. For the three months ended April 30, 2020, RFG has sold less than $0.1 million of products to FreshRealm. For the six months ended April 30, 2020, RFG has sold $0.3 million of products to FreshRealm.

5.

Other assets

Other assets consist of the following (in thousands):

    

April 30, 

    

October 31, 

2021

2020

Mexican IVA (i.e. value-added) taxes receivable (see note 11)

$

34,971

$

30,126

Infrastructure advances to Agricola Belher and Agricola Don Memo

 

2,541

 

1,215

Other

 

1,506

 

1,217

$

39,018

$

32,558

Intangible assets consist of the following (in thousands):

April 30, 2021

October 31, 2020

    

Weighted-

    

Gross

    

    

Net

    

Gross

    

    

Net

Average

Carrying

Accum.

Book

Carrying

Accum.

Book

Useful Life

Value

Amortization

Value

Value

Amortization

Value

Customer list/relationships

 

7 years

$

17,340

$

(9,315)

$

8,025

$

17,340

$

(8,613)

$

8,727

Trade names

 

11 years

 

4,060

 

(2,913)

 

1,147

 

4,060

 

(2,852)

 

1,208

Trade secrets/recipes

 

9 years

 

630

 

(541)

 

89

 

630

 

(517)

 

113

Brand name intangibles

 

indefinite

 

275

 

 

275

 

275

 

 

275

Intangibles, net

$

22,305

$

(12,769)

$

9,536

$

22,305

$

(11,982)

$

10,323

We anticipate recording amortization expense of $0.8 million for the remainder of fiscal 2021, $1.6 million for fiscal year 2022, $1.5 million for fiscal year 2023, $1.5 million for fiscal year 2024, and $3.9 million thereafter.

6.

Stock-Based Compensation

In April 2011, our shareholders approved the Calavo Growers, Inc. 2011 Management Incentive Plan (the “2011 Plan”). All directors, officers, employees and consultants (including prospective directors, officers, employees and consultants) of Calavo and its subsidiaries are eligible to receive awards under the 2011 Plan. Shares were issuable under the 2011 Plan through December 2020. On April 21, 2021, the shareholders of Calavo approved the Calavo Growers, Inc. 2020 equity incentive plan. This is a ten-year plan, with up to 1,500,000 shares a issuable through December 2031.

In April 2021, the Board of Directors approved the vesting of all of the remaining restricted shares outstanding to our former Chief Executive Officer and Board member. With this vesting, we recognized stock-based compensation of $0.7 million for the three and six months ended April 30, 2021.

13

On November 2, 2020, 11 of our non-employee directors were each granted 1,500 restricted shares, as part of their annual compensation (total of 16,500 shares). These shares have full voting rights and participate in dividends as if unrestricted.  The closing price of our stock on such date was $67.97. On January 2, 2022, as long as the directors are still serving on the board, these shares lose their restriction and become non-forfeitable and transferable.  These shares were granted pursuant to our 2011 Plan. The total recognized stock-based compensation expense for these grants was $0.3 million for the three months ended April 30, 2021. The total recognized stock-based compensation expense for these grants was $0.4 million for the six months ended April 30, 2021.

On November 2, 2020, our executive officers were granted a total of 9,334 restricted shares. These shares have full voting rights and participate in dividends as if unrestricted. The closing price of our stock on such date was $67.97. These shares vest in one-half increments, on an annual basis, beginning November 2, 2021. These shares were granted pursuant to our 2011 Plan. The total recognized stock-based compensation expense for these grants was $0.1 million for the three months ended April 30, 2021. The total recognized stock-based compensation expense for these grants was $0.2 million for the six months ended April 30, 2021.

On November 2, 2020, key employees were granted a total of 2,600 restricted shares. These shares have full voting rights and participate in dividends as if unrestricted. The closing price of our stock on such date was $67.97. These shares vest in one-third increments, on an annual basis, beginning November 2, 2021. These shares were granted pursuant to our 2011 Plan. The total recognized stock-based compensation expense for these grants were insignificant for the three months ended April 30, 2021. The total recognized stock-based compensation expense for these grants were insignificant for the six months ended April 30, 2021.

A summary of restricted stock activity, related to our 2011 Management Incentive Plan, is as follows (in thousands, except for per share amounts):

    

    

    

Weighted-Average

    

Aggregate

 

    

Number of Shares

    

Grant Price

    

Intrinsic Value

 

Outstanding at October 31, 2020

 

76

$

80.45

Vested

 

(45)

$

83.27

Granted

 

23

$

67.97

Outstanding at April 30, 2021

 

54

$

72.29

$

4,257

The total recognized stock-based compensation expense for restricted stock was $1.4 million and $1.8 million for the three months ended April 30, 2021 and 2020. The total recognized stock-based compensation expense for restricted stock was $2.3 million and $2.7 million for the six months ended April 30, 2021 and 2020. Total unrecognized stock-based compensation expense totaled $3.5 million as of April 30, 2021 and will be amortized through fiscal year 2023.

Stock options are granted with exercise prices of not less than the fair market value at grant date, generally vest over one to five years and generally expire two to five years after the vest date. We settle stock option exercises with newly issued shares of common stock.

We measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in our consolidated statements of operations over the service period that the awards are expected to vest. We measure the fair value of our stock-based compensation awards on the date of grant.

14

A summary of stock option activity, related to our 2011 Management Incentive Plan, is as follows (in thousands, except for per share amounts):

    

    

Weighted-Average

    

Aggregate

Exercise

Intrinsic

Number of Shares

Price

Value

Outstanding at October 31, 2020

 

16

$

44.21

Exercised

 

(2)

$

23.48

Outstanding at April 30, 2021

 

14

$

47.17

$

433

Exercisable at April 30, 2021

 

12

$

45.59

$

390

At April 30, 2021, outstanding and exercisable stock options had a weighted-average remaining contractual term of 3.0 years. The total recognized and unrecognized stock-based compensation expense was insignificant for the three and six months ended April 30, 2021 and 2020.

7.

Other events

Dividend payment

On December 4, 2020, we paid a $1.15 per share dividend in the aggregate amount of $20.3 million to shareholders of record on November 13, 2020.

Litigation

From time to time, we are involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.

Mexico tax audits

We conduct business both domestically and internationally and, as a result, one or more of our subsidiaries files income tax returns in U.S. federal, U.S. state and certain foreign jurisdictions.  Accordingly, in the normal course of business, we are subject to examination by taxing authorities, primarily in Mexico and the United States.  During our third quarter of fiscal 2016, our wholly-owned subsidiary, Calavo de Mexico (CDM), received a written communication from the Ministry of Finance and Administration of the government of the State of Michoacan, Mexico (MFM) containing preliminary observations related to a fiscal 2011 tax audit of such subsidiary. MFM’s preliminary observations outline certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and Value Added Tax (IVA). During the period from our fourth fiscal quarter of 2016 through our first fiscal quarter of 2019, we attempted to resolve our case with the MFM through working meetings attended by representatives of the MFM, CDM and PRODECON (Local Tax Ombudsman). However, we were unable to materially resolve our case with the MFM through the PRODECON process.

As a result, in April 2019, the MFM issued a final tax assessment to CDM (the “2011 Assessment”) totaling approximately $2.2 billion Mexican pesos (approx. $109.0 million USD at April 30, 2021) related to Income Tax, Flat Rate Business Tax and Value Added Tax, corresponding to the fiscal year 2011 tax audit. We have consulted with an internationally recognized tax advisor and continue to believe this tax assessment is without merit. Therefore, we filed an administrative appeal challenging the MFM’s 2011 Assessment on June 12, 2019. The filing of an administrative appeal in Mexico is a process in which the taxpayer appeals to a different office within the Mexican tax authorities, forcing the legal office within the MFM to rule on the matter. This process preserves the taxpayer’s right to litigate in tax court if the administrative appeal process ends without a favorable or just resolution. Furthermore, in August 2018, we received a favorable ruling from Mexico’s Federal Tax Administration Service, Servicio de Administracion Tributaria’s (the “SAT”) central legal department in Mexico City on another tax matter (see footnote 11 regarding IVA refunds) indicating that they believe that our legal interpretation is accurate on a matter that is also central to the 2011 Assessment. We believe this recent ruling undermines the Assessment we received in April 2019.

15

In February 2021, the legal division of the MFM issued a resolution in which the 2011 Assessment was declared void. As a result, the legal division ordered the MFM to issue a new tax assessment, taking into consideration arguments made by the Company in its filing of the administrative appeal. Such new tax assessment is pending.

Additionally, we also received notice from the SAT, that CDM is currently under examination related to fiscal year 2013. In January 2017, we received preliminary observations from SAT outlining certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and IVA. We provided a written rebuttal to these preliminary observations during our second fiscal quarter of 2017. During the period from our third fiscal quarter of 2017 through our third fiscal quarter of 2018, we attempted to resolve our case with the SAT through working meetings attended by representatives of the SAT, CDM and the PRODECON. However, we were unable to materially resolve our case with the SAT through the PRODECON process.

As a result, in July 2018, the SAT’s local office in Uruapan issued to CDM a final tax assessment (the “2013 Assessment”) totaling approximately $2.6 billion Mexican pesos (approx. $128.8 million USD at April 30, 2021) related to Income Tax, Flat Rate Business Tax, and Value Added Tax, related to this fiscal 2013 tax audit.  Additionally, the tax authorities have determined that we owe our employee’s profit-sharing liability, totaling approximately $118 million Mexican pesos (approx. $5.8 million USD at April 30, 2021).

We have consulted with both an internationally recognized tax advisor as well as a global law firm with offices throughout Mexico, and we continue to believe that this tax assessment is without merit. In August 2018, we filed an administrative appeal on the 2013 Assessment. CDM has appealed our case to the SAT’s central legal department in Mexico City.  Furthermore, and as noted in the preceding paragraphs, in August 2018, we received a favorable ruling from the SAT’s central legal department in Mexico City on another tax matter (see footnote 11 regarding IVA refunds) indicating that they believe that our legal interpretation is accurate on a matter that is also central to the 2013 Assessment. We believe this recent ruling significantly undermines the 2013 Assessment we received in July 2018.

In light of the foregoing, the Company is currently considering its options for resolution of the two tax assessments:

-In the unlikely event of an unfavorable resolution of the administrative appeal, we could file a nullification suit with the Mexican Tax Court. In order to file such suit, we would be required to post collateral or a bond for the total amount of the tax assessment (including inflation adjustments, penalties and surcharges) while the suit is in process, which could last from two to three years. If the suit results in an unfavorable ruling, there is an option to appeal to the Collegiate Circuit Court while maintaining the collateral or bond in place.

-In the event of filing a nullification suit, the collateral or bonding requirement may be avoided by filing a nullification suit on substantive matters (“Juicio de Fondo”). This type of suit permits only arguments on the legal merits of the taxpayer’s case, and limits arguments on procedural matters.

The estimated time for resolution of this matter could be affected by the situation related to the COVID-19 pandemic.

We continue to believe that the ultimate resolution of these matters is unlikely to have a material effect on our consolidated financial position.

8.

Fair value measurements

A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).

16

The following table sets forth our financial assets and liabilities as of April 30, 2021 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:

    

Level 1

    

Level 2

    

Level 3

    

Total

(All amounts are presented in thousands)

Assets at Fair Value at April 30, 2021:

Investment in Limoneira Company(1)

$

30,292

 

-

 

-

$

30,292

Total assets at fair value

$

30,292

-

-

$

30,292

Assets at Fair Value at October 31, 2020:

Investment in Limoneira Company(1)

$

23,197

 

-

 

-

$

23,197

Total assets at fair value

$

23,197

-

-

$

23,197

(1)    The investment in Limoneira Company consists of marketable securities in the Limoneira Company common stock. We currently own approximately 9% of Limoneira’s outstanding common stock. These securities are measured at fair value using quoted market prices. For the three months ended April 30, 2021 and 2020, we recognized gains of $3.5 million and losses of $10.3 million on the consolidated condensed statement of operations. For the six months ended April 30, 2021 and 2020, we recognized gains of $7.1 million and losses of $9.3 million on the consolidated condensed statement of operations.

9.

Noncontrolling interest

The following table reconciles shareholders’ equity attributable to noncontrolling interest related to Avocados de Jalisco (in thousands).

    

Three months ended April 30,

 

Avocados de Jalisco noncontrolling interest

    

2021

    

2020

 

Noncontrolling interest, beginning

$

1,432

$

1,625

Net loss attributable to noncontrolling interest of Avocados de Jalisco

 

(47)

 

(129)

Noncontrolling interest, ending

$

1,385

$

1,496

    

 

Six months ended April 30,

Avocados de Jalisco noncontrolling interest

    

2021

    

2020

 

Noncontrolling interest, beginning

$

1,472

$

1,688

Net loss attributable to noncontrolling interest of Avocados de Jalisco

 

(87)

 

(192)

Noncontrolling interest, ending

$

1,385

$

1,496

10.

Earnings per share

Basic and diluted net income per share is calculated as follows (data in thousands, except per share data):

Three months ended April 30,

    

2021

    

2020

Numerator:

Net income (loss) attributable to Calavo Growers, Inc.

$

8,841

$

(3,278)

Denominator:

Weighted average shares – Basic

 

17,619

 

17,550

Effect of dilutive securities – Restricted stock/options

 

60

 

Weighted average shares – Diluted

 

17,679

 

17,550

Net income (loss) per share attributable to Calavo Growers, Inc:

Basic

$

0.50

$

(0.19)

Diluted

$

0.50

$

(0.19)

17

Six months ended

April 30,

    

2021

    

2020

Numerator:

Net Income (loss) attributable to Calavo Growers, Inc.

$

14,118

$

(4,216)

Denominator:

Weighted average shares - Basic

 

17,609

 

17,543

Effect on dilutive securities – Restricted stock/options

 

59

 

Weighted average shares - Diluted

 

17,668

 

17,543

Net income (loss) per share attributable to Calavo Growers, Inc:

Basic

$

0.80

$

(0.24)

Diluted

$

0.80

$

(0.24)

11.

Mexican IVA taxes receivable

Included in other assets are tax receivables due from the Mexican government for value-added taxes (IVA) paid in advance. CDM is charged IVA by vendors on certain expenditures in Mexico, which, insofar as they relate to the exportation of goods, translate into IVA amounts receivable from the Mexican government.

As of April 30, 2021, and October 31, 2020, CDM IVA receivables totaled $35.0 million (705.8 million Mexican pesos) and $30.2 million (640.7 million Mexican pesos). Historically, CDM received IVA refund payments from the Mexican tax authorities on a timely basis. Beginning in fiscal 2014 and continuing into fiscal 2021, however, the tax authorities began carrying out more detailed reviews of our refund requests and our supporting documentation. Additionally, they are also questioning the refunds requested attributable to IVA paid to certain suppliers that allegedly did not fulfill their own tax obligations. We believe these factors and others have contributed to delays in the processing of IVA claims by the Mexican tax authorities. Currently, we are in the process of collecting such balances through regular administrative processes, but certain amounts may ultimately need to be recovered via legal means and/or administrative appeals.

During the first quarter of fiscal 2017, tax authorities informed us that their internal opinion, based on the information provided by the local SAT office, considers that CDM is not properly documented relative to its declared tax structure and therefore CDM cannot claim the refundable IVA balance. CDM has strong arguments and supporting documentation to sustain its declared tax structure for IVA and income tax purposes. CDM started an administrative appeal for the IVA related to the request of the months of July, August and September of 2015 (the “2015 Appeal”) in order to assert its argument that CDM is properly documented and to therefore change the SAT’s internal assessment. In August 2018, we received a favorable ruling from the SAT’s central legal department in Mexico City on the 2015 Appeal indicating that they believe CDM’s legal interpretation of its declared tax structure is indeed accurate. While favorable on this central matter of CDM’s declared tax structure, the ruling, however, still does not recognize the taxpayers right to a full refund for the IVA related to the months of July, August and September 2015. Therefore, in October 2018, CDM filed a substance-over-form annulment suit in the Federal Tax Court to recover its full refund for IVA over the subject period, which is currently pending resolution.

In spite of the favorable ruling from the SAT’s central legal department in Mexico City, as discussed above, the local SAT office continues to believe that CDM is not properly documented relative to its declared tax structure. As a result, they believe CDM cannot claim certain refundable IVA balances, specifically regarding our IVA refunds related to January through December of 2013, 2014, and 2015, and January 2017. CDM has strong arguments and supporting documentation to sustain its declared tax structure for IVA and income tax purposes. With assistance from our internationally recognized tax advisory firm, as of April 30, 2021, CDM has filed (or has plans to file) administrative appeals for the IVA related to the preceding months. A response to these administrative appeals is currently pending resolution.

In light of the foregoing, the Company is currently considering its options for resolution of the VAT receivables. In the unlikely event of an unfavorable resolution of the administrative appeals, we plan to file nullification suits with the

18

Mexican Tax Court. If the suits result in an unfavorable ruling, there is an option to appeal to the Collegiate Circuit Court. The estimated time for the resolution of these suits could be 2 – 3 years. This estimated time could be impacted by the situation of the COVID-19 pandemic.

We believe that our operations in Mexico are properly documented. Furthermore, our internationally recognized tax advisors believe that there are legal grounds to prevail in the Federal Tax Court and that therefore, the Mexican tax authorities will ultimately authorize the refund of the corresponding IVA amounts.  

12. FreshRealm Separation

On February 3, 2021, Calavo and FreshRealm entered into a Limited Liability Company Member Separation and Release Agreement (the “Separation Agreement”) described below.

Calavo was previously a limited liability company member in FreshRealm and was a party to that certain FreshRealm, LLC Seventh Amended and Restated Limited Liability Company Agreement, dated as of February 27, 2019, by and among FreshRealm and its members. Calavo and FreshRealm were also parties to that certain Sixth Amended and Restated Senior Promissory Note, effective August 10, 2018, as amended (the “Prior Note”), pursuant to which Calavo loaned to FreshRealm principal plus accrued interest in the total sum of $34.5 million. This note was fully reserved in fiscal 2020.

Pursuant to the Separation Agreement, among other terms: (i) Calavo terminated its limited liability company interest and equity ownership in FreshRealm; (ii) Calavo and FreshRealm simultaneously entered into an Amended and Restated Senior Secured Loan Agreement and Promissory Note (the “Amended Note”), which amended and restated the Prior Note; (iii) FreshRealm issued an additional Secured Promissory Note to Calavo in the amount of approximately $5 million that is subordinated to the Amended Note (the “Second Note”, together with the Amended Note, the “Notes”); (iv) in the event FreshRealm pays Calavo the sum of $6 million (the “Loan Payoff Amount”) by March 31, 2022 (the “Loan Payoff Period”), the Notes shall be deemed paid in full; (v) the parties agreed to a mutual release of any claims; and (vi) the parties agreed to indemnify each other from any subsequent third party claims.

In the event FreshRealm fails to pay the Loan Payoff Amount by the Loan Payoff Period, the Notes shall remain in full force and effect, and pursuant to a warrant issued to Calavo, Calavo shall have the right to purchase 4,207,397 equity units in Fresh Realm. The Notes have an interest rate of 1.46% per annum with a maturity date of April 1, 2022 and are secured in all of the assets and collateral of FreshRealm pursuant to that certain Third Amended and Restated Security Agreement dated February 3, 2021.

If FreshRealm (i) pays to Calavo the Loan Payoff Amount within the Loan Payoff Period; and (ii) undergoes a “Success Event” in the future, including: a merger, a majority sale of FreshRealm’s assets or equity ownership interests, a private placement, or an initial public offering where FreshRealm as a company is valued at $100 million or more, FreshRealm must pay to the Company additional compensation in accordance with the following:

FreshRealm must pay Calavo a $10 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $100 million, but less than $230 million;

FreshRealm must pay Calavo a $20 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $230 million, but less than $380 million; or

FreshRealm must pay Calavo a $34 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $380 Million.

Aside from the above, if FreshRealm undergoes a sale of its business either through a merger or a majority sale of its assets or equity interests before February 3, 2022, FreshRealm must pay Calavo $6 million, if it hasn’t already paid the Loan Payoff Amount, plus twenty percent (20%) of the purchase price proceeds from such sale of FreshRealm. Due to the substantial uncertainty, 0 amounts have been recorded on the balance sheet as of April 30, 2021.

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13. Credit Facility

On January 29, 2021, we entered into the Third Amendment to Credit Agreement (the “Third Amendment”) with Farm Credit West, PCA and Bank of America, N.A. relating to our Credit Agreement dated as of June 14, 2016, First Amendment to Credit Agreement dated as of August 29, 2016, and Second Amendment to Credit Agreement dated as of February 28, 2019 (collectively, the Credit Facility). This Third Amendment, among other things, provides for a five-year extension of the maturity date to January 29, 2026, a $20 million increase in the revolving commitment to $100 million (from $80 million) (for a total facility size of $150 million if the $50 million accordion is exercised, up from a total size of $130 million), and a 25 basis point increase in the interest rate. The new interest rate schedules are effective mid-June 2021. The weighted-average interest rate under the Credit Facility was 2.8% and 1.9% at April 30, 2021 and October 31, 2020.  Under the Credit Facility, we had $42.3 million and $20.6 million outstanding as April 30, 2021 and October 31, 2020.  In accordance with the extended due date, the outstanding balance of the Credit Facility has been classified to long-term in the accompanying balance sheet as of April 30, 2021.

     The Credit Facility agreement contains customary affirmative and negative covenants for agreements of this type, including the following financial covenants applicable to the Company and its subsidiaries on a consolidated basis: (a) a quarterly consolidated leverage ratio of not more than 2.50 to 1.00 and (b) a quarterly consolidated fixed charge coverage ratio of not less than 1.15 to 1.00. We were in compliance with all financial covenants at April 30, 2021. 

14. COVID-19 Pandemic Impact

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The COVID-19 pandemic has created challenging and unprecedented conditions for our business, and we are committed to taking action in support of a Company-wide response to the crisis. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. We believe we are well-positioned for the future as we continue to navigate the crisis and prepare for an eventual return to a more normal operating environment. We have successfully implemented contingency plans in the U.S. and in Mexico to monitor the evolving needs of our businesses in those countries, as well as those related to our Peru partner in consignment avocado sales.

The COVID-19 pandemic began to have an adverse impact on our results of operations in the month of March 2020, resulting in cancelled orders, altered customer buying patterns, delays in potential new business opportunities, losses on product unable to be sold, reductions in margins related to lower manufacturing throughput, and changes to integration plans for an acquired entity. The effects of the pandemic have been more pronounced in the portions of our business servicing foodservice customers and to a lesser extent certain segments of our retail business, including behind-the-glass deli and grab-and-go convenience items.

We may also experience additional costs related to increased workers’ compensation claims, health and safety inspections and group health insurance expenses as a result of the COVID-19 pandemic. We may also be subject to lawsuits from employees and others exposed to COVID-19 at our production and other facilities. Our professional and general liability insurance may not cover all claims against us. In addition, our operations and financial results may be further adversely affected by federal or state laws, regulations, orders, or other governmental or regulatory actions addressing the current COVID-19 pandemic. While we have managed the pandemic well, with minimal disruption to our overall business thus far, the continuing impact of the pandemic on our future consolidated results, financial position and cash flows are uncertain.

The recovery from the COVID-19 pandemic and the current economic climate is increasing labor costs, commodity costs and logistical costs. We are experiencing operational challenges that impact our production facilities and our logistics network; the impact of prices for petroleum-based products, packaging materials and commodity costs; and the availability of sufficient labor is increasing costs companywide.

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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the fiscal year ended October 31, 2020 of Calavo Growers, Inc. (“we”, “Calavo”, or the “Company”).

Recent Developments

COVID-19 Pandemic Impact

The COVID-19 pandemic has created challenging and unprecedented conditions for our business, and we are committed to taking action in support of a Company-wide response to the crisis. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. We believe we are well-positioned for the future as we continue to navigate the crisis and prepare for an eventual return to a more normal operating environment. We have successfully implemented contingency plans in the U.S. and in Mexico to monitor the evolving needs of our businesses in those countries, as well as those related to our Peru partner in consignment avocado sales.

The COVID-19 pandemic began to have an adverse impact on our results of operations in the month of March 2020, resulting in cancelled orders, altered customer buying patterns, delays in potential new business opportunities, losses on product unable to be sold, reductions in margins related to lower manufacturing throughput, and changes to integration plans for an acquired entity. The effects of the pandemic have been more pronounced in the portions of our business servicing foodservice customers and to a lesser extent certain segments of our retail business, including behind-the-glass deli and grab-and-go convenience items.

We may also experience additional costs related to increased workers’ compensation claims, health and safety inspections and group health insurance expenses as a result of the COVID-19 pandemic. We may also be subject to lawsuits from employees and others exposed to COVID-19 at our production and other facilities. Our professional and general liability insurance may not cover all claims against us. In addition, our operations and financial results may be further adversely affected by federal or state laws, regulations, orders, or other governmental or regulatory actions addressing the current COVID-19 pandemic. While we have managed the pandemic well, with minimal disruption to our overall business thus far, the continuing impact of the pandemic on our future consolidated results, financial position and cash flows are uncertain.

COVID-19 Recovery Economic Impact

The recovery from the COVID-19 pandemic and the current economic climate is increasing labor costs, commodity costs and logistical costs. We are experiencing operational challenges that impact our production facilities and our logistics network; the impact of prices for petroleum-based products, packaging materials and commodity costs; and the availability of sufficient labor is increasing costs companywide.

Dividend payment

On December 4, 2020, we paid a $1.15 per share dividend in the aggregate amount of $20.3 million to shareholders of record on November 13, 2020.

Litigation

From time to time, we are involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.

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Mexico tax audits

We conduct business both domestically and internationally and, as a result, one or more of our subsidiaries files income tax returns in U.S. federal, U.S. state and certain foreign jurisdictions.  Accordingly, in the normal course of business, we are subject to examination by taxing authorities, primarily in Mexico and the United States.  During our third quarter of fiscal 2016, our wholly-owned subsidiary, Calavo de Mexico (CDM), received a written communication from the Ministry of Finance and Administration of the government of the State of Michoacan, Mexico (MFM) containing preliminary observations related to a fiscal 2011 tax audit of such subsidiary. MFM’s preliminary observations outline certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and Value Added Tax (IVA). During the period from our fourth fiscal quarter of 2016 through our first fiscal quarter of 2019, we attempted to resolve our case with the MFM through working meetings attended by representatives of the MFM, CDM and PRODECON (Local Tax Ombudsman). However, we were unable to materially resolve our case with the MFM through the PRODECON process.

As a result, in April 2019, the MFM issued a final tax assessment to CDM (the “2011 Assessment”) totaling approximately $2.2 billion Mexican pesos (approx. $109.0 million USD at April 30, 2021) related to Income Tax, Flat Rate Business Tax and Value Added Tax, corresponding to the fiscal year 2011 tax audit. We have consulted with an internationally recognized tax advisor and continue to believe this tax assessment is without merit. Therefore, we filed an administrative appeal challenging the MFM’s 2011 Assessment on June 12, 2019. The filing of an administrative appeal in Mexico is a process in which the taxpayer appeals to a different office within the Mexican tax authorities, forcing the legal office within the MFM to rule on the matter. This process preserves the taxpayer’s right to litigate in tax court if the administrative appeal process ends without a favorable or just resolution. Furthermore, in August 2018, we received a favorable ruling from Mexico’s Federal Tax Administration Service, Servicio de Administracion Tributaria’s (the “SAT”) central legal department in Mexico City on another tax matter (see footnote 11 regarding IVA refunds) indicating that they believe that our legal interpretation is accurate on a matter that is also central to the 2011 Assessment. We believe this recent ruling undermines the Assessment we received in April 2019.

In February 2021, the legal division of the MFM issued a resolution in which the 2011 Assessment was declared void. As a result, the legal division ordered the MFM to issue a new tax assessment, taking into consideration arguments made by the Company in its filing of the administrative appeal. Such new tax assessment is pending.

Additionally, we also received notice from the SAT, that CDM is currently under examination related to fiscal year 2013. In January 2017, we received preliminary observations from SAT outlining certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers, and IVA. We provided a written rebuttal to these preliminary observations during our second fiscal quarter of 2017. During the period from our third fiscal quarter of 2017 through our third fiscal quarter of 2018, we attempted to resolve our case with the SAT through working meetings attended by representatives of the SAT, CDM and the PRODECON. However, we were unable to materially resolve our case with the SAT through the PRODECON process.

As a result, in July 2018, the SAT’s local office in Uruapan issued to CDM a final tax assessment (the “2013 Assessment”) totaling approximately $2.6 billion Mexican pesos (approx. $128.8 million USD at April 30, 2021) related to Income Tax, Flat Rate Business Tax, and Value Added Tax, related to this fiscal 2013 tax audit.  Additionally, the tax authorities have determined that we owe our employee’s profit-sharing liability, totaling approximately $118 million Mexican pesos (approx. $5.8 million USD at April 30, 2021).

We have consulted with both an internationally recognized tax advisor as well as a global law firm with offices throughout Mexico, and we continue to believe that this tax assessment is without merit. In August 2018, we filed an administrative appeal on the 2013 Assessment. CDM has appealed our case to the SAT’s central legal department in Mexico City.  Furthermore, and as noted in the preceding paragraphs, in August 2018, we received a favorable ruling from the SAT’s central legal department in Mexico City on another tax matter (see footnote 11 regarding IVA refunds) indicating that they believe that our legal interpretation is accurate on a matter that is also central to the 2013 Assessment. We believe this recent ruling significantly undermines the 2013 Assessment we received in July 2018.

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In light of the foregoing, the Company is currently considering its options for resolution of the two tax assessments:

-In the unlikely event of an unfavorable resolution of the administrative appeal, we could file a nullification suit with the Mexican Tax Court. In order to file such suit, we would be required to post collateral or a bond for the total amount of the tax assessment (including inflation adjustments, penalties and surcharges) while the suit is in process, which could last from two to three years. If the suit results in an unfavorable ruling, there is an option to appeal to the Collegiate Circuit Court while maintaining the collateral or bond in place.

-In the event of filing a nullification suit, the collateral or bonding requirement may be avoided by filing a nullification suit on substantive matters (“Juicio de Fondo”). This type of suit permits only arguments on the legal merits of the taxpayer’s case, and limits arguments on procedural matters.

The estimated time for resolution of this matter could be affected by the situation related to the COVID-19 pandemic.

We continue to believe that the ultimate resolution of these matters is unlikely to have a material effect on our consolidated financial position.

FreshRealm Separation

On February 3, 2021, Calavo and FreshRealm entered into a Limited Liability Company Member Separation and Release Agreement (the “Separation Agreement”) described below.

Calavo was previously a limited liability company member in FreshRealm and was a party to that certain FreshRealm, LLC Seventh Amended and Restated Limited Liability Company Agreement, dated as of February 27, 2019, by and among FreshRealm and its members. Calavo and FreshRealm were also parties to that certain Sixth Amended and Restated Senior Promissory Note, effective August 10, 2018, as amended (the “Prior Note”), pursuant to which Calavo loaned to FreshRealm principal plus accrued interest in the total sum of $34.5 million.

Pursuant to the Separation Agreement, among other terms: (i) Calavo terminated its limited liability company interest and equity ownership in FreshRealm; (ii) Calavo and FreshRealm simultaneously entered into an Amended and Restated Senior Secured Loan Agreement and Promissory Note (the “Amended Note”), which amended and restated the Prior Note; (iii) FreshRealm issued an additional Secured Promissory Note to Calavo in the amount of approximately $5 million that is subordinated to the Amended Note (the “Second Note”, together with the Amended Note, the “Notes”); (iv) in the event FreshRealm pays Calavo the sum of $6 million (the “Loan Payoff Amount”) by March 31, 2022 (the “Loan Payoff Period”), the Notes shall be deemed paid in full; (v) the parties agreed to a mutual release of any claims; and (vi) the parties agreed to indemnify each other from any subsequent third party claims.

In the event FreshRealm fails to pay the Loan Payoff Amount by the Loan Payoff Period, the Notes shall remain in full force and effect, and pursuant to a warrant issued to Calavo, Calavo shall have the right to purchase 4,207,397 equity units in Fresh Realm. The Notes have an interest rate of 1.46% per annum with a maturity date of April 1, 2022 and are secured in all of the assets and collateral of FreshRealm pursuant to that certain Third Amended and Restated Security Agreement dated February 3, 2021.

If FreshRealm (i) pays to Calavo the Loan Payoff Amount within the Loan Payoff Period; and (ii) undergoes a “Success Event” in the future, including: a merger, a majority sale of FreshRealm’s assets or equity ownership interests, a private placement, or an initial public offering where FreshRealm as a company is valued at $100 million or more, FreshRealm must pay to the Company additional compensation in accordance with the following:

FreshRealm must pay Calavo a $10 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $100 million, but less than $230 million;

FreshRealm must pay Calavo a $20 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $230 million, but less than $380 million; or

23

FreshRealm must pay Calavo a $34 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $380 Million.

Aside from the above, if FreshRealm undergoes a sale of its business either through a merger or a majority sale of its assets or equity interests before February 3, 2022, FreshRealm must pay Calavo $6 million, if it hasn’t already paid the Loan Payoff Amount, plus twenty percent (20%) of the purchase price proceeds from such sale of FreshRealm. Due to the substantial uncertainty, no amounts have been recorded on the balance sheet as of April 30, 2021.

Non-GAAP Financial Measures

The below tables include non-GAAP measures EBITDA, adjusted EBITDA, adjusted net income and adjusted diluted EPS, which are not prepared in accordance with U.S. generally accepted accounting principles, or “GAAP.”

EBITDA is defined as net income (loss) attributable to Calavo Growers, Inc. excluding (1) interest income and expense, (2) income taxes (benefit) provision, (3) depreciation and amortization and (4) stock-based compensation expense. Adjusted EBITDA is EBITDA with further adjustments for (1) non-cash net losses (income) recognized from unconsolidated entities, (2) goodwill impairment, (3) write-off of long-lived assets, (4) acquisition-related costs, (5) restructuring and certain severance costs, (6) certain litigation and other related costs, and (7) one-time items. Adjusted EBITDA is a primary metric by which management evaluates the operating performance of the business, on which certain operating expenditures and internal budgets are based and by which, in addition to other factors, the Company’s senior management is compensated. The adjustments to calculate EBITDA and adjusted EBITDA are items recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded.

Adjusted net income is defined as net income (loss) attributable to Calavo Growers, Inc. excluding (1) non-cash net losses (income) recognized from unconsolidated entities, (2) goodwill impairment, (3) write-off of long-lived assets, (4) acquisition-related costs, (5) restructuring and certain severance costs, (6) certain litigation and other related costs, and (7) one-time items. Adjusted net income and the related measure of adjusted diluted EPS exclude certain items that are recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. We believe adjusted net income affords investors a different view of the overall financial performance of the Company than adjusted EBITDA and the GAAP measure of net income (loss) attributable to Calavo Growers, Inc.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the financial tables below.

Items are considered one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. One-time items are identified in the notes to the reconciliations in the financial tables below.

Non-GAAP information should be considered as supplemental in nature and not as a substitute for, or superior to, any measure of performance prepared in accordance with GAAP. None of these metrics are presented as measures of liquidity. The way the Company measures EBITDA, adjusted EBITDA, adjusted net income and adjusted diluted EPS may not be comparable to similarly titled measures presented by other companies and may not be identical to corresponding measures used in Company agreements.

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Adjusted Net Income (Non-GAAP, Unaudited)

The following table presents adjusted net income and adjusted diluted EPS, each a non-GAAP measure, and reconciles them to net income (loss) attributable to Calavo Growers, Inc., and Diluted EPS, which are the most directly comparable GAAP measures. See “Non-GAAP Financial Measures” above (in thousands, except per share amounts).

Three months ended 

April 30,

 

Six months ended

 April 30,

    

2021

    

2020

 

2021

    

2020

Net income (loss) attributable to Calavo Growers, Inc.

$

8,841

$

(3,278)

$

14,118

$

(4,216)

Non-GAAP adjustments:

 

  

 

  

 

  

 

  

Non-cash losses recognized from unconsolidated entities (a)

 

1,131

 

2,177

 

1,286

 

5,205

Income from FreshRealm Recovery (b)

 

 

 

(130)

 

Certain management transition expenses (c)

 

685

 

1,119

 

685

 

1,119

Acquisition costs (d)

 

 

220

 

262

 

510

Net (gain) loss on Limoneira shares (e)

 

(3,506)

 

10,349

 

(7,095)

 

9,343

RFG rent expense add back (f)

 

108

 

 

216

 

Professional expenses related to FreshRealm

 

50

 

 

141

 

Tax impact of adjustments (g)

 

367

 

(3,575)

 

1,166

 

(4,166)

Adjusted net income attributed to Calavo Growers, Inc.

$

7,676

$

7,012

$

10,649

$

7,795

Calavo Growers, Inc.’s net income (loss) per share:

 

  

 

  

 

  

 

  

Diluted EPS (GAAP)

$

0.50

$

(0.19)

$

0.80

$

(0.24)

Adjusted Diluted EPS

$

0.43

$

0.40

$

0.60

$

0.44

Number of shares used in per share computation:

 

  

 

  

 

  

 

  

Diluted

 

17,679

 

17,550

 

17,668

 

17,543

(a)For the three months ended April 30, 2020, FreshRealm realized losses totaling $5.1 million, of which we recorded $1.9 million of non-cash losses.  For the six months ended April 30, 2020, FreshRealm realized losses totaling $14.4 million, of which we recorded $5.4 million of non-cash losses.  For the three and six months ended April 30, 2021, we realized losses from Agricola Don Memo totaling $1.1 million and $1.3 million. For the three months ended April 31, 2020, we realized losses from Agricola Don Memo totaling $0.3 million. For the six months ended April 31, 2020, we realized income from Agricola Don Memo totaling $0.2 million.
(b)As part of the FreshRealm Separation Agreement (See Note 12), we received $0.1 million for previously reserved receivables.
(c)The second quarter of fiscal 2021 includes higher stock-based compensation for the early vesting of restricted stock for the retirement of our former Chief Executive Officer and Board member. Second quarter of fiscal 2020 results include higher stock-based compensation expense related to senior management transitions, which does not impact the underlying cost structure of the company.
(d)In the first quarter of 2021, we incurred professional service costs related to a considered but non-consummated acquisition. In the first quarter of 2020, we incurred transaction expenses related to the acquisition of SFFI Company, Inc. doing business as Simply Fresh Fruit.
(e)For the three and six months ended April 30, 2021, we recorded $3.5 million and $7.1 million in unrealized gains related to these mark-to-market adjustments.  For the three and six months ended April 30, 2020, we recorded $10.3 million and $9.3 million in unrealized losses related to these mark-to-market adjustments.  
(f)For the three and six months ended April 30, 2021, we incurred $0.1 million and $0.2 million related to rent paid for RFG corporate office space that we have vacated and plan to sublease.
(g)Tax impact of non-GAAP adjustments are based on the prevailing year-to-date tax rates.

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Reconciliation of EBITDA and Adjusted EBITDA (Non-GAAP, Unaudited)

The following table presents EBITDA and adjusted EBITDA, each a non-GAAP measure, and reconciles them to net income (loss) attributable to Calavo Growers, Inc., which is the most directly comparable GAAP measure. See “Non-GAAP Financial Measures” above (in thousands, except per share amounts).

    

Three months ended

 April 30,

 

Six months ended 

April 30,

    

2021

    

2020

 

2021

    

2020

Net income (loss) attributable to Calavo Growers, Inc.

$

8,841

$

(3,278)

 

$

14,118

$

(4,216)

Interest Income

(17)

(688)

 

(89)

(1,634)

Interest Expense

 

191

 

342

365

 

529

Provision (benefit) for Income Taxes

 

2,772

 

(1,208)

4,715

 

(1,858)

Depreciation & Amortization

 

4,077

 

4,010

8,371

 

7,646

Stock-Based Compensation

 

1,357

 

1,787

2,264

 

2,717

EBITDA

$

17,221

$

965

$

29,744

$

3,184

Adjustments:

 

  

 

  

 

  

 

  

Non-cash losses recognized from unconsolidated entities (a)

 

1,131

 

2,177

 

1,286

 

5,205

Net (gain) loss on Limoneira shares (e)

 

(3,506)

 

10,349

 

(7,095)

 

9,343

Income from FreshRealm recovery (b)

 

 

 

(130)

 

Professional expenses related to FreshRealm

 

50

 

 

141

 

RFG rent expense add back (f)

 

108

 

 

216

 

Acquisition costs (d)

 

 

220

 

262

 

510

Adjusted EBITDA

$

15,004

$

13,711

$

24,424

$

18,242

Adjusted EBITDA per dilutive share

$

0.85

$

0.78

$

1.38

$

1.04

See prior page for footnote references

Net Sales

The following table summarizes our net sales by business segment for each of the three and six months ended April 30, 2021 and 2020:

Three months ended April 30, 

Six months ended April 30, 

2021

Change

2020

2021

Change

2020

Gross sales:

    

    

    

    

    

    

    

    

    

    

    

    

    

Fresh products

$

161,686

(5)

%  

$

170,868

$

277,145

(9)

%  

$

304,058

RFG

 

96,289

3

%  

 

93,529

 

186,595

(13)

%  

 

214,463

Calavo Foods

 

20,736

16

%  

 

17,853

 

37,194

(3)

%  

 

38,337

Less intercompany eliminations

(1,890)

74

%  

(1,084)

(3,535)

51

%  

(2,342)

Total net sales

$

276,821

(2)

%  

$

281,166

$

497,399

(10)

%  

$

554,516

As a percentage of sales:

Fresh products

 

58.0

%  

 

60.5

%  

 

55.3

%  

 

54.6

%

RFG

 

34.5

%  

 

33.1

%  

 

37.2

%  

 

38.5

%

Calavo Foods

 

7.4

%  

 

6.3

%  

 

7.4

%  

 

6.9

%

 

100.0

%  

 

100.0

%  

 

100.0

%  

 

100.0

%

Summary

Net sales for the three months ended April 30, 2021, compared to the corresponding period in fiscal 2020, decreased by $4.3 million, or approximately 2%. The decrease was due to a decline in the Fresh products segment. Net sales for

26

the six months ended April 30, 2021, compared to the corresponding period in fiscal 2020, decreased by $57.1 million, or approximately 10%. This decrease was due to declines across all segments.

For the three and six months ended April 30, 2021, the decrease in Fresh product sales was due to declines in sales of avocados and tomatoes. For the six months ended April 30, 2021, the decrease in Calavo Foods was due primarily to a decrease in the sales of prepared avocado products. For the six months ended April 30, 2021, the decrease in RFG sales was due primarily to decreased sales from fresh-cut fruit & vegetables and prepared foods products. See discussion below for further details.

All three segments of our business are subject to seasonal trends which can impact the volume and/or quality of raw materials sourced in any particular quarter. All intercompany sales are eliminated in our consolidated results of operations.

Fresh products

Second Quarter 2021 vs. Second Quarter 2020

Net sales for the Fresh products business decreased by approximately $9.2 million, or 5%, for the second quarter of fiscal 2021 compared to the corresponding period in fiscal 2020. This decrease in Fresh product sales during the second quarter of fiscal 2021 was primarily related to decreased sales prices of tomatoes due to higher supply of tomatoes in the marketplace. In addition, avocado sales decreased due to a decline in avocado sales prices.

Sales of tomatoes decreased $5.9 million, or 31%, for the second quarter of 2021, when compared to the prior year period. This decrease in tomato sales was primarily due to a 25% decrease in the average sales price per carton compared to the prior year period, in addition to a decrease of 8% of the number of tomato cartons sold due to a delay in the start of the growing season.

Sales of avocados decreased $3.6 million, or 2%, for the second quarter of 2021 compared to the prior year period. The average avocado sales price per carton decreased 10% compared to the prior year period. This decrease in the sales price per carton was mainly due to an increase of supply of avocados in the marketplace. The volume of avocados sold in the second quarter of 2021 increased 9% compared to the prior year period.

Six Months Ended April 30, 2021 vs. Six Months Ended April 30, 2020

Net sales for the Fresh products business decreased by approximately $26.9 million, or 9%, for the six months ended April 30, 2021, compared to the corresponding period in fiscal 2020. This decrease was primarily related to decreased sales prices of avocados due to higher supply of avocados in the marketplace. In addition, tomato sales decreased due to a decline of tomato sales prices.

Sales of avocados decreased $17.8 million, or 7%, for the six months ended April 30, 2021, compared to the prior year period. The average avocado sales price per carton decreased 11% compared to the prior year period. This decrease in the sales price per carton was mainly due to an increase of supply of avocados in the marketplace. The volume of avocados sold in the six months ended April 30, 2021 increased 5% compared to the prior year period.

Sales of tomatoes decreased $9.7 million, or 30%, for the six months ended April 30, 2021, compared to the prior year period. This decrease in tomato sales was primarily due to a 25% decrease in the average sales price per carton compared to the prior year period, in addition to a decrease of 6% of the number of tomato cartons sold due to a delay in the start of the growing season.

27

RFG

Second Quarter 2021 vs. Second Quarter 2020

Net sales for RFG for the quarter ended April 30, 2021, compared to the corresponding period in fiscal 2020, increased $2.8 million, or 3%. The increase was primarily due to additional sales in regions where RFG has added manufacturing capacity. This was partially offset by a decrease due to lower sales out of the Midwest, relating to the closure of RFG’s co-packing partner in that region, which occurred in April 2020.

Six Months Ended April 30, 2021 vs. Six Months Ended April 30, 2020

Net sales for RFG for the six months end April 30, 2021, compared to the corresponding period in fiscal 2020, decreased $27.9 million, or 13%. The decrease was primarily due to lower sales out of the Midwest, relating to the closure of RFG’s co-packing partner in that region, which occurred in April 2020. This was partially offset by additional sales in regions where RFG has added manufacturing capacity. Additionally, changing consumer demand and buying patterns related to COVID-19 adversely impacted RFG’s sales during the quarter.

Calavo Foods

Second Quarter 2021 vs. Second Quarter 2020

Net sales for Calavo Foods for the quarter ended April 30, 2021, compared to the corresponding period in fiscal 2020, increased $2.9 million, or 16%. Sales of prepared avocado products increased by approximately $2.8 million, or 16%, primarily related to an increase in the total volume of pounds sold.

Six Months Ended April 30, 2021 vs. Six Months Ended April 30, 2020

Net sales for Calavo Foods for the six months ended April 30, 2021, compared to the corresponding period in fiscal 2020, decreased $1.1 million, or 3%. Sales of prepared avocado products decreased by approximately $1.2 million, or 3%, primarily related to an decreased in the total volume of pounds sold. Sales of prepared avocado products were impacted primarily by a decline in demand from foodservice customers related to COVID-19 during the year.

Gross Profit

The following table summarizes our gross profit and gross profit percentages by business segment for the three and six months ended April 30, 2021 and 2020:

Three months ended April 30, 

Six months ended April 30, 

2021

Change

2020

2021

Change

2020

Gross Profit:

    

    

    

    

    

    

    

    

    

    

    

    

 

Fresh products

$

15,008

4

%  

$

14,405

$

28,153

34

%  

$

20,987

RFG

 

2,288

(16)

%  

 

2,736

 

2,266

(60)

%  

 

5,610

Calavo Foods

 

5,304

7

%  

 

4,934

 

10,020

(11)

%  

 

11,286

Total gross profit

$

22,600

2

%  

$

22,075

$

40,439

7

%  

$

37,883

Gross profit percentages:

Fresh products

 

9.3

%  

 

8.4

%  

 

10.2

%  

 

6.9

%

RFG

 

2.4

%  

 

2.9

%  

 

1.2

%  

 

2.6

%

Calavo Foods

 

25.6

%  

 

27.6

%  

 

26.9

%  

 

29.4

%

Consolidated

 

8.2

%  

 

7.9

%  

 

8.1

%  

 

6.8

%

28

Summary

Our cost of goods sold consists predominantly of ingredient costs (fruit, vegetables and other food products), packing materials, freight and handling, labor and overhead (including depreciation) associated with preparing food products, and other direct expenses pertaining to products sold.

Gross profit increased by approximately $0.5 million, or 2%, for the second quarter of fiscal 2021 compared to the corresponding period in fiscal 2020. The increase was primarily attributable to gross profit improvements in the Fresh products segment and the Calavo Foods segment, partially offset by the RFG segment. Gross profit increased by approximately $2.6 million, or 7%, for the six months ended April 30, 2021, compared to the corresponding period in fiscal 2020. The increase was primarily attributable to gross profit improvements in the Fresh products segment, partially offset by the Calavo Foods and RFG segments.

Fresh products

The increase in our Fresh products segment gross profit percentage for the quarter ended April 30, 2021, was the result of increased gross profit for avocados. For the second quarter of fiscal 2021, the gross profit percentage for avocados was 9.2% compared to 8.4% for the second quarter of 2020. In fiscal 2021, we were able to manage the spread between the sales price and the fruit cost of avocados more effectively compared to the prior year period.

Gross profit for the quarter was also affected by the weakening of the U.S. dollar in relation to the Mexican peso during the quarter, resulting in a $0.5 million net loss related the remeasurement of peso-dominated net assets at our Mexican subsidiaries. During the same period last year, we had a remeasurement loss of $3.4 million.

The increase in our Fresh products segment gross profit percentage for the six months ended April 30, 2021 was the result of increased gross profit for avocados. For the six months ended April 30, 2021, the gross profit percentage for avocados was 10.1% compared to 6.9% for the prior year period. In fiscal 2021, we were able to manage the spread between the sales price and the fruit cost of avocados more effectively compared to the prior year period.

Gross profit for the six month period was also affected by the strengthening of the U.S. dollar in relation to the Mexican peso during the six months ended April 30, 2021, which resulted in a $0.6 million net gain related the remeasurement of peso-dominated net assets at our Mexican subsidiaries. During the same period last year, we had a remeasurement loss of $3.3 million.

Note that any additional significant fluctuations in the exchange rate between the U.S. dollar and the Mexican peso may have a material impact on future gross profits for our Fresh products segment.

RFG

RFG’s gross profit percentage for the quarter ended April 30, 2021 was 2.4%, compared to 2.9% for the prior year period. RFG’s gross profit percentage for the six months ended April 30, 2021 was 1.2%, compared to 2.6% for the prior year period. The declines in gross profit for the quarter and six months ended April 30, 2021, were due to increased commodity costs, lack of availability of key commodities, lower supply of labor that caused increase overtime costs, and extraordinary weather events. In addition, we experienced losses due to the closure of our Midwest co-packing partner.

Calavo Foods

Calavo Foods’ gross profit percentage for the second quarter of fiscal 2021 was 25.6%, compared to 27.6% for the prior year period. Calavo Foods’ gross profit percentage for the six months ended April 30, 2021 was 26.9%, compared to 29.4% for the prior year period. The decreases in Calavo Foods gross profit percentage were due primarily to higher per pound manufacturing costs primarily related to less pounds produced. Partially offsetting these higher costs, we had declines in overall fruit costs due to a large supply of avocados in the marketplace. Any significant fluctuation in the

29

cost of fruit used in the production process or the exchange rate between the U.S. dollar and the Mexican peso may have a material impact on future gross profit for our Calavo Foods segment.

Selling, General and Administrative

Three months ended April 30, 

Six months ended April 30, 

2021

Change

2020

2021

Change

2020

(Dollars in thousands)

(Dollars in thousands)

Selling, general and administrative

$

13,683

    

(6)

%  

$

14,504

    

$

27,857

    

(10)

%  

$

30,802

    

Percentage of net sales

 

4.9

%  

 

5.2

%  

 

5.6

%  

 

5.6

%

Selling, general and administrative expenses of $13.7 million for the three months ended April 30, 2021 include costs of marketing and advertising, sales expenses (including broker commissions) and other general and administrative costs. Selling, general and administrative expenses decreased by $0.8 million, or 6%, for the three months ended April 30, 2021 compared to the prior year period. This decrease was primarily due to prior year stock grants for certain management transition expenses ($1.1 million), a decrease in broker commission ($0.3 million) and a decrease in salaries and benefit expense due to the eliminations of staff positions ($0.2 million). Partially offsetting these decreases was the vesting of restricted stock for the retirement of Lecil Cole, our former Chief Executive Officer and Board member ($0.7 million).

Selling, general and administrative expenses decreased by $2.9 million, or 10%, for the six months ended April 30, 2021 compared to the prior year period. This decrease was primarily due to a decrease in salaries and benefit expense due to the eliminations of staff positions ($2.1 million), prior year stock grants for certain management transition expenses ($1.1 million), and a decrease in broker commission ($0.6 million). Partially offsetting these decreases was the vesting of restricted stock for the retirement of Mr. Cole ($0.7 million).

Loss from unconsolidated entities

Three months ended April 30, 

Six months ended April 30,

 

2021

Change

2020

2021

Change

2020

 

(Dollars in thousands)

(Dollars in thousands)

 

Loss from unconsolidated entities

    

$

(1,131)

    

(48)

%  

$

(2,177)

    

$

(1,286)

    

(75)

%  

$

(5,205)

Losses from unconsolidated entities includes our participation in earnings or losses from our investments in FreshRealm and Don Memo. For the three and six months ended April 30, 2021, we realized losses from Agricola Don Memo totaling $1.1 million and $1.3 million. For the three months ended April 31, 2020, we realized losses from Agricola Don Memo totaling $0.3 million. For the six months ended April 31, 2020, we realized income from Agricola Don Memo totaling $0.2 million. For the three months ended April 30, 2020, FreshRealm realized losses totaling $5.1 million, of which we recorded $1.9 million of non-cash losses.  For the six months ended April 30, 2020, FreshRealm realized losses totaling $14.4 million, of which we recorded $5.4 million of non-cash losses. 

Income Taxes (Provision) Benefit

Three months ended April 30, 

Six months ended April 30, 

2021

Change

2020

2021

Change

2020

Income tax benefit (provision)

    

$

(2,772)

    

NA

$

1,208

    

$

(4,715)

    

NA

$

1,858

    

Effective tax rate

 

24.0

%  

 

26.2

%  

 

25.2

%  

 

29.7

%

Our tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter.

For the first quarter ended in fiscal 2020, we recorded a discrete income tax benefit of approximately $0.2 million, pursuant to ASU 2016-09, Improvements to Employee Share-based Payment Accounting.  Our effective tax rate was higher in the first quarter of fiscal 2020 as a result of discrete excess tax benefits on vesting share-based compensation in

30

addition to the tax benefit associated with the quarter-to-date loss. We recognize the effects of tax legislation in the period in which the law is enacted.  Our deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years we estimate the related temporary differences to reverse.

Liquidity and Capital Resources

Cash provided by operating activities was $10.4 million for the six months ended April 30, 2021, compared to cash used by operating activities of $3.0 million for the corresponding period in fiscal 2020. Cash used by operating activities for the six months ended April 30, 2021 reflect primarily our net income of $14.0 million, plus add-backs for non-cash activities (depreciation and amortization, stock-based compensation expense, provision for losses on accounts receivable, losses from unconsolidated entities, net gains or losses on Limoneira shares, deferred taxes, loss on disposal of property, plant and equipment, loss on the reserve for FreshRealm and gain on the sale of the Temecula packinghouse) of $4.8 million and a net decrease in the components of our working capital of approximately $8.4 million.

Decreases in operating cash flows caused by working capital changes include an increase in accounts receivable of $26.4 million, an increase in inventory of $11.6 million, an increase in other assets of $5.1 million, and an increase in advances to suppliers of $4.5 million, partially offset by an increase in payable to growers of $20.0 million, a net increase in accounts payable and accrued expenses of $8.3 million, a decrease in income taxes receivable of $8.2 million, and an increase in prepaid expenses and other current assets of $2.7 million.

The increase in our accounts receivable, as of April 30, 2021 when compared to October 31, 2020, is primarily due an increase in sales in April 2021 compared to October 2020. The increase in our inventory, as of April 30, 2021 when compared to October 31, 2020, is primarily due to higher inventory of California and Mexican Avocados. The increase in other assets is primarily related to the increase in IVA receivable in fiscal 2021. The increase in advances to suppliers is mainly due to advances to our tomato growers in the first six months of fiscal 2021.The increase in payable to growers is mostly due to increased volumes and sales prices for California and Mexican avocados in the month of April 2021 compared to October 2020. The increase in accounts payable and accrued expenses is primarily related to an increase in payables related to an increase in the volume of California and Mexican avocados. The decrease in income taxes receivable is due to the net income and the timing of estimated payments made during the six months ended April 30, 2021.

Cash used in investing activities was $9.0 million for the six months ended April 30, 2021, which primarily related to the purchases of property, plant and equipment of $7.7 million and infrastructure advances to Don Memo for $1.3 million.

Cash provided by financing activities was $0.1 million for the six months ended April 30, 2021, which related principally to the net proceeds on our credit facilities totaling $21.7 million, partially offset by, payment of our $20.3 million dividend, payments on long-term obligations of $0.7 million and the payment of minimum withholding taxes on net share settlement of equity awards of $0.6 million.

Our principal sources of liquidity are our existing cash balances, cash generated from operations, amounts available for borrowing under our existing Credit Facility, and our investment in Limoneira shares. Cash and cash equivalents as of April 30, 2021 and October 31, 2020 totaled $5.6 million and $4.1 million. Our working capital at April 30, 2021 was $74.8 million, compared to $29.6 million at October 31, 2020.

We believe that cash flows from operations, the available Credit Facility, and other sources will be sufficient to satisfy our future capital expenditures, grower recruitment efforts, working capital and other financing requirements for at least the next twelve months. We will continue to pursue grower recruitment opportunities and expand relationships with retail and/or foodservice customers to fuel growth in each of our business segments. We have a revolving credit facility with Bank of America as administrative agent and Farm Credit West as joint lead arranger. Under the terms of this agreement, we may draw on funds for both working capital and long-term productive asset purchases. Total credit available under this agreement is $100 million and it expires in January 2026. See Note 13 to the consolidated condensed financial statements included in this Quarterly Report for more information. Upon notice to Bank of America, we may from time to time, request an increase in the Credit Facility by an amount not exceeding $50 million. For our Credit

31

Facility, the weighted-average interest rate was 2.8% and 1.9% at April 30, 2021 and October 31, 2020. Under the Credit Facility, we had $42.3 million and $20.6 million outstanding as April 30, 2021 and October 31, 2020.

The Credit Facility agreement contains customary affirmative and negative covenants for agreements of this type, including the following financial covenants applicable to the Company and its subsidiaries on a consolidated basis: (a) a quarterly consolidated leverage ratio of not more than 2.50 to 1.00 and (b) a quarterly consolidated fixed charge coverage ratio of not less than 1.15 to 1.00. We were in compliance with all such covenants at April 30, 2021 and at the date of this Quarterly Report.

Contractual Obligations

There have been no material changes to our contractual commitments, from those previously disclosed in our Annual Report on Form 10-K for our fiscal year ended October 31, 2020. For a summary of the contractual commitments at October 31, 2020, see Part II, Item 7, in our 2020 Annual Report on Form 10-K.

Impact of Recently Issued Accounting Pronouncements

See Note 1 to the consolidated condensed financial statements included in this Quarterly Report.

32

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents, accounts receivable, payable to growers, accounts payable, current and long-term borrowings pursuant to our Credit Facility, and long-term, fixed-rate obligations. All of our financial instruments are entered into during the normal course of operations and have not been acquired for trading purposes. The table below summarizes interest rate sensitive financial instruments and presents principal cash flows in U.S. dollars, which is our reporting currency, and weighted-average interest rates by expected maturity dates, as of April 30, 2021.

(All amounts in thousands)

Expected maturity date April 30,

    

2022

    

2023

    

2024

    

2025

    

2026

    

Thereafter

    

Total

    

Fair Value

Assets

Cash and cash equivalents (1)

$

5,582

$

$

$

$

$

$

5,582

$

5,582

Accounts receivable (1)

 

90,112

 

 

 

 

 

 

90,112

 

90,112

Advances to suppliers (1)

 

9,521

 

 

 

 

 

 

9,521

 

9,521

Liabilities

Payable to growers (1)

$

31,390

$

$

$

$

$

$

31,390

$

31,390

Accounts payable (1)

 

14,012

 

 

 

 

 

 

14,012

 

14,012

Borrowings pursuant to credit facilities (1)

 

 

 

 

 

42,250

 

 

 

(1)We believe the carrying amounts of cash and cash equivalents, accounts receivable, advances to suppliers, payable to growers, and accounts payable approximate their fair value due to the short maturity of these financial instruments and the carrying amount of borrowings pursuant to credit facilities approximates fair market value due to the variable rate of interest.

We were not a party to any derivative instruments during the fiscal year. It is currently our intent not to use derivative instruments for speculative or trading purposes. Additionally, we do not use any hedging or forward contracts to offset market volatility.

Our Mexican-based operations transact a significant portion of business in Mexican pesos. Funds are transferred by our corporate office to Mexico on a weekly basis to satisfy domestic cash needs. We do not currently use derivative instruments to hedge fluctuations in the Mexican peso to U.S. dollar exchange rates. Management does, however, evaluate this opportunity from time to time. Total foreign currency remeasurement losses for the three months ended April 30, 2021 and 2020, net of gains, was $0.5 million and $3.4 million. Total foreign currency remeasurement gains for the six months ended April 30, 2021, net of losses, was $0.6 million. Total foreign currency remeasurement losses for the six months ended April 30, 2020, net of gains, was $3.3 million.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report.  Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective.

There were no changes in the Company’s internal control over financial reporting during the quarter ended April 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.

33

ITEM 1A. RISK FACTORS

The risk factors set forth below update the risk factors in our Annual Report on Form 10-K for the year ended October 31, 2020.  In addition to the risk factors below, you should carefully consider the risk factors discussed in our most recent Form 10-K report, which could materially affect our business, financial position, results of operations and the trading price of our common stock.  The risks and uncertainties that we face are not limited to those set forth below and/or in the 2020 Form 10-K.  Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our common stock.

The recovery from the COVID-19 pandemic and the current economic climate is increasing labor costs, commodity costs and logistical costs which will likely adversely affect our business operations, financial condition, and results of operations.

We are experiencing operational challenges that impact our production facilities and our logistics network, the impact of prices for petroleum-based products, packaging materials and commodity costs. The availability of sufficient labor is increasing costs companywide.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In December 2020, Calavo withheld 12,448 shares from certain officers for the payments of minimum withholding of taxes on the net share settlement of equity awards. In February 2021, Calavo withheld 1,664 shares from our chief executive officer for the payment of minimum withholding of taxes on the net share settlement of equity awards.

34

ITEM 6. EXHIBITS

10.1

2020 Equity Incentive Plan, approved by shareholders on April 21, 2021 *

10.2

Limited Liability Company Member Separation and Release Agreement, dated February 3, 2021, by and between FreshRealm LLC and Calavo Growers, Inc. (1)

10.3

Amended and Restated Senior Secured Loan Agreement and Promissory Note, dated February 3, 2021, by and between FreshRealm LLC and Calavo Growers, Inc. (1)

10.4

Secured Promissory Note, dated February 3, 2021, by and between FreshRealm LLC and Calavo Growers, Inc. (1)

10.5

Warrant Agreement, dated February 3, 2021, by and between FreshRealm LLC and Calavo Growers, Inc. (1)

10.6

Third Amended and Restated Security Agreement, dated February 3, 2021, by and between FreshRealm LLC and Calavo Growers, Inc. (1)

10.7

Third Amendment to Credit Agreement, dated January 29, 2021, by and between Calavo Growers, Inc., Farm Credit West, PCA and Bank of America, N.A. (2)

31.1

Certification of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2

Certification of Principal Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1

Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350. *

101

The following financial information from the Quarterly Report on Form 10-Q of Calavo Growers, Inc. for the quarter ended April 30, 2021, formatted in Inline XBRL (Extensible Business Reporting Language): (1) Consolidated Condensed Balance Sheets as of April 30, 2021 and October 31, 2020; (2) Consolidated Condensed Statements of Operations for the three and six months ended April 30, 2021 and 2020; (3) Consolidated Condensed Statements of Cash Flows for the three and six months ended April 30, 2021 and 2020; (4) Consolidated Statements of Shareholders’ Equity for the three and six months ended April 30, 2021 and 2020; and (5) Notes to Consolidated Condensed Financial Statements.

104

Cover Page Interactive Data File (formatted as Inline XBRL).

(1)

Previously filed on February 9, 2021 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference.

(2)

Previously filed on February 2, 2021 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference

*

Filed with this Form 10-Q.

35

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Calavo Growers, Inc.

(Registrant)

Date: June 8, 2021

By

/s/ James Gibson

James Gibson

Chief Executive Officer

(Principal Executive Officer)

Date: June 8, 2021

By

/s/ Kevin Manion

Kevin Manion

Chief Financial Officer

(Principal Financial Officer)

36