Calavo Growers (CVGW) Risk Factors

Income/(loss) from unconsolidated entities includes our allocation of earnings or losses from our investments in Don Memo. We do not control the operations of these investments, and our allocation of potential income or loss can increase or decrease our overall profitability significantly. Any loans/notes or advances that we make to unconsolidated entities (such as the existing advances to Don Memo) may at some point in the future be deemed uncollectible and as such may materially and negatively impact our financial results in the period such determination is made. As noted earlier, we do not control the operations of Don Memo, and their future operating performance and/or their future ability to raise capital from other third parties could negatively impact our ability to collect on our loans/notes or advances.

On June 26, 2023, Calavo and certain subsidiaries entered into a credit agreement (the "Credit Agreement") by and among Calavo, certain subsidiaries of Calavo as guarantors, and Wells Fargo Bank, National Association, as agent and lender. The Credit Agreement provides for a revolving credit facility of up to $90.0 million, along with a capex credit facility of up to $10.0 million. The agreements governing our indebtedness impose significant operating and financial restrictions on us. These restrictions prohibit or limit our ability to: incur indebtedness; grant liens on its assets; enter into certain investments; consummate fundamental change transactions; engage in mergers or acquisitions or dispose of assets; enter into certain transactions with affiliates; make changes to its fiscal year; enter into certain restrictive agreements; and make certain restricted payments (including for dividends). Each of these limitations are subject to various conditions.  The Credit Agreement also contains a springing fixed charge coverage ratio financial covenant that is tested if the amount of the Revolving Loans available for Calavo to borrow under the New Credit Facility is less than 10% of the total revolving credit facility. The Credit Agreement also contains certain affirmative covenants and customary events of default provisions, including, subject to thresholds and grace periods, among others, payment default, covenant default, cross default to other material indebtedness, and judgment default. Our ability to comply with the ratios or tests may be affected by events beyond our control, including prevailing economic, financial and industry conditions. A breach of any of these covenants, or failure to meet or maintain ratios or tests could result in a default under our credit agreement. Certain events of default under our credit agreement would prohibit us from paying dividends on our common stock. In addition, upon the occurrence of an event of default under our credit agreement, the lenders could elect to declare all amounts outstanding under the credit agreement, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the credit agreement lenders could proceed against the security granted to them to secure that indebtedness. If the lenders accelerate the payment of the indebtedness, our assets may not be sufficient to repay in full this indebtedness and our other indebtedness.

The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on many factors, including: - Market acceptance of our products; and - Opportunities for expansion. If our capital resources are not sufficient to satisfy our liquidity needs, we may seek to sell additional equity or obtain additional debt financing. The sale of additional equity would result in dilution to our shareholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. We may not be able to obtain additional financing, if required, in amounts or on terms acceptable to us, or at all.

We and certain of our subsidiaries have entered into non-binding, exclusive negotiations regarding the potential sale of all of the assets used in our Fresh Cut business and certain related real property (the "Proposed Transaction"). The closing of the Proposed Transaction is subject to the negotiation and execution of a binding agreement. There can be no assurance that a binding agreement will result from the current negotiations, and if a binding agreement does result, the price, structure, form of consideration (for example, cash, promissory, equity) and other material terms may be materially different than currently expected. Whether a binding agreement results, and the terms thereof, may depend on the continuing financial and operating performance of the Fresh Cut business during the negotiation process and the proposed purchaser's willingness and ability to provide the capital and/or financing necessary to complete the transaction. If we are able to finalize a bidning agreement, it may be subject to the satisfaction or waiver of certain conditions, including, among others, availability of third-party consents that may be required, the accuracy of each party's representations and warranties contained in any binding agreement, compliance by each party with its respective covenants contained in any binding agreement, and the potential requirement of a transaction services agreement for continuing services by the Company to the purchaser for a period of time following any closing. We or the proposed purchaser may be unable to satisfy such conditions to the closing of the Proposed Transaction in a timely manner or at all and, if such conditions are not satisfied or waived, the Proposed Transaction may be delayed or completed on terms that are less favorable, perhaps materially, to us than the terms currently being negotiated, or the Proposed Transaction may not be completed at all. Whether or not a binding agreement is executed and the closing occurs, the announcement and pendency of the Proposed Transaction may adversely affect our relationships with customers, suppliers and vendors, and the operating performance and financial results of the Prepared segment may also be materially adversely affected. We or the proposed purchaser may choose not to proceed with the Proposed Transaction, and if the Proposed Transaction is delayed or not completed for any reason, investor confidence may decline and we may face negative publicity and possible litigation. Further, failure to complete the Proposed Transaction would adversely affect our current plans to use proceeds from the Proposed Transaction to reduce our debt and return cash to shareholders. In addition, we will have expended significant management resources in an effort to complete the Proposed Transaction and will have incurred transaction costs

We rely on independent third-party certifications, such as certifications of our products as "organic," "Non-GMO" or "kosher," to differentiate our products from others. We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified organic. For example, we can lose our "organic" certification if a manufacturing plant becomes contaminated with non-organic materials, or if it is not properly cleaned after a production run. In addition, all raw materials must be certified organic. Similarly, we can lose our "kosher" certification if a manufacturing plant and raw materials do not meet the requirements of the appropriate kosher supervision organization. The loss of any independent certifications could adversely affect our market position as an organic and natural products company, which could harm our business.

In January 2017, we received preliminary observations from the SAT related to an audit for fiscal year 2013 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 the conclusive agreement submitted before PRODECON (Mexican Tax Ombudsman), having several working meetings attended by representatives of the SAT, Calavo de Mexico ("CDM") and the PRODECON. However, we were unable to materially resolve our case with the SAT through the PRODECON process. In July 2018, a local office of the SAT issued a final tax assessment (the "2013 Assessment") totaling approximately $2.6 billion Mexican pesos (which includes annual adjustments for inflation, and equals approx. $143.8 million USD at October 31, 2023) related to a fiscal 2013 tax audit. This amount has been adjusted for inflation as of October 31, 2023 to the amount of $3 billion Mexican pesos (approx. $166.0 million USD). Additionally, the tax authorities have determined that we owe our employees profit-sharing liability, totaling approximately $118 million Mexican pesos (approx. $6.5 million USD at October 31, 2023). In August 2018, we filed an administrative appeal (the "Administrative Appeal") on the 2013 Assessment, appealing our case to the SAT's Legal Administration in Michoacan. On June 25, 2021, we became aware that the Administrative Appeal had been resolved against CDM on March 12, 2021, and that CDM had allegedly failed to timely respond to and challenge the SAT's notification of such resolution, therefore rendering the 2013 Assessment as definitive. In addition, the SAT placed liens on the fixed assets of CDM, with a net book value of approximately $26 million USD, and on bank accounts of CDM totaling approximately $1 million USD in order to guaranty the 2013 Assessment. As of October 31, 2022 all liens have been removed from the assets of CDM as a result of a Court ruling in favor of CDM. CDM accordingly received access to its bank accounts in November 2022. We have taken measures to vigorously defend our position that the 2013 Assessment is without merit and we have court rulings in favor of CDM, including a Court resolution from the Tax Court ordering the SAT to accept an Administrative Guaranty and remove all liens. On August 20, 2021, we filed an Annulment Suit (the "Suit") with the Federal Tax Court, which among other things, contends that the notifications made by the SAT to CDM and its designated advisors of the resolution of the Administrative Appeal in March 2021 was not legally communicated and asserts the same matters central to the Reconsideration as wrongly concluded in the resolution of the Administrative Appeal. On September 22, 2021, we had an initial in-person meeting with the SAT in Mexico City to formally present and discuss the Administrative Reconsideration (the "Reconsideration") that we filed on August 18, 2021. The SAT agreed to review our Reconsideration in more detail; however, on January 3, 2022, the SAT formally rejected our request for the Reconsideration. In response to this rejection, on January 21, 2022, we filed a capital injunction suit (the "Injunction Suit") with a federal district court seeking to nullify the arguments against the Reconsideration made by the SAT on constitutional grounds. The main purpose of the Injunction Suit was to challenge the SAT's response issued to the Reconsideration, and with that, to keep the Reconsideration alive until the Injunction Suit is decided. This would allow time to continue the discussions with SAT at the administrative level and would give SAT the legal basis to issue a new resolution. The Injunction Suit represents a further opportunity for a court to analyze this matter from a constitutional perspective. On August 16, 2023, we received notice that the federal district court rejected the Injunction Suit. In so doing, the federal district court did not rule on the substance of the case, stating that the substance of the case will be resolved by the Tax Court through the Annulment Suit. The Company filed an appeal with the federal circuit court on August 30, 2023. On March 10, 2022, we met with the SAT and offered an Administrative Guaranty (Embargo en Via Administrativa) to secure the 2013 Assessment, which provides the SAT with certain administrative rights to CDM assets in the event we do not prevail in our actions through the Federal Tax Court. On October 10, 2022, the Tax Court ruled in favor of CDM granting the definitive suspension, accepting the Administrative Guaranty and forcing the SAT to remove all liens placed on CDM fixed assets and bank accounts. These liens were removed in November 2022. The Court also recognized that the $3.1 billion peso assessment exceeds the economic capacity of CDM. While we continue to believe that the 2013 Assessment is completely without merit, and that we will prevail on the Annulment Suit in the Tax Court, we also believe that it is in the best interest of CDM and the Company to settle the 2013 Assessment as quickly as possible. Furthermore, we believe that the above actions taken by CDM will encourage the SAT to agree to reach a settlement. In accordance with our cumulative probability analysis on uncertain tax positions, our settlements made by the SAT in other cases, the 2011 Assessment settlement reached by CDM with the MFM, and the value of CDM assets, we recorded a provision of $11 million, in the third quarter of fiscal 2021, as a discrete item in Income Tax Provision. The provision includes estimated penalties, interest and inflationary adjustments. We believe that this provision remains appropriate as of October 31, 2023 based on our cumulative probability analysis. We incurred $2.4 million of related professional fees for the year ended October 31, 2023, respectively, which we have recoded in Expenses related to Mexican Tax matters on the consolidated statements of operations. We cannot assure you that any of these measures will be successful or that we will be able to settle the 2013 Assessment on terms acceptable to us or at all.  Such outcomes could have a material adverse effect on our results of operations and financial condition which could result in an event of default under our credit facility and the acceleration of indebtedness under such facility. Further, we cannot assure you that the provision for this matter in our financial statements will be adequate to fund any settlement we may ultimately enter into or any amount of taxes.

Sales to Kroger and Trader Joes, our largest customers, amounted to approximately 17% and 13% of our total net sales in 2023. We expect that a significant portion of our revenues will continue to be derived from a relatively small number of customers. We believe these customers make purchase decisions based on a combination of price, product quality, consumer demand, customer service performance, desired inventory levels and other factors that may be important to them at the time the purchase decisions are made. Changes in our customers' strategies or purchasing patterns, including a reduction in the number of brands they carry, may adversely affect our sales. Additionally, our customers may face financial or other difficulties which may impact their operations and cause them to reduce their level of purchases from us, which could adversely affect our results of operations. Customers also may respond to any price increase that we may implement by reducing their purchases from us, resulting in reduced sales of our products. If sales of our products to one or more of our largest customers decrease, the impact may have a material adverse effect on our business, financial condition, and results of operations. Any bankruptcy or other business disruption involving one of our significant customers also could adversely affect our results of operations.

We buy and sell fresh produce that can be subject to price volatility caused by weather conditions such as rainfall, hailstorms, windstorms, floods, droughts, wildfires and freezes, as well as by impacts from diseases and pests. Fresh produce is highly perishable and generally must be brought to market and sold soon after harvest. The selling price received for each type of produce depends on factors such as the availability and quality of the produce item in the market and the availability and quality of competing types of produce. In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. Food safety warnings, advisories, notices and recalls such as those administered by the FDA, CDC, other federal/state government agencies and/or suppliers of various agricultural products, could also reduce demand and/or prices for some of our products. To the extent that consumers stop purchasing products that we produce due to health, food safety or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products.