UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K/A (Amendment No. 1)

 

[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended October 31, 2018

 

OR

 

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

 

Commission file number: 000-33385

 

CALAVO GROWERS, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant's telephone number, including area code:  (805) 525-1245

 

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

 

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [X]  No [ ]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [ ]  No [X]

 

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 [X]  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 (§232.0405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes [X]  No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [  ]

 

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.

 

 

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 [X]

 

Based on the closing price as reported on the Nasdaq Global Select Market, the aggregate market value of the Registrant's Common Stock held by non-affiliates on April 30, 2018 (the last business day of the Registrant's most recently completed second fiscal quarter) was approximately $1.5 billion.  Shares of Common Stock held by each executive officer and director and by each shareholder affiliated with a director or an executive officer have been excluded from this calculation because such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.  The number of outstanding shares of the Registrant's Common Stock as of November 30, 2018 was 17,566,984.

 

Documents Incorporated by Reference

Portions of the Registrant's Proxy Statement for the 2018 Annual Meeting of Shareholders, which we intend to hold on April 24, 2019 are incorporated by reference into Part III of this Form 10-K.

 

 

 

 

 

EXPLANATORY NOTE -AMENDMENT

Calavo Growers, Inc. (“Calavo”) is filing this Amendment No. 1 on Form 10-K/A (this “Form 10-K/A”) to include in its Annual Report on Form 10-K for the fiscal year ended October 31, 2018 (the “Annual Report”)., pursuant to Rule 3-09 of Regulation S-X under the Securities Exchange Act of 1934, financial statements and related notes of its equity investee, FreshRealm, LLC (“FreshRealm”).

Calavo owned approximately 37% of FreshRealm as of October 31, 2018.  In accordance with Rule 3-09 of Regulation S-X, we must determine if our unconsolidated subsidiaries are considered “significant subsidiaries”.  In evaluating our investments, there are three tests utilized to determine if our subsidiaries are considered significant subsidiaries: the asset test, the income test and the investment test.  Rule 3-09 of Regulation S-X requires separate audited financial statements of an unconsolidated subsidiary in an annual report if any of the three tests exceed 20%. Such statements are required to be audited only for the years in which such tests were met. Pursuant to Rule 3-09 of Regulation S-X, separate audited financial statements of FreshRealm are required for the fiscal year ended December 31, 2018 and are included in this Form 10-K/A.

FreshRealm did not meet the significance test for Fiscal 2017 and 2016. Accordingly, Calavo has also included in this Form 10-K/A the unaudited financial statements of FreshRealm, LLC for fiscal years 2016 and 2017. The financial statements were not included in the Original Form 10-K because FreshRealm’s fiscal year ended December 31, 2018, which was after the date of the filing of the Original Form 10-K.

Item 15 is the only portion of the Annual Report being supplemented or amended by this Form 10-K/A. Additionally, in connection with the filing of this Form 10-K/A and pursuant to SEC rules, Calavo is including the consent of the independent auditors of FreshRealm LLC and currently dated certifications. This Form 10-K/A does not otherwise update any exhibits as originally filed and does not otherwise reflect events occurring after the original filing date of the Annual Report. Accordingly, this Form 10-K/A should be read in conjunction with Calavo’s filings with the SEC subsequent to the filing of the Annual Report.

EXHIBIT INDEX

*Filed with this Annual Report on Form 10-K/A.

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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, on April 1, 2019.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on April 1, 2019 by the following persons on behalf of the registrant and in the capacities indicated:

 

 

 

 

Exhibit 23.2

 

Consent of Independent Auditors

 

We consent to the incorporation by reference in Registration Statements on Form S-3 (No. 333-180597, No. 333-191702, and  No. 333-199754) and Form S-8 (No. 333-132175,  No. 333-179101, and No. 333-75378)  of Calavo Growers, Inc. of our report dated March 22, 2019, relating to the financial statements of FreshRealm, LLC included in Amendment No. 1 to the Annual Report on Form 10-K of Calavo Growers, Inc., filed with the Securities and Exchange Commission.

 

 

Exhibit 31.1

 

CERTIFICATION

 

I, Lecil E. Cole, certify that:

 

1.            I have reviewed this Amendment No. 1 to the Annual Report on Form 10-K for the year ended October 31, 2018 (the “report”) of Calavo Growers, Inc. (the “registrant”);

 

2.            Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.            Based on my knowledge, the financial statements and other financial information included in this report, fairly present, in all material respects, the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

 

Exhibit 31.2

 

CERTIFICATION

 

I, B. John Lindeman, certify that:

 

1.            I have reviewed this Amendment No. 1 to the Annual Report on Form 10-K for the year ended October 31, 2018 (the “report”) of Calavo Growers, Inc. (the “regirstrant”);

 

2.            Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.            Based on my knowledge, the financial statements and other financial information included in this report, fairly present, in all material respects, the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

 

Exhibit 32

 

WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER

AND CHIEF FINANCIAL OFFICER

 

Each of the undersigned, the Chairman of the Board and Chief Executive Officer, Chief Financial Officer, and Corporate Secretary of Calavo Growers, Inc. (the “Company”), hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge, this Amendment No. 1 to the Company’s Annual Report on Form 10-K for the year ended October 31, 2018, as amended with the Securities and Exchange Commission on the date hereof (jointly, the “Report”), fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated:  April 1, 2019

 

 

 

Exhibit 99.1

FreshRealm LLC

Financial Statements

As of December 31, 2018, and 2017 and For the Years Ended December 31, 2018, 2017 and 2016

 

Table of Contents

 

 

 

 

 

Report of Independent Auditors

 

 

To the Members and Board of Managers

FreshRealm, LLC

 

Report on Financial Statements

We have audited the accompanying financial statements of FreshRealm, LLC, which comprise the balance sheet as of December 31, 2018, and the related statements of operations, members’ equity (deficit), and cash flows for the year ended December 31, 2018, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FreshRealm, LLC as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in accordance with accounting principles generally accepted in the United States of America.

 

Emphasis of Matter

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company is likely to need additional equity or debt financing to fund operations. This matter raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ Moss Adams LLP

 

Los Angeles, California

March 22, 2019

 

 

FreshRealm, LLC

Balance Sheets

 

 

 

 

FreshRealm, LLC

Statements of Operations

 

 

 

 

 

 

 

 

FreshRealm, LLC

Statements of Members’ Equity (Deficit)

 

 

 

 

 

 

FreshRealm, LLC

Statements of Cash Flows

 

 

 

 

Note 1 – Description of Business and Basis of Presentation

Description of business – FreshRealm, LLC (the “Company” or “FreshRealm”) is headquartered in Ventura, California. The Company is primarily involved in the sales, production and distribution of fresh food meal kits and related products to national retail grocery businesses and home meal distribution providers. Using its cloud-based platform, the Company connects its customers to a national network of food suppliers, food makers and food packers. In the home delivery segment, the Company’s containers are 100% recyclable and the porters in which the food is shipped are reusable.  In 2017, the Company started utilizing its platform to supply fresh food meal kits to retailers.  This customer base has grown and represents the majority of the Company’s business. The Company was formed on January 17, 2013 and is owned by its members. 

Note 2 – Liquidity

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant losses from its inception, primarily as the result of operations and technology development. The Company has a net loss of approximately $33.3 million for the year ended December 31, 2018, and an accumulated deficit of approximately $76.4 million since inception. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for one year after March 22, 2019, which is the date the financial statements are available to be issued. The Company’s ability to continue as a going concern is dependent upon achieving a level of sales adequate to support the Company’s cost structure and raising significant capital. Prior to attaining this level of sales, the Company plans to fund its operations through a combination of additional debt and/or equity financing. See Note 15 – Subsequent Events for additional debt fund raising obtained subsequent to December 31, 2018. There is no assurance that the Company will be successful in its efforts to continue to raise additional equity or debt financing or to realize adequate revenue and cash flows from commercial sales. The accompanying financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Management plans to pursue equity and/or debt financing as required to fund operations until it is able to generate adequate cash flows from product sales.

Note 3 – Summary of Significant Accounting Policies

Basis of presentation – The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). References to the ASC included hereinafter refer to the Accounting Standard Codification established by the Financial Accounting Standard Board (FASB) as the source of authoritative U.S. GAAP.

Use of estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. The Company bases its estimates on historical experience and on various other assumptions that are believed reasonable under the circumstances. Actual results could differ from those estimates. The Company evaluates these estimates on an ongoing basis, including those related to useful lives of intangible assets, property and equipment, and legal contingencies, among others.

Cash and cash equivalents – The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At December 31, 2018 and 2017, the Company’s cash consisted of amounts held as bank deposits. 

Note 3 – Summary of Significant Accounting Policies (continued)

The Company has provided a letter of credit to the landlord for one of its leases in the amount of approximately $349,000 as of December 31, 2018 and 2017.  The letter of credit has a term of 12 months and renews automatically each year in the event the lease is still in effect.  The amounts associated with the letter of credit have been classified as restricted cash on the accounting balance sheets.  The restricted cash is included as a component of total cash as presented on the accompanying statements of cash flows. 

Accounts receivable – The Company’s accounts receivable from product sales are recorded at contracted prices. The company provides an allowance for doubtful collections, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal accounts receivables are generally due 15 days after issuance of invoice. Receivables past due more than 120 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.  The allowance for doubtful accounts amounted to approximately $299,000 and $0 (unaudited) at December 31, 2018 and 2017, respectively.

Accounts receivable included a past due amount of $251,000 from one of the Company’s customers at December 31, 2017. This amount was subsequently converted to a short term note receivable in August 2018 with interest of 10% per annum payable in eleven monthly payments of principal and interest of $24,000.  The outstanding balance is reflected as notes receivable as of December 31, 2018 (see Note 7).  

Property and equipment – Property and equipment are stated at historical cost less accumulated depreciation. Depreciation expense for furniture and fixtures is computed using the straight‐line method over the estimated useful lives of the assets, generally three years. Depreciation expense for porter parts is computed using the units of production method, which depreciates assets based on frequency of usage, generally 50 occurrences.

Inventory – Inventories are stated at the lower of cost or net realizable value. Cost is determined principally by the first-in, first-out method. Costs include materials, labor and manufacturing overhead.

Any write-down of inventory to the lower of cost or net realizable value creates a new cost basis that subsequently would not be marked up based on changes in underlying facts and circumstances. On an ongoing basis, the Company evaluates inventory for obsolescence and slow-moving items. This evaluation includes analysis of sales levels, sales projections, and purchases by item. If our review indicates a reduction in utility below carrying value, we reduce inventory to a new cost basis. If future demand or market conditions are different than our current estimates, an inventory adjustment to write down inventory may be required, and would be reflected in cost of goods sold in the period the revision is made.

Capitalized software development costs – In accordance with applicable accounting standards, direct costs of the Company’s internal use software development incurred during the application development stage are capitalized until the software is substantially complete and ready for its intended use. The costs capitalized are limited predominately to payroll and the payroll-related costs of employees who are directly engaged in the application development stage in which activities include software configuration, interfaces, coding, installation of hardware, testing, and parallel processing. Costs included in the preliminary project and post-implementation operation stages are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life which is approximately three years. During the year ended December 31, 2018 and 2017, the Company capitalized approximately $181,000 and $816,000 (unaudited), respectively, of gross costs related to salaries and wages. 

Salaries and related expenses – Salaries and related expenses consist primarily of personnel and related expenses, including wages, benefits, unit-based compensation and bonuses.

Note 3 – Summary of Significant Accounting Policies (continued)

Unit-based compensation – The Company grants unit-based awards to employees and directors, including profit interest units and options, which are accounted for in accordance with ASC 718.  The fair value of each grant is estimated on the grant date and is recognized as an expense over the vesting period net of estimated forfeitures.     

Income taxes – The Company is a limited liability company which was treated as a partnership for federal income tax purposes and did not pay U.S. income taxes on its taxable income up through December 15, 2018.  Through this point, earnings and losses of the Company were included in the individual returns of the members and taxed at the member level. Therefore, no provision or liability for federal income taxes was included in the financial statements for activity up through December 15, 2018.

On February 27, 2019, the Company filed an Entity Classification Election with the Internal Revenue Service to be treated as a corporation for U.S. federal and state income tax purposes effective December 16, 2018. As a result, for activity subsequent to this point the Company accounts for income taxes under the asset and liability method of ASC 740, where deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The deferred tax assets of the Company relate primarily to operating loss carryforwards for federal income tax purposes.  A full valuation allowance for deferred tax assets has been provided because the Company believes it is not more likely than not that the deferred tax asset will be realized. Realization of deferred tax assets is dependent on the Company generating sufficient taxable income in future periods.

The Company uses a recognition threshold and measurement process for accounting for uncertain tax positions and also provides guidance on various related matters such as de-recognition, interest, penalties, and disclosures required. Generally, the Company is subject to examination by U.S. federal (or state and local) income tax authorities for three to four years from the filing of a tax return. The Company does not have any entity-level uncertain tax positions as of December 31, 2018.

The Company converted to a calendar year-end effective December 31, 2017. FreshRealm filed its 2016 tax return for the fiscal year ended October 31, 2017, and a short period 2017 return for the period November 1 through December 31, 2017.  The Company will file a return covering the period from January 1, 2018 through December 15, 2018 as an LLC, as well as a stub return as a corporation from December 16, 2018 through December 31, 2018. 

Fair value of financial instruments – The Company accounts for the fair value of financial instruments in accordance with the provisions of FASB ASC 820, Fair Value Measurement. This standard defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an “exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 applies to all accounting pronouncements that require fair value measurements.

The Company’s financial instruments consist primarily of cash, accounts payable, accrued expenses, and notes payable. The carrying values of cash equivalents, accounts payable, and accrued expenses are representative of their fair values due to their short‐term maturities.

Note 3 – Summary of Significant Accounting Policies (continued)

Revenue recognition – The Company recognizes revenue upon concluding that all the criteria for revenue recognition have been met including: (i) persuasive evidence of an arrangement exists, (ii) the price is fixed or determinable, (iii) collection is reasonably assured, and (iv) delivery of products has occurred or services have been rendered. The Company purchases food from various manufacturers, and assembles it into meal kits for retailers or packs it into porters. Once the packing is complete, the meal kits are delivered to retailer distribution centers and the porters are loaded into the third-party carrier’s truck and shipped to the customers. The Company recognizes revenue when the product is delivered to its customers, which is typically the grocer retailer.

Subsequent events – Subsequent events are events or transactions that occur after the balance sheet dates but before financial statements are issued. The Company recognizes and discloses the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company’s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheets but arose after the balance sheet date and before the financial statements are issued.

The Company has evaluated subsequent events through March 22, 2019, which is the date the financial statements were available to be issued.

Recently issued and adopted accounting pronouncements – In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 – Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Related to this ASU, Update No. 2016-10 (Topic 606) was issued. The update clarifies aspects identifying performance obligations and the licensing implementation guidance. For private companies, this ASU and update is effective for fiscal years beginning after December 15, 2018, and for interim periods beginning after December 15, 2019. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services. The Company is currently evaluating the method of adoption to use and the effect the standard is expected to have on the Company’s financial position, results of operations, and cash flows.

In February 2016, the FASB issued ASU No. 2016-02 – Leases (Topic 842). This update’s purpose is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update affects any entity that enters into a lease, with some specified scope exemptions. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the method of adoption to use.  The Company expects most of its leases to be recorded on the balance sheet as a result of adopting the update, which is expected to have a significant impact on the balance sheet.

Note 3 – Summary of Significant Accounting Policies (continued)

In March 2016, the FASB issued ASU No. 2016‐09, Stock Compensation: Improvements to Employee Share‐Based Payment Accounting. This ASU was designed to simplify accounting for share‐based payments in the following areas: income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU also contains provisions that simplify two areas specific to private companies: practical expedient for expected term and intrinsic value. For private companies, the amendments take effect for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any organization in any interim or annual period. The Company has adopted this guidance during the year ended December 31, 2018.  Adoption of this guidance did not have a material impact on the Company’s financial statements. 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). The standard is intended to eliminate diversity in practice in the treatment of restricted cash in the statement of cash flows and requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. For the Company, the amendments in ASU 2016-18 are effective for annual periods beginning after December 15, 2018, with early adoption permitted. The Company has adopted this guidance for the year ended December 31, 2018 and has classified restricted cash as part of total cash on the statements of cash flows.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The standard is intended to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. For the Company, the amendments in ASU 2017-09 are effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company has adopted this guidance during the year ended December 31, 2018. Adoption of this guidance did not have a material impact on the Company’s Financial Statements.

Note 4 – Property and Equipment

Property and equipment at December 31, 2018 and 2017(unaudited), consists of the following:

 

Depreciation expense was approximately $1,049,000, $709,000 (unaudited), and $156,000 (unaudited) for the year ended December 31, 2018, 2017 and 2016, respectively.

Note 5 – Inventory

Inventory consisted of the following at December 31, 2018 and 2017 (unaudited):

   

 

Note 6 – Intangible Assets

Intangible assets are comprised of software development costs related to costs incurred internally in creating the software for the Company’s product. The intangible assets are amortized on a straight-line basis over the estimated useful lives of 3 years. Intangible assets at December 31, 2018 and 2017 (unaudited) consist of the following:

Future scheduled amortization expense related to these assets as of December 31, 2018, is as follows:

 

Amortization expense for the year ended December 31, 2018, 2017 and 2016 was approximately $993,000, $882,000 (unaudited) and $652,000 (unaudited), respectively.

Note 7 – Notes Receivable

The following is a summary of notes receivables outstanding as of December 31, 2018 and 2017 (unaudited):

 

The Company also entered into a series of convertible promissory notes with a customer during 2018 for an aggregate total of $2,000,000 bearing interest at 12% per annum.  All unpaid principal and interest are due on the earlier of December 31, 2019, or upon a qualified financing or change in control of the customer, as defined in the agreements.  Upon a qualified financing or change in control of the customer, the Company shall have the option to convert the outstanding note balances into shares of the customer at a conversion rate equal to 80% of the price per equity sold by the customer in the financing or change of control.  If the notes are still outstanding at December 31, 2019, the Company shall have the option to convert the outstanding note balances into the most senior outstanding preferred equity instruments of the customer at a conversion price equal to the price paid by purchasers in the most recent equity sale.  The Company has fully reserved for the notes receivable balances, as collection of the notes are considered doubtful and the net realizable value of any securities the Company could convert the notes into are considered to be $0. 

Note 8 – Members’ Equity

The Company’s Amended and Restated Limited Liability Company Agreement (the “Operating Agreement”) dated July 31, 2013 allowed for the issuance of 1,271,075 Class A units. The Operating Agreement has been amended based on a written consent of the board as needed to allow for additional units issued. As of December 31, 2018, the Company was authorized to issue up to 3,580,379 Class A units

During the year ended December 31, 2016 (unaudited), the Company sold 307,802 Class A units for proceeds of approximately $10,661,000.  During the year ended December 31, 2017 (unaudited), the Company sold 764,855 Class A units for proceeds of approximately $28,005,000.  During the year ended December 31, 2018, the Company sold 401,325 Class A units for proceeds of approximately $16,000,000. 

Note 9 – Unit-Based Compensation

Profit Interest Units (PIUs)

Under the terms of the Company’s Operating Agreement, the Company is authorized to issue up to 195,555 PIUs to employees or other service providers with the purpose of attracting and retaining the best available personnel.  PIUs are membership interests in the Company that vest over a period ranging from immediately to five years from the date of grant.  Each PIU grant agreement contains a floor value, equal to the estimated fair value of the Company on the date of grant.  Upon a sale or dissolution of the Company, PIUs do not receive any value for their units unless the proceeds from sale or dissolution is greater than the floor threshold established in the grant agreement.  Accordingly, PIUs have no value on the date of grant.

Note 9 – Unit-Based Compensation (continued)

The Company accounts for PIUs at the fair value of the membership units on the date of the grant less the floor value per unit.  As the floor value equals the estimated fair value on the date of grant, there is no expense recognized in the statements of operations for the year ended December 31, 2018, 2017 (unaudited) and 2016 (unaudited).

The following is a summary of the PIU activity for the periods below.

 

As of December 31, 2018, 43,102 of the outstanding PIUs were vested.  The remaining unvested units are scheduled to vest over periods extending through May 2023. 

2018 Equity Incentive Plan

The Company has adopted the 2018 Equity Incentive Plan (the “Plan”) which provides for the Company to grant options and other unit-based incentive awards to key employees and other service providers.  Under the terms of the Plan, 75,084 units in the Company have been reserved for satisfaction of awards issued under the Plan.  The exercise price (or base value from which appreciation is to be measured) of any awards made under the Plan will be the fair value of the units on the date of the grant.  Any awards made under the plan have a maximum term not to exceed 10 years.  In December 2018, the Company granted options to employees, which represent the first awards issued under the Plan. 

The fair value of each option is estimated on the grant date using the Black-Scholes option pricing model using the assumptions noted in the following table.  As there is no active market for the Company’s membership units, the volatility was estimated as of each grant date using an index of comparable publicly traded companies.  The expected life represents the average between the vesting period and contractual life

Note 9 – Unit-Based Compensation (continued)

of the options.  The risk-free interest rate is based on published U.S. Treasury Department interest rates for the expected terms of the underlying options.   

 

The following summarizes the option activity for the periods below:

The weighted average grant-date fair value of options granted during the year ended December 31, 2018 was $27.66.  Total share-based compensation expense relating to options during the year ended December 31, 2018, 2017 and 2016 amounted to approximately $17,000, $0 (unaudited), and $0 (unaudited), respectively.

As of December 31, 2018, the total unrecognized expense relating to the options expected to be recognized in future periods was approximately $350,000.  The unrecognized expense is expected to be recognized over the vesting periods of the underlying options which extend through January 2023.