NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the Three Months and Nine Months Ended September 30, 2021 and 2020
(UNAUDITED)
The accompanying unaudited condensed consolidated interim financial statements have been prepared by Maui Land & Pineapple Company, Inc. (together with its subsidiaries, the “Company”) in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes to the annual audited consolidated financial statements required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements contain all normal and recurring adjustments necessary to fairly present the Company’s financial position, results of operations and cash flows for the interim periods ended September 30, 2021 and 2020. The unaudited condensed consolidated interim financial statements and notes should be read in conjunction with the annual audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2020.
2.
|
USE OF ESTIMATES AND RECLASSIFICATIONS
|
The Company’s reports for interim periods utilize numerous estimates of general and administrative expenses and other costs for the full year. Future actual amounts may differ from these estimates. Amounts reflected in condensed consolidated interim statements are not necessarily indicative of results for a full year.
3.
|
EARNINGS (LOSS) PER SHARE – BASIC AND DILUTED
|
Basic and diluted weighted-average shares outstanding for the three and nine months ended September 30, 2021 and 2020 were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
19,361,852
|
|
|
|
19,291,102
|
|
|
|
19,347,153
|
|
|
|
19,275,696
|
|
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted net income (loss) per common share is computed similar to basic net income (loss) per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares from share-based compensation arrangements had been issued.
Property as of September 30, 2021 and December 31, 2020 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
(in thousands)
|
|
Land
|
|
$
|
5,072
|
|
|
$
|
5,072
|
|
Land improvements
|
|
|
12,943
|
|
|
|
12,943
|
|
Buildings
|
|
|
22,892
|
|
|
|
23,465
|
|
Machinery and equipment
|
|
|
10,505
|
|
|
|
10,476
|
|
Total property
|
|
|
51,412
|
|
|
|
51,956
|
|
Less accumulated depreciation
|
|
|
34,089
|
|
|
|
33,445
|
|
Property, net
|
|
$
|
17,323
|
|
|
$
|
18,511
|
|
Land
Most of the Company’s 22,800 acres of land were acquired between 1911 and 1932 and are carried in its consolidated balance sheets at cost. Approximately 20,700 acres of land are located in West Maui and comprise a largely contiguous parcel that extends from the sea to an elevation of approximately 5,700 feet. This parcel includes approximately 900 acres within the Kapalua Resort, a master-planned, destination resort and residential community located in West Maui encompassing approximately 3,000 acres. The Company’s remaining 2,100 acres of land are located in Upcountry Maui in an area commonly known as Hali’imaile and are mainly comprised of leased agricultural fields, including related processing and maintenance facilities.
Land Improvements
Land improvements are comprised primarily of roads, utilities, and landscaping infrastructure improvements at the Kapalua Resort. Also included is the Company’s potable and non-potable water systems in West Maui. The majority of the Company’s land improvements were constructed and placed in service in the mid-to-late 1970’s or conveyed in 2017. Depreciation expense would be considerably higher if these assets were stated at current replacement cost.
Buildings
Buildings are comprised of restaurant, retail and light industrial spaces located at the Kapalua Resort and Hali’imaile which are used in the Company’s leasing operations. The majority of the buildings were constructed and placed in service in the mid-to-late 1970’s. Depreciation expense would be considerably higher if these assets were stated at current replacement cost.
Machinery and Equipment
Machinery and equipment are mainly comprised of zipline course equipment installed in 2008 at the Kapalua Resort and used in the Company’s leasing operations.
Assets held for sale as of September 30, 2021 and December 31, 2020 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
(in thousands)
|
|
Kapalua Resort, 46-acre Kapalua Central Resort project
|
|
$
|
2,979
|
|
|
$
|
2,978
|
|
Upcountry Maui, 646-acre parcel of agricultural land
|
|
|
156
|
|
|
|
156
|
|
Kapalua Resort, Kapalua Water and Kapalua Waste Treatment Company assets
|
|
|
-
|
|
|
|
4,306
|
|
|
|
$
|
3,135
|
|
|
$
|
7,440
|
|
In February 2020, the Company entered into an agreement to sell the Kapalua Central Resort project for $43.9 million. The closing of the transaction was contingent upon, among other things, the satisfaction of certain customary closing conditions, including an extended due diligence period. In September 2021, the Company received a notice to terminate this agreement from the prospective buyer.
In December 2019, the Company entered into an Asset Purchase Agreement to sell the Public Utilities Commission (PUC)-regulated assets of Kapalua Water Company, Ltd. and Kapalua Waste Treatment Company, Ltd. located in the Kapalua Resort. In March 2021, the sale was approved by the State of Hawaii PUC subject to certain closing conditions of its Decision and Order. The Company received net proceeds of $4.2 million from the sale in May 2021. The results of discontinued operations related to the sale of the Kapalua Water Company, Ltd. and Kapalua Waste Treatment Company, Ltd. assets are reflected in Note 13.
The above assets held for sale have not been pledged as collateral under the Company’s credit facility.
Long-term debt is comprised of amounts outstanding under the Company’s $15.0 million revolving line of credit facility with First Hawaiian Bank (“Credit Facility”). The Credit Facility matures on December 31, 2021. Interest accrued on borrowings is based on LIBOR plus 3.50%. As of September 30, 2021 and December 31, 2020, the Credit Facility’s interest rates were 3.59% and 3.65%, respectively. The Company has pledged its 800-acre Kapalua Mauka project and approximately 30,000 square feet of commercial leased space in the Kapalua Resort as security for the Credit Facility. Net proceeds from the sale of any collateral are required to be repaid toward outstanding borrowings and will permanently reduce the Credit Facility’s revolving commitment amount. There are no commitment fees on the unused portion of the Credit Facility.
The terms of the Credit Facility include various representations, warranties, affirmative, negative and financial covenants and events of default customary for financings of this type. Financial covenants include a minimum liquidity (as defined) of $2.0 million, a maximum of $45.0 million in total liabilities, and a limitation on new indebtedness.
The Company believes that it was in compliance with the covenants under the Credit Facility as of September 30, 2021.
7.
|
SHARE-BASED COMPENSATION
|
The Company’s directors, officers and certain members of management receive a portion of their compensation in shares of the Company’s common stock granted under the Company’s 2017 Equity and Incentive Award Plan (“Equity Plan”). Share-based compensation is valued based on the average of the high and low share price on the date of grant. Shares are issued upon execution of agreements reflecting the grantee’s acceptance of the respective shares subject to the terms and conditions of the Equity Plan. Restricted shares issued under the Equity Plan vest quarterly and have voting and regular dividend rights but cannot be disposed of until such time as they are vested. All unvested restricted shares are forfeited upon the grantee’s termination of directorship or employment from the Company.
Share-based compensation is determined and awarded annually to the Company’s officers and certain members of management based on their achievement of certain predefined performance goals and objectives under the Equity Plan. Such share-based compensation is comprised of an annual incentive paid in shares of common stock and a long-term incentive paid in restricted shares vesting quarterly over a period of three years.
Share-based compensation totaled $1,084,000 and $1,229,000 for the nine months ended September 30, 2021 and 2020, respectively. Included in these amounts were $526,000 and $512,000 of restricted shares of common stock that vested during the first nine months of 2021 and 2020, respectively.
8.
|
ACCRUED RETIREMENT BENEFITS
|
Accrued retirement benefits as of September 30, 2021 and December 31, 2020 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan
|
|
$
|
6,863
|
|
|
$
|
8,790
|
|
Non-qualified retirement plans
|
|
|
2,251
|
|
|
|
2,301
|
|
Total
|
|
|
9,114
|
|
|
|
11,091
|
|
Less current portion
|
|
|
(165
|
)
|
|
|
(165
|
)
|
Non-current portion of accrued retirement benefits
|
|
$
|
8,949
|
|
|
$
|
10,926
|
|
The Company has a defined benefit pension plan which covers substantially all of its former bargaining and non-bargaining full-time, part-time and intermittent employees. In 2011, pension benefits under the plan were frozen. The Company also has unfunded non-qualified retirement plans covering nine of its former executives. The non-qualified retirement plans were frozen in 2009 and future vesting of additional benefits was discontinued.
The net periodic benefit costs for pension and post-retirement benefits for the three and nine months ended September 30, 2021 and 2020 were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Interest cost
|
|
$
|
309
|
|
|
$
|
408
|
|
|
$
|
927
|
|
|
$
|
1,225
|
|
Expected return on plan assets
|
|
|
(418
|
)
|
|
|
(489
|
)
|
|
|
(1,254
|
)
|
|
|
(1,483
|
)
|
Amortization of net loss
|
|
|
225
|
|
|
|
206
|
|
|
|
675
|
|
|
|
617
|
|
Pension and other postretirement expenses
|
|
$
|
116
|
|
|
$
|
125
|
|
|
$
|
348
|
|
|
$
|
359
|
|
9.
|
CONTRACT ASSETS AND LIABILITIES
|
Receivables from contracts with customers were $495,000, $806,000 and $673,000 as of September 30, 2021, December 31, 2020, and December 31, 2019 respectively.
Deferred club membership revenue
The Company manages the operations of the Kapalua Club, a private, non-equity club program providing members special programs, access and other privileges at certain of the amenities within the Kapalua Resort. Deferred revenues from dues received from the private club membership program are recognized on a straight-line basis over one year.
Deferred license fee revenue
The Company entered into a trademark license agreement with the owner of the Kapalua Plantation and Bay golf courses, effective April 1, 2020. Under the terms and conditions set forth in the agreement, the licensee is granted a perpetual, terminable on default, transferable, non-exclusive license to use the Company’s trademarks and service marks to promote its golf courses and to sell its licensed products. The Company received a single royalty payment of $2.0 million in March 2020. Revenue recognized on a straight-line basis over its estimated economic useful life of 15 years was $100,000 and $67,000 for the nine months ended September 30, 2021 and 2020, respectively.
The Company uses a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company’s provision for income taxes is calculated using the liability method. Deferred income taxes are provided for all temporary differences between the financial statement and income tax bases of assets and liabilities using tax rates enacted by law or regulation. A full valuation allowance continues to be established for deferred income tax assets as of September 30, 2021 and December 31, 2020, respectively.
11.
|
REPORTABLE OPERATING SEGMENTS
|
The Company’s reportable operating segments are comprised of the discrete business units whose operating results are regularly reviewed by the Company’s Chief Executive Officer – its chief decision maker – in assessing performance and determining the allocation of resources. Reportable operating segments are as follows:
|
•
|
Real Estate includes the planning, entitlement, development and sale of real estate inventory. The segment included the operations of Kapalua Realty Company, a general brokerage real estate company located within the Kapalua Resort, through June 30, 2020.
|
|
•
|
Leasing includes revenues and expenses from real property leasing activities, license fees and royalties for the use of certain of the Company’s trademarks and brand names by third parties, and the cost of maintaining the Company’s real estate assets, including conservation activities. The operating segment also includes the management of ditch, reservoir and well systems that provide non-potable irrigation water to West and Upcountry Maui areas.
|
|
•
|
Resort Amenities include a membership program that provides certain benefits and privileges within the Kapalua Resort for its members.
|
The Company’s reportable operating segment results are measured based on operating income (loss), exclusive of interest, depreciation, general and administrative, share-based compensation, pension and other postretirement expenses.
Reportable operating segment revenues and income for the three and nine months ended September 30, 2021 and 2020 were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Operating Segment Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
-
|
|
|
$
|
15
|
|
|
$
|
2,700
|
|
|
$
|
173
|
|
Leasing
|
|
|
2,184
|
|
|
|
1,448
|
|
|
|
5,947
|
|
|
|
4,620
|
|
Resort amenities and other
|
|
|
253
|
|
|
|
234
|
|
|
|
799
|
|
|
|
648
|
|
Total Operating Segment Revenues
|
|
$
|
2,437
|
|
|
$
|
1,697
|
|
|
$
|
9,446
|
|
|
$
|
5,441
|
|
Operating Segment Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
(67
|
)
|
|
$
|
(71
|
)
|
|
$
|
2,082
|
|
|
$
|
(284
|
)
|
Leasing
|
|
|
1,400
|
|
|
|
777
|
|
|
|
3,452
|
|
|
|
2,342
|
|
Resort amenities and other
|
|
|
(51
|
)
|
|
|
82
|
|
|
|
(195
|
)
|
|
|
(245
|
)
|
Total Operating Segment Income
|
|
$
|
1,282
|
|
|
$
|
788
|
|
|
$
|
5,339
|
|
|
$
|
1,813
|
|
The Company leases land primarily to agriculture operators and space in commercial buildings, primarily to restaurant and retail tenants through 2048. These operating leases generally provide for minimum rents and, in some cases, licensing fees, percentage rentals based on tenant revenues, and reimbursement of common area maintenance and other expenses. Certain leases allow the lessee an option to extend or terminate the agreement. There are no leases allowing a lessee an option to purchase the underlying asset. Total leasing income for the three and nine months ended September 30, 2021 and 2020 were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rentals
|
|
$
|
753
|
|
|
$
|
677
|
|
|
$
|
2,225
|
|
|
$
|
2,086
|
|
Percentage rentals
|
|
|
547
|
|
|
|
-
|
|
|
|
1,080
|
|
|
|
304
|
|
Licensing fees
|
|
|
203
|
|
|
|
104
|
|
|
|
492
|
|
|
|
449
|
|
Other
|
|
|
373
|
|
|
|
349
|
|
|
|
1,248
|
|
|
|
959
|
|
Total
|
|
$
|
1,876
|
|
|
$
|
1,130
|
|
|
$
|
5,045
|
|
|
$
|
3,798
|
|
13.
|
DISCONTINUED OPERATIONS
|
In March 2021, the sale of the Public Utilities Commission (PUC)-regulated assets of Kapalua Water Company, Ltd. and Kapalua Waste Treatment Company, Ltd. was approved by the State of Hawaii PUC. The Company received net proceeds of $4.2 million in May 2021 at closing. The results of discontinued operations related to the Kapalua Water Company, Ltd. and Kapalua Waste Treatment Company, Ltd. assets for the nine months ended September 30, 2021 were as follows:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
(unaudited)
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Operating revenues
|
|
$
|
838
|
|
|
$
|
2,014
|
|
Operating costs and expenses
|
|
|
(1,012
|
)
|
|
|
(2,098
|
)
|
Impairment loss
|
|
|
(40
|
)
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(214
|
)
|
|
$
|
(84
|
)
|
14.
|
COMMITMENTS AND CONTINGENCIES
|
On December 31, 2018, the State of Hawaii Department of Health (“DOH”) issued a Notice and Finding of Violation and Order (“Order”) for alleged wastewater effluent violations related to the Company’s Upcountry Maui wastewater treatment facility. The facility was built in the 1960’s to serve approximately 200 single-family homes developed for workers in the Company’s former agricultural operations. The facility is made up of two 1.5-acre wastewater stabilization ponds and surrounding disposal leach fields. The Order includes, among other requirements, payment of a $230,000 administrative penalty and development of a new wastewater treatment plant, which become final and binding – unless a hearing is requested to contest the alleged violations and penalties.
The DOH agreed to defer the Order without a hearing date while the Company continues working on a previously approved corrective action plan to resolve and remediate the facility’s wastewater effluent issues. The construction of additional leach fields, installation of a surface aerator, sludge removal system, and natural pond cover using water plants were completed through September 30, 2021. The DOH is continuing to review the test results of these corrective action plan items. No hearing date has been set as discussions with the DOH are still ongoing to address any other matters regarding the Order.
The Company is presently unable to estimate the amount, or range of amounts, of any probable liability, if any, related to the Order and no provision has been made in the accompanying unaudited condensed consolidated interim financial statements.
There are various other claims and legal actions pending against the Company. The resolution of these other matters is not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations after consultation with legal counsel.
Quarantine, travel restrictions and other public health measures to reduce the spread of COVID-19 has caused an adverse impact on local economic activity, including business closures, increased unemployment, financial market instability, and reduced tourism. The Company’s future business operations, including the results of operations, cash flows and financial position will be significantly affected should the spread of the COVID-19 pandemic, including its variants, accelerate in future periods.
15.
|
FAIR VALUE MEASUREMENTS
|
GAAP establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements to enable the reader of the unaudited condensed consolidated interim financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. GAAP requires that financial assets and liabilities be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The Company considers all cash on hand to be unrestricted cash for the purposes of the interim unaudited condensed consolidated balance sheets and interim unaudited condensed consolidated statements of cash flows. The fair value of receivables and payables approximate their carrying value due to the short-term nature of the instruments. The valuation is based on settlements of similar financial instruments all of which are short-term in nature and are generally settled at or near cost. The fair value of debt was estimated based on borrowing rates currently available to the Company for debt with similar terms and maturities. The carrying amount of debt, which approximated fair value, was approximately $200,000 at December 31, 2020 (audited). The fair value of debt was measured using the Level 2 inputs, noted above.
16.
|
RECENT ACCOUNTING PRONOUCEMENTS
|
In June 2016, the FASB issued ASU 2016-13 to update the methodology used to measure current expected credit losses (“CECL”). This ASU apples to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet exposures, such as loan commitments. This ASU requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(accumulated deficit) in the period of adoption. ASU 2019-10 was subsequently issued delaying the effective date to the first quarter of 2023. The Company is in the process of assessing the impact of the ASU on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC Topic 740, Income Taxes. This guidance removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. The guidance also clarifies and simplifies other areas of ASC Topic 740. This ASU was effective beginning in the first quarter of 2021 with early adoption permitted. Certain adjustments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(accumulated deficit) in the period of adoption. The ASU has not had a significant impact on the Company’s consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04 as an update to provide optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in the ASU are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The ASU is effective through December 31, 2022. Management is evaluating its impact on the Company’s consolidated financial statements and related disclosures, if elected.