MAUI LAND & PINEAPPLE CO INC - Quarter Report: 2019 March (Form 10-Q)

 

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		March 31,				December 31,
		2019				2018
		(in thousands except share data)
ASSETS
CURRENT ASSETS
Cash		$	1,133			$	624
Accounts receivable, less allowance of $34 for doubtful accounts			1,196				897
Current Portion of income tax receivable			2,499				2,499
Prepaid expenses and other assets			128				37
Assets held for sale			156				212
Total current assets			5,112				4,269
PROPERTY			66,153				65,962
Accumulated depreciation			(37,173	)			(36,741	)
Net property			28,980				29,221
OTHER ASSETS
Deferred development costs			10,772				10,790
Income tax receivable			2,500				2,500
Other noncurrent assets			1,295				1,320
Total other assets			14,567				14,610
TOTAL ASSETS		$	48,659			$	48,100
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt		$	1,735			$	1,235
Accounts payable			2,081				2,024
Payroll and employee benefits			335				814
Current portion of accrued retirement benefits			165				165
Deferred revenue			551				137
Other current liabilities			380				323
Total current liabilities			5,247				4,698
LONG-TERM LIABILITIES
Accrued retirement benefits			9,889				9,871
Deposits			2,543				2,558
Other noncurrent liabilities			118				54
Total long-term liabilities			12,550				12,483
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Common stock--no par value, 43,000,000 shares authorized, 19,180,375 and 19,125,521 shares issued and outstanding			80,170				79,411
Additional paid in capital			9,314				9,246
Accumulated deficit			(37,029	)			(35,934	)
Accumulated other comprehensive loss			(21,593	)			(21,804	)
Total stockholders' equity			30,862				30,919
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY		$	48,659			$	48,100

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		Three Months Ended March 31,
		2019				2018
		(in thousands except
		per share amounts)
OPERATING REVENUES
Real estate		$	157			$	36
Leasing			1,677				1,495
Utilities			748				704
Resort amenities and other			261				307
Total operating revenues			2,843				2,542
OPERATING COSTS AND EXPENSES
Real estate			264				66
Leasing			568				578
Utilities			601				521
Resort amenities and other			311				353
General and administrative			864				831
Share-based compensation			598				579
Depreciation			432				439
Total operating costs and expenses			3,638				3,367
OPERATING LOSS			(795	)			(825	)
Pension and other post-retirement expenses			(253	)			(102	)
Interest expense			(47	)			(37	)
NET LOSS		$	(1,095	)		$	(964	)
Pension, net of income taxes of $0			211				185
COMPREHENSIVE LOSS		$	(884	)		$	(779	)
NET LOSS PER COMMON SHARE
--BASIC AND DILUTED		$	(0.06	)		$	(0.05	)

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																		Accumulated
										Additional								Other
		Common Stock								Paid in				Accumulated				Comprehensive
		Shares				Amount				Capital				Deficit				Loss				Total
Balance, January 1, 2019			19,125			$	79,411			$	9,246			$	(35,934	)		$	(21,804	)		$	30,919
Share-based compensation			52				889				208												1,097
Vested restricted stock issued			16				208				(208	)											-
Stock option exercised (Note 3)			25				62				68												130
Shares cancelled to pay tax liability			(38	)			(400	)															(400	)
Other comprehensive income - pension																			211				211
Net loss															(1,095	)							(1,095	)
Balance, March 31, 2019			19,180			$	80,170			$	9,314			$	(37,029	)		$	(21,593	)		$	30,862
Balance, January 1, 2018			19,040			$	78,584			$	9,246			$	(36,432	)		$	(20,254	)		$	31,144
Share-based compensation			71				845				120												965
Vested restricted stock issued			15				120				(120	)											-
Shares cancelled to pay tax liability			(35	)			(411	)															(411	)
Other comprehensive income - pension																			185				185
Net income															(964	)							(964	)
Balance, March 31, 2018			19,091			$	79,138			$	9,246			$	(37,396	)		$	(20,069	)		$	30,919

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		Three Months Ended March 31,
		2019				2018
		(in thousands)
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	555			$	522
INVESTING ACTIVITIES
Payments of deferred development costs			(146	)			(90	)
NET CASH USED IN INVESTING ACTIVITIES			(146	)			(90	)
FINANCING ACTIVITIES
Proceeds from long-term debt			500				-
Debt and common stock issuance costs and other			(400	)			(411	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			100				(411	)
NET INCREASE IN CASH			509				21
CASH AT BEGINNING OF PERIOD			624				1,029
CASH AT END OF PERIOD		$	1,133			$	1,050
Cash paid during the period:
Interest		$	26			$	30

 

SUPPLEMENTAL NON-CASH ACTIVITIES:

 

●	Common stock issued to certain members of the Company’s management totaled $951,000 and $845,000 for the three months ended March 31, 2019 and 2018, respectively.

●	Accounts payable at March 31, 2018 includes $100,000 for the estimated cost of subdividing the Kapalua Golf Academy practice course.

 

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1.     BASIS OF PRESENTATION

 

The accompanying interim unaudited condensed consolidated 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, 2018, and pursuant to the instructions to Form 10-Q and Article 8 promulgated by Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes to financial statements required by GAAP for complete financial statements. In the opinion of management, the accompanying condensed consolidated 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 March 31, 2019 and 2018. The condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2018.

 

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 interim reports are not necessarily indicative of results for a full year. Certain amounts in the December 31, 2018 condensed consolidated balance sheet were reclassified to conform to the current period’s presentation. Such amounts had no impact on total assets and liabilities or net loss and comprehensive loss previously reported.

 

3.     STOCKHOLDERS’ EQUITY

 

Basic and diluted weighted-average shares outstanding for the three months ended March 31, 2019 and 2018 were as follows:

 

 

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.

 

Potentially dilutive shares arise from non-qualified stock options to purchase common stock. The treasury stock method is utilized to determine the number of potentially dilutive shares related to the outstanding non-qualified stock options.

 

On March 6, 2019, the Company’s Chairman & Chief Executive Officer exercised a non-qualified stock option to acquire 25,000 shares of the Company’s stock at an exercise price of $5.20 per share. The stock option was granted on March 9, 2009 and vested 20% annually beginning March 9, 2010 through March 9, 2014. The stock option had an expiration date of March 9, 2019.

 

 

 

4.

PROPERTY

 

Property at March 31, 2019 and December 31, 2018 consisted of the following:

 

 

Land

 

Most of the Company’s 22,800 acres of land were acquired between 1911 and 1932 and is carried in its 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. Also included are machinery and equipment used in the Zipline Course and in the Company’s utilities operations.

 

5.     ASSETS HELD FOR SALE AND REAL ESTATE SALES

 

Assets held for sale at March 31, 2019 and December 31, 2018 consisted of the following:

 

 

The above assets held for sale have not been pledged as collateral under the Company’s credit facility.

 

The value of the Upcountry Maui, 33-acre parcel of agricultural land and wastewater treatment facility was considered fully impaired and written down to zero at March 31, 2019.

 

 

 

6.     LONG-TERM DEBT

 

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, 2019 and provides for two optional one-year extension periods. Interest on borrowings is at LIBOR plus 3.50%, or 5.99% and 5.84%, at March 31, 2019 and December 31, 2018, 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 is in compliance with the covenants under the Credit Facility as of March 31, 2019.

 

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 $598,000 and $579,000 for the three months ended March 31, 2019 and 2018, respectively. Included in these amounts were $208,000 and $120,000 of restricted shares of common stock which vested during the first three months of 2019 and 2018, respectively.

 

8.	ACCRUED RETIREMENT BENEFITS

 

Accrued retirement benefits at March 31, 2019 and December 31, 2018 consisted of the following:

 

 

The Company had two defined benefit pension plans which cover substantially all of its former bargaining and non-bargaining full-time, part-time and intermittent employees. In 2011, pension benefits under both plans were frozen. The Company also has unfunded non-qualified retirement plans covering twelve of its former executives. The non-qualified retirement plans were frozen in 2009 and future vesting of additional benefits was discontinued. During the fourth quarter of 2018, the Company merged the two defined benefit pension plans to streamline the administration of the frozen plan.

 

 

The net periodic benefit costs for pension and postretirement benefits for the three months ended March 31, 2019 and 2018 were as follows:

 

 

 

9.

INCOME TAXES

 

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 effective tax rate for 2019 and 2018 reflects the recognition of interim period tax benefits and changes to its tax valuation allowance.

 

In December 2017, The Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law. The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%, elimination of Alternative Minimum Tax (AMT) and refund of AMT credit carryforward, limitations on the deductibility of interest expense and executive compensation, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. The TCJA also establishes new tax laws that will affect future periods, including, but not limited to: (1) reducing the U.S. federal corporate tax rate; (2) limiting deductible interest expense; (3) modifying the tax treatment of like-kind exchanges; (4) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (5) imposing a new provision designed to tax global intangible low-tax income; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) limiting the use of Net Operating Loss (NOL) carryforwards created in tax years beginning after December 31, 2017; (8) modifying the limitations on the use of foreign tax credits to reduce our U.S. income tax liability; and (9) further restricting the deductibility of certain executive compensation and fringe benefits. The Company is in the process of analyzing the regulations issued and determining an estimate of the financial impact.

 

In accordance with TCJA, the Company eliminated $91.3 million of AMT NOL carry forwards at December 31, 2018 and recognized as income tax benefit $5.0 million from its unused AMT credit carry forwards. The Company expects to receive 50%, or $2.5 million, of said credit in 2019 and the remaining balance over the following two years.

 

10.     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 development and sale of real estate inventory and the operations of Kapalua Realty Company, a general brokerage real estate company located within the Kapalua Resort.

 

•

Leasing primarily 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.

 

•

Utilities primarily include the operations of Kapalua Water Company and Kapalua Waste Treatment Company, the Company’s water and sewage transmission services (regulated by the Hawaii Public Utilities Commission) for the Kapalua Resort. 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 months ended March 31, 2019 and 2018 were as follows:

 

 

 

11.	COMMITMENTS AND CONTINGENCIES

 

There have been no changes in the status of commitments and contingencies as reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There are various other claims and legal actions pending against the Company. In the opinion of management, after consultation with legal counsel, the resolution of these other matters is not expected to have a material adverse effect on the Company’s financial position or results of operations.

 

12.	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 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 consolidated balance sheets and 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 fair value of income tax receivables approximate their carrying value due to the certainty of collection or 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 at March 31, 2019 and December 31, 2018 were $1,735,000 and $1,235,000, respectively, which approximated fair value. The fair value of debt was measured using the level 2 inputs, noted above.

 

13.     NEW ACCOUNTING PRONOUNCEMENTS

 

In February 2016, the FASB issued an ASU that sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors). Subsequently, the FASB issued additional ASUs that further clarified the original ASU. The ASUs became effective for us on January 1, 2019. Upon adoption of the lease ASUs on January 1, 2019, we elected the following practical expedients provided by these ASUs:

 

	●	Package of practical expedients – requires the Company not to reevaluate its existing or expired leases as of January 1, 2019, under the new lease accounting ASUs.
	●	Optional transition method practical expedient – requires the Company to apply the new lease ASUs prospectively from the adoption date of January 1, 2019.
	●	Land easements practical expedient – requires the Company to account for land easements existing as of January 1, 2019, under the accounting standards applied to them prior to January 1, 2019.
	●	Single component practical expedient – requires the Company to account for lease and nonlease components associated with that lease under the new lease ASUs, if certain criteria are met.
	●	Short-term leases practical expedient – for operating leases with a term of 12 months or less in which the Company is the lessee, this expedient allows us not to record on the Company’s balance sheets related lease liabilities, taxes collected from lessees, lessor costs paid directly by lessee to a third party and right-of-use assets.

 

Lessor accounting

 

The Company recognized revenue from our lease agreements aggregating $1.7 million for the three months ended March 31, 2019. This revenue consisted primarily of rental revenue, percentage rental revenue, and tenant recoveries.

 

 

The Company recognizes rental revenue from its operating leases on a straight-line basis over the respective lease terms. The Company commences recognition of rental revenue at the date the property is ready for its intended use and the tenant takes possession of or controls the physical use of the property.

 

Under the lease ASU, each lease agreement will be evaluated to identify the lease components and nonlease components at lease inception. The total consideration in the lease agreement will be allocated to the lease and nonlease components based on their relative standalone selling prices. Lessors will continue to recognize the lease revenue component using an approach that is substantially equivalent to existing guidance for operating leases (straight-line basis).

   

On January 1, 2019, the Company elected the single component practical expedient, which requires the Company, by class of underlying asset, not to allocate the total consideration to the lease and nonlease components based on their relative stand-alone selling prices. This single component practical expedient requires the Company to account for the lease component and nonlease component(s) associated with that lease as a single component if (i) the timing and pattern of transfer of the lease component and the nonlease component(s) associated with it are the same and (ii) the lease component would be classified as an operating lease if it were accounted for separately. If it is determined that the lease component is the predominant component, the Company accounts for the single component as an operating lease in accordance with the new lease ASUs. Conversely, the Company is required to account for the combined component under the new revenue recognition ASU if it is determined that the nonlease component is the predominant component.

 

As a result of this assessment, rental revenues and tenant recoveries from the lease of real estate assets that qualify for this expedient are accounted for as a single component under the new lease ASUs, with tenant recoveries primarily as variable consideration. Tenant recoveries that do not qualify for the single component practical expedient and are considered nonlease components are accounted for under the revenue recognition ASUs. The Company’s operating leases commencing or modified after January 1, 2019, for which the Company is the lessor are expected to qualify for the single component practical expedient accounting under the new lease ASUs. The adoption of this guidance will not have a material impact on the Company’s financial statements.

 

Costs to execute leases

 

The new lease ASU will require that lessors and lessees capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease (e.g. commissions paid to leasing brokers). Under the new lease ASU, allocated payroll costs and other costs such as legal costs incurred as part of the leasing process prior to the execution of a lease will no longer qualify for classification as initial direct costs but will instead be expensed as incurred. Under the package of practical expedients that the Company elected on January 1, 2019, it is not required to reassess whether initial direct leasing costs capitalized prior to the adoption of the new lease ASUs in connection with the leases that commenced prior to January 1, 2019, qualify for capitalization under the new lease ASUs. Effective January 1, 2019, costs that the Company incurs to negotiate or arrange a lease regardless of its outcome, such as fixed employee compensation, tax, or legal advice to negotiate lease terms, and costs related to advertising or soliciting potential tenants are expensed as incurred.

 

Lessee accounting

 

Under the new lease ASUs, lessees are required to apply a dual approach by classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, which corresponds to a similar evaluation performed by lessors. In addition to this classification, a lessee is also required to recognize a right-of-use asset and a lease liability for all leases regardless of their classification, whereas a lessor is not required to recognize a right-of-use asset and a lease liability for any operating leases.

 

For the three months ended March 31, 2019, the Company recognized rent expense of approximately $7,000 for these leases. As of March 31, 2019, the remaining contractual payments under the office and equipment leases are $50,000. All of the aforementioned leases for which the Company is the lessee are currently classified as operating leases.

 

Under the package of practical expedients that the Company elected upon adoption of the new lease ASUs, all of its operating leases existing as of January 1, 2019, for which the Company is the lessee, continue to be classified as operating leases subsequent to the adoption of the new lease ASUs. The Company has also evaluated the effect of the new lease ASUs on the calculation of its debt covenants as of March 31, 2019 and noted no significant effect on the calculation.

 

In June 2016, FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses. This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of information to determine credit loss estimates.  This ASU will be effective for annual reporting periods beginning after December 15, 2019 for public business entities. The Company is in the process of assessing the impact of ASU No. 2016-13 on its financial statements.

 

On August 28, 2018, the FASB issued ASU 2018-14 which amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU’s changes related to disclosures are part of the FASB’s disclosure framework project which was aimed to improve the effectiveness of disclosures in notes to financial statements. This ASU is effective for public business entities for annual reporting periods beginning after December 15, 2020, with early adoption permitted. The Company is in the process of assessing the impact of ASU on its financial statements and expects to adopt the new disclosure requirements on January 1, 2021.

 

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