MAUI LAND & PINEAPPLE CO INC - Quarter Report: 2021 September (Form 10-Q)

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the three months ended September 30, 2021 (this “Quarterly Report”) and other reports filed by us with the U.S. Securities and Exchange Commission (SEC) contain “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These statements include all statements included in or incorporated by reference to this Quarterly report on Form 10-Q that are not statements of historical facts, which can generally be identified by words such as “anticipate,” “believe,” “continue” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “project,” “pursue,” “will,” “would,” or the negative or other variations thereof or comparable terminology. We caution you that the foregoing list may not include all of the forward-looking statements made in this Quarterly Report. Actual results could differ materially from those projected in forward-looking statements as a result of the following factors, among others:

Such risks and uncertainties also include those risks and uncertainties discussed in the sections entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “Annual Report”) and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report, as well as other factors described from time to time in our reports filed with the SEC. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable as of the date of this report, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this report. Thus, you should not place undue reliance on any forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Further, any forward-looking statements speak only as of the date made and, except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this report. We qualify all of our forward-looking statements by these cautionary statements.

PART I FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See Notes to Condensed Consolidated Interim Financial Statements.

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

See Notes to Condensed Consolidated Interim Financial Statements.

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

See Notes to Condensed Consolidated Interim Financial Statements.

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

For the Three Months and Nine Months Ended September 30, 2021 and 2020

(in thousands)

See Notes to Condensed Consolidated Interim Financial Statements.

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

See Notes to Condensed Consolidated Interim Financial Statements.

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

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.

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.

Basic and diluted weighted-average shares outstanding for the three and nine months ended September 30, 2021 and 2020 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.

Property as of September 30, 2021 and December 31, 2020 consisted of the following:

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:

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.

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.

Accrued retirement benefits as of September 30, 2021 and December 31, 2020 consisted of the following:

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:

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.

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:

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:

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:

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:

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.

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.

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.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our unaudited condensed consolidated interim financial condition and results of operations should be read in conjunction with our annual audited consolidated financial statements and related notes included in our Annual Report and the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements below. Factors that could cause or contribute to those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere within this Quarterly Report, particularly in the section entitled “Cautionary Note Regarding Forward-Looking Statements.”  Depending upon the context, the terms the “Company,” “we,” “our,” and “us,” refer to either Maui Land & Pineapple Company, Inc. alone, or to Maui Land & Pineapple Company, Inc. and its subsidiaries collectively.

Overview

Maui Land & Pineapple Company, Inc. is a Hawaii corporation and the successor to a business organized in 1909. The Company consists of a landholding and operating parent company, its principal subsidiary, Kapalua Land Company, Ltd. and certain other subsidiaries of the Company.

We own approximately 23,000 acres of land on the island of Maui, Hawaii and develop, sell, and manage residential, resort, commercial, agricultural and industrial real estate through the following business segments:

• Real Estate—Our real estate operations consist of land planning and entitlement, development and sales activities. This segment also included the operations of Kapalua Realty Company, Ltd., a general brokerage real estate company located in the Kapalua Resort, through June 30, 2020.

• Leasing—Our leasing operations include residential, resort, commercial, agricultural and industrial land and property leases, licensing of our registered trademarks and trade names. This operating segment also includes the management of ditch, reservoir, and well systems in West and Upcountry Maui and the stewardship of conservation areas.

• Resort Amenities—We manage the operations of the Kapalua Club, a private, non-equity club program providing our members special programs, access and other privileges at certain amenities at the Kapalua Resort.

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.

Impact of COVID-19 Pandemic on Our Business

In March 2020, the Governor of the State of Hawaii issued “stay-at-home” orders for its residents and visitors, followed by subsequent “safer-at-home” and “act with care” proclamations in response to the novel coronavirus (“COVID-19”) pandemic. In addition, the Governor issued emergency proclamations, pursuant to which all transpacific passengers into the State of Hawaii were required to self-quarantine upon entry. Beginning in October 2020, travelers to the State of Hawaii were able avoid this 10-day quarantine requirement under a pre-travel testing program by presenting a proof of a negative result from a valid COVID-19 Nucleic Acid Amplification Test. Throughout the year ending December 31, 2021, several state and local laws have eased social distancing guidelines and travel restrictions, including the elimination of quarantine restrictions for domestic travelers by providing evidence of full vaccination. As a result of these amendments, passenger volume to the island of Maui increased to approximately 1,790,000 for the nine months ended September 30, 2021 compared to approximately 460,000 for the nine months ended September 30, 2020.

However, the ongoing impacts and disruptions caused by the COVID-19 pandemic in the geographic region in which we operate remain uncertain as of the date of this filing. On August 23, 2021, the Governor requested residents and visitors to delay all non-essential travel through the end of October 2021 due to the increase in hospitalizations caused by the COVID-19 Delta variant. State and local emergency measures, including physical distancing, capacity, and proof of vaccination requirements at certain establishments, are periodically adjusted based on public health data such as positivity rates, vaccination counts, and hospital occupancies. The extent to which the COVID-19 pandemic will impact our business, financial condition, and results of operations in the future is highly uncertain and will be affected by a number of factors. These include the duration and extent of the COVID-19 pandemic, the development of new variants of the COVID-19 virus that may be more contagious or virulent than prior versions, the scope of mandated or recommended containment and mitigation measures, the effect of government stabilization and recovery efforts, and the success of vaccine distribution programs.

We continue to monitor the effects of the COVID-19 pandemic on us, our customers, and our vendors. While we are not able to accurately predict the magnitude or scope of such impacts at this time, should the existence of the COVID-19 pandemic continue for an extended period, our future business operations, including the results of operations, cash flows and financial position will be significantly affected. Appropriate remote work arrangements continue to be established for our employees in order to maintain our financial reporting systems.

Results of Operations

Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020

CONSOLIDATED

REAL ESTATE

There were no sales of real estate during the three months ended September 30, 2021 and 2020, respectively.

In May 2021, we sold the property commonly known as the Steeple House located in the Kapalua Resort for $1.7 million. The sale included the fee simple interest of the 1.1 acre parcel as well as buildings and improvements located on the property.

In June 2021, we entered into a Purchase and Sale Agreement with a local buyer to sell and grant to a conservation organization a perpetual, non-exclusive conservation easement. The conservation easement consists of approximately 791 acres of unimproved land in Honolua Valley, Maui, Hawaii. We collected proceeds of approximately $949,000 upon closing.

In September 2021, we received from the prospective buyer of the 46 acre property in the Central Resort area of Kapalua, a notice of termination of the Purchase and Sale Agreement dated February 6, 2020, as amended. The closing of the transaction was contingent upon, among other things, the satisfaction of certain customary closing conditions, including an extended due diligence period.

During the nine months ended September 30, 2020, our wholly-owned subsidiary, Kapalua Realty Company, Ltd., earned sales commissions from resales of properties owned by private residents in the Kapalua Resort and surrounding areas. Effective July 1, 2020, we entered into an office lease agreement and license agreement with a real estate company to provide general brokerage services to the area. No sales commissions were earned in 2021.

Real estate development expenditures were $63,000 during the nine months ended September 30, 2021. There were no real estate developments expenditures during the nine months ended September 30, 2020.

Real estate development and sales are cyclical and depend on a number of factors. Results for one period are therefore not necessarily indicative of future performance trends in this business segment. Uncertainties associated with the COVID-19 pandemic may, among other things, reduce demand for real estate and impair prospective purchasers’ ability to obtain financing, which would adversely affect revenues from our real estate operations.

LEASING

The increase in leasing operating revenues for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 was primarily due to increased rental income from our commercial leasing portfolio. Certain rental income is contingent upon the sales of the tenant exceeding a defined threshold and recognized as a percentage of sales after those thresholds are achieved. For the three and nine months ended September 30, 2021, percentage rental income was $546,000 and $1.1 million, respectively. The impact of COVID-19 on tenants’ sales activity in 2020 reduced percentage rental income to zero and $304,000 for the three and nine months ended September 30, 2020, respectively.

Operating costs and expenses during the three months ended September 30, 2020 were lower compared to the three months ended September 30, 202, as they were reduced by insurance reimbursements of $220,000 for repairs to property damaged from Tropical Storm Olivia in October 2018.

Our leasing operations face substantial competition from other property owners in Maui and Hawaii.

RESORT AMENITIES AND OTHER         

Our Resort Amenities segment includes the operations of the Kapalua Club, a private, non-equity club providing its members special programs, access and other privileges at certain of the amenities at the Kapalua Resort, including a 30,000 square foot full-service spa and a private pool-side dining beach club. The Kapalua Club does not operate any resort amenities and the dues collected are primarily used to pay contracted fees for member access to the spa, beach club, golf courses and other resort amenities.

In March 2020, access to certain facilities and amenities was restricted due to regulations related to COVID-19. As a result of these restrictions, a partial refund of member dues reduced revenue during the three and nine months ended September 30, 2020. Fees paid for contracted services correspondingly reduced operating costs and expenses during the three and nine months ended September 30, 2020. There were no refunds of member dues or reductions of contracted rates in the three months or nine months ended September 30, 2021.

OTHER INCOME

The Company had a 51% ownership interest in Kapalua Bay Holdings, LLC (KBH). In 2009, the investment was written down to zero. As part of the dissolution of KBH, the Company received $894,000 as a return of cash collateral related to an owner controlled insurance program in May 2020. In April 2021, the Company received a final distribution of $13,000 from KBH.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We had cash on hand of approximately $4.9 million and $869,000 (audited) at September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021, $15.0 million was available and no amount outstanding under our revolving line of credit facility with First Hawaiian Bank (“Credit Facility”). The Credit Facility matures on December 31, 2021. A renewal or extension of the Credit Facility is expected in December 2021. Interest on borrowings accrues at LIBOR plus 3.50%. We have pledged our 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.

As of September 30, 2021, we were in compliance with the covenants under the Credit Facility. If economic conditions are negatively impacted by the COVID-19 pandemic in future periods, we expect to borrow under our Credit Facility.

Cash Flows

Net cash flow provided by our operating activities was approximately $585,000 for the nine months ending September 30, 2021. In June 2021, proceeds of $1.7 million and $949,000 were received from the sales of the Steeple House in the Kapalua Resort and a conservation easement in Honolua Valley, respectively. In May 2021, we received proceeds of $4.2 million upon closing of the Kapalua Water Company, Ltd. and Kapalua Waste Treatment Company, Ltd. asset sale.

The outstanding balance of our Credit Facility was reduced to zero as of September 30, 2021. Interest payments on our Credit Facility totaled $9,000 and $20,000 for the nine months ended September 30, 2021 and 2020, respectively.

We made a minimum funding contribution of $553,000 to our defined benefit pension plan in January 2021. The CARES Act included limited funding relief provisions for single employer defined benefit plans allowing us to defer the required contributions that would have been otherwise due in 2020. In August 2021, we made an additional $1.0 million contribution to the plan. No further contributions are required to be made to the plan in 2021.

Future Cash Inflows and Outflows

Our business initiatives include investing in our operating infrastructure, continued planning and entitlement efforts on our development projects, and monitoring the impact of COVID-19 on our business segments. Our income from real estate, leasing activities and Kapalua Club membership dues, were all impacted since March 2020, and may be impacted in the future for an uncertain period of time should public health measures and travel restrictions become reinstated. This may require borrowing under our Credit Facility or other indebtedness, repayment of which may be dependent on selling of our real estate assets at acceptable prices in condensed timeframes.

Our indebtedness could have the effect of, among other things, increasing our exposure to general adverse economic and industry conditions, limiting our flexibility in planning for, or reacting to, changes in our business and industry, and limiting our ability to borrow additional funds.

Critical Accounting Policies and Estimates

The preparation of the unaudited condensed consolidated interim financial statements in conformity with GAAP requires the use of accounting estimates. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on the unaudited condensed consolidated interim financial statements and thus actual results could differ from the amounts reported and disclosed herein. For additional information regarding our critical accounting policies, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” contained within our Annual Report. There have been no significant changes in our critical accounting policies.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no material exposure to changes in interest rates related to our borrowing and investing activities used to maintain liquidity and to fund business operations. We have no material exposure to foreign currency risks.

We are subject to potential changes in consumer behavior and regulatory risks through travel and social distancing restrictions due to our location as a vacation destination. Potential deferrals and abatements may impact our rental income.

Item 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal quarter covered by this report. Based upon the foregoing, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms.

Changes in Internal Controls Over Financial Reporting

There have been no significant changes in our internal controls over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) or 15d-15(f)) during the three months ended September 30, 2021.

PART II OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

For information related to Item 1. Legal Proceedings, refer to Note 14, Commitments and Contingencies, to our condensed consolidated financial statements included herein.

Item 1A.  RISK FACTORS

Potential risks and uncertainties include, among other things, those factors discussed in the sections entitled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020 and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q. Readers should carefully review those risks and the risks and uncertainties disclosed in other documents we file from time to time with the SEC. During the three months ended September 30, 2021, there were no material changes to the risks and uncertainties described in the section entitled “Risk Factors” in our Annual Report. We undertake no obligation to publicly release the results of any revisions to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

Item 6.  EXHIBITS

SIGNATURE

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

EXHIBIT INDEX