MAUI LAND & PINEAPPLE CO INC - Quarter Report: 2023 June (Form 10-Q)

This quarterly report on Form 10-Q (this “Quarterly Report”) and other reports filed by us with the U.S. Securities and Exchange Commission (the “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 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, 2022 (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 Quarterly 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 Quarterly 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 Quarterly Report. We qualify all of our forward-looking statements by these cautionary statements.

PART I FINANCIAL INFORMATION

Item 1. Condensed Consolidated Interim 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

For the Three and Six Months Ended June 30, 2023 and 2022

(UNAUDITED)

(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 and Six Months Ended June 30, 2023 and 2022

(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 conformity with generally accepted accounting principles in the United States of America (“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 year ended December 31, 2022, and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). 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 consolidated financial position, results of operations and cash flows for the interim periods ended June 30, 2023 and 2022. 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 year ended December 31, 2022.

On June 29, 2022, the Company’s shareholders voted to approve a proposal to change the state of incorporation of the Company from Hawaii to Delaware. The reincorporation was effected through a plan of conversion completed on July 18, 2022. Total authorized capital stock provided by the Delaware certificate of incorporation includes 48,000,000 shares, consisting of 43,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share. No change in ownership resulted from the reincorporation as each outstanding share of common stock was automatically converted into one share of the newly established Company. The name of the Company after reincorporation remains Maui Land & Pineapple Company, Inc. and shares of common stock continue to be listed on the New York Stock Exchange under the ticker symbol “MLP.”

Cash and cash equivalents include cash on hand, deposits in banks, and money market funds.

Restricted cash of $10,000 at December 31, 2022 (audited) consisted of deposits held in escrow from the prospective buyer of a property held for sale. The funds held in escrow were returned to the Company due to the termination of the sale agreement in April 2023.

Held-to-maturity debt securities are stated at amortized cost. Investments are reviewed for impairment by management on a periodic basis. If any impairment is considered other-than-temporary, the security is written down to its fair value and a corresponding loss recorded as a component of other income (expense).

Amortized cost and fair value of corporate debt securities at June 30, 2023 and December 31, 2022 consisted of the following:

Maturities of debt securities at June 30, 2023 and December 31, 2022 were as follows:

The fair value of debt securities were measured using Level 1 inputs which are based on quotes for trades occurring in active markets for identical assets.

Property and equipment at June 30, 2023 and December 31, 2022 consisted of the following:

Land

The Company holds approximately 22,000 acres of land. Most of this land was acquired between 1911 and 1932 and is carried in its condensed consolidated balance sheets at cost. More than 20,400 acres are located in West Maui and is comprised of a largely contiguous collection of parcels which extend from the ocean to an elevation of approximately 5,700 feet. The West Maui landholdings include approximately 900 acres within Kapalua Resort, a master-planned, destination resort and residential community. Approximately 1,500 acres are located in Upcountry Maui in an area commonly known as Hali’imaile and is mainly comprised of leased agricultural fields, commercial and light industrial properties.

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 Company’s 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 consisted of the 46-acre Central Resort project located in Kapalua. In December 2021, the Company entered into an agreement to sell the Kapalua Central Resort project for $40.0 million. Terms of the agreement were subsequently amended to include a closing condition requiring the Maui Planning Commission to approve a five-year extension of a Special Management Area (“SMA”) permit issued by the County of Maui. The Company allowed the agreement with the buyer to expire on April 11, 2023. The application for the extension of the SMA permit is being managed by the Company while the project continues to be marketed for sale and joint venture.

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

Receivables from contracts with customers were $0.4 million and $0.3 million at June 30, 2023 and December 31, 2022, 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. Revenue recognized for each of the six months ended June 30, 2023 and 2022 was $0.4 million.

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 $0.1 million for each of the six months ended June 30, 2023 and 2022.

Long-term debt is comprised of amounts outstanding under the Company’s $15.0 million revolving line of credit facility (“Credit Facility”) with First Hawaiian Bank (“Bank”) maturing on December 31, 2025. The Credit Facility provides options for revolving or term loan borrowing. Interest on loan borrowing is based on the Bank’s prime rate minus 1.125 percentage points. Interest on term loan borrowing may be fixed at the Bank’s commercial loan rates using an interest rate swap option. The Company has pledged 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 of new indebtedness on collateralized properties without the prior written consent of the Bank.

The outstanding balance of the Credit Facility was zero at June 30, 2023 and December 31, 2022. The Company was in compliance with the covenants under the Credit Facility at June 30, 2023.

Accrued retirement benefits at June 30, 2023 and December 31, 2022 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 an unfunded non-qualified retirement plan covering nine of its former executives. The non-qualified retirement plan was frozen in 2009 and future vesting of additional benefits discontinued.

The net periodic benefit costs for pension and post-retirement benefits for the three and six months ended June 30, 2023 and 2022 were as follows:

No contributions are required to be made to the defined benefit pension plan in 2023.

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 1960s to serve approximately 200 single-family homes developed for workers in the Company’s former agricultural operations. The facility is comprised 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.

An administrative hearing date previously scheduled for July 2023 was postponed due to continuing favorable negotiations with the State and the Company making progress towards the determination of a technical solution to resolve the Order. As a condition of the deferral of the administrative hearing, the Company will submit a progress update at the end of August 2023. The Company is engaged with a third party specialist to provide recommendations for a technical solution that would meet the requirements of the Order and the Company has committed to the State that a formal selection of a technical solution will be presented to the State on or before December 31, 2023. .

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 condensed consolidated interim financial position or results of operations after consultation with legal counsel.

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. Leasing income subject to ASC Topic 842 for the three and six months ended June 30, 2023 and 2022 were as follows:

The Company’s directors 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 awarded annually to certain members of the Company’s management based on their achievement of 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 of common stock vesting quarterly over a period of three years. 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 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.

Directors receive both cash and equity compensation under the Equity Plan. Share-based compensation is comprised of restricted shares of common stock vesting quarterly over the directors’ annual period of service and 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 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.

During the quarter ended June 30, 2023, options to purchase shares of the Company’s common stock under the Equity Plan were granted to directors. The number of common shares granted which are subject to option for annual board service, board committee service, and continued service of the Chairman of the Board is 0.3 million shares, 0.1 million shares, and 0.4 million shares, respectively. Share-based compensation of stock option grants is valued at the commitment date, based on the fair value of the equity instruments, and is recognized as expense on a straight-line basis over the directors’ service period. For annual board service and board committee service, stock option grants have a contractual period of ten years and vest quarterly over 12 months. The exercise price per share is based on the average of the high and low share price on the date of grant, or $12.11 per share. The fair value of these grants using the Black-Scholes option-pricing model was $3.88 per share based on an expected term of 5.25 years, expected volatility of 28%, and a risk-free rate of 4.16%. During the three months ended June 30, 2023, 0.1 million share options vested to directors for annual board and committee service. For continued board service of the Chairman, the stock option grant has a contractual period of ten years which vests as follows: 0.1 million shares on June 1, 2024, 0.1 million shares on June 1, 2025, and 0.1 million shares on June 1, 2026. The exercise price per share is based on the average of the high and low share price on the date of grant, or $9.08 per share. The fair value of these grants using the Black-Scholes option-pricing model was $3.94 per share based on an expected term of 6.12 years, expected volatility of 37%, and a risk-free rate of 3.53%.

The simplified method described in Staff Accounting Bulletin No. 107 was used by management due to the lack of historical option exercise behavior, The Company does not currently issue dividends. There were no forfeitures of stock option grants as of June 30, 2023. Management does not anticipate future forfeitures to be material.

Share-based compensation expense totaled $0.8 million and $0.3 million for the three months ended June 30, 2023 and 2022, respectively, and $1.8 million and $0.7 million for the six months ended June 30, 2023 and 2022, respectively. Included in these amounts were $0.1 million and $0.2 million of restricted common stock vested during the three months ended June 30, 2023 and 2022, respectively, and $1.0 million and $0.4 million of restricted common stock vested during the six months ended June 30, 2023 and 2022 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 was established for deferred income tax assets at June 30, 2023 and December 31, 2022, respectively.

Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted net income per common share is computed similar to basic net income 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 had been issued. Potentially dilutive shares arise from non-vested restricted stock and non-qualified stock options granted under the Company’s Equity Plan. The treasury stock method is applied to determine the number of potentially dilutive shares.

Basic and diluted weighted-average shares outstanding for the three months ended June 30, 2023 and 2022 were 19.6 million and 19.4 million, respectively. Basic and diluted weighted-average shares outstanding for the six months ended June 30, 2023 and 2022 were also 19.6 million and 19.4 million, 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 and by the Board of Directors. 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, and share-based compensation.

Reportable operating segment revenues and income for the three and six months ended June 30, 2023 and 2022 were as follows:

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 unaudited condensed consolidated balance sheets and 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 method to determine the valuation of stock options granted to directors during the three months ended June 30, 2023 is described in Note 12.

In June 2016, the FASB issued ASU 2016-13 to update the methodology used to measure current expected credit losses. The ASU applies 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. The guidance requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. ASU 2019-10 was subsequently issued delaying the effective date to the first quarter of 2023. The ASU did not have a material effect on the Company’s condensed consolidated interim financial statements.

18.  SUBSEQUENT EVENT

On August 18, 2023, the Island of Maui experienced several large wildfires that severely impacted the residents, businesses and communities throughout Maui. The devastating fires directly impacted Central Maui, otherwise known as Upcountry Maui, South Maui in the vicinity of Kihei Town and most severely, the historical, West Maui town of Lahaina.

The Company’s land and asset holdings are located in two primary areas on Maui, approximately 1,500 acres are located Upcountry Maui in the Town of Hali’imaile and approximately 20,400 acres are located in West Maui in the Kapalua Resort area. The Company’s land and property holdings were not affected by the fires. The Company is actively supporting efforts to provide support and aid to our impacted tenants, partners, and the communities and residents of the Island of Maui.

On August 14, 2023, the Company filed with the SEC, Form 12b-25 to provide notification for late filing of our 2023 Q2 Form 10-Q that was due on August 14, 2023. The primary reason for the notice was due to the impacts of the wildfires as described above. The following is the narrative submitted with the filing of Form 12B-25:

The Company, including its corporate office and key team members, are primarily located near Lahaina on the island of Maui. Maui has recently experienced disastrous wildfires that have devastated the community. The wildfires have created power outages, limiting access to internet and phone services, and have adversely affected management’s availability. The Company is unable to file the Quarterly Report by the prescribed filing deadline without unreasonable effort and expense, because it requires additional time (1) to complete the preparation of its financial statements and other disclosures in the Quarterly Report, and (2) for its independent registered public accounting firm to finalize the review of the financial statements. The Company currently expects to file the Quarterly Report within the five calendar day extension period provided under Rule 12b-25.

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 on Form 10-K for the year ending December 31, 2022 (our “Annual Report") and the unaudited condensed consolidated interim financial statements and related notes included in this Quarterly Report on Form 10-Q (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 Delaware 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. On June 29, 2022, the Company’s shareholders voted to approve a proposal to change the state of incorporation of the Company from Hawaii to Delaware. The reincorporation was effected through a plan of conversion completed on July 18, 2022. Total authorized capital stock provided by the Delaware certificate of incorporation include 48,000,000 shares, consisting of 43,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share.  No change in ownership resulted as each outstanding share of common stock was automatically converted into one share of the reincorporated Company. The name of the Company after reincorporation remains Maui Land & Pineapple Company, Inc. and shares of common stock continue to be listed on the New York Stock Exchange under the ticker symbol “MLP.”

We own approximately 22,000 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.

• Leasing—Our leasing operations include residential, resort, commercial, agricultural, and industrial land and property leases, and 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 watershed 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.

Results of Operations

Three and Six Months Ended June 30, 2023 compared to Three and Six Months Ended June 30, 2022

CONSOLIDATED

REAL ESTATE

There were no sales of real estate during the three and six months ended June 30, 2023. During the prior year’s three months ended June 30, 2022, we sold approximately 50 acres in West Maui for $2.0 million and a 646-acre parcel in Upcountry Maui for $9.6 million.

In December 2021, we entered into an agreement to sell the Kapalua Central Resort project for $40.0 million. On May 13, 2022, terms of the agreement were amended to include a closing condition requiring the Maui Planning Commission to approve a five-year extension of a Special Management Area (SMA) permit issued by the County of Maui. We allowed the agreement to expire on April 11, 2023. Approximately $19,000 previously held in escrow was returned to us due to the termination of the sale agreement. The development plans for our real estate holdings are currently being reviewed and evaluated in conjunction with our leadership transition. We continue to manage the application process of the SMA permit extension for the Central Resort project while the project continues to be marketed for sale or joint venture.

Operating expenses for the three months ended June 30, 2023 include $0.2 million of transition costs related to the resignation of our former Vice President. For the three months ended June 30, 2022, we recognized $0.6 million related to the cost of land parcels sold.

Property and development costs capitalized during the six months ended June 30, 2023 totaled $0.2 million. There were no significant real estate development expenditures during the six months ended June 30, 2022.

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 macroeconomic market conditions, including increases in interest rates and fears of a recession, may reduce demand for real estate and impair prospective purchasers’ ability to obtain financing, which would adversely affect revenues from our real estate operations.

LEASING

As visitor traffic continues to return to pre-pandemic levels, income from our leasing operations increased during the six months ended June 30, 2023, compared to the six months ended June 30, 2022, due primarily to higher base rents received from our current leases and improved sales performance at our tenants’ operations.

Operating expenses increased for the six months ended June 30, 2023, compared to the six months ended June 30, 2022,resulting from increases in premiums from our property insurance policies and higher costs to maintain our water delivery systems.

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 the contracted fees for member access to the spa, beach club, golf courses and other resort amenities.

Lower membership levels during the six months ended June 30, 2023 were offset by an annual increase in dues rates. Revenues during the prior year’s three months ended June 30, 2022 decreased as a result of refunds issued for terminated memberships.

The increase in operating costs for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, was primarily due to higher golf course fees billed to us.

GENERAL AND ADMINISTRATIVE COSTS, SHARE-BASED COMPENSATION

The increase in general and administrative costs and share-based compensation for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 was attributable to expenses related to the transition of director and management personnel. General and administrative costs increased to $1.0 million for the three months ended June 30, 2023 primarily due to one-time expenses related to our executive transition. Additionally, all outstanding stock grants of resigned executive personnel, including the Company’s former Chairman and Chief Executive Officer, became fully vested during the six months ended June 30, 2023.

During the quarter ended June 30, 2023, options to purchase shares of common stock under our Equity Plan were granted to directors. The number of common shares subject to option for annual board service, board committee service, and continued service of the Chairman of the Board were 250,000 shares, 78,000 shares, and 400,000 shares, respectively. For the six months ended June 30, 2023, 82,000 share options vested to directors for annual board and committee service. Share-based compensation expense totaled $0.8 million and $0.3 million for the three months ended June 30, 2023 and 2022, respectively, and $1.8 million and $0.7 million for the six months ended June 30, 2023 and 2022, respectively.

OTHER INCOME

Interest income of $0.1 million and $0.2 million was earned on our money market and bond investment portfolio during the three and six months ended June 30, 2023, respectively. We also recognized $0.2 million of cash collateral returned from an owner-controlled insurance program of a former partnership interest.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our cash and cash equivalents were $7.2 million and $8.5 million (audited) at June 30, 2023 and December 31, 2022, respectively.

We also had investments of $3.1 million and $3.0 million at June 30, 2023 and December 31, 2022, respectively. Our investments consist of corporate bond securities maturing on various dates through November 2024. These bond investments yield approximately 5.3% at June 30, 2023. We intend to hold our bond securities until maturity.

At June 30, 2023, $15.0 million was available from our revolving line of credit facility (“Credit Facility”) with First Hawaiian Bank (“Bank”). The Credit Facility, which matures on December 31, 2025, provides for revolving or term loan borrowing options. Interest on revolving loan borrowings is calculated using the Bank’s prime rate minus 1.125 percentage points. Interest on term loan borrowing is fixed at the Bank’s commercial loan rates with interest rate swap options available. We have pledged 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.

We were in compliance with the covenants of our Credit Facility at June 30, 2023. If economic conditions are negatively impacted in future periods, we may borrow under our Credit Facility.

Cash Flows

Net cash flow used in our operating activities for the six months ended June 30, 2023 was $0.4 million. For the six months ended June 30, 2022, $11.9 million was provided by our operating activities.

There were no sales of real estate during the six months ended June 30, 2023. In the prior year, we collected $2.0 million and $9.2 million from the sales of 50 acres in West Maui and 646 acres in Upcountry Maui, respectively.

Interest income earned from our money market and bond investments was $0.2 million for the six months ended June 30, 2023.

The outstanding balance of our Credit Facility remained zero at June 30, 2023. There were no interest payments on our Credit Facility due during the six months ended June 30, 2023.

No contributions are required to be made to our defined benefit pension plan in 2023. In August 2022, we made a $5.7 million voluntary contribution to the plan.

Capital Resources

Our business initiatives include investing in our operating infrastructure, continued planning and entitlement efforts on our development projects. 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. We believe that our cash on-hand and cash received from operations, together with borrowing capacity under our Credit Facility, will provide sufficient financial flexibility to meet working capital requirements and to fund capital expenditures through the next twelve months and the foreseeable future.

Our indebtedness, if drawn upon, 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. Stock options granted to directors during the three months ended June 30, 2023 were accounted for in accordance with ASC Topic 718, Compensation – Stock Compensation.

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 U.S. Securities and Exchange Commission’s (“SEC”) 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 at 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 during the six months ended June 30, 2023 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 six months ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

For information related to Item 1. Legal Proceedings, refer to Note 10, Commitments and Contingencies, to our condensed consolidated interim 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 and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report. Readers should carefully review those risks and the risks and uncertainties disclosed in other documents we file from time to time with the SEC. 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. During the six months ended June 30, 2023, there were no material changes to the risks and uncertainties described in Part I, Item 1A., “Risk Factors,” of our Annual Report.

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.