Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with Part I, Item 1, “Business”, Item 1A, “Risk Factors” and the accompanying Consolidated Financial Statements and related Notes thereto included in this Annual Report commencing on page 42 . Our actual results of operations may differ materially from those discussed in forward-looking statements as a result of various factors, including, but not limited to, those included in Part I, Item 1A, “Risk Factors” and other portions of this Annual Report. A discussion regarding our financial condition and results of operations for the year ended September 30, 2022, as compared to 2021, has been reported previously and may be found under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended September 30, 2022, filed with the SEC on December 13, 2022.
Business Overview
Business Description
Alico, Inc., together with its subsidiaries (collectively, “Alico”, the “Company”, “we”, “us” or “our”) generates operating revenues primarily from the sale of our citrus products, providing management services to citrus groves owned by third parties, and grazing and hunting leasing. We operate as two business segments, and all of our operating revenues are generated in the United States. For the year ended September 30, 2023, we generated operating revenues of $39,846 thousand, loss from operations of $4,197 thousand, and net income attributable to common stockholders of $1,835 thousand. Net cash used in operating activities was $6,254 thousand for the year ended September 30, 2023. See Part I, Item 1, Business , included in this Annual Report for a discussion of our year highlights.
Business Segments
The Company has two segments as follows:
• Alico Citrus includes activities related to planting, owning, cultivating and/or managing citrus groves to produce fruit for sale to fresh and processed citrus markets, including activities related to the purchase and resale of fruit and value-added services, which include contracting for the harvesting, marketing and hauling of citrus; and
• Land Management and Other Operations includes activities related to native plant sales, grazing and hunting leasing, management and/or conservation of unimproved native pastureland and activities related to rock mining royalties and other insignificant lines of business. Also included are activities related to owning and/or leasing improved farmland. Improved farmland is acreage that has been converted, or is permitted to be converted, from native pasture and which may have various improvements including irrigation, drainage and roads.
For the year ended September 30, 2023, the Alico Citrus segment generated 95.7% of our consolidated revenues and the Land Management and Other Operations segment generated 4.3% of our consolidated revenues.
Consolidated Results of Operations
The following discussion presented below provides an analysis of our results of operations for the year ended September 30, 2023, as compared to 2022, and the year ended September 30, 2022, as compared to 2021.
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(in thousands) Years Ended
September 30, Change Years Ended
September 30, Change
2023 2022 $ % 2022 2021 $ %
Operating revenues:
Alico Citrus $ 38,145 $ 89,681 $ (51,536) (57.5) % $ 89,681 $ 105,796 $ (16,115) (15.2) %
Land Management and Other Operations 1,701 2,266 (565) (24.9) % 2,266 2,768 (502) (18.1) %
Total operating revenues 39,846 91,947 (52,101) (56.7) % 91,947 108,564 (16,617) (15.3) %
Gross profit (loss):
Alico Citrus 5,186 (16,511) 21,697 (131.4) % (16,511) 21,903 (38,414) NM
Land Management and Other Operations 1,260 1,746 (486) (27.8) % 1,746 1,990 (244) (12.3) %
Total gross profit (loss) 6,446 (14,765) 21,211 (143.7) % (14,765) 23,893 (38,658) NM
General and administrative expenses 10,643 10,079 564 5.6 % 10,079 9,453 626 6.6 %
(Loss) income from operations (4,197) (24,844) 20,647 (83.1) % (24,844) 14,440 (39,284) NM
Total other income, net 6,656 37,799 (31,143) (82.4) % 37,799 31,947 5,852 18.3 %
Income before income taxes 2,459 12,955 (10,496) (81.0) % 12,955 46,387 (33,432) (72.1) %
Income tax provision 801 1,069 (268) (25.1) % 1,069 11,567 (10,498) (90.8) %
Net income 1,658 11,886 (10,228) (86.1) % 11,886 34,820 (22,934) (65.9) %
Net loss attributable to noncontrolling interests 177 573 (396) (69.1) % 573 39 534 NM
Net income attributable to Alico, Inc. common stockholders $ 1,835 $ 12,459 $ (10,624) (85.3) % $ 12,459 $ 34,859 $ (22,400) (64.3) %
NM - Not Meaningful
The following table presents our operating revenues, by segment, as a percentage of total operating revenues for the years ended September 30, 2023, 2022 and 2021:
Years Ended September 30,
2023 2022 2021
Operating revenues:
Alico Citrus 95.7 % 97.5 % 97.5 %
Land Management and Other Operations 4.3 % 2.5 % 2.5 %
Total operating revenues 100.0 % 100.0 % 100.0 %
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The following discussion provides an analysis of our operating segments:
Alico Citrus
(in thousands, except per box and per pound solids data)
Years Ended
September 30, Change Years Ended
September 30, Change
2023 2022 Unit % 2022 2021 Unit %
Operating Revenues:
Early and Mid-Season $ 11,954 $ 28,287 $ (16,333) (57.7) % $ 28,287 $ 31,525 $ (3,238) (10.3)%
Valencias 23,906 47,529 (23,623) (49.7) % 47,529 55,918 (8,389) (15.0) %
Fresh Fruit and other 1,051 1,937 (886) (45.7) % 1,937 1,370 567 41.4 %
Grove Management Services 1,234 11,928 (10,694) (89.7) % 11,928 16,983 (5,055) (29.8) %
Total $ 38,145 $ 89,681 $ (51,536) (57.5) % $ 89,681 $ 105,796 $ (16,115) (15.2) %
Boxes Harvested:
Early and Mid-Season 979 2,175 (1,196) (55.0) % 2,175 2,519 (344) (13.7) %
Valencias 1,669 3,274 (1,605) (49.0) % 3,274 3,779 (505) (13.4) %
Total Processed 2,648 5,449 (2,801) (51.4) % 5,449 6,298 (849) (13.5) %
Fresh Fruit 41 91 (50) (54.9) % 91 61 30 49.2 %
Total 2,689 5,540 (2,851) (51.5) % 5,540 6,359 (819) (12.9) %
Pound Solids Produced:
Early and Mid-Season 4,586 11,034 (6,448) (58.4) % 11,034 13,598 (2,564) (18.9) %
Valencias 8,702 17,756 (9,054) (51.0) % 17,756 22,042 (4,286) (19.4) %
Total 13,288 28,790 (15,502) (53.8) % 28,790 35,640 (6,850) (19.2) %
Pound Solids per Box:
Early and Mid-Season 4.68 5.07 (0.39) (7.7) % 5.07 5.40 (0.33) (6.1) %
Valencias 5.21 5.42 (0.21) (3.9) % 5.42 5.83 (0.41) (7.0) %
Price per Pound Solids:
Early and Mid-Season $ 2.61 $ 2.56 $ 0.05 2.0 % $ 2.56 $ 2.32 $ 0.24 10.3 %
Valencias $ 2.75 $ 2.68 $ 0.07 2.6 % $ 2.68 $ 2.54 $ 0.14 5.5 %
Price per Box:
Fresh Fruit $ 14.02 $ 13.80 $ 0.22 1.6 % $ 13.80 $ 9.97 $ 3.83 38.5 %
Operating Expenses:
Cost of Sales $ 50,961 $ 81,944 $ (30,983) (37.8) % $ 81,944 $ 55,660 $ 26,284 47.2 %
Harvesting and Hauling 10,573 15,965 (5,392) (33.8) % 15,965 16,922 (957) (5.7) %
Fresh Fruit and other (29,326) (2,264) (27,062) NM (2,264) (3,773) 1,509 (40.0) %
Grove Management Services 751 10,547 (9,796) (92.9) % 10,547 15,084 (4,537) (30.1) %
Total $ 32,959 $ 106,192 $ (73,233) (69.0) % $ 106,192 $ 83,893 $ 22,299 26.6 %
NM - Not Meaningful
Components of Results of Operations for Alico Citrus Segment
Our citrus groves produce the majority of our annual operating revenues and the citrus grove business is seasonal because it is tied to the growing and harvest season. Historically, the second and third quarters of our year produce the majority of the annual revenues and working capital requirements are typically greater in the first and fourth quarters of our year, coinciding with the growing cycles.
We sell our Early and Mid-Season and Valencia oranges to processors that convert the majority of the citrus crop into orange juice. The processors generally buy the citrus crop on a pound solids basis, which is the measure of the soluble solids (sugars and acids) contained in one box of fruit. Our fresh fruit is generally sold to packing houses that purchase
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citrus on a per box basis. We also provide citrus grove caretaking and harvest and haul management services to third parties from which revenues are generated, including a management fee. Other revenues consist of the purchase and reselling of fruit.
Our operating expenses consist primarily of cost of sales, harvesting and hauling costs and grove management service costs. Cost of sales represents the cost of maintaining the citrus groves for the preceding calendar year and does not vary in relation to production. Harvesting and hauling costs represent the costs of bringing citrus product to processors and vary, based upon the number of boxes produced. Grove management services include those costs associated with citrus grove caretaking and harvest and haul management services provided to third parties. Other expenses include the period costs of reselling third-party fruit.
Comparison of the year ended September 30, 2023 and 2022 for the Alico Citrus Segment
The decrease in revenue for the year ended September 30, 2023, compared to the year ended September 30, 2022, was primarily due to an increase in fruit drop caused by the impact of Hurricane Ian, which in turn reduced our harvest of both the Early and Mid-Season and Valencia fruit. In addition, we had a decrease in Grove Management Services revenues, from $11,928 thousand for the year ended September 30, 2022, to $1,234 thousand for the year ended September 30, 2023, due to the termination of the Property Management Agreement (see “The Land We Manage” in Item 1. Business for further details). We recorded approximately $751 thousand and $10,547 thousand of operating expenses relating to grove management services for the Grove Owners for the years ended September 30, 2023 and 2022, respectively.
The decrease in Early and Mid-Season and Valencia fruit harvested was primarily driven by a decrease in processed box production and a decrease in pound solids per box. The processed box production for the year ended September 30, 2023 decreased by 51.4%, as compared to the same period in the prior year, primarily due to greater fruit drop attributed to disease and weather conditions.
The aggregate decrease in pound solids per box of 5.8% during the year ended September 30, 2023, as compared to the prior year ended September 30, 2022, was mainly due to the internal quality of the fruit not being as strong as it had been in the previous year. This decrease in pound solids per box was also due in part to an acceleration of the harvesting of the Early and Mid-Season and Valencia crops to maximize the box production and avoid additional fruit drop as a result of the impact of Hurricane Ian.
Partially offsetting the decrease in processed box production and pound solids per box for the year ended September 30, 2023, compared to the year ended September 30, 2022, was an increase in the price per pound solid of 2.6%. The increase, in large part, was due to production being down in Florida, as well as in Brazil, and due to the continued strong consumption of Not from Concentrate Orange Juice (“NFC”), both of which have led to continued low inventory levels.
We also recorded a decrease in revenue from sales of Fresh Fruit. The decrease in sales of Fresh Fruit was primarily due to a decrease in both boxes sold and pricing per box.
The USDA, in its October 12, 2023 Citrus Crop Forecast Report for the 2023-24 harvest season, indicated the overall Florida orange crop decreased from approximately 41,200,000 boxes for the 2021-22 crop year to approximately 15,800,000 boxes for the 2022-23 crop year, a decrease of 61.7%. We experienced a decline in total box production in the 2022-2023 harvest season crop of 51.5%. We believe this lower rate of decline, as compared to the state forecast, is due to the efficiencies of our comprehensive grove management program, as well as certain precautionary measures we took to minimize the impact of the freeze event on its groves and production.
The decrease in operating expenses for the year ended September 30, 2023, as compared to the year ended September 30, 2022, primarily relates to the inventory adjustments recorded at September 30, 2022 on the ending inventory balance, as a result of the impact of Hurricane Ian, which effectively lowered the inventory to be expensed in the year ended September 30, 2023, as well as the receipt of approximately $27,389 thousand in crop insurance and $839 thousand in property and casualty reimbursements for Hurricane Ian. We experienced significant cost increases in fertilizer, herbicide, labor and fuel in maintaining our groves. These cost increases, coupled with the timing of the harvest, and the lower box production for both our Early and Mid-Season and Valencia harvest, resulted in a higher cost of sales per box for the year ended September 30, 2023, as compared to the same period in the prior year. In addition, we incurred additional costs related to the clean-up and repairs as a result of Hurricane Ian.
We also recorded an increase in our Harvesting and Hauling expense per box, which is directly related to an increase in the harvesting labor costs, as well as the increased time spent by the harvesters to fill the boxes as a result of the increased fruit drop caused by Hurricane Ian for the year ended September 30, 2023, when compared to the prior year.
The decrease in Grove Management Services expense is directly related to the termination of the Property Management Agreement by the Grove Owners in June 2022. We recorded approximately $751 thousand and $10,547 thousand of operating expenses relating to grove management services for the Grove Owners for the years ended September 30, 2023 and 2022, respectively.
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The credit amounts shown in “Fresh Fruit and other” in operating expenses above primarily represent insurance proceeds of approximately $27,389 thousand in crop insurance and $839 thousand in property and casualty reimbursements for Hurricane Ian received in the year ended September 30, 2023, and federal relief proceeds received under the CRBG program in the years ended September 30, 2023 and 2022 of approximately $1,315 thousand and $1,123 thousand, respectively.
Land Management and Other Operations
The table below presents key operating measures for the years ended September 30, 2023, 2022 and 2021:
(in thousands)
Years Ended
September 30, Change Years Ended
September 30, Change
2023 2022 $ % 2022 2021 $ %
Revenue From:
Land and Other Leasing $ 1,327 $ 1,655 $ (328) (19.8) % $ 1,655 $ 2,404 $ (749) (31.2) %
Other 374 611 (237) (38.8) % 611 364 247 67.9 %
Total $ 1,701 $ 2,266 $ (565) (24.9) % $ 2,266 $ 2,768 $ (502) (18.1) %
Operating Expenses:
Land and Other Leasing $ 436 $ 516 $ (80) (15.5) % $ 516 $ 762 $ (246) (32.3) %
Other 5 4 1 25.0 % 4 16 (12) (75.0) %
Total $ 441 $ 520 $ (79) (15.2) % $ 520 $ 778 $ (258) (33.2) %
Components of Results of Operations for Land Management and Other Operations Segment
Land and other leasing include lease income from leases for grazing rights, hunting leases, a farm lease, a lease to a third party of an aggregate mine, leases of oil extraction rights to third parties, and other miscellaneous income.
Land and Other Leasing operating expenses include real estate, property taxes, and general and administrative expenses, including salaries, benefits and legal and professional fees.
Comparison of the year ended September 30, 2023 and 2022 for the Land Management and Other Operations Segment
The decrease in revenues from Land Management and Other Operations for the year ended September 30, 2023, as compared to the prior year, was primarily due to a decrease in grazing and hunting lease revenue due to the sales of portions of the Alico Ranch, which resulted in the reduction of land covered under our grazing and hunting lease contracts. Additionally, the modification to the grazing leases resulted in a reduction in the ad valorem taxes due from the lessees, as we revised the grazing lease agreements due to the sale of certain of the ranch acres previously covered under the agreement.
The decrease in operating expenses from Land Management and Other Operations for the year ended September 30, 2023, as compared to the prior year, was primarily due to the reduction of the ad valorem tax expense as a result of us owning fewer ranch acres due to the sale of ranch land.
The following discussion provides an analysis of our results of operation, as a whole:
General and Administrative
General and administrative expenses for the year ended September 30, 2023 was $10,643 thousand, compared to $10,079 thousand for the year ended September 30, 2022. The increase was principally attributable to an increase in legal and professional fees, as compared to the same period last year.
Other Income, net
Other income, net, for the years ended September 30, 2023 and 2022 was $6,656 thousand and $37,799 thousand, respectively. The decrease in other income, net was primarily due to less ranch land sales, which resulted in lower gains on sales of $11,509 thousand during the year ended September 30, 2023, compared to $41,102 thousand for the prior year period.
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Income Taxes
For the years ended September 30, 2023 and 2022, the provision for income taxes was $801 thousand and $1,069 thousand, respectively, and the related effective income tax rates were 32.6% and 8.3%, respectively. The effective tax rate for the year ended September 30, 2023 is higher than the statutory tax rate due to the deferred rate change and return-to-provision adjustments, which was partially offset by a reduction in the valuation allowance. The effective tax rate for the year ended September 30, 2022 was lower than the statutory tax rate due to the bargain sale of 1,638 acres of land to the state of Florida at a price below market value, which resulted in a charitable contribution carryover for tax purposes. The bargain sale generated a tax benefit of $6,300 thousand, of which $500 thousand was utilized in the prior year, none of which was used in the current year. We do not anticipate that we will be able to recognize the entire charitable deduction carryover before it expires in 2027. A valuation allowance of $4,309 thousand was recorded on September 30, 2022, resulting in a net benefit of $1,468 thousand. As of September 30, 2023 the valuation allowance was reduced to $4,170 thousand, resulting in a benefit of $139 thousand.
Liquidity and Capital Resources
A comparative balance sheet summary is presented in the following table:
(in thousands) September 30,
2023 September 30,
2022 Change
Cash and cash equivalents $ 1,062 $ 865 $ 197
Total current assets $ 58,805 $ 31,616 $ 27,189
Total current liabilities $ 15,065 $ 16,525 $ (1,460)
Working capital $ 43,740 $ 15,091 $ 28,649
Total assets $ 428,353 $ 409,255 $ 19,098
Principal amount of term loans and lines of credit $ 129,319 $ 111,624 $ 17,695
Current ratio 3.90 to 1 1.91 to 1
Debt ratio 0.30 to 1 0.27 to 1
Sources and Uses of Liquidity and Capital
Our business has historically generated positive net cash flows from operating activities. Sources of cash primarily include cash flows from operations, sales of under-performing land and other assets, amounts available under our credit facilities and access to capital markets. Access to additional borrowings under revolving lines of credit is subject to the satisfaction of customary borrowing conditions. As a public company, we may have access to other sources of capital. However, access to, and availability of, financing on acceptable terms in the future will be affected by many factors, including (i) financial condition, prospects, and credit rating; (ii) liquidity of the overall capital markets; and (iii) the state of the economy. There can be no assurance that we will continue to have access to the capital markets on acceptable terms, or at all.
The principal uses of cash that affect our liquidity position include the following: operating expenses including employee costs, the cost of maintaining the citrus groves, harvesting and hauling of citrus products, capital expenditures, stock repurchases, dividends, debt service costs including interest and principal payments on term loans and other credit facilities and acquisitions.
Management believes that a combination of cash-on-hand, cash generated from operations, asset sales (see “Recent Developments” in Item 1. Business for further details) and availability under our lines of credit will provide sufficient liquidity to service the principal and interest payments on our indebtedness and will satisfy working capital requirements and capital expenditures for at least the next twelve months and over the long term.
Borrowing Facilities and Long-term Debt
We have a $70,000 thousand working capital line of credit, of which $45,030 thousand is available for general use as of September 30, 2023, and a $25,000 thousand revolving line of credit, all of which is available for general use as of September 30, 2023 (see Note 6. Long-Term Debt and Lines of Credit to the Consolidated Financial Statements included in this Annual Report for further information). The working capital line of credit agreement was amended on October 27, 2022, and the primary terms of the amendment were an extension of the maturity to November 1, 2025, and the conversion of the interest rate from LIBOR plus a spread to SOFR plus a spread, which is adjusted quarterly, based on our debt service coverage ratio for the preceding quarter and can vary from 175 to 250 basis points, effective October 1, 2022. There were no changes to the commitment amount.
The level of debt could have important consequences on our business, including, but not limited to, increasing our vulnerability to general adverse economic and industry conditions, limiting the availability of cash flow to fund future
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investments, capital expenditures, working capital, business activities and other general corporate requirements, and limiting flexibility in planning for, or reacting to, changes in our business and industry.
Our credit facilities are subject to various debt covenants, including the following financial covenants: (i) minimum debt service coverage ratio of 1.10 to 1.00; (ii) tangible net worth of at least $160,000 thousand increased annually by 10% of consolidated net income for the preceding years, or $174,628 thousand applicable for the year ended September 30, 2023; (iii) minimum current ratio of 1.50 to 1.00; (iv) debt to total assets ratio not greater than 0.625 to 1.00; and (v) solely in the case of the WCLC (as defined below), a limit on capital expenditures of $30,000 thousand per year. As of September 30, 2023, we were in compliance with all of the financial covenants.
Consolidated Statements of Cash Flows
The following table details the items contributing to the changes in cash and cash equivalents and restricted cash for the years ended September 30, 2023, 2022 and 2021:
(in thousands) Years Ended September 30,
2023 2022 2021
Net cash (used in) provided by operating activities $ (6,254) $ 6,523 $ 16,504
Net cash (used in) provided by investing activities (4,123) 22,468 (3,268)
Net cash provided by (used in) financing activities 13,204 (29,012) (32,037)
Net increase (decrease) in cash and cash equivalents and restricted cash $ 2,827 $ (21) $ (18,801)
Net Cash (Used In) Provided By Operating Activities
The decrease in net cash used in operating activities for the year ended September 30, 2023, as compared to the year ended September 30, 2022, was primarily due to lower revenues as a result of the fruit drop caused by Hurricane Ian.
Net Cash (Used In) Provided By Investing Activities
The shift to net cash used in investing activities for the year ended September 30, 2023, from net cash provided by investing activities for the year ended September 30, 2022, was driven by lower proceeds from ranch land sales.
Net Cash Provided By (Used In) Financing Activities
The shift to net cash provided by financing activities for the year ended September 30, 2023, from net cash used in financing activities for the year ended September 30, 2022, was primarily due to a net increase in borrowing under the working capital line of credit (“WCLC”) with Rabo Agrifinance, Inc. (“Rabo”), and lower repayments of term loans.
The WCLC agreement provides for Rabo to issue up to $2,000 thousand in letters of credit on our behalf. As of September 30, 2023, there was $248 thousand in outstanding letters of credit, which correspondingly reduced our availability under the line of credit.
Contractual Obligations
Our material cash requirements from known contractual and other obligations are described in the accompanying notes to the financial statements within Item 8 . Financial Statements and Supplementary Data . These include principal and interest payments on long-term debt as described in Note 6. Long-Term Debt and Lines of Credit , operating leases as described in Note 1 1 . Leases and purchase commitments as described in Note 14. Commitments and Contingencies to our Consolidated Financial Statements included in this Annual Report.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP, which requires management to make estimates, judgments and assumptions that affect the amounts reported in those financial statements and accompanying notes. Management considers an accounting policy to be critical if it is important to our financial condition and results of operations and if it requires significant judgment and estimates on the part of management in its application. Management considers an accounting estimate to be critical if it is made in accordance with generally accepted accounting principles, involves a significant level of estimation uncertainty, and has had, or is reasonably likely to have, a material impact on our financial condition or results of operations. We consider policies and estimates relating to the following matters to be critical accounting policies:
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Revenue Recognition
We recognize revenue at the amount we expect to be entitled to be paid, determined when control of the products or services is transferred to our customers, which occurs upon delivery of and acceptance of the fruit by the customer and we have a right to payment. For grove management services, we recognize operating revenue, including a management fee, when services are rendered and consumed. Management reviews the reasonableness of the revenue accruals quarterly based on buyers’ and processors’ advances to growers, cash and futures markets and experience in the industry. Adjustments are made throughout the year to these estimates as more current relevant industry information becomes available. Differences between the estimates and the final realization of revenues can be significant and can be either positive or negative. During the periods presented in this Annual Report, no material adjustments were made to the reported revenues from our crops.
Inventories
The costs of growing crops, including, but not limited to, labor, fertilization, fuel, crop nutrition and irrigation, are capitalized into inventory throughout the respective crop year. Such costs are expensed as cost of sales when the crops are harvested and are recorded as operating expenses in the Consolidated Statements of Operations. Inventories are stated at the lower of cost or net realizable value. The cost for unharvested citrus crops is based on accumulated production costs incurred during the period from January 1 through the balance sheet date. In the event that there is a casualty loss due to severe weather or other significant incident which negatively impacts inventory, we will undertake a process to estimate the amount of casualty loss. The process includes a number of factors, including touring all of the citrus groves by operational personnel, to assess the estimated fruit drop by grove and estimate the amount of fruit we expect to produce for the respective harvest season. As a result of this process, we would estimate the amount of casualty loss, if any, to reduce the carrying value of unharvested fruit crop on trees inventory.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Major improvements are capitalized while maintenance and repairs are expensed in the period the cost is incurred. Costs related to the development of citrus groves, through planting of trees, are capitalized. Such costs include land clearing, excavation and construction of ditches, dikes, roads and reservoirs among other costs. After the planting, caretaking costs or pre-productive maintenance costs are capitalized for four years. After four years, a grove is considered to have reached maturity and the accumulated costs are depreciated over 25 years, except for land clearing and excavation, which are considered costs of land and not depreciated.
Income Taxes
We use the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statements and the income tax basis of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in income or loss in the period that includes the enactment date. A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on our income tax provision and net income or loss in the period the determination is made. For the years ended September 30, 2023 and September 30, 2022, we recorded a valuation allowance of $4,170 thousand and $4,309 thousand, respectively. We recognize interest and/or penalties related to income tax matters in income tax expense.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs. We record interest related to unrecognized tax benefits in income tax expense.
Impairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. We record impairment losses on long-lived assets used in operations, other than goodwill, when events and circumstances indicate that the asset or asset group might be impaired and the estimated cash flows (undiscounted and without interest charges) to be generated by those assets or asset group over the remaining lives of the assets are less than the carrying amounts of those assets. In calculating impairments and the estimated cash flows, we assign its asset groups by determining the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of the other Company assets. The net carrying values of assets or asset groups not recoverable are reduced to their fair values. Our cash flow estimates are based on historical results adjusted to reflect our best estimates of future market conditions and operating conditions. As of September 30, 2023 and 2022, long-lived assets were comprised of property and equipment.
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Fair Value Measurements
We categorize our financial instruments measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing the asset or liability into a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
• Level 1 – Observable inputs such as quoted market prices for identical assets and liabilities in active markets;
• Level 2 – Inputs, other than the quoted prices for identical assets and liabilities in active markets, for which significant other observable market inputs are readily available; and
• Level 3 – Unobservable inputs in which there is little or no market data, such as internally developed valuation models which require the reporting entity to develop its own assumptions.
The carrying amounts of our financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the short term and immediate nature of these financial instruments. See Note 2. S u mmary of S i gnificant Accounting Policies to our Consolidated Financial Statements included in this Annual Report for additional information about the fair value of our debt.
As of September 30, 2023 and 2022, we did not have any assets held for sale that had been measured at fair value on a non-recurring basis.
Impact of Accounting Pronouncements
See Item 8. “Financial Statements and Supplementary Data” – Note 1. Description of Business and Basis of Presentation to our Consolidated Financial Statements included in this Annual Report for additional information about the impact of accounting pronouncements.
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