Limoneira CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Limoneira Company, a Delaware corporation, is the successor to several businesses with operations in California since 1893. We are primarily an agribusiness company founded and based in Santa Paula, California, committed to responsibly using and managing our approximately 15,400 acres of land, water resources and other assets to maximize long-term stockholder value. Our current operations consist of fruit production, sales and marketing, rental operations, real estate and capital investment activities. We are one of California’s oldest citrus growers. According to Sunkist Growers, Inc. (“Sunkist”), we are one of the largest growers of lemons in the United States and, according to the California Avocado Commission, one of the largest growers of avocados in the United States. In addition to growing lemons and avocados, we grow oranges and a variety of specialty citrus and other crops. We have agricultural plantings throughout Ventura, Tulare, San Luis Obispo and San Bernardino Counties in California, Yuma County in Arizona, La Serena, Chile and Jujuy, Argentina, which collectively consist of approximately 6,100 acres of lemons, 800 acres of avocados, 1,000 acres of oranges and 900 acres of specialty citrus and other crops. We also operate our own packinghouses in Santa Paula and Oxnard, California and Yuma, Arizona, where we process, pack and sell lemons that we grow, as well as lemons grown by others. We have a 47% interest in Rosales S.A. (“Rosales”), a citrus packing, marketing and sales business, a 90% interest in Fruticola Pan de Azucar S.A. (“PDA”), a lemon and orange orchard and 100% interest in Agricola San Pablo, SpA ("San Pablo"), a lemon and orange orchard, all of which are located near La Serena, Chile. We have a 51% interest in a joint venture, Trapani Fresh Consorcio de Cooperacion ("Trapani Fresh"), a lemon orchard in Argentina. Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. Water for our farming operations is sourced from the existing water resources associated with our land, which includes rights to water in the adjudicated Santa Paula Basin (aquifer) and the un-adjudicated Fillmore and Paso Robles Basins (aquifers). We use ground water from the San Joaquin Valley Basin and water from local water and irrigation districts in Tulare County, which is in California’s San Joaquin Valley. We also use ground water from the Cadiz Valley Basin in California's San Bernardino County and surface water in Arizona from the Colorado River through the Yuma Mesa Irrigation and Drainage District (“YMIDD”). We use ground water provided by wells and surface water for our PDA and San Pablo farming operations in Chile and our Trapani Fresh farming operations in Argentina. For more than 100 years, we have been making strategic investments in California agriculture and real estate. We currently have an interest in three real estate development projects in California. These projects include multi-family housing and single-family homes of approximately 900 units in various stages of planning and development. Business Division Summary We have three business divisions: agribusiness, rental operations and real estate development. The agribusiness division is comprised of four reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness, which includes oranges, specialty citrus and other crops. The agribusiness division includes our core operations of farming, harvesting, lemon packing and lemon sales operations. The rental operations division includes our residential and commercial rentals, leased land operations and organic recycling. The real estate development division includes our investments in real estate development projects. Financial information and discussion of our four reportable segments are contained in the notes to the accompanying consolidated financial statements of this Quarterly Report on Form 10-Q. Agribusiness Summary We market and sell citrus directly to our food service, wholesale and retail customers throughout the United States, Canada, Asia, Australia, Europe and certain other international markets. We are one of the largest growers of lemons and avocados in the United States. In fiscal year 2021, we sold a majority of our avocados to Calavo. Additionally, we sell our pistachios to a roaster, packager and marketer of nuts, and our wine grapes to various wine producers. Historically, our agribusiness division has been seasonal in nature with quarterly revenue fluctuating depending on the timing and variety of crops being harvested. Cultural costs in our agribusiness division tend to be higher in the first and second quarters and lower in the third and fourth quarters because of the timing of expensing cultural costs in the current year that were inventoried in the prior year. Our harvest costs generally increase in the second quarter and peak in the third quarter, coinciding with the increasing production and revenue. 23 Fluctuations in price are a function of global supply and demand with weather conditions, such as unusually low temperatures, typically having the most dramatic effect on the amount of lemons supplied in any individual growing season. We believe we have a competitive advantage by maintaining our own lemon packing operations, even though a significant portion of the costs related to these operations are fixed. As a result, cost per carton is a function of fruit throughput. While we regularly monitor our costs for redundancies and opportunities for cost reductions, we also supplement the number of lemons we pack in our packinghouse with additional lemons procured from other growers. Because the fresh utilization rate for our lemons, or percentage of lemons we harvest and pack that are sold to the fresh market, is directly related to the quality of lemons we pack and, consequently, the price we receive per 40-pound box, we only pack lemons from other growers if we determine their lemons are of good quality. Our avocado producing business is important to us, yet it faces constraints on growth as there is little additional land with sufficient water that can be cost-effectively acquired to support new avocado orchards in Southern California. Also, avocado production is cyclical as avocados typically bear fruit on a bi-annual basis with large crops in one year followed by smaller crops the next year. While our avocado production can be volatile, the profitability and cash flow realized from our avocados helps to diversify our fruit production base. In addition to growing lemons and avocados, we grow oranges, specialty citrus and other crops, typically utilizing land not suitable for growing high quality lemons. We regularly monitor the demand for the fruit we grow in the ever-changing marketplace to identify trends. For instance, while per capita consumption of oranges in the United States has been decreasing since 2000 primarily as a result of consumers increasing their consumption of mandarin oranges and other specialty citrus, the international market demand for U.S. oranges has increased. As a result, we have focused our orange production on high quality late season Navel oranges primarily for export to Japan, China and Korea, which are typically highly profitable niche markets. We produce our specialty citrus and other crops in response to identified consumer trends and believe that we are a leader in the niche production and sale of certain of these high margin fruits. We carefully monitor the respective markets of specialty citrus and other crops and we believe that demand for the types and varieties of specialty citrus and other crops that we grow will continue to increase throughout the world. Rental Operations Summary Our rental operations include our residential and commercial rentals, leased land operations and organic recycling. Our residential rental units generate reliable cash flows that we use to partially fund the operating costs of our business and provide affordable housing to many of our employees, including our agribusiness employees. This unique employment benefit helps us maintain a dependable, long-term employee base. In addition, our leased land business provides us with a typically profitable diversification. Revenue from rental operations is generally level throughout the year. Real Estate Development Summary We invest in real estate investment projects and recognize that long-term strategies are required for successful real estate development activities. Our goal is to redeploy real estate earnings and cash flow into the expansion of our agribusiness and other income producing real estate. For real estate development projects and joint ventures, it is not unusual for the timing and amounts of revenues and costs, partner contributions and distributions, project loans, other financing assumptions and project cash flows to be impacted by government approvals, project revenue and cost estimates and assumptions, economic conditions, financing sources and product demand as well as other factors. Such factors could affect our results of operations, cash flows and liquidity. Water and Mineral Rights Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. Water for our farming operations is sourced from the existing water resources associated with our land, which includes rights to water in the adjudicated Santa Paula Basin (aquifer) and the un-adjudicated Fillmore and Paso Robles Basins (aquifers). We use ground water and water from local water districts in Tulare County and ground water in San Bernardino County. Following our acquisition of Associated Citrus Packers, Inc. ("Associated"), we began using federal project water in Arizona from the Colorado River through the YMIDD. We also have acquired water rights in Chile related to our acquisitions of PDA and San Pablo. 24 We use a combination of ground water provided by wells that derive water from the San Joaquin Valley Basin and water from various water districts and irrigation districts in Tulare County, California, which is in the agriculturally productive San Joaquin Valley. We use ground water provided by wells which derive water from the Cadiz Valley Basin at the Cadiz Ranch in San Bernardino County, California. Our Windfall Farms property located in San Luis Obispo County, California obtains water from wells that derive water from the Paso Robles Basin. Our Associated farming operations in Yuma, Arizona source water from the Colorado River through the YMIDD, where we have access to approximately 11,700-acre feet of Class 3 Colorado River water rights. We use ground water provided by wells and surface water for our PDA and San Pablo farming operations in La Serena, Chile and our Trapani Fresh farming operations in Argentina. California has experienced below average precipitation since 2018. According to the U.S. Drought Monitor, Ventura County was experiencing moderate drought conditions and Tulare and San Bernardino Counties were experiencing severe drought conditions as of January 31, 2022. In October 2021, the California Governor declared a drought state of emergency statewide. Federal officials who oversee the Central Valley Project, California’s largest water delivery system, allocated 5% of the contracted amount of water to San Joaquin Valley farmers in 2021 compared to 100% in 2017 through 2020. We are assessing the impact these reductions may have on our California orchards. In August 2021, the U.S. Bureau of Reclamation declared a Level 1 Shortage Condition at Lake Mead in the Lower Colorado River Basin for the first time ever, requiring shortage reductions and water savings contributions for states in the southwest. Beginning January 1, 2022, Arizona experienced water releases from Lake Mead reduced by approximately 18% of the state’s annual apportionment. We are assessing the impact these reductions may have on our Arizona orchards. Recent Developments We are equal partners in a joint venture with The Lewis Group of Companies (“Lewis”) for the residential development of our East Area I real estate development project and formed Limoneira Lewis Community Builders, LLC ("LLCB") as the development entity. LLCB has closed on lot sales representing 586 units from inception through January 31, 2022. For further information see Note 5 – Real Estate Development of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q. In September 2021, we signed a Memorandum of Understanding with Wileman Bros. & Elliott, Inc. ("Wileman"), to form an alliance to sell their combined citrus volumes under Limoneira's One World of Citrus trademark. Wileman is a 95-year-old citrus business located in California’s Central Valley with a focus on oranges, mandarins and specialty citrus. Effective November 1, 2021, our oranges and certain specialty citrus will be packed by Wileman. In February 2022, we terminated our Avocado Marketing Agreement and the associated Letter Agreement Regarding Fruit Commitment with Calavo to pursue opportunities with other packing and marketing companies. In January 2022, we were notified of Alex M. Teague’s decision to retire as Senior Vice President and Chief Operating Officer of our Company, effective February 1, 2022. In connection with his retirement, we entered into a separation agreement with Mr. Teague whereas, (i) Mr. Teague will be paid one year of his annual base salary, which shall be paid in one lump sum within ninety (90) business days of January 12, 2022; (ii) twenty-three thousand nine hundred ninety-nine (23,999) shares of our common stock granted to Mr. Teague pursuant to the Limoneira Company Omnibus Incentive Plan shall fully vest; and (iii) Mr. Teague will receive certain other benefits as set forth in the agreement. As of January 31, 2022, we accrued $0.4 million cash severance and $0.3 million accelerated vesting of stock-based compensation. On December 14, 2021, we declared a cash dividend of $0.075 per common share paid on January 14, 2022, in the aggregate amount of $1.3 million to stockholders of record as of December 27, 2021. COVID-19 Pandemic The COVID-19 pandemic has had an adverse impact on the industries and markets in which we conduct business. In particular, the United States lemon market has seen a significant decline in volume, with lemon demand falling since widespread shelter in place orders were issued in mid-March 2020, resulting in a significant market oversupply. The export market for fresh product has also significantly declined due to the COVID-19 pandemic impacts. As of January 31, 2022, the demand within both markets is recovering but has not yet returned to pre-pandemic levels. The decline in demand for our products beginning the second quarter of fiscal year 2020, which we believe was due to the COVID-19 pandemic, negatively impacted our sales and profitability for the last three quarters of fiscal year 2020, all of fiscal year 2021, and the first quarter of fiscal year 2022. We also expect material adverse impacts on our sales and profitability in future periods. The duration of these trends and the magnitude of such impacts cannot be estimated at this time, as they are influenced by a 25 number of factors, many of which are outside management’s control, including, but not limited, to those presented in Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended October 31, 2021. Notwithstanding the adverse impacts and subject to unforeseen changes that may arise as the COVID-19 pandemic continues, we currently expect improvement in fiscal year 2022 compared to fiscal year 2021. Given the economic uncertainty as a result of the COVID-19 pandemic over the past two years, we have taken actions to improve our current liquidity position, including temporarily postponing capital expenditures, selling equity securities to increase cash, reducing operating costs, and substantially reducing discretionary spending. Although we are considered an essential business, there is significant uncertainty around the breadth and duration of our business disruptions related to the COVID-19 pandemic, as well as its impact on the U.S. economy, the ongoing business operations of our customers and our results of operations and financial condition. Our management team is actively monitoring the impacts of the COVID-19 pandemic and may take further actions altering our business operations that we determine are in the best interests of our employees and customers or as required by federal, state, or local authorities. The full impact of the COVID-19 pandemic on our results of operations, financial condition, or liquidity for fiscal year 2022 and beyond cannot be fully estimated at this point. The following discussions are subject to the future effects of the COVID-19 pandemic on our ongoing business operations. 26 Results of Operations The following table shows the results of operations (in thousands): Three Months Ended January 31, 2022 2021 Revenues: Agribusiness $ 38,083 $ 37,137 Other operations 1,191 1,138 Total net revenues 39,274 38,275 Costs and expenses: Agribusiness 41,244 36,938 Other operations 1,074 1,082 Gain on disposal of assets (85) — Selling, general and administrative 6,599 5,895 Total costs and expenses 48,832 43,915 Operating loss: Agribusiness (3,161) 199 Other operations 117 56 Gain on disposal of assets 85 — Selling, general and administrative (6,599) (5,895) Operating loss (9,558) (5,640) Other income: Interest income 21 43 Interest expense, net of patronage dividends 215 134 Equity in earnings of investments, net 51 366 Other income (expense), net 15 (6) Total other income 302 537 Loss before income tax benefit (9,256) (5,103) Income tax benefit 2,650 1,187 Net loss (6,606) (3,916) Net loss (income) attributable to noncontrolling interest 88 (292) Net loss attributable to Limoneira Company $ (6,518) $ (4,208) Non-GAAP Financial Measures Due to significant depreciable assets associated with the nature of our operations and interest costs associated with our capital structure, management believes that earnings before interest, income taxes, depreciation and amortization (“EBITDA”) and adjusted EBITDA, which excludes named executive officer severance and gain on disposal of assets, is an important measure to evaluate our results of operations between periods on a more comparable basis. Such measurements are not prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and should not be construed as an alternative to reported results determined in accordance with GAAP. The non-GAAP information provided is unique to us and may not be consistent with methodologies used by other companies. EBITDA and adjusted EBITDA are summarized and reconciled to net loss attributable to Limoneira Company which management considers to be the most directly comparable financial measure calculated and presented in accordance with GAAP as follows (in thousands): 27 Three Months Ended January 31, 2022 2021 Net loss attributable to Limoneira Company $ (6,518) $ (4,208) Interest income (21) (43) Interest expense, net of patronage dividends (215) (134) Income tax benefit (2,650) (1,187) Depreciation and amortization 2,480 2,501 EBITDA $ (6,924) $ (3,071) Named executive officer severance 770 — Gain on disposal of assets (85) — Adjusted EBITDA $ (6,239) $ (3,071) Three Months Ended January 31, 2022 Compared to the Three Months Ended January 31, 2021 Revenues Total net revenues for the three months ended January 31, 2022 were $39.3 million compared to $38.3 million for the three months ended January 31, 2021. The 3% increase of $1.0 million was primarily the result of increased lemons and avocados agribusiness revenues, partially offset by decreased specialty citrus and other crops agribusiness revenues, as detailed below ($ in thousands): Agribusiness Revenues for the Three Months Ended January 31, 2022 2021 Change Lemons $ 35,568 $ 34,197 $ 1,371 4% Avocados 766 — 766 —% Oranges 873 1,091 (218) (20)% Specialty citrus and other crops 876 1,849 (973) (53)% Agribusiness revenues $ 38,083 $ 37,137 $ 946 3% • Lemons: The increase in the first three months of fiscal year 2022 was primarily the result of increased shipping and handling, compared to the same period of fiscal year 2021. During the first three months of fiscal years 2022 and 2021, shipping and handling was $6.0 million and $4.9 million, respectively. During the first three months of fiscal years 2022 and 2021, fresh lemon sales were $24.7 million and $25.0 million, in aggregate, on 1,207,000 and 1,320,000 cartons of lemons sold at average per carton prices of $20.48 and $18.91, respectively. Lemon revenues in the first three months of fiscal years 2022 and 2021 included brokered fruit and other lemon sales of $3.9 million and $3.5 million and lemon by-product sales of $1.0 million and $0.8 million, respectively. • Avocados: During the first three months of fiscal year 2022, 365,000 pounds of avocados were sold at an average per pound price of $2.10. Due to harvest timing, no sales were recorded in the first quarter of fiscal year 2021. • Oranges: The decrease in the first three months of fiscal year 2022 was primarily the result of decreased volumes, partially offset by higher prices of oranges sold, compared to the same period of fiscal year 2021. In the first three months of fiscal years 2022 and 2021, we sold 53,000 and 119,000 40-pound carton equivalents of oranges at an average per carton price of $16.47 and $9.17, respectively. • Specialty citrus and other crops: The decrease in the first three months of fiscal year 2022 was primarily the result of decreased volume and lower prices of specialty citrus sold, compared to the same period of fiscal year 2021. During the first three months of fiscal years 2022 and 2021, we sold 51,000 and 115,000 40-pound carton equivalents of specialty citrus at an average per carton price of $14.63 and $15.46, respectively. Other operations revenue in the first three months of fiscal years 2022 and 2021 was $1.2 million and $1.1 million, respectively. 28 Costs and Expenses Our total costs and expenses in the first three months of fiscal year 2022 were $48.8 million compared to $43.9 million in the same period of fiscal year 2021. The 11% increase of $4.9 million was primarily attributable to increases in our packing costs and third-party grower and supplier costs. Costs and expenses associated with our agribusiness division include packing costs, harvest costs, growing costs, costs related to the fruit we procure and sell for third-party growers and suppliers and depreciation and amortization expense, as detailed below ($ in thousands): Agribusiness Costs and Expenses for the Three Months Ended January 31, 2022 2021 Change Packing costs $ 11,280 $ 10,377 $ 903 9% Harvest costs 5,246 4,923 323 7% Growing costs 8,278 8,112 166 2% Third-party grower and supplier costs 14,255 11,314 2,941 26% Depreciation and amortization 2,185 2,212 (27) (1)% Agribusiness costs and expenses $ 41,244 $ 36,938 $ 4,306 12% • Packing costs: Packing costs primarily consist of the costs to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. In the first three months of fiscal years 2022 and 2021, lemon packing costs were $10.6 million and $9.5 million, respectively. During the first three months of fiscal years 2022 and 2021, we packed and sold 1,207,000 and 1,320,000 cartons of lemons at average per carton costs of $8.74 and $7.22, respectively. The increase in average per carton cost is primarily due to costs of labor and benefits, cardboard cartons, fruit treatments and packaging and shipping supplies from inflation and supply chain issues. Additionally, in the first three months of fiscal years 2022 and 2021, packing costs included $0.7 million and $0.8 million of shipping costs, respectively. • Harvest costs: The increase in the first three months of fiscal year 2022 was primarily the result of increased volume of lemons, oranges and avocados harvested compared to the same period in fiscal year 2021. • Growing costs: Also referred to as cultural costs, consist of orchard maintenance costs such as cultivation, fertilization and soil amendments, pest control, pruning and irrigation. The increase in the first three months of fiscal year 2022 was primarily due to farm management decisions based on weather, harvest timing and crop conditions. • Third-party grower and supplier costs: We sell fruit that we grow and fruit that we procure from other growers and suppliers. The cost of procuring fruit from other growers is referred to as third-party grower and supplier costs. The increase in the first three months of fiscal year 2022 was primarily due to higher prices and increased volume of third-party grower fruit sold, compared to the same period of fiscal year 2021. Of the 1,207,000 and 1,320,000 cartons of lemons packed and sold during the first three months of fiscal years 2022 and 2021, 693,000 (57%) and 637,000 (48%) were procured from third-party growers at average per carton prices of $16.28 and $14.63, respectively. Additionally, in the first three months of fiscal years 2022 and 2021 we incurred $3.0 million and $2.0 million, respectively, of costs for purchased, packed fruit for resale. • Depreciation and amortization: Depreciation and amortization expense for the first three months of fiscal year 2022 was similar to the same period of fiscal year 2021. Other operations expenses were $1.1 million in the first three months of fiscal years 2022 and 2021. Selling, general and administrative costs and expenses were $6.6 million in the first three months of fiscal year 2022 compared to $5.9 million in the first three months of fiscal year 2021. The 12% increase of $0.7 million primarily consisted of the following: • Named executive officer severance for the first three months of fiscal year 2022 was $0.7 million compared to zero in the same period of fiscal year 2021. • Selling expenses for the first three months of fiscal year 2022 was $0.1 million higher than the same period of fiscal year 2021. • Other selling, general and administrative expenses, including certain corporate overhead expenses, for the first three months of fiscal year 2022 were $0.1 million lower than the same period of fiscal year 2021. Other Income Other income in the first three months of fiscal year 2022 was comprised primarily of $0.1 million of equity in earnings of investments and $0.2 million of net interest income. Other income in the first three months of fiscal year 2021 was comprised primarily of $0.4 million of equity in earnings of investments and $0.2 million of net interest income. 29 Income Taxes We recorded an estimated income tax benefit of $2.7 million and $1.2 million in the first three months of fiscal years 2022 and 2021 on pre-tax loss of $9.3 million and $5.1 million, respectively. The tax benefit recorded for the first three months of fiscal year 2022 differs from the U.S. federal statutory tax rate of 21.0% due primarily to foreign jurisdictions which are taxed at different rates, state taxes, tax impact of stock-based compensation, and nondeductible tax items. Our projected annual effective blended tax rate for fiscal year 2022, excluding discrete items, is approximately 50.1%. Net Loss (Income) Attributable to Noncontrolling Interest Net loss (income) attributable to noncontrolling interest represents 10% and 49% of the net loss (income) of PDA and Trapani Fresh, respectively. Segment Results of Operations We operate in four reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness. Our reportable operating segments are strategic business units with different products and services, distribution processes and customer bases. We evaluate the performance of our operating segments separately to monitor the different factors affecting financial results. Each segment is subject to review and evaluations related to current market conditions, market opportunities and available resources. See Note 18 - Segment Information of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding our operating segments. Three Months Ended January 31, 2022 Compared to the Three Months Ended January 31, 2021 The following table shows the segment results of operations for the three months ended January 31, 2022 (in thousands): Fresh Lemons Lemon Packing Eliminations Avocados Other Agribusiness Total Agribusiness Corporate and Other Total Revenues from external customers $ 29,600 $ 5,968 $ — $ 766 $ 1,749 $ 38,083 $ 1,191 $ 39,274 Intersegment revenue — 6,589 (6,589) — — — — — Total net revenues 29,600 12,557 (6,589) 766 1,749 38,083 1,191 39,274 Costs and expenses 32,161 10,556 (6,589) 321 2,610 39,059 7,293 46,352 Depreciation and amortization — — — — — 2,185 295 2,480 Operating (loss) income $ (2,561) $ 2,001 $ — $ 445 $ (861) $ (3,161) $ (6,397) $ (9,558) The following table shows the segment results of operations for the three months ended January 31, 2021 (in thousands): Fresh Lemons Lemon Packing Eliminations Avocados Other Agribusiness Total Agribusiness Corporate and Other Total Revenues from external customers $ 29,300 $ 4,897 $ — $ — $ 2,940 $ 37,137 $ 1,138 $ 38,275 Intersegment revenue — 6,685 (6,685) — — — — — Total net revenues 29,300 11,582 (6,685) — 2,940 37,137 1,138 38,275 Costs and expenses 29,507 9,531 (6,685) — 2,373 34,726 6,688 41,414 Depreciation and amortization — — — — — 2,212 289 2,501 Operating (loss) income $ (207) $ 2,051 $ — $ — $ 567 $ 199 $ (5,839) $ (5,640) The following analysis should be read in conjunction with the previous section “Results of Operations.” Fresh Lemons Fresh lemons segment revenue is comprised of sales of fresh lemons, lemon by-products and other lemon revenue such as purchased, packed fruit for resale. For the first three months of fiscal years 2022 and 2021, our fresh lemons segment total net revenues were $29.6 million and $29.3 million, respectively. The 1% increase of $0.3 million was primarily due to an increase in brokered fruit and other lemon sales of $0.4 million, partially offset by a net decrease in fresh lemons and lemon by-products sales of $0.1 million. 30 Costs and expenses associated with our fresh lemons segment include growing costs, harvest costs and costs of lemons we procure from third-party growers and suppliers. For the first three months of fiscal years 2022 and 2021, our fresh lemons segment costs and expenses were $32.2 million and $29.5 million, respectively. The 9% increase of $2.7 million primarily consisted of the following: • Harvest costs for the first three months of fiscal year 2022 were $0.7 million higher than the same period of fiscal year 2021. • Growing costs for the first three months of fiscal year 2022 were $0.1 million lower than the same period of fiscal year 2021. • Third-party grower and supplier costs for the first three months of fiscal year 2022 were $2.4 million higher than the same period of fiscal year 2021. • Transportation costs for the first three months of fiscal year 2022 were $0.1 million lower than the same period of fiscal year 2021. • Intersegment costs and expenses for the first three months of fiscal year 2022 were $0.1 million lower than the same period of fiscal year 2021. Lemon Packing Lemon packing segment revenue is comprised of intersegment packing revenue and shipping and handling revenue. For the first three months of fiscal years 2022 and 2021, our lemon packing segment total net revenues were $12.6 million and $11.6 million, respectively. The 8% increase of $1.0 million was primarily due to increased price per carton of lemons packed. Costs and expenses associated with our lemon packing segment consist of the cost to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. For the first three months of fiscal years 2022 and 2021, our lemon packing costs and expenses were $10.6 million and $9.5 million, respectively. The 11% increase of $1.0 million was primarily due to increased costs of labor and benefits, cardboard cartons, fruit treatments and packaging and shipping supplies from inflation and supply chain issues. For the first three months of fiscal years 2022 and 2021, lemon packing segment operating income per carton sold was $1.66 and $1.55, respectively. In the first three months of fiscal years 2022 and 2021, the lemon packing segment included $6.6 million and $6.7 million, respectively, of intersegment revenues that were charged to the fresh lemons segment to pack lemons for sale. Such intersegment revenues and expenses are eliminated in our consolidated financial statements. Avocados For the first three months of fiscal year 2022, our avocados segment had revenues of $0.8 million, compared to no revenues in the same period of fiscal year 2021. Costs and expenses associated with our avocados segment include growing and harvest costs. For the first three months of fiscal years 2022 and 2021, our avocados segment costs and expenses were $0.3 million and zero, respectively. The increase of $0.3 million primarily consisted of harvest costs. Other Agribusiness For the first three months of fiscal years 2022 and 2021, our other agribusiness segment total net revenues were $1.7 million and $2.9 million, respectively. The 41% decrease of $1.2 million primarily consisted of the following: • Orange revenues for the first three months of fiscal year 2022 were $0.2 million lower than the same period of fiscal year 2021. • Specialty citrus and other crops revenues for the first three months of fiscal year 2022 were $1.0 million lower compared to the same period of fiscal year 2021. Costs and expenses associated with our other agribusiness segment include growing costs, harvest costs and purchased fruit costs. For the first three months of fiscal years 2022 and 2021, our other agribusiness costs and expenses were $2.6 million and $2.4 million, respectively. The 10% increase of $0.2 million primarily consisted of the following: • Harvest costs for the first three months of fiscal year 2022 were $0.4 million lower than the same period of fiscal year 2021. • Purchased fruit costs for the first three months of fiscal year 2022 were $0.6 million higher than the same period of fiscal year 2021. 31 Total agribusiness depreciation and amortization expenses for the first three months of fiscal year 2022 were similar to the same period of fiscal year 2021. Corporate and Other Our corporate and other operations had revenues of $1.2 million and $1.1 million for the first three months of fiscal years 2022 and 2021, respectively. Costs and expenses in our corporate and other operations for the first three months of fiscal years 2022 and 2021 were approximately $7.4 million and $6.7 million, respectively, and include selling, general and administrative costs and expenses not allocated to the operating segments. Depreciation and amortization expenses for the first three months of fiscal years 2022 and 2021 were similar at $0.3 million. Seasonal Operations Historically, our agribusiness operations have been seasonal in nature with quarterly revenue fluctuating depending on the timing and the variety of crops being harvested. Cultural costs in our agribusiness tend to be higher in the first and second quarters and lower in the third and fourth quarters because of the timing of expensing cultural costs in the current year that were inventoried in the prior year. Our harvest costs generally increase in the second quarter and peak in the third quarter coinciding with the increasing production and revenue. Due to this seasonality and to avoid the inference that interim results are indicative of the estimated results for a full fiscal year, we present supplemental information for 12-month periods ended at the interim date for the current and preceding years. 32 Results of Operations for the Trailing Twelve Months Ended January 31, 2022 and 2021 The following table shows the unaudited results of operations (in thousands): Trailing Twelve Months Ended January 31, 2022 2021 Revenues: Agribusiness $ 162,327 $ 156,591 Other operations 4,699 4,587 Total revenues 167,026 161,178 Costs and expenses: Agribusiness 152,798 151,676 Other operations 4,324 4,317 Gain on disposal of assets 24 502 Selling, general and administrative 20,130 20,865 Total costs and expenses 177,276 177,360 Operating loss (10,250) (16,182) Other income (expense): Interest income 357 180 Interest expense, net of patronage dividends (1,420) (1,744) Equity in earnings of investments, net 2,888 825 Loss on stock in Calavo Growers, Inc. — (4,275) Other income (expense), net 111 (302) Total other income (expense) 1,936 (5,316) Loss before income tax benefit (8,314) (21,498) Income tax benefit 1,729 6,545 Net loss (6,585) (14,953) Loss attributable to noncontrolling interest 836 737 Net loss attributable to Limoneira Company $ (5,749) $ (14,216) The following analysis should be read in conjunction with the previous section “Results of Operations.” • Total revenues increased $5.8 million in the twelve months ended January 31, 2022 compared to the twelve months ended January 31, 2021 primarily due to increased agribusiness revenues, particularly increased lemon sales. • Total costs and expenses decreased $0.1 million in the twelve months ended January 31, 2022 compared to the twelve months ended January 31, 2021, primarily due to increases in our agribusiness costs, partially offset by decreases in selling, general and administrative expenses and the smaller gain on disposal of assets. The increase in agribusiness costs is primarily attributable to increased costs of third-party grower and supplier fruit and cultural costs, partially offset by decreased packing costs and harvest costs. The decrease in selling, general and administrative expenses is primarily attributable to decreased corporate expenses associated with our strategic initiatives. • Total other income increased $7.3 million in the twelve months ended January 31, 2022 compared to the twelve months ended January 31, 2021 primarily due to increased equity in earnings of investments and decreased loss on stock in Calavo. • Income tax benefit decreased $4.8 million in the twelve months ended January 31, 2022 compared to the twelve months ended January 31, 2021 primarily due to the decrease in pre-tax loss of $13.2 million. 33 Liquidity and Capital Resources Overview Our primary sources of liquidity are cash and cash flows generated from our operations and use of our revolving credit facility. Our liquidity and capital position fluctuates during the year depending on seasonal production cycles, weather events and demand for our products. Typically, our first and last fiscal quarters coincide with the fall and winter months during which we are growing crops that are harvested and sold in the spring and summer, which are our second and third quarters. To meet working capital demand and investment requirements of our agribusiness and real estate development projects and to supplement operating cash flows, we utilize our revolving credit facility to fund agricultural inputs and farm management practices until sufficient returns from crops allow us to repay amounts borrowed. Raw materials needed to propagate the various crops grown by us consist primarily of fertilizer, herbicides, insecticides, fuel and water, all of which are readily available from local sources. Material contractual obligations arising in the normal course of business primarily consist of purchase obligations, long-term fixed rate and variable rate debt and related interest payments, operating and finance leases and our noncontributory, defined benefit pension plan (“the Plan”). In fiscal year 2021, we decided to terminate the Plan effective December 31, 2021. The liabilities disclosed as of January 31, 2022, reflect an estimate of the additional cost to pay lump sums to a portion of the active and vested terminated participants and purchase annuities for all remaining participants from an insurance company. See Notes 10, 11 and 15 to the consolidated financial statements in the Quarterly Report for amounts outstanding as of January 31, 2022, related to debt, leases and the Plan. Purchase obligations consist of contracts primarily related to packing supplies and pollination services, the majority of which are due in the next three years. We believe that the cash flows from operations and available borrowing capacity from our existing credit facilities will be sufficient to satisfy our capital expenditures, debt service, working capital needs and other contractual obligations for the next twelve months. In addition, we have the ability to control a portion of our investing cash flows to the extent necessary based on our liquidity demands. Cash Flows from Operating Activities For the three months ended January 31, 2022 and 2021, net cash used in operating activities was $8.2 million and $1.8 million, respectively. The significant components of our cash flows used in operating activities were as follows: • Net loss for the three months ended January 31, 2022 and 2021 was $6.6 million and $3.9 million, respectively. The components of net loss in the three months ended January 31, 2022 compared to the net loss in the same period in fiscal year 2021 consist of an increase in operating loss of $3.9 million, a decrease in total other income of $0.2 million and an increase in income tax benefit of $1.5 million. • The adjustments to reconcile net loss to net cash used in operating activities were $1.1 million and $2.3 million in the three months ended January 31, 2022 and 2021, respectively, primarily due to changes in deferred income taxes. • The changes in operating assets and liabilities used $2.6 million and $0.2 million of operating cash in the three months ended January 31, 2022 and 2021, respectively, primarily due to changes in income taxes receivable, accounts payable and growers and suppliers payable, and prepaid expenses and other current assets, partially offset by changes in accounts receivables/other from related parties and accrued liabilities and payables to related parties. Cash Flows from Investing Activities For the three months ended January 31, 2022 and 2021, net cash used in investing activities was $0.7 million and $3.6 million, respectively. • Capital expenditures were $2.1 million in the three months ended January 31, 2022, comprised of $1.8 million for property, plant and equipment primarily related to orchard and vineyard development and $0.2 million for real estate development projects. • Capital expenditures were $3.4 million in the three months ended January 31, 2021, comprised of $3.1 million for property, plant and equipment primarily related to orchard and vineyard development and $0.3 million for real estate development projects. 34 Cash Flows from Financing Activities For the three months ended January 31, 2022 and 2021, net cash provided by financing activities was $9.3 million and $6.7 million, respectively. • The $9.3 million of cash provided by financing activities during the three months ended January 31, 2022 was primarily comprised of net repayments of long-term debt in the amount of $11.7 million, partially offset by common and preferred dividends, in aggregate, of $1.5 million and the exchange of common stock of $0.9 million. • The $6.7 million of cash provided by financing activities during the three months ended January 31, 2021 was primarily comprised of net borrowings of long-term debt in the amount of $8.8 million, partially offset by common and preferred dividends, in aggregate, of $1.4 million. Transactions Affecting Liquidity and Capital Resources Credit Facilities and Long-Term Debt We finance our working capital and other liquidity requirements primarily through cash from operations and our Farm Credit West Credit Facility, which includes the MLA, Supplements and Revolving Equity Line of Credit (the "RELOC"). In addition, we have the Farm Credit West term loans, Banco de Chile term loans and COVID-19 loans, and a note payable to the sellers of a land parcel. Additional information regarding these loans and the note payable can be found in Note 10 to the consolidated financial statements included in this Quarterly Report. In June 2021, we entered into the MLA with the Lender dated June 1, 2021, together with the Supplements and a Fixed Interest Rate Agreement. The MLA governs the terms of the Supplements. The MLA amends and restates the previous Master Loan Agreement between us and the Lender, dated June 19, 2017 and extends the principal repayment to July 1, 2026. The Supplements and RELOC provide aggregate borrowing capacity of $130.0 million comprised of $75.0 million under the Revolving Credit Supplement, $40.0 million under the Non-Revolving Credit Supplement and $15.0 million under the RELOC. As of January 31, 2022, our outstanding borrowings under the Farm Credit West Credit Facility were $123.8 million and we had $6.2 million of availability. The MLA subjects us to affirmative and restrictive covenants including, among other customary covenants, financial reporting requirements, requirements to maintain and repair any collateral, restrictions on the sale of assets, restrictions on the use of proceeds, prohibitions on the incurrence of additional debt and restrictions on the purchase or sale of major assets of our business. We are also subject to a financial covenant that requires us to maintain compliance with a specified debt service coverage ratio on an annual basis. In December 2021, the Lender modified the covenant to defer measurement at October 31, 2021 and revert to a debt service coverage ratio of 1.25:1.0 measured as of October 31, 2022. We expect to be in compliance with these covenants in fiscal year 2022. In the first quarter of fiscal years 2022 and 2021, Farm Credit West declared an annual patronage dividend of $1.6 million and $1.2 million, respectively, which we received in the second quarter of fiscal years 2022 and 2021. Treasury Stock In fiscal year 2021, our Company's Board of Directors approved a share repurchase program authorizing us to repurchase up to $10.0 million of our outstanding shares of common stock through September 2022; no shares have been repurchased under this program. Dividends The holders of the Series B Convertible Preferred Stock (the “Series B Stock”) and the Series B-2 Preferred Stock (the “Series B-2 Preferred Stock”) are entitled to receive cumulative cash dividends. Such preferred dividends paid were $0.1 million in the three months ended January 31, 2022 and 2021. Cash dividends declared in the three months ended January 31, 2022 and 2021 were $0.075 per common share and such dividends paid were $1.3 million in the three months ended January 31, 2022 and 2021. 35 Off-Balance Sheet Arrangements As discussed in Note 7 – Real Estate Development and Note 8 – Equity in Investments of the notes to consolidated financial statements included in our fiscal year 2021 Annual Report on Form 10-K, we have investments in joint ventures and partnerships that are accounted for using the equity method of accounting. Critical Accounting Estimates The preparation of our consolidated financial statements in accordance with GAAP requires us to develop critical accounting policies and make certain estimates, assumptions and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates and judgments on historical experience, available relevant data and other information that we believe to be reasonable under the circumstances, and we continue to review and evaluate these estimates. Actual results may materially differ from these estimates under different assumptions or conditions as new or additional information become available in future periods. During the three months ended January 31, 2022, our critical accounting policies and estimates have not changed since the filing of our Annual Report on Form 10-K as of October 31, 2021. Please refer to that filing for a description of our critical accounting policies and estimates. Recent Accounting Pronouncements See Note 2 – Summary of Significant Accounting Policies of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q for information concerning recent accounting pronouncements. 36 Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in the disclosures discussed in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2021 as filed with the SEC on January 10, 2022.