Item 3. Legal Proceedings
Item 3.
LEGAL PROCEEDINGS
 
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 our Upcountry Maui wastewater treatment facility. The facility was built in the 1960’s to serve approximately 200 single-family homes developed for workers in our former agricultural operations. The facility is made up of two 1.5-acre wastewater stabilization ponds and surrounding disposal leach fields. The Order includes, among other requirements, payment of a $230,000 administrative penalty and development of a new wastewater treatment plant, which become final and binding – unless a hearing is requested to contest the alleged violations and penalties.
 
The DOH agreed to defer the Order without a hearing date while we continue working on a previously approved corrective action plan to resolve and remediate the facility’s wastewater effluent issues. The construction of additional leach fields was completed as of December 31, 2020. Additionally, the installation of a surface aerator, sludge removal system, and natural pond cover using water plants was completed in 2021. Our continued testing of wastewater effluent consistently returns results within the allowable ranges. We are in compliance with all of the required standards. No hearing date has been set as discussions with the DOH are still ongoing to address any other matters regarding the Order. 
 
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We have accrued approximately $23,000 related to the administrative penalty at December 31, 2021. We are presently unable to estimate the remaining amount, or range of amounts, of any probable liability, if any, related to the Order and no additional provision has been made in the accompanying financial statements.
 
From time to time, we are a party to various claims, complaints and other legal actions that have arisen in the normal course of our business activities. We believe the outcome of these pending legal proceedings, in the aggregate, is not likely to have a material adverse effect on our operations, financial position or cash flows.
 
Item 4.
MINE SAFETY DISCLOSURES
 
Not applicable.
 
PART II
 
Item   5.
MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock is traded on the NYSE under the symbol “MLP.” Our ability to declare dividends is restricted by the terms of our credit agreement. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. As of February 9, 2022, there were 225 shareholders of record of our common stock, which do not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.
 
Unregistered Sales of Equity Securities
 
None.
 
Repurchases
 
None.
 
Securities Authorized For Issuance Under Equity Compensation Plans
 
The information regarding securities authorized for issuance under our equity compensation plans is set forth in Item 12 of this Annual Report.
 
Item 6.
SELECTED FINANCIAL DATA
 
Because we are a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K, we are not required to provide the information required by this Item.
 
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 the forward-looking statements disclaimer set forth at the beginning of this Annual Report, the risk factors set forth in Item 1A of this Annual Report, and our financial statements and the notes to those statements set forth in Item 8 of this Annual Report.
 
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RESULTS OF OPERATIONS
 
Comparison of Years Ended December 31, 2021 and 2020
 
CONSOLIDATED 
 
 
Years Ended December 31,
 
 
 
2021
 
 
2020
 
 
 
(in thousands except share amounts)
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
$
12,443
 
 
$
7,540
 
Segment operating costs and expenses
 
 
(5,600
)
 
 
(4,726
)
General and administrative
 
 
(2,569
)
 
 
(2,445
)
Share-based compensation
 
 
(1,449
)
 
 
(1,632
)
Depreciation
 
 
(1,188
)
 
 
(1,289
)
Operating Income (Loss)
 
 
1,637
 
 
 
(2,552
)
Other income
 
 
13
 
 
 
894
 
Pension and other postretirement expenses
 
 
(4,732
)
 
 
(475
)
Interest expense
 
 
(122
)
 
 
(134
)
Loss from Continuing Operations
 
 
(3,204
)
 
 
(2,267
)
Loss from Discontinued Operations
 
 
(216
)
 
 
(337
)
Net Loss
 
$
(3,420
)
 
$
(2,604
)
 
 
 
 
 
 
 
 
 
Loss from Continuing Operations per Common Share
 
$
(0.17
)
 
$
(0.12
)
Loss from Discontinuing Operations per Common Share
 
$
(0.01
)
 
$
(0.02
)
Net Loss per Common Share
 
$
(0.18
)
 
$
(0.14
)
 
 
REAL ESTATE 
 
 
Years Ended December 31,
 
 
 
2021
 
 
2020
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
$
3,400
 
 
$
772
 
Operating costs and expenses
 
 
(750
)
 
 
(600
)
Operating income
 
$
2,650
 
 
$
172
 
 
Real estate operating revenues include the sales of real estate inventory and sales commissions from resales of properties by our wholly owned subsidiary, Kapalua Realty Company, Ltd.
 
In May 2021, we sold the property commonly known as the Steeple House located in the Kapalua Resort for $1.8 million. The sale included the fee simple interest of the 1.1 acre parcel as well as buildings and improvements located on the property.
 
In June 2021, we sold and granted to a conservation organization a perpetual, non-exclusive conservation easement consisting of approximately 791 acres of unimproved land in Honolua Valley for $0.9 million. This easement permits the buyer right of entry to perform improvements to enhance and improve conservation and preservation efforts to the property. Limited commercial activity relating to conservation education, guided hikes and eco-tourism site visits are permitted.
 
In November 2021, we received twelve residential workforce housing credits valued at $0.6 million pursuant to Maui County Code Section 2.96.050 from the buyer of a 5.27 acre parcel located in Kapalua, also known as Site 6-0. As a condition of the sale in 2016, the buyer of the parcel was required to transfer these credits within five years of closing.
 
In December 2021, we sold to the County of Maui the fee simple interest in a 1.065 acre property in West Maui, otherwise known as Lot B-1 of the Gorilla Foundation Subdivision, for $0.1 million.
 
In December 2020, we sold to the County of Maui a 5.1 acre, agricultural zoned parcel in West Maui for $0.6 million expanded storage capacity of its recycled water system.
 
During the six months ended June 30, 2020, Kapalua Realty Company, Ltd., provided licensed, general brokerage services for properties in the Kapalua Resort and surrounding areas. We earned sales commissions of $0.2 million during the year ended December 31, 2020. Effective July 1, 2020, we entered into an office lease agreement and license agreement with a real estate company to provide general brokerage services to the area. Under terms of the license agreement, monthly royalty fees are received for the use of certain of our trademarks. No sales commissions were earned during the year ended December 31, 2021.
 
Real estate development expenditures were $0.1 million and $0.4 million during the years ended December 31, 2021 and 2020, respectively.
 
Real estate development and sales are cyclical and depend on several factors. Results for one period are therefore not necessarily indicative of future performance trends in this business segment.
 
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LEASING
 
 
Years Ended December 31,
 
 
 
2021
 
 
2020
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
$
8,103
 
 
$
5,948
 
Operating costs and expenses
 
 
(3,495
)
 
 
(2,933
)
Operating income
 
$
4,608
 
 
$
3,015
 
 
Leasing operating revenues for the year ended December 31, 2021, were comprised of $6.2 million from commercial, industrial, and agricultural leases, $0.7 million of licensing fees from our registered trademarks and trade names, and $1.2 million from potable and non-potable water system sales. This compares to $4.3 million from commercial, industrial, and agricultural leases, $0.5 million of licensing fees from our registered trademarks and trade names, and $1.1 million from potable and non-potable water system sales for the year ended December 31, 2020.
 
The increase in leasing operating revenues for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to higher percentage rental income from our commercial leasing portfolio. Certain rental income is contingent upon the sales of the tenant exceeding a defined threshold and recognized as a percentage of sales after those thresholds are achieved. Percentage rental income was $1.5 million and $0.4 million during the years ended December 31, 2021 and 2020, respectively. The impact of COVID-19 travel restrictions and social distancing measures reduced visitor traffic on the island of Maui which affected tenants’ sales in 2020. Rent abatements of $0.4 million were granted to tenants during 2020.
 
The increase in leasing operating costs and expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to higher repairs and maintenance costs for our commercial leasing portfolio properties. In addition, expenses related to the repair of non-potable irrigation ditch and transmission systems damaged from Tropical Storm Olivia in October 2018 were reduced by insurance reimbursements of $0.2 million in 2020.
 
Our leasing operations face substantial competition from other property owners in Maui and Hawaii.
 
RESORT AMENITIES
 
 
Years Ended December 31,
 
 
 
2021
 
 
2020
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
$
940
 
 
$
820
 
Operating costs and expenses
 
 
(1,355
)
 
 
(1,193
)
Operating loss
 
$
(415
)
 
$
(373
)
 
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, a private pool-side dining beach club, and two 18-hole championship golf courses. The Kapalua Club does not own or operate any resort amenities and the member dues collected are primarily used to pay contracted fees to provide access for its members to the spa, beach club and other resort amenities.
 
Kapalua Club membership dues rates were increased for the year ended December 31, 2021 to offset higher contracted fee expenses. During a portion of the year ended December 31, 2020, access to certain facilities and amenities was restricted due to public health measures and regulations related to COVID-19. As a result of these facility closures, a partial refund of member dues was issued resulting in lower than anticipated operating revenues in 2020.
 
Contracted fee expenses correspondingly increased for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to higher contracted golf course fees charged to the Company.
 
Member dues may be affected in future periods depending on the impact of COVID-19 on public health measures and travel regulations.
 
OTHER INCOME
 
We held a 51% ownership interest in Kapalua Bay Holdings, LLC (“KBH”). In 2009, the investment was written down to zero. In May 2020, as part of the dissolution of KBH, we received $0.9 million as a return of cash collateral related to an owner-controlled insurance program. We received final closing distribution of $13,000 from KBH in March 2021.
 
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PENSION EXPENSE
 
In November 2021, the Company signed a purchase agreement with an insurer to annuitize the scheduled pension payments of 384 participants currently receiving benefits. Approximately $10.4 million was paid to the insurer from plan assets for the group annuity contract. A settlement charge of $4.3 million was recognized in pension expense as a result of the annuity purchase.
 
INTEREST EXPENSE
 
In 2021 and 2020, our interest expense was approximately $0.1 million. At December 31, 2021 and 2020, the interest rate on our Credit Facility with First Hawaiian Bank was 2.12% and 3.65%, respectively.
 
DISCONTINUED OPERATIONS
 
In December 2019, we entered into an Asset Purchase Agreement (“Agreement”) to sell the assets of Kapalua Water Company, Ltd. (“KWC”) and Kapalua Waste Treatment Company, Ltd. (“KWT”) located in the Kapalua Resort subject to certain closing conditions, including completion of due diligence and approval by the State of Hawaii Public Utilities Commission (“PUC”). As part of the agreement, the purchaser commited to serve the future expansion areas of Kapalua as they are developed. In return, we agreed to deliver water from our wells and ditches to certain delivery points at defined rates over an initial period of 20 years from the date of closing. The purchase price did not include approximately $3.6 million of water system infrastructure and other related assets conveyed to us by the owner of a 125-acre portion of the Kapalua Mauka project.
 
Upon entering the Agreement, these assets were classified as held for sale, written down to their fair value, and included in discontinued operations for the years ended December 31, 2021 and 2020.
 
In March 2021, the sale was approved by the PUC subject to certain closing conditions of its Decision and Order. The Company received net proceeds of approximately $4.2 million upon closing of the sale in May 2021.
 
IMPACT OF COVID-19
 
In March 2020, the Governor of the State of Hawaii issued “stay-at-home” orders for its residents and visitors, followed by subsequent “safer-at-home” and “act with care” proclamations in response to the COVID-19 pandemic. In addition, the Governor issued emergency proclamations, pursuant to which all transpacific passengers into the State of Hawaii were required to self-quarantine upon entry. Beginning in October 2020, travelers to the State of Hawaii were able avoid the 10-day quarantine requirement under a pre-travel testing program by presenting a proof of a negative result from a valid COVID-19 Nucleic Acid Amplification Test. Throughout the year ended December 31, 2021, several state and local laws have eased social distancing guidelines and travel restrictions, including the elimination of quarantine restrictions for domestic travelers by providing evidence of full vaccination.
 
However, the ongoing impacts and disruptions caused by the COVID-19 pandemic in the geographic region in which we operate remain uncertain as of the date of this filing. State and local regulations and measures, including physical distancing, capacity, and proof of vaccination requirements at certain establishments, are periodically adjusted based on public health data such as positivity rates, vaccination counts, and hospital occupancies. The extent to which the COVID-19 pandemic will impact our business, financial condition, and results of operations in the future is highly uncertain and will be affected by a number of factors. These include the duration and extent of the COVID-19 pandemic, the development of new variants of the COVID-19 virus that may be more contagious or virulent than prior versions, the scope of mandated or recommended containment and mitigation measures, the effect of government stabilization and recovery efforts, and the success of vaccine distribution programs.
 
We continue to monitor the effects of the COVID-19 pandemic on us, our customers, and our vendors. While we are not able to accurately predict the magnitude or scope of such impacts at this time, should the existence of the COVID-19 pandemic continue for an extended period, our future business operations, including the results of operations, cash flows and financial position will be significantly affected. Appropriate remote work arrangements continue to be established for our employees in order to maintain our financial reporting systems.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity
 
We had cash on hand of $5.6 million and $0.9 million as of December 31, 2021 and 2020, respectively. We also had $15.0 million and $14.8 million of available credit under a $15.0 million revolving line of credit facility with First Hawaiian Bank (“Credit Facility”) as of December 31, 2021 and 2020, respectively.
 
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On December 23, 2021, we executed a Fourth Loan Modification Agreement and Second Amended and Restated Credit Agreement (“Agreements”) extending the maturity date of the Credit Facility to December 31, 2025. The Agreements provide revolving or term loan borrowing options. Interest on revolving borrowing is calculated based on 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.
 
As of December 31, 2021, we were in compliance with the covenants under the Credit Facility.
 
Cash Flows
 
Net cash flow provided by our operating activities totaled $1.4 million for the year ended December 31, 2021. Interest payments on our long-term debt totaled $9,000 for the year ended December 31, 2021.
 
Minimum funding contributions of $0.6 million were made to our defined benefit pension plan in January 2021. We made an additional voluntary contribution of $1.0 million to the plan in August 2021. We are not required to make any additional contributions in 2022.
 
Future Cash Inflows and Outflows
 
In December 2021, the Company entered into a purchase and sale agreement in an amount of $40.0 million for a 46-acre parcel located within Kapalua Central Resort. The sale is subject to customary diligence and closing conditions. We anticipate the transaction to close no later than March 31, 2022.
 
In February 2022, we entered into an agreement to sell a 646-acre parcel located in Upcountry Maui for $9.7 million. Terms of the agreement include a 30-day due diligence period, a closing date 30 days after the last day of the due diligence period, and other customary closing conditions. A $2.0 million refundable deposit was received into escrow.
 
Our business initiatives include investing in our operating infrastructure and continued planning and entitlement efforts on our development projects. At times, this may require borrowing under our Credit Facility or other indebtedness, repayment of which may be dependent on selling of our real estate assets at acceptable prices in condensed timeframes.
 
Our indebtedness could have the effect of, among other things, increasing our exposure to general adverse economic and industry conditions, limiting our flexibility in planning for, or reacting to, changes in our business and industry, and limiting our ability to borrow additional funds.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Our accounting policies are described in Note 1 to our financial statements set forth in Item 8 of this Annual Report. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of accounting estimates. Some of these estimates and assumptions involve a high level of subjectivity and judgment and therefore the impact of a change in these estimates and assumptions could materially affect the amounts reported in our financial statements. The accounting policies and estimates that we have identified as being critical to our financial statements are as follows:
 
 
•
Our long-lived assets are reviewed for impairment if events or circumstances indicate that the carrying amount of the long-lived asset may not be recoverable. These asset impairment loss analyses contain uncertainties because they require management to make assumptions and apply considerable judgments to, among others, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets; thus, the accounting estimates may change from period to period. If management uses different assumptions or if different conditions occur in future periods, our financial condition or future operating results could be materially impacted.
 
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•
Deferred development costs consist principally of predevelopment and offsite development costs related to various projects in the planning stages by our real estate segment. Based on our future development plans for the Kapalua Resort and other properties, and the estimated value of these future projects, we have concluded that our deferred development costs will be recoverable from our future development projects. Our assumptions and estimates could be subject to significant change because of the long-term nature of our development plans and the uncertainty of when or if certain projects will be developed.
 
 
•
Assets are classified as held for sale when management approves and commits to a plan to sell the property; the property is available for immediate sale in its present condition, subject only to terms that are usual and customary; an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; the sale of the property is probable and is expected to be completed within one year; the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Assets held for sale are stated at the lower of net book value or estimated fair value less cost to sell.
 
 
•
Sales of real estate assets that are considered central to our ongoing major operations are classified as real estate sales revenue, along with any associated cost of sales, in our consolidated statements of operations and comprehensive loss. Sales of real estate assets that are considered peripheral or incidental transactions to our ongoing major or central operations are reflected as net gains or losses in our consolidated statements of operations and comprehensive loss.
 
 
•
If the sale of a real estate asset represents a strategic shift that has, or will have, a major effect on our operations, such as the discontinuance of a business segment, then the operations of the property, including any interest expense directly attributable to it, are classified as discontinued operations, and amounts for all prior periods presented are reclassified from continuing operations to discontinued operations. The disposal of an individual property generally will not represent a strategic shift and, therefore, will typically not meet the criteria for classification as discontinued operations.
 
 
•
Determining pension expense and obligations for our defined benefit pension plan utilizes actuarial estimates of participants’ age at retirement, life span, the long-term rate of return on investments and other factors. In addition, pension expense is sensitive to the discount rate utilized to value the pension obligation. These assumptions are subject to the risk of change as they require significant judgment and have inherent uncertainties that management or its consulting actuaries may not control or anticipate. A detailed discussion of our defined benefit pension plans is contained in Note 6 to our financial statements set forth in Item 8 of this Annual Report.
 
 
•
Management calculates the income tax provision, current and deferred income taxes, and tax credits along with the valuation allowance based upon various complex estimates and interpretations of income tax laws and regulations. Deferred tax assets and tax credits are reduced by a valuation allowance to the extent that it is more likely than not that they will not be realized. To the extent we begin to generate taxable income in future years, and it is determined the valuation allowance is no longer required, the tax benefit for the remaining deferred tax assets and tax credits will be recognized at such time. A detailed discussion of our income taxes is contained in Note 8 to our financial statements set forth in Item 8 of this Annual Report.
 
 
•
Our results of operations could be affected by significant litigation or contingencies adverse to the Company, including, but not limited to, liability claims, environmental matters, and contract terminations. We record accruals for legal matters when the information available indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We make adjustments to these accruals to reflect the impact and status of negotiations, settlements, rulings, advice of legal counsel and other information and events that may pertain to a particular matter. Predicting the outcome of claims and lawsuits and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from those estimates. In making determinations of likely outcomes of litigation matters, we consider many factors. These factors include, but are not limited to, the nature of specific claims, our experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative dispute resolution mechanisms and the matter’s current status. A detailed discussion of significant litigation matters and contingencies is contained in Note 12 to our financial statements set forth in Item 8 of this Annual Report.
 
IMPACT OF INFLATION AND CHANGING PRICES
 
Most of the land we own was acquired from 1911 to 1932 and is carried at cost. At the Kapalua Resort, some of the fixed assets were constructed and placed in service in the mid-to-late 1970’s. Depreciation expense would be considerably higher if fixed assets were stated at current replacement cost.
 
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OFF-BALANCE SHEET ARRANGEMENTS
 
As of December 31, 2021, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
 
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Because we were a smaller reporting company, as defined in Item 10(f)(1) of SEC Regulation S-K in 2021, we are not required to provide the information required by this Item.
 
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