Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition, results of operations, and liquidity and capital resources should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto and the financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2017 (
“
2017 Annual Report
”
). This discussion includes forward-looking statements that are subject to risks, uncertainties and other factors that could cause our actual results for this fiscal year and periods that follow to differ materially from those contemplated by these forward-looking statements. Factors that could cause or contribute to such differences include those identified below under the heading
“
Disclosure Regarding Forward-Looking Statements
”
and those described in Part I, Item 1A – Risk Factors in our 2017 Annual Report on Form 10-K.
Overview
Royal Hawaiian Orchards, L.P. (the “Partnership”) is a producer, marketer and distributor of high-quality macadamia nuts. We are the largest macadamia nut farmer in the State of Hawaii, farming approximately 5,095 tree acres of orchards that we own or lease in two locations on the island of Hawaii, including 641 tree acres that we own and lease to another party. We also farm approximately 433 tree acres of macadamia orchards on the island of Hawaii for other orchard owners.
The Partnership was formed in 1986 as a master limited partnership.
Recent Developments
Settlement Agreement with the Olson Trust
We entered into a Definitive Terms of Settlement Agreement (the “Settlement Agreement”) on February 14, 2017, with Edmund C. Olson as Trustee for the EDMUND C. OLSON TRUST No. 2 dated August 21, 1985 (the “Olson Trust”). On February 22, 2018, the Partnership and Olson Trust completed substantially all of the transactions contemplated by the Settlement Agreement with the exception of small parcels subject to legal partition, including the parcel underlying the Partnership’s garage and field office. Pursuant to the Settlement Agreement, we gained ownership of 653 acres of land, which includes the land underlying 382 acres of our trees and the land underlying our husking and drying plants, and we will gain ownership of the land underlying our garage and field office. We relinquished 515 acres of leased land (the lease for 423 acres of which was scheduled to expire in 2034 and 92 acres of which was scheduled to expire in 2045), including 348 acres of owned trees, and 30 acres of owned land, including 24 acres of owned trees. We recognized $380,000 of gain as a result of the exchange orchards for land.
Divestiture of brands and macadamia nut snack business
On March 14, 2018, we completed the sale of our brands and macadamia snack business to MacFarms, LLC (“MacFarms”). MacFarms acquired all assets that were used in the marketing and retail sales of macadamia nuts under our trademark and trade-name brands, including but not limited to the ROYAL HAWAIIAN ORCHARDS® trademark, for 11,220,242 ordinary fully paid shares, approximately 13% of the issued shares, in Buderim Group Limited (ASX:BUG), the parent company of MacFarms. As part of the transaction, we entered into a supply agreement with MacFarms to sell kernel at market prices based on our kernel sales internationally. In addition, the Partnership and MacFarms entered into agreements to process each other’s WIS nuts as needed and to explore joint investment in a processing facility in Hawaii. Three employees involved in the macadamia snack business became employees of MacFarms. Our branded products segment will continue to market bulk macadamia nut kernel to MacFarms and other customers.
For additional details of the terms of the sale of the brands and macadamia nut snack business, see our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 28, 2018.
The results of our previous macadamia snack business have been presented as discontinued operations. See Note 3 –
Discontinued Operations
, in the accompanying financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Reverse Split
On March 19, 2018, the Partnership issued a press release announcing the filing with the U.S. Securities and Exchange Commission of a Schedule 14C Information Statement (“Information Statement”) to inform the limited partners that limited partners holding approximately 85% of the Partnership’s outstanding Class A Units have adopted resolutions by majority written consent in lieu of a meeting of limited partners approving amendments to the Partnership’s Amended and Restated Agreement of Limited Partnership, which, among other things, authorize Royal Hawaiian Resources, Inc. (the “Managing Partner” or “RHR”) to effect pro rata splits and combinations of partnership interests, including reverse splits. The Information Statement further informs the limited partners that the Managing Partner has authorized a reverse split of our Class A Units on the basis of one post-split Unit for each 2000 pre-split Units, and the Partnership has filed a Schedule 13E-3 under Rule 13e-3 for a “going private transaction” in connection with the reverse split.
Our Operations
We have two business segments: orchards and branded products. The orchards segment includes our orchard, farming and processing operations. The branded products segment includes the marketing and sale of processed (“bulk”) kernel through our wholly-owned subsidiary Hawaiian Macadamia Nut Company (formerly Royal Hawaiian Macadamia Nut, Inc.) (“HMNC”).
Our orchards segment derives its revenues from the sale of wet-in-shell (“WIS”) macadamia nuts grown in orchards we own or lease, the sale of macadamia nut kernel to HMNC, the farming of macadamia orchards owned by other growers and leasing orchards. Our financial results are principally driven by nut production, which is seasonal and highly contingent upon Hawaii’s climatic conditions and nut prices. The macadamia crop year in Hawaii runs from July 1 through June 30, with nuts generally being harvested from August through April. Nut production is generally highest during the third and fourth quarters of the calendar year, with very low production in the first quarter and little or no production in the second quarter. Nut production in the first half of the year is the result of pollination and nut-set that occurs during April through July or August of the previous year. Factors such as cool temperatures to promote flower development, sunlight, adequate moisture and its distribution determine the length of the flower pollination/nut-set season.
Subsequent to the sale of the Royal Hawaiian Orchards brand to MacFarms, our branded products segment derives its revenues from the sale of bulk macadamia nuts to MacFarms pursuant to a supply agreement and from sales to macadamia nut buyers throughout the world. Sales of bulk macadamia nut are dependent on the overall world market for macadamia nuts.
How We Evaluate Our Business
In operating our business and monitoring its performance, we pay attention to trends in the global and local macadamia nut industries and the food manufacturing industry. Management evaluates the performance of each segment on the basis of operating income, revenue growth and cash flow. In addition, we manage our orchards segment based on increased nut-in-shell productivity, farming costs, kernel recovery, cost stabilization and cash flow generation to support and fund other Partnership priorities. We manage our branded products segment based on sales, gross margins and selling expenses. The Partnership accounts for intersegment sales and transfers at cost plus a mark-up, and such transactions are eliminated in consolidation.
Factors that May Affect Our Results of Operations
Macadamia nut production is very seasonal, with the largest quantities typically being produced and added to inventory from September through November, resulting in large inventories that will be processed into kernel and then sold throughout the year.
A substantial portion of our WIS revenues occur from September through February. Weather conditions may affect yields and delay harvesting, which may result in higher or lower than normal production and revenues within a particular fiscal quarter or fiscal year. In the first six months of 2017, our crop was larger than average due to a later than average start of the 2016-2017 crop year, which caused more of the crop to be harvested in the first half of 2017. Harvest of our 2017-2018 crop started in mid-July compared to the 2016-2017 crop year when the harvest started in late August.
We have three long-term nut purchase agreements with Mauna Loa Macadamia Nut Corporation (“Mauna Loa”), expiring in 2029, 2078 and 2080. Under these agreements, all macadamia nuts produced from the orchards acquired from International Air Service Co., Ltd. (“IASCO”), which represented approximately 23% of our production in 2017, must be sold to and purchased by Mauna Loa at a predetermined price as described below.
Under the IASCO agreements, we are paid based on WIS pounds at a price that is derived annually from a formula that factors in the Mauna Loa wholesale price of the highest year-to-date volume fancy and choice products sold in Hawaii and the U.S. Department of Agriculture National Agricultural Statistics Service (“NASS”) reported price of WIS Hawaii macadamia nuts for the period of delivery. If the Final NASS Report for the year contains a price or moisture that varies from that used in the formula price calculations for nuts delivered during the year, then an adjustment is made between the parties. The NASS nut price for the crop year ended June 30, 2017 was $1.00 per WIS pound compared to $0.97 per WIS pound in 2016.
On March 14, 2018, we entered into an Agreement for the Sale of Macadamia Kernel with MacFarms, expiring March 13, 2023, unless extended by the parties. Pursuant to this agreement, MacFarms will purchase at least 780,000 pounds of macadamia kernel per year and will pay market prices based on the international market for macadamia nuts determined by an average of macadamia kernel prices for the respective styles of kernel sold by us for the prior six months less any adjustments for quantity, or as agreed upon by the Parties from time to time.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain of our accounting policies, including estimates of deferred farming costs, accrual for workers’ compensation claims, assumptions used to determine employee benefit obligations, valuation of long-lived and intangible assets, carrying value of inventories, revenue recognition and accounts receivable, the calculation of our income tax liabilities, and allocation of general and administrative costs to subsidiaries, require management to make significant judgments in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to a degree of uncertainty. Management’s judgments are based on historical experience, terms of existing contracts, observance of trends in the industry, crop information provided by customers and information available from outside sources, as appropriate. Actual results may differ from these estimates. To provide an understanding of the methodology applied, significant accounting policies are discussed where appropriate in this discussion and analysis and in the notes to consolidated financial statements in our 2017 Annual Report.
Results of Operations
Consolidated Revenues, Cost of Revenues and Gross Profit
For the three months ended March 31, 2018, net revenue decreased $2.1 million or 29% compared to the same period in 2017. The decrease in the three-month period was due to a $1.8 million decrease in revenues from branded products due to lower bulk sales and a $262,000 decrease in orchard revenue due to lower production in the IASCO orchards compared to the same period in 2017. Bulk sales were lower in the first quarter due to lower inventory balances at the end of 2017 compared to the end of 2016 so less kernel was available to sell. Also, production in the first quarter of 2017 was higher than average due to a late harvest which pushed volume and revenue into 2017. Lower production in 2018 was somewhat offset by higher prices for WIS macadamia nuts and macadamia kernel.
For the three months ended March 31, 2018, cost of revenues decreased $2.2 million or 37%, compared to the same period in 2017 due to a decrease in bulk sales and due to lower costs per pound than in 2017. The 2018 bulk kernel sold from the 2017 crop had a lower cost per pound compared to nuts from 2017 sold from the 2016 crop due to the lower crop yields in 2016 that resulted in higher costs per pound compared to the 2017 nuts.
We generated a gross profit of $1.2 million and a gross margin of 25%, compared to gross profit of $1.1 million and gross margin of 15% for the same period in 2017. Lower revenue was more than offset by lower costs due to the lower cost per pound of the 2017 crop that was sold in the first quarter of 2018.
Orchards Segment
The orchards segment derives its revenues from the sale of WIS macadamia nuts, the sale of macadamia nut kernel to HMNC pursuant to an intercompany supply agreement, contract farming, and leasing orchards.
The tables below show revenues, costs of revenues and gross profit and other financial information for our orchards segment for the three months ended March 31, 2018 and 2017. See Note 5
– Segment Information
to the accompanying financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of orchards segment results to our consolidated results.
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
% Change
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
|
$
|
1,908
|
|
|
$
|
2,170
|
|
|
$
|
(262
|
)
|
|
|
-12
|
%
|
Intersegment revenue (HMNC)
|
|
|
3,377
|
|
|
|
3,620
|
|
|
|
(243
|
)
|
|
|
-7
|
%
|
Total revenue
|
|
$
|
5,285
|
|
|
$
|
5,790
|
|
|
$
|
(505
|
)
|
|
|
-9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of orchards revenue
|
|
$
|
4,655
|
|
|
$
|
5,602
|
|
|
$
|
(947
|
)
|
|
|
-17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
204
|
|
|
$
|
(109
|
)
|
|
$
|
313
|
|
|
|
287
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
780
|
|
|
$
|
761
|
|
|
$
|
19
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
1,436
|
|
|
$
|
16
|
|
|
$
|
1,420
|
|
|
|
8875
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
81,481
|
|
|
$
|
71,432
|
|
|
$
|
10,049
|
|
|
|
14
|
%
|
Revenues from external customers decreased $262,000 for the three months ended March 31, 2018, as compared to the same period in 2017. The decrease was due to lower production from the IASCO orchards compared to 2017 resulting from an earlier start to the fall 2017 harvest than the fall 2016 harvest when a late harvest resulted in a larger than average spring 2017 crop. For the three-month period ended March 31, 2018, intersegment revenue (sales to HMNC) decreased $243,000 due to lower inventories at the end of 2017 compared to the end of 2016 when the late harvest resulted in greater than average inventory. Segment revenue for sales to HMNC is recognized after the nuts have been husked, dried and shelled.
For the three months ended March 31, 2018, cost of orchards revenue decreased $947,000. The decrease in cost of orchards revenue for the three months ended March 31, 2018, compared to the same period in 2017 was due to the lower revenues and lower costs per pound. Cost of orchards revenue was higher for the three months ended March 31, 2017, due to higher volume and due to a historically low calendar year 2016 crop, which resulted in higher costs per pound for intersegment sales.
For the three months ended March 31, 2018, we had operating income of $204,000 compared to an operating loss of $109,000 in the same period in 2017. The increase in operating income for the three months ended March 31, 2018, as compared to the same period in 2017, was due to higher margins on our crop due to lower costs per pound compared to 2017.
For the three months ended March 31, 2018 and 2017, WIS nut production was 4.5 million pounds and 5.2 million pounds, respectively. The decrease in production in 2018 as compared to the same period in 2017 was due to a late crop in 2016 which resulted in some production shifting into the first half of 2017 and due to the fall harvest starting earlier in 2017 than in 2016 so that less production carried over to 2018.
Farming costs are recognized when our products are sold to external customers. Farming costs related to WIS nuts are capitalized as deferred farming costs or WIS inventory until sold to external customers. Farming costs related to our branded products are initially capitalized as deferred farming costs and subsequently added to our branded products inventory until sold to external customers.
Branded Products Segment
Our branded products segment derives its revenues from the sale of bulk macadamia nuts reported under HMNC. Financial information for our branded products segment excluding discontinued operations for the three months ended March 31, 2018 and 2017, are set forth in the following tables.
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
March 31, 2017
|
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenues
|
|
$
|
3,127
|
|
|
|
|
|
|
|
$
|
4,946
|
|
|
|
|
|
|
|
$
|
(1,819
|
)
|
|
|
-37
|
%
|
Cost of revenues
|
|
|
2,522
|
|
|
|
81
|
%
|
(1)
|
|
|
4,013
|
|
|
|
81
|
%
|
(1)
|
|
|
(1,491
|
)
|
|
|
-37
|
%
|
Gross profit
|
|
|
605
|
|
|
|
19
|
%
|
(1)
|
|
|
933
|
|
|
|
19
|
%
|
(1)
|
|
|
(328
|
)
|
|
|
-35
|
%
|
General and administrative expenses
|
|
|
111
|
|
|
|
4
|
%
|
(1)
|
|
|
146
|
|
|
|
3
|
%
|
(1)
|
|
|
(35
|
)
|
|
|
-24
|
%
|
Selling expenses
|
|
|
39
|
|
|
|
1
|
%
|
(1)
|
|
|
162
|
|
|
|
3
|
%
|
(1)
|
|
|
(123
|
)
|
|
|
-76
|
%
|
Operating income
|
|
$
|
455
|
|
|
|
15
|
%
|
(1)
|
|
$
|
625
|
|
|
|
13
|
%
|
(1)
|
|
$
|
(170
|
)
|
|
|
27
|
%
|
(1) As a percentage of revenues.
Gross segment revenue for the three months ended March 31, 2018, decreased $1.8 million compared to the same period in 2017, due to lower sales of bulk kernel. Lower bulk revenue was due to lower inventory balances at the year ended 2017 compared to 2016 so less kernel was available in the first quarter 2018 to sell and also an increased amount of kernel used by the snack business included in discontinued operations.
Cost of revenues (excluding inter-segment eliminations) for the three months ended March 31, 2018, decreased by $1.5 million (37%) compared to the same period in 2017. The cost of revenues decreased for the three months ended March 31, 2018, due to lower bulk sales. Cost of revenues as a percentage of revenue for three months ended March 31, 2018, was approximately the same as cost of revenues for the same period in 2017. Our prices for intersegment sales of kernel from the orchards to branded products are set pursuant to an intercompany agreement at cost plus a mark-up.
Operating income for the branded products segment for the three months ended March 31, 2018, decreased $170,000 from operating income in the same period in 2017 mainly due to lower revenues. Selling expenses decreased due to decreased personnel costs as a result of cuts in expenditures at the end of the first quarter of 2017.
General and Administrative Expenses
General and administrative expenses on a consolidated basis were $536,000 and $443,000 for the three months ended March 31, 2018 and 2017, respectively. The increase in general and administrative expenses in the three months ended March 31, 2018, compared to 2017, was attributable to higher legal fees and officer compensation as compared to 2017.
Selling Expenses
Selling expenses on a consolidated basis were $39,000 and $162,000 for the three months ended March 31, 2018 and 2017, respectively. The decrease in selling expenses in 2018 was attributable to lower commissions and freight due to a lower volume of bulk kernel sales compared to 2017.
Interest Income and Expense
Interest expense, net of interest income, for the three months ended March 31, 2018, was $68,000 compared to $262,000 for the same period in 2017. The decrease in the three months ended March 31, 2018, was due to (i) a lower balance outstanding on the line of credit as a result of payments from operating cash flow and from proceeds from the rights offering, (ii) repayment of the 2015 bridge loan incurred in connection with the Becker Property Acquisition and a 2010 term loan in May 2017, and (iii) $29,000 of interest income earned on cash balances.
Net Gain (Loss) on Sale of Property and Equipment
For the three months ended March 31, 2018 and 2017, we had a gain of $380,000 and $0, respectively, from continuing operations. The gain of $380,000 was a non-cash gain due to the exchange of orchards for land under the Settlement Agreement with Olson Trust.
Other Income (Loss)
Other income, net of other expense, was $18,000 and $126,000 for the three months ended March 31, 2018 and 2017, respectively. Other income for the three-month period ended March 31, 2018, was primarily comprised of amounts received from an insurance adjustment. The other income for the three months ended March 31, 2017, was primarily attributable to a patronage dividend from AgCredit.
For the three months ended March 31, 2018, we recorded an unrealized loss on marketable securities of $380,000. We had no marketable securities at March 31, 2017.
Net Income from Continuing Operations
For the three months ended March 31, 2018, we had net income from continuing operations of $587,000 compared to net income from continuing operations of $345,000 for the same period in 2017. The increase in net income for the three-month period ended March 31, 2018, was primarily due to increased gross margin from our orchard segment due to lower nut costs from the 2017 crop sold in the first three months of 2018 compared to the costs of the 2016 crop sold in the first three months of 2017.
Income Taxes
The Partnership is subject to a gross income tax as a result of our election to continue to be taxed as a partnership rather than as a corporation, as allowed by the Taxpayer Relief Act of 1997. This tax is calculated at 3.5% on partnership gross income (revenues less cost of revenues). For the three months ended March 31, 2018 and 2017, gross income tax expense was $34,000 and $5,000, respectively. Income tax expense increased due to higher gross income and due to the taxable gain from the exchange of macadamia trees to the Olson Trust for land.
Our wholly owned subsidiary, HMNC, is subject to taxation as a C corporation at the current federal tax rate of 21% and a blended state tax rate of approximately 6.9% on the corporation’s taxable income (loss). As a result of the cumulative tax losses of HMNC, the balance of our deferred tax asset at March 31, 2018, was $1.3 million, against which we have recorded a valuation allowance equal to 100% of the deferred tax asset due to the uncertainty regarding future realization of HMNC’s net operating loss carry-forwards.
Liquidity and Capital Resources
Our businesses are seasonal. Production from our orchard segment normally peaks in the fall and winter; however, farming operations continue year-round.
(in thousands)
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Cash and cash equivalents
|
|
$
|
12,061
|
|
|
$
|
9,355
|
|
Marketable securities
|
|
|
2,803
|
|
|
|
-
|
|
Accounts receivable
|
|
|
3,141
|
|
|
|
5,659
|
|
Inventories
|
|
|
5,581
|
|
|
|
5,535
|
|
Accounts payable
|
|
|
743
|
|
|
|
948
|
|
Accrued payroll and benefits
|
|
|
821
|
|
|
|
690
|
|
Net working capital
(1)
|
|
|
20,749
|
|
|
|
19,082
|
|
(1)
|
Working capital consists of total current assets less total current liabilities.
|
At March 31, 2018, our working capital was $20.7 million and our current ratio (current assets/current liabilities) was 6.94-to-1, compared to working capital of $19.1 million and a current ratio of 6.95-to-1 at December 31, 2017. Reductions in current assets of discontinued operations were offset with increased cash and marketable securities from the sale of the brands and snack business. We believe that as of the date of the filing of this quarterly report on Form 10-Q, we have sufficient working capital to fund our operations for the next 12 months.
Debt
As of the indicated dates, we had the following long-term debt outstanding (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Long-Term Debt
|
|
|
|
|
|
|
|
|
Revolving Credit Facility (due 2020)
(1)
|
|
$
|
-
|
|
|
$
|
-
|
|
2015 6-Year Term Loan (due 2021)
|
|
|
2,625
|
|
|
|
2,844
|
|
2015 20-Year Term Loan (due 2035)
|
|
|
4,541
|
|
|
|
4,607
|
|
Other
|
|
|
98
|
|
|
|
105
|
|
Total principal amount of long-term debt
|
|
|
7,264
|
|
|
|
7,556
|
|
Less: unamortized debt issuance costs
|
|
|
(107
|
)
|
|
|
(111
|
)
|
|
|
|
7,157
|
|
|
|
7,445
|
|
Less: current portion of long-term debt
|
|
|
(1,015
|
)
|
|
|
(1,015
|
)
|
Total long-term debt outstanding
|
|
$
|
6,142
|
|
|
$
|
6,430
|
|
______________________
|
(1)
|
On July 13, 2017, the maturity date was extended to July 15, 2020
.
|
The following table summarizes the Partnership’s principal maturities of its debt (in thousands):
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2018
(1)
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Remaining
|
|
Debt
|
|
$
|
7,264
|
|
|
$
|
735
|
|
|
$
|
1,167
|
|
|
$
|
1,169
|
|
|
$
|
564
|
|
|
$
|
272
|
|
|
$
|
3,357
|
|
_________________________
(1) For remainder of 2018.
Credit Agreement with AgCredit PCA
.
On March 27, 2015, the Partnership and each of its wholly-owned subsidiaries, the Managing Partner through June 2016, HMNC and Royal Hawaiian Services, LLC (“RHS”), as the borrowers, and American AgCredit PCA (“AgCredit PCA”), as lender and as agent for such other persons who may be added as lenders from time to time, entered into an Amended and Restated Credit Agreement (as it may be further amended, restated, modified or supplemented from time to time, the “PCA Credit Agreement.”). Set forth below is a summary of the borrowings provided for by the PCA Credit Agreement:
Revolving Credit Facility.
The PCA Credit Agreement provides for a $9 million revolving credit facility (the “Revolving Credit Facility”), which was scheduled to mature on July 15, 2017. On July 13, 2017, we entered into the Seventh Amendment to Amended and Restated Credit Agreement (the “Seventh PCA Credit Agreement Amendment”) with AgCredit PCA. The Seventh PCA Credit Agreement Amendment extended the maturity date by three years to July 15, 2020. Advances under the Revolving Credit Facility bear interest based on an election made by us at the time of the advance at either LIBOR rates or at the base rate of the higher of (a) one-half of one percent (0.50%) per annum in excess of the latest Federal Funds Rate (as defined in the PCA Credit Agreement); and (b) the prime rate of interest in effect for such day as published from time to time in
The Wall Street Journal
. We are required to pay a fee of 0.375% per annum on the daily unused portion of the Revolving Credit Facility. The interest rate on the Revolving Credit Facility at March 31, 2018, was 5.25% per annum.
As of both March 31, 2018 and December 31, 2017, there was no outstanding balance on the Revolving Credit Facility.
2015 6-Year Term Loan.
The PCA Credit Agreement provides for a six-year term loan of $5.25 million, which matures on March 27, 2021 (the “2015 6-Year Term Loan”). The 2015 6-Year Term Loan bears interest at a fixed rate of 4.01% per annum. We used the proceeds of the 2015 6-Year Term Loan to replace working capital used to construct Phase 1 of our drying plant and to finance the construction of Phase 2 of our drying plant. As of March 31, 2018 and December 31, 2017, the outstanding balance on the 2015 6-Year Term Loan was $2.625 million and $2.844 million, respectively.
The borrowings pursuant to the PCA Credit Agreement are collateralized by all of our personal and real property assets, including a second priority interest in the properties acquired in the June 2015 acquisition by the Partnership of 736 acres of land, including improvements, 641 acres of macadamia nut trees, and windbreak trees (the “Becker Property Acquisition”). The PCA Credit Agreement contains certain restrictions associated with partner distributions, further indebtedness, sales of assets, and maintenance of certain financial covenants, including minimum consolidated tangible net worth commencing with the fiscal year ending December 31, 2017, and minimum Consolidated EBITDA (as defined below). Under the PCA Credit Agreement, we are required to achieve minimum Consolidated EBITDA for the four-quarter period ending March 31, 2018 and future four-quarter periods ending on the last day of each fiscal quarter as follows:
Fiscal Quarter Ended/Ending
|
|
|
|
|
|
|
|
|
|
December 31, 2017 through September 30, 2018
|
|
|
2,750,000
|
|
December 31, 2018 and each fiscal quarter thereafter
|
|
|
3,000,000
|
|
_________________
(1) Consolidated EBITDA is a non-GAAP financial measure based on the definition of Consolidated EBITDA in the PCA Credit Agreement, which is defined as the sum (without duplication) of (a) consolidated net income determined in accordance with GAAP;
plus
(b) the sum of (i) Federal, state, local and foreign income taxes, (ii) interest expense (including the interest portion of any capitalized lease obligations), (iii) depletion, depreciation, and amortization, and (iv) extraordinary losses;
minus
(c) the sum of (i) gains on asset sales and (ii) extraordinary gains.
Management believes that the Consolidated EBITDA covenant is a material term of the PCA Credit Agreement and that information about the Consolidated EBITDA covenant is material to an investor’s understanding of our performance and ability to comply with our loan covenants. Reconciliation of Consolidated Net Income to Consolidated EBITDA is as follows:
|
|
Four Quarters
ended March 31,
2018
|
|
|
|
(in thousands)
|
|
Consolidated Net Income
|
|
$
|
4,545
|
|
Total interest expense
|
|
|
661
|
|
Income taxes
|
|
|
93
|
|
Depreciation and amortization
|
|
|
3,161
|
|
Gain on sale of assets
|
|
|
(2,275
|
)
|
Consolidated EBITDA
|
|
$
|
6,185
|
|
Credit Agreement with AgCredit FLCA.
Also in connection with the Becker Property Acquisition, we entered into a Credit Agreement, effective June 15, 2015 (the “FLCA Credit Agreement”), with American AgCredit, FLCA (“AgCredit FLCA”), providing for a $5.265 million 20-year term loan that matures on July 1, 2035 (“2015 20-Year Term Loan”). The 2015 20-Year Term Loan bears interest at a fixed rate of 5.29% per annum and requires quarterly payments, with fixed principal reductions, over the term. The FLCA Credit Agreement requires the maintenance of certain financial covenants, including a covenant requiring the Total Indebtedness to Consolidated EBITDA Ratio (as defined in the FLCA Credit Agreement) not to exceed 4.0 to 1.0 as of the last day of each calendar quarter commencing with the calendar quarter ending September 30, 2017. As of March 31, 2018, the Total Indebtedness to Consolidated EBITDA Ratio was 1.17 to 1. We used the proceeds of the 2015 20-Year Term Loan for the Becker Property Acquisition. The 2015 20-Year Term Loan is secured by a mortgage on the properties acquired in the Becker Property Acquisition. As of March 31, 2018 and December 31, 2017, the outstanding balance on the 2015 20-Year Term Loan was $4.541 million and $4.607 million, respectively.
Cash Flows
The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows provided by or used in operating, investing and financing activities and ending cash balance:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Cash and cash equivalents at beginning of period
|
|
$
|
9,355
|
|
|
$
|
1,132
|
|
Net cash provided by operating activities
|
|
|
4,489
|
|
|
|
1,178
|
|
Net cash used in investing activities
|
|
|
(1,492
|
)
|
|
|
(20
|
)
|
Net cash provided by financing activities
|
|
|
(291
|
)
|
|
|
(1,277
|
)
|
Cash and cash equivalents at end of period
|
|
|
12,061
|
|
|
|
1,013
|
|
Operating Cash Flow.
Net cash provided by operating activities for the three months ended March 31, 2018 and 2017, was $4.5 million and $1.2 million, respectively, an increase of $3.3 million. Net income increased $3.4 million for the first three months of 2017, and there were positive changes in asset and liability balances, including a $2.5 million decrease in accounts receivable and a $246,000 increase in inventory and deferred farming cost, which was comprised of an accrual of a $100,000 inventory reserve and a $346,000 change in deferred farming cost. Cash provided by operating activities was $3.3 million more than the cash provided by operating activities in the first three months of 2017.
Investing Cash Flow.
Cash used in investing activities from continuing operations of $1.45 million in the three months ended March 31, 2018, consisted of $1.1 million used for the purchase of a 90 acre orchard, including improvements and equipment, and $310,000 used for equipment purchases. Cash used in investing activities of $20,000 in the three months ended March 31, 2017, was used for small equipment purchases.
Financing Cash Flow.
Financing activities for the three months ended March 31, 2018, consisted of proceeds of $750,000 from the Revolving Credit Facility, payments of $291,000 on our long-term debt and payments of $750,000 on our Revolving Credit Facility.
Financing activities for the three months ended March 31, 2017, consisted of payment on our long-term debt of $777,000, and $500,000 on our Revolving Credit Facility.
Disclosure Regarding Forward-Looking Statements
Statements that are not historical facts contained or incorporated by reference into this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements involve risks and uncertainties that could cause actual results to differ from projected results. The words “anticipate,” “goal,” “seek,” “project,” “strategy,” “future,” “likely,” “may,” “should,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend” and similar expressions and references to future periods, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements include statements we make regarding:
|
●
|
projections of revenues, expenses, income or loss;
|
|
●
|
quarterly results not being indicative of annual performance;
|
|
●
|
trends in our business, including seasonality of nut production and sales of branded products;
|
|
●
|
estimates of deferred farming costs and the timing of the accumulation and recognition of such costs;
|
|
●
|
our plans, objectives and expectations, including those relating to regulatory actions, business plans, products or services;
|
|
●
|
amount of kernel produced in our orchards segment that will be inventoried and used in our branded products segment;
|
|
●
|
crop insurance coverage;
|
|
●
|
the focus of our efforts for future sales of kernel;
|
|
●
|
the sufficiency of our working capital to fund operations for the next year;
|
|
●
|
future economic performance;
|
|
●
|
legal proceedings, commitments and contingencies;
|
|
●
|
expected impact of new accounting standards on our financial statements and the timing of adopting such guidance;
|
|
●
|
the effectiveness of our disclosure controls and procedures and internal controls over financial reporting; and
|
|
●
|
estimated fair values of our financial instruments.
|
Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Our actual results could differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in such forward-looking statements include, without limitation, the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, as well as risks associated with the following:
|
●
|
changing interpretations of GAAP;
|
|
●
|
changes in macadamia nut prices;
|
|
●
|
world market conditions relating to macadamia nuts;
|
|
●
|
the weather and local conditions in Hawaii affecting macadamia nut production;
|
|
●
|
legislation or regulatory environments, requirements or changes adversely affecting our businesses;
|
|
●
|
general economic conditions;
|
|
●
|
geopolitical events and regulatory changes;
|
|
●
|
our ability to retain and attract skilled employees;
|
|
●
|
our success in finding purchasers for our macadamia nut production at acceptable prices;
|
|
●
|
the availability of and our ability to negotiate acceptable agreements with third parties that are necessary for our business, including those with nut processors, distributors and transportation companies;
|
|
●
|
market acceptance of our products in the branded segment;
|
|
●
|
the availability and cost of raw materials;
|
|
●
|
changes in fuel and labor costs;
|
|
●
|
our success at managing the risks involved in the foregoing items; and
|
|
●
|
other factors discussed from time to time in our press releases, public statements and documents filed or furnished with the SEC.
|
Forward-looking statements speak only as of the date on which such statements are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. All forward-looking statements are expressly qualified by these cautionary statements.