Liquidity and Capital Resources





General

In addition to historical information, this Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations about its businesses and the markets in which the Company operates. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties or other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual operating results may be affected by various factors including, without limitation, changes in international, national and Hawaiian economic conditions, competitive market conditions, uncertainties and costs related to the imposition of conditions on receipt of governmental approvals and costs of material and labor, the effect of the outbreak of the COVID-19 virus, and actual versus projected timing of events all of which may cause such actual results to differ materially from what is expressed or forecast in this report.

Certain subsidiaries of Kaanapali Land are jointly indebted to Kaanapali Land pursuant to a certain Secured Promissory Note in the principal amount of $70 million, dated November 14, 2002, and due September 30, 2029, as extended. Such note had an outstanding balance of principal and accrued interest as of March 31, 2022 and December 31, 2021 of approximately $90 million and $91 million, respectively. The interest rate currently is 0.39% per annum and compounds semi-annually. The note, which is prepayable, is secured by substantially all of the remaining real property owned by such subsidiaries, pursuant to a certain Mortgage, Security Agreement and Financing Statement, dated as of November 14, 2002 and placed on record in December 2002. The note has been eliminated in the consolidated financial statements because the obligors are consolidated subsidiaries of Kaanapali Land.

The Company had cash and cash equivalents of approximately $20 million and $17 million, as of March 31, 2022 and December 31, 2021, respectively, which is available for, among other things, working capital requirements, including future operating expenses, and the Company's obligations for engineering, planning, regulatory and development costs, drainage and utilities, environmental remediation costs on existing and former properties, potential liabilities resulting from tax audits, and existing and possible future litigation. The Company does not anticipate making any distributions for the foreseeable future.

The primary business of Kaanapali Land is the investment in and development of the Company's assets on the Island of Maui. The various development plans will take many years at significant expense to fully implement. Proceeds from land sales are the Company's only source of significant cash proceeds and the Company's ability to meet its liquidity needs is dependent on the timing and amount of such proceeds.

The Company's operations have in recent periods been primarily reliant upon the net proceeds of sales of developed and undeveloped land parcels.





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Kaanapali Land and Fireman's Fund entered into a settlement agreement on or about November 24, 2021, whereby Fireman's Fund, the carrier that had been paying defense costs and settlements for the Kaanapali Land asbestos cases, would pay $2.4 million for certain listed Kaanapali Land asbestos cases upon a Final Order of the D/C bankruptcy court lifting the automatic stay to allow the payments. The D/C court issued the lift-stay order on March 1, 2022. On April 12, 2022, the Company received $2.4 million as reimbursement for the various settlements Kaanapali made that were subject to the lift-stay order of March 1, 2022. Reference is made to Note 7 of the Company's consolidated financial statements for further discussion of this matter.

In September 2014, Kaanapali Land Management Corp. ("KLMC"), pursuant to a property and option purchase agreement with an unrelated third party, closed on the sale of an approximate 14.9 acre parcel in West Maui. The purchase price was $3.3 million, paid in cash at closing. The agreement (as subsequently amended) commits KLMC to fund up to $0.6 million, depending on various factors, for off-site roadway, sewer and electrical improvements that will also provide service to other KLMC properties. Although certain offsite construction has begun at the site, the commitment remains outstanding as construction of such improvements does not yet trigger such funding. The 14.9 acre site is intended to be used for a critical access hospital, skilled nursing facility, assisted living facility, and independent living facility.

The Company is in the planning stages for the development of a 295-acre parcel in the region mauka of the Kaanapali Coffee Farms ("KCF Mauka"). The parcel is to be comprised of 61 agricultural lots that will be offered to individual buyers. The Company expects to develop the parcel in phases and all phases have been submitted to the County for subdivision approval. The Company is working with the County to resolve certain of the County's comments relating to the subdivision. Upon final subdivision approval and receipt of final plat of the first phase from the County, which requires a bond in the amount of the cost to develop the first phase, the Company can pre-sell the undeveloped lots in the first phase. The Company expects to market the lots in the first phase upon receiving final approvals from the County of Maui, subject to various contingencies, including, but not limited to, governmental and market factors and the availability of a bond to secure the first phase of the development. Therefore, there can be no assurance the Company will be able to meet such timetable, that the subdivision will ultimately be approved or that the lots will sell for prices deemed advantageous by the Company.

In January 2021, the Company entered into agreements with an unrelated third party for that third party to prepare plans to develop Puukolii Village Mauka and another subdivision on the Company's property. The plans are to include development segments and timeline, offsite and onsite infrastructure, construction cost analysis, proposed budgets and proforma financial statements. If after discussion and negotiation the Company and the third party are unable to agree on the plans, then either the Company or the third party may terminate the agreements. Such discussions are ongoing.

At a public meeting on January 18, 2022, the staff of the State of Hawaii Commission on Water Resource Management ("CWRM") presented an informational briefing on the "Designation of the Lahaina Aquifer Section; Maui as a Surface Water and Ground Water Management Area" as recommended by the Chair of the Commission. The Commission's primary responsibilities are to implement and administer the State Water Code by planning, surveying, regulating, enforcing, and conserving the State's water resources. This includes regulating the use of water resources in water management areas. At its meeting on February 15, 2022, the Commissioners of CWRM unanimously voted to accept the Chairperson's recommendation. The next step in the designation process is for CWRM to hold public hearings on the recommended designation. The proposed designation would regulate the surface and groundwaters supplying the Company's irrigation systems that take water from streams, development tunnels, and wells. The Company is evaluating the potential effects, if any, this designation may have on its agricultural operations and developments. Further, the Company continues to respond to CWRM to set forth its views on the proposed designation and prepares for CWRM's further action.



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The Company's Pension Plan has excess assets of approximately $20 million. On January 15, 2022, Pacific Trail Holdings LLC, the manager of the Company, adopted a plan to freeze the benefit accruals under and close participation in the Pension Plan and terminate the Pension Plan on or about June 1, 2022. Effective February 7, 2022, the Level 1 and Level 2 plan asset investments were reallocated to a money market fund. After distribution of Pension Plan benefits to participants, remaining surplus Pension Plan assets are expected to be distributed from the Pension Plan in accordance with the requirements of the Internal Revenue Code of 1986 (as amended) by certain regulatory deadlines.

Although the Company does not currently believe that it has significant liquidity problems over the near term, should the Company be unable to satisfy its liquidity requirements from its existing resources and future property sales, it will likely pursue alternate financing arrangements. However it cannot be determined at this time what, if any, financing alternatives may be available and at what cost.

Economic uncertainty relating to COVID-19 continues and the effects of an improving economy could be negatively impacted by surges in COVID-19 and new variants, the administration and effectiveness of vaccines and government responses to future developments as well as supply chain disruptions, labor shortages and rising inflation. A resurgence of COVID-19 or the emergence of new, significant variants, could negatively impact the Maui real estate market, which could negatively impact the Company's results and financial position.





Results of Operations

Reference is made to the footnotes to the financial statements for additional discussion of items addressing comparability between years.

Property, net decreased as of March 31, 2022 due to the sale of a lot during first quarter 2022.

The decrease in other assets at March 31, 2022 as compared to December 31, 2021 is primarily due to insurance recoveries related to the Waipio site received in March 2022, offset by insurance recoveries receivable related to asbestos claims.

The decrease in other liabilities at March 31, 2022 as compared to December 31, 2021 is due to the reversal of a contingency reserve pursuant to the settlement payment made in March 2022 related to the Waipio site.

The increase in sales and the related increase in costs of sales for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 is primarily due to sale of one lot during the first quarter 2022, as compared to no lot sales during the first quarter 2021.

The decrease in selling, general and administrative expenses for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 is due to the insurance recoveries related to asbestos claims offset by the adjustment of the loss contingency during first quarter 2021.





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Inflation

As a result of increasing signs of inflation in recent months, the Federal Reserve approved a .25% rate increase in March 2022 and a .5% rate increase in May 2022.

High rates of inflation may adversely affect real estate development generally because of their impact on interest rates. High interest rates not only increase the cost of borrowed funds to the Company, but can also have a significant effect on the affordability of permanent mortgage financing to prospective purchasers. However, high rates of inflation may permit the Company to increase the prices that it charges in connection with real property sales, subject to general economic conditions affecting the real estate industry and local market factors.

Critical Estimates and Significant Accounting Policies

The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's unaudited condensed consolidated interim financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated interim financial statements requires management to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes are reasonable under the circumstances; additionally management evaluates these results on an on-going basis. Management's estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Different estimates could be made under different assumptions or conditions, and in any event, actual results may differ from the estimates. The impact of a change in these estimates, assumptions, and judgments could materially affect the amounts reported in the Company's consolidated financial statements.

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