Limoneira CO (LMNR) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10-K). This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those presented under “Risk Factors” included in Item 1A and elsewhere in this Annual Report on Form 10-K. This section generally discusses the results of operations for fiscal year 2022 compared to fiscal year 2021. For discussion related to the results of operations and changes in financial condition for fiscal year 2021 compared to fiscal year 2020 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2021 Form 10-K, which was filed with the United States Securities and Exchange Commission (SEC) on January 10, 2022.

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 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 citrus sales operations. The rental operations division includes our residential and commercial rentals comprised of 257 completed rental units, leased land operations and organic recycling. The real estate development division includes our investments in real estate development projects. Generally, we see our Company as a land and farming company that generates annual cash flows to support our progress into diversified real estate development activities. As real estate developments are monetized, our agriculture business will then be able to expand more rapidly into new regions and markets.

Recent Developments – Refer to Part I, Item 1 “Fiscal Year 2022 Highlights and Recent Developments”

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Results of Operations

The following table shows the results of operations for ($ in thousands):

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 stock-based compensation, loss on stock in Calavo Growers, Inc. ("Calavo"), named executive officer cash severance, pension settlement cost and (gain) loss on disposal of assets, is an important measure to evaluate our results of operations between periods on a more comparable basis. Adjusted EBITDA in previous periods did not exclude stock-based compensation which has now been excluded as management believes this is a better representation of cash generated by operations and is consistent with peer company reporting. Adjusted EBITDA for prior periods has been restated to conform to the current presentation. 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.

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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):

Fiscal Year 2022 Compared to Fiscal Year 2021

Revenues

Total revenues for fiscal year 2022 were $184.6 million compared to $166.0 million for fiscal year 2021. The 11% increase of $18.6 million was primarily the result of increased avocados, oranges and specialty citrus and other crops agribusiness revenues, as detailed below ($ in thousands):

•Lemons: Lemon revenues in fiscal year 2022 were similar to fiscal year 2021. During fiscal years 2022 and 2021, fresh lemon sales were $92.9 million and $85.9 million on 4.9 million and 4.4 million cartons of fresh lemons packed and sold at average per carton prices of $18.77 and $19.60, respectively. Lemon revenues in fiscal years 2022 and 2021 included brokered fruit and other lemon sales of $24.5 million and $36.0 million, respectively, shipping and handling of $22.2 million and $17.5 million, respectively, and lemon by-products of $3.5 million in both fiscal years.

•Avocados: The increase in fiscal year 2022 was primarily the result of increased volume and higher prices of avocados sold compared to fiscal year 2021. The California avocado crop typically experiences alternating years of high and low production due to plant physiology. During fiscal years 2022 and 2021, 8.2 million and 5.7 million pounds of avocados were sold at average per pound prices of $2.08 and $1.20, respectively. Higher prices in fiscal year 2022 were primarily related to lower supply of fruit in the marketplace.

•Oranges: The increase in fiscal year 2022 was primarily due to increased brokered fruit sales and higher prices compared to fiscal year 2021. Orange revenues in fiscal year 2022 included brokered fruit sales of $5.0 million, compared to immaterial brokered fruit sales in fiscal year 2021, sold at average per carton prices of $14.66 and $8.04, respectively.

•Specialty citrus and other crops: The increase in fiscal year 2022 was primarily due to increased brokered fruit sales and higher prices of specialty citrus sold compared to fiscal year 2021. Specialty citrus revenues in fiscal year 2022 included brokered fruit sales of $2.9 million, compared to immaterial brokered fruit sales in 2021, sold at an average per carton price of $13.22 and $11.20, respectively.

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Other operations revenue in fiscal year 2022 and 2021 was $5.3 million and $4.6 million, respectively.

Costs and Expenses

Total costs and expenses for fiscal year 2022 were $182.4 million compared to $172.4 million for fiscal year 2021. This 6% increase of $10.0 million was primarily attributable to increases in our agribusiness costs and selling, general and administrative expenses, partially offset by an increase in gain on disposal of assets. Costs associated with our agribusiness division include packing costs, harvest costs, growing costs, costs related to the lemons we procure from third-party growers and suppliers and depreciation and amortization expense. These costs are discussed further below ($ in thousands):

•Packing costs: Packing costs 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. Lemon packing costs were $43.0 million and $36.0 million in fiscal years 2022 and 2021, respectively. The increase in fiscal year 2022 was primarily attributable to increased volume of fresh lemons packed and sold and higher average per carton costs compared to fiscal year 2021. In fiscal years 2022 and 2021, we packed and sold 4.9 million and 4.4 million cartons of lemons at average per carton costs of $8.69 and $8.22, respectively. The increase in average per carton costs in fiscal year 2022, compared to fiscal year 2021, was primarily due to higher costs in labor and benefits, fruit treatments, cardboard cartons and packing and shipping supplies. Additionally, in fiscal years 2022 and 2021, packing costs included $2.4 million and $2.7 million of shipping costs, respectively.

•Harvest costs: The increase in fiscal year 2022 was primarily attributable to increased volume of lemons and avocados harvested compared to fiscal year 2021.

•Growing costs: 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 decrease in fiscal year 2022, compared to fiscal year 2021, reflects 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 others is referred to as third-party grower and supplier costs. The increase in fiscal year 2022 was primarily due to increased volume of fruit procured from third-party growers and suppliers compared to fiscal year 2021. In fiscal years 2022 and 2021, costs for purchased, packed fruit for resale increased by $0.9 million; we incurred costs of $26.2 million and $25.2 million, respectively. During fiscal years 2022 and 2021, of the 4.9 million and 4.4 million lemon cartons sold, 2.6 million (52%) and 2.3 million (52%) were procured from third-party growers and suppliers at average per carton prices of $13.03 and $13.83, respectively: an increase of $1.9 million.

•Depreciation and amortization: Depreciation and amortization expense in fiscal year 2022 was similar compared to fiscal year 2021.

Other operations expenses for fiscal years 2022 and 2021 were $4.4 million and $4.3 million, respectively.

(Gain) loss on disposal of assets for fiscal years 2022 and 2021 were $(4.5) million and $0.1 million, respectively. The change is primarily due to sales of East Area I Retained Property and Oxnard Lemon packing facility in fiscal year 2022.

Selling, general and administrative expenses for fiscal year 2022 were $21.8 million compared to $19.4 million for fiscal year 2021. The $2.4 million increase was primarily the result of:

•$1.0 million increase in salaries, benefits and incentive compensation;

•$0.8 million increase in named executive officer severance;

•$0.4 million increase in selling expenses; and

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•$0.2 million increase in other selling, general and administrative expenses, including certain corporate overhead expenses.

Other (Expense) Income

Other (expense) income, for fiscal year 2022 was $(1.9) million compared to $2.2 million for fiscal year 2021. The $4.0 million increase in other expenses was primarily the result of:

•$0.8 million increase in interest expense, net as a result of increased interest rates;

•$1.9 million decrease in equity in earnings of investments primarily from LLCB; and

•$1.0 million increase in other expenses primarily from pension expense and pension settlement cost.

Income Taxes

We recorded for fiscal years 2022 and 2021 income tax (provision) benefit of $(0.8) million and $0.3 million on pre-tax income (loss) of $0.3 million and $(4.2) million, respectively. The tax provision recorded for fiscal year 2022 differs from the U.S. federal statutory tax rate of 21% due primarily to foreign jurisdictions which are taxed at different rates, state taxes, tax impact of stock-based compensation, nondeductible tax items and valuation allowances on certain deferred tax assets of foreign subsidiaries. Our effective tax rate for fiscal years 2022 and 2021 was 234.8% and 6.4%, respectively.

Loss Attributable to Noncontrolling Interest

Loss attributable to noncontrolling interest primarily represents 10% and 49% of the net losses 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 20 - Segment Information for additional information regarding our operating segments.

Segment information for fiscal year 2022 (in thousands):

Segment information for fiscal year 2021 (in thousands):

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Fiscal Year 2022 Segment Information Compared to Fiscal Year 2021 Segment Information

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, brokered fruit and other lemon revenue. For fiscal year 2022, our fresh lemons segment revenue was $120.9 million compared to $125.4 million for fiscal year 2021. The 4% decrease of $4.5 million was primarily the result of decreased brokered lemon sales, partially offset by increased fresh lemon sales, as discussed earlier.

Costs and expenses associated with our fresh lemons segment include harvest costs, growing costs, cost of fruit we procure from third-party growers and suppliers, transportation costs and packing service charges incurred from the lemon packing segment to pack lemons for sale. For fiscal year 2022, our fresh lemon costs and expenses were $115.1 million compared to $116.1 million for fiscal year 2021. The 1% decrease of $1.0 million primarily consisted of the following:

•Harvest costs for fiscal year 2022 were $2.9 million higher than fiscal year 2021;

•Growing costs for fiscal year 2022 were $2.2 million lower than fiscal year 2021;

•Third-party grower and supplier costs for fiscal year 2022 were $5.6 million lower than fiscal year 2021;

•Transportation costs for fiscal year 2022 were $0.3 million lower than fiscal year 2021; and

•Intersegment costs and expenses for fiscal year 2022 were $4.2 million higher than fiscal year 2021.

Lemon Packing

Lemon packing segment revenue is comprised of intersegment packing revenue and shipping and handling revenue. For fiscal year 2022, our lemon packing segment revenue was $52.0 million compared to $43.2 million for fiscal year 2021. The 20% increase of $8.8 million was primarily due to increased volume 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 fiscal year 2022, our lemon packing costs and expenses were $43.0 million compared to $36.0 million for fiscal year 2021. The 19% increase of $7.0 million was primarily due to increased volume of lemons packed and higher costs in labor and benefits, cardboard cartons, fruit treatments and packing and shipping supplies.

Lemon packing segment operating income per carton sold was $1.81 and $1.63 for fiscal years 2022 and 2021, respectively.

The lemon packing segment included $29.8 million and $25.6 million of intersegment revenues for fiscal years 2022 and 2021, respectively, which 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 fiscal year 2022, our avocados segment revenue was $17.3 million compared to $6.8 million for fiscal year 2021, a 155% increase of $10.5 million.

Cost and expenses associated with our avocados segment include harvest costs and growing costs. For fiscal year 2022, our avocado costs and expenses were $5.5 million compared to $4.2 million for fiscal year 2021. The 31% increase of $1.3 million primarily consisted of the following:

•Harvest costs for fiscal year 2022 were $1.0 million higher than fiscal year 2021; and

•Growing costs for fiscal year 2022 were $0.3 million higher than fiscal year 2021.

Other Agribusiness

For fiscal year 2022, our other agribusiness segment revenue was $18.9 million compared to $11.6 million for fiscal year 2021. The 62% increase of $7.3 million primarily consisted of the following:

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•Orange revenue for fiscal year 2022 was $5.5 million higher than fiscal year 2021; and

•Specialty citrus and other crop revenue for fiscal year 2022 was $1.7 million higher than fiscal year 2021.

Costs and expenses associated with our other agribusiness segment include harvest, growing and brokered fruit costs. Our other agribusiness costs and expenses for fiscal year 2022 were $18.2 million compared to $9.2 million for fiscal year 2021. The 99% increase of $9.0 million primarily consisted of the following:

•Harvest costs for fiscal year 2022 were $0.4 million lower than fiscal year 2021;

•Growing costs for fiscal year 2022 were $0.9 million higher than fiscal year 2021; and

•Brokered fruit costs for fiscal year 2022 were $8.5 million higher than fiscal year 2021.

Total agribusiness depreciation and amortization for fiscal years 2022 and 2021 was $8.6 million.

Corporate and Other

Our corporate and other operations had rental revenues of approximately $5.3 million and $4.6 million in fiscal years 2022 and 2021, respectively.

Costs and expenses in our corporate and other operations were approximately $20.6 million and $22.7 million in fiscal years 2022 and 2021, respectively, and include rental operations costs, selling, general and administrative expenses not allocated to the operating segments, and (gain) loss on disposal of assets. Depreciation and amortization expenses were approximately $1.2 million in fiscal years 2022 and 2021.

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, financing transactions 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 October 31, 2022 and 2021, 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 Note 10 - Long-Term Debt, Note 12 - Leases and Note 16 - Retirement Plans for amounts outstanding on October 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 fiscal years ended October 31, 2022 and 2021, net cash provided by operating activities was $14.8 million and $9.6 million, respectively. Our cash flow provided by operating activities is primarily from agricultural sales and rental operations. Cash flow used in operations generally consists of agribusiness costs, rental operation costs, selling, general and administrative expenses. The significant components of our cash flows provided by operating activities are as follows.

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•Net loss was $0.5 million and $3.9 million for fiscal years 2022 and 2021, respectively. The components of net loss in fiscal year 2022, compared to fiscal year 2021, consists of an increase in operating income of $8.5 million, an increase in total other expense of $4.0 million and an increase in income tax provision of $1.1 million.

•Adjustments to reconcile net loss to net cash provided by operating activities:

◦Adjustments provided $10.0 million of operating cash in fiscal year 2022, compared to providing $10.2 million of operating cash in fiscal year 2021, primarily due to significant changes in (gain) loss on disposal of assets, equity in earnings of investments, net, and other, net, which primarily related to pension expense and pension settlement cost.

◦Changes in operating assets and liabilities provided $5.3 million of operating cash in fiscal year 2022, compared to providing $3.3 million of operating cash in fiscal year 2021, primarily due to significant changes in accounts receivable and receivables/other from related parties, income taxes receivable, accounts payable and growers and suppliers payable and accrued liabilities and payables to related parties.

Cash Flows from Investing Activities

For the years ended October 31, 2022 and 2021, net cash provided by (used in) investing activities was $19.4 million and $(10.2) million, respectively, and is primarily comprised of capital expenditures, sales of assets, collection of notes receivable and investments.

•Capital expenditures for fiscal year 2022 were $10.1 million for property, plant and equipment, primarily related to orchards, and real estate development projects. Additionally, in fiscal year 2022 we received $19.3 million in net proceeds from sales of assets, $7.9 million in net proceeds from sales of real estate development assets and $2.8 million in collection of loan and notes receivable.

•Capital expenditures for fiscal year 2021 were comprised of $9.8 million for property, plant and equipment, primarily related to orchards, and real estate development projects. Additionally, in fiscal year 2021 we invested $0.7 million in mutual water companies and water rights.

Cash Flows from Financing Activities

For the years ended October 31, 2022 and 2021, net cash (used in) provided by financing activities was $(33.5) million and $0.5 million, respectively.

•The $(33.5) million of cash used in financing activities for fiscal year 2022 was primarily comprised of net repayments of long-term debt in the amount of $26.8 million. Additionally, in fiscal year 2022 we paid common and preferred dividends, in aggregate, of $5.8 million, paid $1.5 million for the exchange of common stock related to our employees restricted stock awards and received $1.0 million of proceeds from equipment financings.

•The $0.5 million of cash provided by financing activities for fiscal year 2021 was primarily comprised of net borrowings of long-term debt in the amount of $7.1 million. Additionally, in fiscal year 2021 we paid common and preferred dividends, in aggregate, of $5.8 million and paid $0.7 million for the exchange of common stock related to our employees restricted stock awards.

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 Master Loan Agreement (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. Additional information regarding these loans can be found in Note 10 - Long-Term Debt.

In June 2021, we entered into the MLA with Farm Credit West, PCA (the "Lender") dated June 1, 2021, together with the Supplements and a Fixed Interest Rate Agreement, which extends the principal repayment to July 1, 2026. The MLA governs the terms of the Supplements.

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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 October 31, 2022, our outstanding borrowings under the Farm Credit West Credit Facility were $88.5 million and we had $41.5 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 greater than or equal to 1:25:1.0 on an annual basis. We were in compliance as of October 31, 2022.

In August 2021, we entered into the FCW term loan with the Lender and used the proceeds to pay off the Wells Fargo term loan. The FCW term loan has a fixed interest rate of 3.19% and is payable in monthly installments through September 2026.

In fiscal years 2022 and 2021 we received annual patronage dividends of $1.6 million and $1.2 million, respectively, from the Lender.

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 were repurchased under this program. In fiscal year 2020, we repurchased 250,977 shares for $3.5 million under a program which expired in March 2021.

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 totaled $0.5 million in each of the fiscal years 2022 and 2021.

Cash dividends declared in each of the fiscal years 2022 and 2021 totaled $0.30 per common share and such dividends paid totaled $5.3 million.

Real Estate Development Activities and Related Capital Resources

As noted under “Transactions Affecting Liquidity and Capital Resources,” we have the ability to control a portion of our investing cash flows to the extent necessary based upon our liquidity demands. In order for our real estate development operations to reach their maximum potential benefit to us, however, we will need to be successful over time in identifying other third-party sources of capital to collaborate with us to move those development projects forward. While we are frequently in discussions with potential external sources of capital in respect to all of our development projects, current market conditions for California real estate projects make it difficult to predict the timing and amounts of future capital that will be required to complete the development of our projects.

In November 2015, we entered into a joint venture with Lewis for the residential development of our East Area I real estate development project. To consummate the transaction, we formed LLCB as the development entity, contributed our East Area I property to the joint venture and sold a 50% interest in the joint venture to Lewis for $20.0 million. The first phase of the project broke ground to commence mass grading in November 2017. Project plans currently include approximately 1,500 residential units and site improvements. A total of 586 residential units have closed from the project's inception to October 31, 2022.

In October 2022, we entered into a joint venture with Lewis for the development of our 17-acre East Area I Retained Property. We formed LLCB II as the development entity, contributed our Retained Property to the joint venture and sold a 50% interest to Lewis for approximately $8.0 million. We recorded a gain on the transaction of approximately $4.7 million, of which $0.5 million was deferred.

The joint venture partners will share in the capital contributions to fund project costs until loan proceeds and/or revenues are sufficient to fund the projects. Since inception each partner has made funding contributions of $21.4 million to LLCB. We expect to receive approximately $115.0 million from LLCB and LLCB II over the seven remaining years of the projects, including the $8.0 million received in fiscal year 2022.

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Trend Information

The commodity pricing for our fresh produce, and therefore our revenues and margins, is significantly impacted by consumer demand. The worldwide fresh produce industry has historically enjoyed consistent underlying demand and favorable growth dynamics. In recent years, the market for fresh produce has increased faster than the rate of population growth, supported by ongoing trends including greater consumer demand for healthy, fresh and convenient foods, increased retailer square footage devoted to fresh produce, and greater emphasis on fresh produce as a differentiating factor in attracting customers. Health-conscious consumers are driving much of the growth in demand for fresh produce. Over the past several decades, the benefits of natural, preservative-free and organic foods have become an increasingly significant element of the public dialogue on health and nutrition. As a result, consumption of fresh fruit and vegetables has markedly increased. Conversely, a decrease in demand, as was seen during the COVID-19 pandemic as a result of restaurant closures, has the impact of reducing our pricing and therefore our revenues and margins.

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. For further information on significant accounting policies, see discussion in Note 2 - Summary of Significant Accounting Policies.

Impairment of Real Estate Development Projects – We evaluate our real estate development projects, held either by us or as included specifically within our investments in LLCB and LLCB II, for impairment on an ongoing basis. Our evaluation for impairment involves an initial assessment of each real estate development project to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of, or investment in, real estate development are no longer recoverable. Possible indications of impairment may include events or changes in circumstances affecting the entitlement process, zoning, government regulation, geographical demand for new housing or commercial property, and market conditions related to residential or commercial land lots. When events or changes in circumstances exist, we further evaluate the real estate development for impairment by a) comparing undiscounted future cash flows expected to be generated over the life of the real estate development to the respective carrying amount for our real estate development or b) determining if our equity in investment has incurred an other-than-temporary decline.

We make significant judgments in evaluating each real estate development project, as held by us or within our investments in LLCB and LLCB II, for possible indications of impairment. These judgments may relate to the identification of appropriate and comparable market prices, the consideration of changes to legal factors or the business climate, the likelihood of successfully completing the entitlement process, changes in zoning or government regulation, and demand for new housing. Changes in these judgments could have a significant impact on real estate development or equity in investments. For fiscal years 2022, 2021 and 2020, no impairment loss has been recognized on any real estate development and no other-than-temporary-impairment has been recognized on our equity in LLCB or LLCB II.

The impairment calculation for real estate developments held by us compares the carrying value of the asset to the asset’s estimated future cash flows (undiscounted). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated future cash flows (discounted). We recognize an impairment loss equal to the amount by which the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset will be its new cost basis. Restoration of a previously recognized impairment loss is prohibited. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to impairment losses that could be material to our results of operations.

Whenever events or changes in circumstances indicate that the carrying amount of our equity investments in LLCB and LLCB II might not be recoverable, then we determine whether an impairment is other-than-temporary. If we conclude the impairment is other-than-temporary, we determine the estimated fair value of the investment by performing a discounted cash flow or market approach analysis and recognize an other-than-temporary impairment to reduce the investment to its estimated fair value.

We believe that the accounting estimate related to impairment of real estate development projects held by us, or other-than-temporary impairment of our equity investments in LLCB and LLCB II, is a critical accounting estimate because it is very susceptible to change from period to period; it requires management to make assumptions about future prices, production, and costs,

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and the potential impact of a loss from impairment could be material to our earnings. Management’s assumptions regarding future cash flows from real estate development projects or return on equity of our investments in LLCB and LLCB II have fluctuated in the past due to changes in prices, production and costs and are expected to continue to do so in the future as market conditions change.

Recent Accounting Pronouncements

See Note 2 - Summary of Significant Accounting Policies for information concerning recent accounting pronouncements.

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