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, 2021 and December 31, 2020 of approximately $90 million and $90 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 $18 million and $18 million, as of March 31, 2021 and December 31, 2020, 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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On April 16, 2021, the U.S. Department of Justice and the U.S. Environmental Protection Agency, on behalf of various federal agencies of the United States of America, executed a Consent Decree with Kaanapali Land, LLC, a Delaware limited liability company (the "Company") that, if entered by the U.S. District Court sitting in the District of Hawaii, United States of America v. Kaanapali Land, and Oahu Sugar Company, LLC Case No. 1:21-CV-00190, would resolve the U.S. federal government's current environmental claims against the Company with respect to contamination at the former mixing site on Waipio Peninsula on Oahu in Hawaii that had been leased by Oahu Sugar Company LLC, a former subsidiary of the Company. In return for payments by the Company totaling $7.5 million, the Consent Decree would resolve liability asserted by the U.S. government against the Company under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) as well as under the Clean Water Act, both for response costs (those costs expended for investigation and cleanup) and for natural resource damages.

The Company has been in discussions with Fireman's Fund, the insurance carrier with which the Company and certain of its subsidiaries maintained liability policies, regarding the payment or reimbursement by Fireman's Fund of a significant portion of the settlement amount to be paid by the Company under the Consent Decree. The Company can give no assurances as to what portion, if any, of the settlement payment will be recovered from Firemen's Fund.

The Consent Decree is subject to a number of contingencies that could prevent it from being finalized with its current terms. In particular, and without limitation, (i) the Consent Decree has been lodged with the District Court for a period of at least 30 days for public notice and comment, and the United States has reserved the right to withdraw or withhold its consent if the comments regarding the Consent Decree disclose facts or considerations that indicate the Consent Decree is inappropriate, improper or inadequate, (ii) the Company may oppose entry of the Consent Decree as the result of any objection in other pending proceedings to use by the Company of site-related insurance proceeds from Fireman's Fund; and (iii) the District Court in Hawaii might determine not to enter the Consent Decree as currently written or as approved by the federal government. There can be no assurance that the contingencies will not preclude entry of the Consent Decree.

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. 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. Although the Company expects to market the lots in the first phase beginning in the second half of 2021, 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 and the considerable uncertainty surrounding the COVID-19 pandemic and its continuing repercussions may impact the viability or timing of the project. 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.





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The Commission on Water Resource Management ("CWRM") consists of approximately seven members appointed by the governor and confirmed by the Hawaii State Senate. CWRM assists the state as trustee of water resources pursuant to the state water code. CWRM exercises jurisdiction over land-based surface sources and conducts water resource assessments and regulatory activities over, among other things, freshwater streams throughout Maui. The Company is reliant on water sourced from its irrigation systems which divert water from streams and development tunnels into a system of ditches, tunnels, flumes, siphons and reservoirs.

The Company does not consider the excess assets of the Pension Plan (approximately $18 million) to be a source of liquidity due to the substantial cost, including Federal income tax consequences, associated with liquidating the Pension Plan.

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.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, and the U.S. and Hawaiian economy began to experience pronounced disruptions. Quarantine, travel restrictions and other governmental restrictions to reduce the spread of COVID-19 has caused and is likely to continue to have an adverse impact on economic activity, including business closures, increased unemployment, financial market instability, and reduced tourism to Maui. The duration of the disruption on global, national, and local economies cannot be reasonably estimated at this time. Therefore, while this matter will negatively and materially impact our results and financial position, the related financial impact cannot be reasonably estimated at this time. The Company continues to monitor the economic impact of the COVID-19 pandemic, as well as mitigating emergency assistance programs, such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and other subsequent federal legislation.





Results of Operations

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

The decrease in other assets at March 31, 2021 as compared to December 31, 2020 is primarily due to refundable AMT tax credits received from the IRS in February 2021.

The decrease in sales for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 is primarily due to the negative impact on coffee sales due to continued mandates including restrictions on travel, both inter-island and trans-Pacific arrivals to the Hawaiian islands, and other mandates negatively impacting business and the economy in Hawaii related to the COVID-19 pandemic.

The increase in selling, general and administrative expenses for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 is due to the adjustment of the loss contingency related to the Waipio site at March 31, 2021.





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Inflation

Due to the lack of significant fluctuations in the level of inflation in recent years, inflation generally has not had a material effect on real estate development.

In the future, 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, and therefore may be advantageous where property investments are not highly leveraged with debt or where the cost of such debt has been previously fixed.

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