Limoneira CO (LMNR) FY 2023 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 2023 compared to fiscal year 2022. For discussion related to the results of operations and changes in financial condition for fiscal year 2022 compared to fiscal year 2021 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2022 Form 10-K, which was filed with the United States Securities and Exchange Commission (SEC) on December 22, 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 11,100 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, other crops and farm management services. The agribusiness division includes our core operations of farming, harvesting, lemon packing and lemon sales operations. The rental operations division includes our residential and commercial rentals comprised of 238 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 2023 Highlights and Recent Developments”

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Results of Operations

The following table shows the results of operations ($ 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, named executive officer cash severance, pension settlement cost, (gain) loss on disposal of assets, net, cash bonus related to sale of assets and gain on legal settlement are important measures to evaluate our results of operations between periods on a more comparable basis. Adjusted EBITDA in fiscal year 2021 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 fiscal year 2021 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 income (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 2023 Compared to Fiscal Year 2022

Revenues

Total net revenues for fiscal year 2023 were $179.9 million compared to $184.6 million for fiscal year 2022. The 3% decrease of $4.7 million was primarily due to decreased avocados and oranges agribusiness revenues, partially offset by farm management agribusiness revenues, as detailed below (in thousands):

•Lemons: The decrease in fiscal year 2023, compared to fiscal year 2022, was primarily due to decreased fresh lemon sales, partially offset by increased brokered lemons and other lemon sales. During fiscal years 2023 and 2022, fresh lemon sales were $86.8 million and $92.9 million, in aggregate, on 4.8 million and 4.9 million cartons of lemons sold at average per carton prices of $18.24 and $18.77, respectively. Lemon revenues in fiscal years 2023 and 2022 included brokered lemons and other lemon sales of $30.3 million and $24.5 million, shipping and handling of $20.6 million and $22.2 million, and lemon by-product sales of $3.0 million and $3.5 million, respectively. In addition, lemon revenues included settlement proceeds of $1.4 million allocated to lemons in fiscal year 2023.

•Avocados: The decrease in fiscal year 2023, compared to fiscal year 2022 was primarily due to decreased volume and lower prices of avocados sold. During fiscal years 2023 and 2022, 3.8 million and 8.2 million pounds of avocados were sold at an average per pound price of $1.06 and $2.08, respectively. The California avocado crop typically experiences alternating years of high and low production due to plant physiology. In addition, avocado revenues included settlement proceeds of $2.4 million allocated to avocados and crop insurance proceeds of $0.7 million in fiscal year 2023.

•Oranges: The decrease in fiscal year 2023, compared to fiscal year 2022, was primarily due to decreased volume, mainly related to the Northern Properties sale. During fiscal years 2023 and 2022, 292,000 and 676,000 cartons of oranges were sold at an average per carton price of $19.79 and $14.66, respectively.

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•Specialty citrus and other crops: The increase in fiscal year 2023, compared to fiscal year 2022, was primarily due to higher prices, partially offset by decreased volume of specialty citrus sold. During fiscal years 2023 and 2022, we sold 240,000 and 434,000 40-pound carton equivalents of specialty citrus at an average per carton price of $27.18 and $13.22, respectively. Additionally, during fiscal years 2023 and 2022, we sold $2.9 million and $3.2 million of wine grapes, respectively.

•Farm management: Farm management revenues in fiscal year 2023 were $9.9 million, primarily due to the Northern Properties farming, management and operations services. There were no farm management revenues in fiscal year 2022.

Other operations revenue in fiscal years 2023 and 2022 was $5.5 million and $5.3 million, respectively. The increase in fiscal year 2023, compared to fiscal year 2022, was primarily due to increased leased land revenue.

Costs and Expenses

Our total costs and expenses in fiscal year 2023 were $169.1 million, compared to $182.4 million in the same period of fiscal year 2022. The 7% decrease of $13.3 million was primarily due to increased gain on disposal of assets, mainly related to the Northern Properties sale, partially offset by the loss on disposal of Cadiz Ranch assets and increased agribusiness costs and expenses. Agribusiness costs and expenses are detailed below (in thousands):

•Packing costs: Packing costs consist primarily 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. In fiscal years 2023 and 2022, lemon packing costs were $45.7 million and $43.0 million, respectively. The increase in fiscal year 2023 was primarily due to higher average per carton costs, partially offset by decreased volume of fresh lemons packed and sold compared to fiscal year 2022. During fiscal years 2023 and 2022, we packed and sold 4.8 million and 4.9 million cartons of lemons at average per carton costs of $9.61 and $8.69, respectively. The increase in average per carton costs in fiscal year 2023, compared to fiscal year 2022, was primarily due to increased labor and benefit costs. Additionally, in fiscal years 2023 and 2022, packing costs included $2.9 million and $2.4 million of shipping costs, respectively.

•Harvest costs: The decrease in harvest costs in fiscal year 2023, compared to fiscal year 2022, was primarily due to decreased volume of avocados, oranges and specialty citrus harvested, partially offset by increased volume of lemons harvested.

•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 increase in fiscal year 2023, compared to fiscal year 2022, was primarily due to the Northern Properties farm management costs which were expensed in fiscal year 2023 and were capitalized as cultural costs in fiscal year 2022, as well as 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 other growers and suppliers as well as the cost of brokered fruit is referred to as third-party grower and supplier costs. The increase in fiscal year 2023, compared to fiscal year 2022, was primarily due to increased costs incurred for brokered fruit, partially offset by decreased costs for third-party growers and suppliers' fruit. In fiscal years 2023 and 2022, we incurred costs for purchased, packed fruit for resale of $29.4 million and $26.2 million, respectively. In fiscal years 2023 and 2022, we incurred costs for third-party growers and suppliers' fruit of $31.9 million and $33.4 million, respectively. During fiscal years 2023 and 2022 of the 4.8 million and 4.9 million cartons of lemons packed and sold, 2.6 million (54%) and 2.6 million (52%), were procured from third-party growers and suppliers at average per carton prices of $12.44 and $13.03, respectively.

•Depreciation and amortization: Depreciation and amortization expense for fiscal years 2023 and 2022 was $7.3 million and $8.6 million, respectively. The decrease in fiscal year 2023, compared to fiscal year 2022, was primarily due to the Northern Properties sale in fiscal year 2023.

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Other operations expenses for fiscal years 2023 and 2022 were $4.6 million and $4.4 million, respectively.

Gain on disposal of assets, net in fiscal years 2023 and 2022 were $28.8 million and $4.5 million, respectively. The change is primarily due to the gain on the sale of the Northern Properties, partially offset by the loss on disposal of Cadiz Ranch assets in fiscal year 2023.

Gain on legal settlement was $2.3 million in fiscal year 2023 due to the Settlement Agreement related to the Thomas fire.

Selling, general and administrative expenses for fiscal year 2023 were $26.5 million compared to $21.8 million for fiscal year 2022. The $4.7 million increase was primarily due to:

•$2.5 million net increase in salaries, benefits and incentive compensation;

•$0.7 million increase in tax, legal and consulting fees primarily related to disposals of Northern Properties and Cadiz;

•$0.2 million increase in selling expenses; and

•$1.3 million net increase in other selling, general and administrative expenses, primarily associated with our strategic initiatives.

Other Income (Expense)

Total other income (expense) was $2.6 million and $(1.9) million for fiscal years 2023 and 2022, respectively. The $4.4 million increase in total other income was primarily due to:

•$4.0 million increase of equity earnings in investments primarily due to LLCB;

•$1.8 million decrease of interest expense due to decreased long-term debt; and

•$1.7 million increase of other expense primarily due to pension settlement cost.

Income Taxes

We recorded for fiscal years 2023 and 2022 income tax provision of $4.2 million and $0.8 million on pre-tax income of $13.4 million and $0.3 million, respectively. The tax provision recorded for fiscal year 2023 differs from the U.S. federal statutory tax rate of 21.0% 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 2023 and 2022 was 31.8% and 234.8%, respectively.

Net Loss Attributable to Noncontrolling Interest

Net loss attributable to noncontrolling interest represents 10% and 49% of the net loss of PDA and Trapani Fresh, respectively, for fiscal years 2023 and 2022.

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 21 - Segment Information for additional information regarding our operating segments.

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Segment information for fiscal year 2023 (in thousands):

Segment information for fiscal year 2022 (in thousands):

Fiscal Year 2023 Segment Information Compared to Fiscal Year 2022 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 lemons and other lemon revenue. For fiscal years 2023 and 2022, our fresh lemons segment total net revenues were $121.5 million and $120.9 million, respectively. The 1% increase of $0.6 million was primarily due to:

•Fresh lemon sales decrease of $6.2 million;

•Brokered lemons and other lemon sales increase of $5.8 million;

•Lemon by-products decrease of $0.4 million; and

•Legal settlement proceeds in fiscal year 2023 allocated to fresh lemons of $1.4 million.

Costs and expenses associated with our fresh lemons segment include growing costs, harvest costs, cost of lemons 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 years 2023 and 2022, our fresh lemons segment costs and expenses were $120.5 million and $115.1 million, respectively. The 5% increase of $5.4 million was primarily due to:

•Harvest costs increase of $0.3 million;

•Growing costs increase of $3.2 million;

•Third-party grower and supplier costs increase of $0.1 million;

•Transportation costs increase of $0.5 million; and

•Intersegment costs and expenses increase of $1.3 million.

Lemon Packing

Lemon packing segment revenue is comprised of packing revenue, intersegment packing revenue and shipping and handling revenue. For fiscal years 2023 and 2022, our lemon packing segment total net revenues were $51.7 million and $52.0 million, respectively, a 1% decrease of $0.3 million.

Costs and expenses associated with our lemon packing segment 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. For fiscal years 2023 and 2022, our lemon packing costs and expenses were $45.7 million and $43.0 million, respectively. The 6% increase of $2.7 million was primarily due to increased labor and benefit costs.

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Lemon packing segment operating income per carton sold was $1.25 and $1.81 for fiscal years 2023 and 2022, respectively.

The lemon packing segment included $31.1 million and $29.8 million of intersegment revenues for fiscal years 2023 and 2022, respectively, that 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

Our avocados segment revenues were $7.0 million and $17.3 million for fiscal years 2023 and 2022, respectively, a 59% decrease of $10.3 million, due primarily to alternating years of high and low production due to plant physiology.

Costs and expenses associated with our avocados segment include growing and harvest costs. Our avocados segment costs and expenses were $4.0 million and $5.5 million for fiscal years 2023 and 2022, respectively. The 27% decrease of $1.5 million primarily consisted of the following:

•Harvest costs decrease of $0.9 million; and

•Growing costs decrease of $0.6 million.

Other Agribusiness

Our other agribusiness segment total net revenues were $25.2 million and $18.9 million for fiscal years 2023 and 2022, respectively. The 34% increase of $6.3 million was primarily due to:

•Orange revenues decrease of $4.1 million;

•Specialty citrus and other revenues increase of $0.5 million; and

•Farm management revenues in fiscal year 2023 were $9.9 million. There were no farm management revenues in fiscal year 2022.

Costs and expenses associated with our other agribusiness segment include growing costs, harvest costs and purchased fruit costs. Our other agribusiness costs and expenses were $22.7 million and $18.2 million for fiscal years 2023 and 2022, respectively. The 25% increase of $4.5 million was primarily due to:

•Harvest costs decrease of $1.5 million;

•Growing costs increase of $4.4 million; and

•Purchased fruit costs increase of $1.6 million.

Total agribusiness depreciation and amortization expenses were $7.3 million and $8.6 million for fiscal years 2023 and 2022, respectively.

Corporate and Other

Our corporate and other operations revenues were $5.5 million and $5.3 million for fiscal years 2023 and 2022, respectively.

Costs and expenses (gain) in our corporate and other operations were $(1.3) million and $20.6 million for fiscal years 2023 and 2022, respectively, and include selling, general and administrative costs and expenses, gain on disposal of assets, net and gain on legal settlement not allocated to the operating segments. Depreciation and amortization expenses for fiscal years 2023 and 2022 were $1.3 million and $1.2 million, respectively.

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.

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Material contractual obligations arising in the normal course of business consist primarily of purchase obligations, long-term fixed rate and variable rate debt and related interest payments and operating and finance leases. See Note 11 - Long-Term Debt and Note 13 - Leases for amounts outstanding as of October 31, 2023, related to debt and leases. Purchase obligations consist of contracts primarily related to packing supplies, 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. We believe our revenue generating operations, distributions from equity investments and credit facilities will generate sufficient cash needed to operate beyond 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

Net cash (used in) provided by operating activities was $(15.9) million and $14.8 million for fiscal years 2023 and 2022, respectively. The significant components of our cash flows (used in) provided by operating activities were as follows:

•Net income (loss) was $9.1 million and $(0.5) million for fiscal years 2023 and 2022, respectively. The components of net income for fiscal year 2023, compared to net loss for fiscal year 2022, consists of an increase in operating income of $8.6 million and an increase in total other income of $4.4 million, offset by an increase in income tax provision of $3.4 million.

•Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

◦Adjustments (used) provided $(22.5) million and $10.0 million for fiscal years 2023 and 2022, respectively, primarily related to depreciation and amortization, gain on disposal of assets, stock compensation expense, equity in earnings of investments, net and deferred income taxes.

◦Changes in operating assets and liabilities (used in) provided by $(2.5) million and $5.3 million of operating cash for fiscal years 2023 and 2022, respectively, primarily related to cultural costs, prepaid expenses/other current assets, accounts payable/growers and suppliers payable, accrued liabilities/payables to related parties, and other long-term liabilities.

Cash Flows from Investing Activities

▪The $90.6 million of net cash provided by investing activities during fiscal year 2023 was comprised primarily of net proceeds from sales of assets of $98.5 million, net proceeds from the sale of real estate development assets of $2.6 million, partially offset by capital expenditures of $10.3 million, primarily related to orchard and vineyard development.

▪The $19.4 million of net cash provided by investing activities during fiscal year 2022 was comprised primarily of net proceeds from sale of assets of $19.3 million, net proceeds from the sale of real estate development assets of $7.9 million, collection on notes receivable of $2.8 million, partially offset by capital expenditures of $10.1 million related to orchard and vineyard development.

Cash Flows from Financing Activities

•The $71.9 million of net cash used in financing activities during fiscal year 2023 was comprised primarily of net repayments of long-term debt $65.0 million and common and preferred stock dividends of $5.9 million.

•The $33.5 million of net cash used in financing activities during fiscal year 2022 was comprised primarily of net repayments of long-term debt of $26.8 million, common and preferred stock dividends of $5.8 million and the exchange of common stock of $1.5 million, partially offset by proceeds from equipment financings of $1.0 million.

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 from our AgWest Farm Credit Facility, which includes the Master Loan Agreement (the “MLA”) and Supplements. In addition, we have Banco de Chile term loans and COVID-19 loans. Additional information regarding these loans can be found in Note 11- Long-Term Debt.

In June 2021, we entered into the MLA with the Lender, 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 provide aggregate borrowing capacity of $115.0 million, comprised of $75.0 million under the Revolving Credit Supplement and $40.0 million under the Non-Revolving Credit Supplement. As of October 31, 2023, our outstanding borrowings under the AgWest Farm Credit Facility were $40.0 million and we had $75.0 million of availability.

On January 31, 2023, the Company sold the Northern Properties which resulted in total net proceeds of $98.4 million. The proceeds were used to pay down all of the Company's domestic debt except the Non-Revolving Credit Supplement.

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 specific debt service coverage ratio on an annual basis. In September 2023, the Lender modified the covenant to defer measurement as of October 31, 2023 and resume a debt service coverage ratio of 1.25:1.0 measured as of October 31, 2024.

In fiscal years 2023 and 2022 we received annual patronage dividends of $1.4 million and $1.6 million, respectively, from the Lender.

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 2023 and 2022.

Cash dividends declared in each of the fiscal years 2023 and 2022 totaled $0.30 per common share and such dividends paid totaled $5.4 million in fiscal year 2023 and $5.3 million in fiscal year 2022.

Income Taxes

In fiscal years 2023 and 2022, we paid income taxes of $7.2 million and $0.1 million, respectively.

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. Approved project plans currently include approximately 1,500 residential units and site improvements. A total of 707 residential units have closed from the project's inception to October 31, 2023.

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 and $0.5 million to LLCB II. We expect to receive approximately $123.0 million from LLCB, LLCB II and East Area II over the next seven years of the projects.

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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 projects 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 projects for impairment by a) comparing undiscounted future cash flows expected to be generated over the life of the real estate development projects 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 2023, 2022 and 2021, 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.

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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, 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.