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LIMONEIRA COMPANY


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM              TO             
  
Commission File Number: 001-34755
LIMONEIRA COMPANY
(Exact name of Registrant as Specified in its Charter)
Delaware
77-0260692
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
1141 Cummings Road, Santa Paula, CA
93060
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code: (805) 525-5541
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol (s)
Name of Each Exchange of Which Registered
Common Stock, $0.01 par value
LMNR
The NASDAQ Stock Market LLC (NASDAQ Global Select Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes ¨ No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:  
¨    Large accelerated filer
ý  Accelerated filer
¨  Emerging growth company

¨    Non-accelerated filer
¨  Smaller reporting company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No

As of August 31, 2019, there were 17,772,753 shares outstanding of the registrant’s common stock.

1

LIMONEIRA COMPANY
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements
 
 
 
Consolidated Balance Sheets – July 31, 2019 and October 31, 2018
 
 
Consolidated Statements of Operations – three and nine months ended July 31, 2019 and 2018
 
 
Consolidated Statements of Comprehensive (Loss) Income – three and nine months ended July 31, 2019 and 2018
 
 
Consolidated Statements of Stockholders' Equity and Temporary Equity–three and nine months ended July 31, 2019 and 2018
 
 
Consolidated Statements of Cash Flows – nine months ended July 31, 2019 and 2018
 
 
Notes to Consolidated Financial Statements
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II. OTHER INFORMATION
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
SIGNATURES


2

Cautionary Note on Forward-Looking Statements.
 
This Quarterly Report on Form 10-Q contains both historical and forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond the Company’s control. The potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance to differ materially from those expressed or implied include:

•
changes in laws, regulations, rules, quotas, tariff, and import laws;
•
adverse weather conditions, natural disasters and other adverse natural conditions, including freezes, rains, fires and droughts that affect the production, transportation, storage, import and export of fresh produce;
•
market responses to industry volume pressures;
•
increased pressure from disease, insects and other pests;
•
disruption of water supplies or changes in water allocations;
•
product and raw materials supplies and pricing;
•
energy supply and pricing;
•
changes in interest and currency exchange rates;
•
availability of financing for development activities;
•
general economic conditions for residential and commercial real estate development;
•
political changes and economic crisis;
•
international conflict;
•
acts of terrorism;
•
labor disruptions, strikes, shortages or work stoppages;
•
loss of important intellectual property rights; and
•
other factors disclosed in our public filings with the Securities and Exchange Commission (the "SEC").

The Company’s actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which the Company is not currently aware or which the Company currently deems immaterial could also cause the Company’s actual results to differ, including those discussed in the section entitled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended October 31, 2018. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update these forward-looking statements, even if our situation changes in the future.
 
The terms the “Company,” “Limoneira”, “we,” “our” and “us” as used throughout this Quarterly Report on Form 10-Q refer to Limoneira Company and its consolidated subsidiaries, unless otherwise indicated.


3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
LIMONEIRA COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($ in thousands, except share amounts) 
 
July 31,
2019
October 31,
2018
Assets
 

 

Current assets:
 

 

Cash
$
943

$
609

Accounts receivable, net
24,127

14,116

Cultural costs
7,034

5,413

Prepaid expenses and other current assets
18,483

10,528

Income taxes receivable
—

378

Total current assets
50,587

31,044

 
 
 
Property, plant and equipment, net
247,619

225,681

Real estate development
16,378

107,162

Equity in investments
57,775

18,698

Investment in Calavo Growers, Inc.
21,226

24,250

Other assets
22,104

14,504

Total assets
$
415,689

$
421,339

 
 
 
Liabilities and stockholders’ equity
 

 

Current liabilities:
 

 

Accounts payable
$
16,174

$
6,134

Growers payable
15,752

10,089

Accrued liabilities
4,273

7,724

Current portion of long-term debt
3,024

3,127

Total current liabilities
39,223

27,074

Long-term liabilities:
 

 

Long-term debt, less current portion
109,253

76,966

Deferred income taxes
25,090

25,372

Other long-term liabilities
3,196

3,647

Sale-leaseback deferral
—

58,330

Total liabilities
176,762

191,389

Commitments and contingencies (See Note 16)




 
 
Series B Convertible Preferred Stock – $100.00 par value (50,000 shares authorized: 14,790 shares issued and outstanding at July 31, 2019 and October 31, 2018) (8.75% coupon rate)
1,479

1,479

Series B-2 Convertible Preferred Stock – $100.00 par value (10,000 shares authorized: 9,300 shares issued and outstanding at July 31, 2019 and October 31, 2018) (4% dividend rate on liquidation value of $1,000 per share)
9,331

9,331

 
 
 
Stockholders’ equity:
 

 

Series A Junior Participating Preferred Stock – $0.01 par value (20,000 shares authorized: zero issued or outstanding at July 31, 2019 and October 31, 2018)
—

—

Common Stock – $0.01 par value (39,000,000 shares authorized: 17,772,753 and 17,647,135 shares issued and outstanding at July 31, 2019 and October 31, 2018, respectively)
178

176

Additional paid-in capital
160,200

159,071

Retained earnings
57,309

50,354

Accumulated other comprehensive (loss) income
(5,130
)
8,965

Noncontrolling interest
15,560

574

Total stockholders’ equity
228,117

219,140

Total liabilities and stockholders’ equity
$
415,689

$
421,339

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4

LIMONEIRA COMPANY


CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ in thousands, except share amounts)
 
Three Months Ended
July 31,
 
Nine Months Ended
July 31,
 
2019
 
2018
 
2019
 
2018
Net revenues:
 

 
 

 
 
 
 
Agribusiness
$
49,631

 
$
38,677

 
$
131,254

 
$
110,875

Rental operations
1,238

 
1,273

 
3,668

 
3,803

Real estate development
—

 
—

 
—

 
—

Total net revenues
50,869

 
39,950

 
134,922

 
114,678

Costs and expenses:
 

 
 

 
 
 
 
Agribusiness
42,747

 
23,983

 
118,741

 
80,943

Rental operations
993

 
1,004

 
3,167

 
3,045

Real estate development
50

 
25

 
102

 
94

Selling, general and administrative
4,961

 
3,513

 
14,819

 
11,529

Total costs and expenses
48,751

 
28,525

 
136,829

 
95,611

Operating income (loss)
2,118

 
11,425

 
(1,907
)
 
19,067

Other (expense) income:
 

 
 

 
 
 
 
Interest expense
(774
)
 
(260
)
 
(1,313
)
 
(1,054
)
Equity in earnings of investments
480

 
123

 
2,449

 
40

Loss on sale of stock in Calavo Growers, Inc.
(6
)
 
—

 
(6
)
 
—

Unrealized loss on stock in Calavo Growers, Inc.
(1,769
)
 
—

 
(2,067
)
 
—

Other income, net
15

 
26

 
375

 
283

Total other (expense) income
(2,054
)
 
(111
)
 
(562
)
 
(731
)
 
 
 
 
 
 
 
 
Income (loss) before income tax (provision) benefit
64

 
11,314

 
(2,469
)
 
18,336

Income tax (provision) benefit
(461
)
 
(3,114
)
 
216

 
5,093

Net (loss) income
(397
)
 
8,200

 
(2,253
)
 
23,429

Net (income) loss attributable to noncontrolling interest
(593
)
 
1

 
(615
)
 
(4
)
Net (loss) income attributable to Limoneira Company
(990
)
 
8,201

 
(2,868
)
 
23,425

Preferred dividends
(125
)
 
(125
)
 
(376
)
 
(376
)
Net (loss) income attributable to common stock
$
(1,115
)
 
$
8,076

 
$
(3,244
)
 
$
23,049

 
 
 
 
 
 
 
 
Basic net (loss) income per common share
$
(0.06
)
 
$
0.51

 
$
(0.19
)
 
$
1.54

 
 
 
 
 
 
 
 
Diluted net (loss) income per common share
$
(0.06
)
 
$
0.50

 
$
(0.19
)
 
$
1.50

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding-basic
17,554,000

 
15,947,000

 
17,527,000

 
14,979,000

Weighted-average common shares outstanding-diluted
17,554,000

 
16,551,000

 
17,527,000

 
15,578,000

  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 



5

LIMONEIRA COMPANY


CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(In thousands)
 
Three Months Ended July 31,
 
Nine Months Ended
July 31,
 
2019
 
2018
 
2019
 
2018
Net (loss) income
$
(397
)
 
$
8,200

 
$
(2,253
)
 
$
23,429

Other comprehensive (loss) income, net of tax:
 

 
 

 
 
 
 
Foreign currency translation adjustments
(559
)
 
(75
)
 
(116
)
 
218

Minimum pension liability adjustment, net of tax of $28, $51, $83 and $154 for the three and nine months ended July 31, 2019 and 2018, respectively.
72

 
125

 
218

 
372

Unrealized holding gains on available-for-sale securities, net of tax of $0, $105, $0 and $1,653 for the three and nine months ended July 31, 2019 and 2018, respectively.
—

 
(255
)
 
—

 
3,987

Unrealized gains from derivative instrument, net of tax of $0, $12, $0 and $79 for the three and nine months ended July 31, 2019 and 2018, respectively.
—

 
2

 
—

 
163

Total other comprehensive (loss) income, net of tax
(487
)
 
(203
)
 
102

 
4,740

Comprehensive (loss) income
(884
)
 
7,997

 
(2,151
)
 
28,169

Comprehensive loss (income) attributable to noncontrolling interest
575

 
(30
)
 
576

 
6

Comprehensive (loss) income attributable to Limoneira Company
$
(309
)
 
$
7,967

 
$
(1,575
)
 
$
28,175

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 


6

LIMONEIRA COMPANY


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY
($ in thousands)

 
Stockholders’ Equity
 
 
 
Temporary Equity
 
Common Stock
 
Additional
Paid-In
 
Retained
 
Accumulated
Other
Comprehensive
 
Noncontrolling
 
 
 
Series B
Preferred
 
Series B-2
Preferred
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income (Loss)
 
Interest
 
Total
 
Stock
 
Stock
Balance at October 31, 2018
17,647,135

 
$
176

 
$
159,071

 
$
50,354

 
$
8,965

 
$
574

 
$
219,140

 
$
1,479

 
$
9,331

Dividends Common ($0.075 per share)
—

 
—

 
—

 
(1,332
)
 
—

 
—

 
(1,332
)
 
—

 
—

Dividends Series B ($2.19 per share)
—

 
—

 
—

 
(32
)
 
—

 
—

 
(32
)
 
—

 
—

Dividends Series B-2 ($10 per share)
—

 
—

 
—

 
(93
)
 
—

 
—

 
(93
)
 
—

 
—

Stock compensation
145,737

 
2

 
789

 
—

 
—

 
—

 
791

 
—

 
—

Exchange of common stock
(20,119
)
 
—

 
(305
)
 
—

 
—

 
—

 
(305
)
 
—

 
—

Net (loss) income
—

 
—

 
—

 
(4,693
)
 
—

 
17

 
(4,676
)
 
—

 
—

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
969

 
(12
)
 
957

 
—

 
—

Reclassification of unrealized gain on marketable securities upon adoption of ASU 2016-01
—

 
—

 
—

 
15,921

 
(15,921
)
 
—

 
—

 
—

 
—

Reclassification upon adoption of ASU 2018-02
—

 
—

 
—

 
(1,724
)
 
1,724

 
—

 
—

 
—

 
—

Balance at January 31, 2019
17,772,753
 
178

 
159,555

 
58,401

 
(4,263
)
 
579

 
214,450

 
1,479

 
9,331

Dividends Common ($0.075 per share)
—

 
—

 
—

 
(1,333
)
 
—

 
—

 
(1,333
)
 
—

 
—

Dividends Series B ($2.19 per share)
—

 
—

 
—

 
(33
)
 
—

 
—

 
(33
)
 
—

 
—

Dividends Series B-2 ($10 per share)
—

 
—

 
—

 
(93
)
 
—

 
—

 
(93
)
 
—

 
—

Stock compensation
—

 
—

 
437

 
—

 
—

 
—

 
437

 
—

 
—

Net income
—

 
—

 
—

 
2,815

 
—

 
5

 
2,820

 
—

 
—

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
(380
)
 
(9
)
 
(389
)
 
—

 
—

Balance at April 30, 2019
17,772,753
 
178

 
159,992

 
59,757

 
(4,643
)
 
575

 
215,859

 
1,479

 
9,331

Dividends Common ($0.075 per share)
—

 
—

 
—

 
(1,333
)
 
—

 
—

 
(1,333
)
 
—

 
—

Dividends Series B ($2.19 per share)
—

 
—

 
—

 
(32
)
 
—

 
—

 
(32
)
 
—

 
—

Dividends Series B-2 ($10 per share)
—

 
—

 
—

 
(93
)
 
—

 
—

 
(93
)
 
—

 
—

Stock compensation
—

 
—

 
208

 
—

 
—

 
—

 
208

 
—

 
—

Acquired noncontrolling interest
—

 
—

 
—

 
—

 
—

 
14,410

 
14,410

 
—

 
—

Net (loss) income
—

 
—

 
—

 
(990
)
 
—

 
593

 
(397
)
 
—

 
—

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
(487
)
 
(18
)
 
(505
)
 
—

 
—

Balance at July 31, 2019
17,772,753
 
$
178

 
$
160,200

 
$
57,309

 
$
(5,130
)
 
$
15,560

 
$
228,117

 
$
1,479

 
$
9,331

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


7

LIMONEIRA COMPANY


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY (Continued)
($ in thousands)
 
Stockholders’ Equity
 
 
 
Temporary Equity
 
Common Stock
 
Additional
Paid-In
 
Retained
 
Accumulated
Other
Comprehensive
 
Noncontrolling
 
 
 
Series B
Preferred
 
Series B-2
Preferred
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income (Loss)
 
Interest
 
Total
 
Stock
 
Stock
Balance at October 31, 2017
14,405,031

 
$
144

 
$
94,294

 
$
34,692

 
$
7,076

 
$
587

 
$
136,793

 
$
1,479

 
$
9,331

Dividends Common Stock ($0.0625 per share)
—

 
—

 
—

 
(908
)
 
—

 
—

 
(908
)
 
—

 
—

Dividends Series B ($2.19 per share)
—

 
—

 
—

 
(32
)
 
—

 
—

 
(32
)
 
—

 
—

Dividends Series B-2 ($10 per share)
—

 
—

 
—

 
(93
)
 
—

 
—

 
(93
)
 
—

 
—

Stock compensation
145,441

 
1

 
708

 
—

 
—

 
—

 
709

 
—

 
—

Exchange of common stock
(17,520
)
 
—

 
(401
)
 
—

 
—

 
—

 
(401
)
 
—

 
—

Net income (loss)
—

 
—

 
—

 
8,625

 
—

 
(2
)
 
8,623

 
—

 
—

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
3,291

 
25

 
3,316

 
—

 
—

Balance at January 31, 2018
14,532,952

 
145

 
94,601

 
42,284

 
10,367

 
610

 
148,007

 
1,479

 
9,331

Dividends Common Stock ($0.0625 per share)
—

 
—

 
—

 
(908
)
 
—

 
—

 
(908
)
 
—

 
—

Dividends Series B ($2.19 per share)
—

 
—

 
—

 
(33
)
 
—

 
—

 
(33
)
 
—

 
—

Dividends Series B-2 ($10 per share)
—

 
—

 
—

 
(93
)
 
—

 
—

 
(93
)
 
—

 
—

Stock compensation
—

 
—

 
230

 
—

 
—

 
—

 
230

 
—

 
—

Net income (loss)
—

 
—

 
—

 
6,599

 
—

 
7

 
6,606

 
—

 
—

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
1,652

 
6

 
1,658

 
—

 
—

Balance at April 30, 2018
14,532,952
 
145

 
94,831

 
47,849

 
12,019

 
623

 
155,467

 
1,479

 
9,331

Dividends Common Stock ($0.0625 per share)
—

 
—

 
—

 
(1,101
)
 
—

 
—

 
(1,101
)
 
—

 
—

Dividends Series B ($2.19 per share)
—

 
—

 
—

 
(32
)
 
—

 
—

 
(32
)
 
—

 
—

Dividends Series B-2 ($10 per share)
—

 
—

 
—

 
(93
)
 
—

 
—

 
(93
)
 
—

 
—

Stock compensation
—

 
—

 
277

 
—

 
—

 
—

 
277

 
—

 
—

Issuance of common stock
3,136,362

 
32

 
64,065

 
—

 
—

 
—

 
64,097

 
—

 
—

Net income (loss)
—

 
—

 
—

 
8,201

 
—

 
(1
)
 
8,200

 
—

 
—

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
(202
)
 
(29
)
 
(231
)
 
—

 
—

Balance at July 31, 2018
17,669,314
 
$
177

 
$
159,173

 
$
54,824

 
$
11,817

 
$
593

 
$
226,584

 
$
1,479

—

$
9,331

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

8

LIMONEIRA COMPANY


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine Months Ended
July 31,
 
2019
 
2018
Operating activities
 

 
 

Net (loss) income
$
(2,253
)
 
$
23,429

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

 
 

Depreciation and amortization
6,327

 
5,210

(Gain) loss on disposals of assets
(11
)
 
188

Gain on sales of real estate development assets
—

 
(25
)
Stock compensation expense
1,436

 
1,216

Equity in earnings of investments
(2,449
)
 
(40
)
Cash distributions from equity investments
458

 
175

Deferred income taxes
(216
)
 
(5,519
)
Accrued interest on notes receivable
(146
)
 
(136
)
Loss on sale of stock in Calavo Growers, Inc.
6

 
—

Unrealized loss on stock in Calavo Growers, Inc.
2,067

 
—

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(10,014
)
 
(4,031
)
Cultural costs
1,644

 
(246
)
Prepaid expenses and other current assets
(4,692
)
 
(954
)
Income taxes receivable
—

 
250

Other assets
(39
)
 
26

Accounts payable and growers payable
15,505

 
3,927

Accrued liabilities
(3,206
)
 
(314
)
Other long-term liabilities
(143
)
 
47

Net cash provided by operating activities
4,274

 
23,203

Investing activities
 

 
 

Capital expenditures
(12,613
)
 
(9,003
)
Purchase of real estate development parcel
—

 
(1,444
)
Net proceeds from sales of real estate development assets
—

 
1,543

Agriculture property acquisitions
(397
)
 
(13,111
)
Business combinations
(15,000
)
 
(25,000
)
Net proceeds from sale of stock in Calavo Growers, Inc.
952

 
—

Collections of installments on note receivable
150

 
—

Equity investment contributions
(4,000
)
 
(3,500
)
Investments in mutual water companies
(472
)
 
(337
)
Net cash used in investing activities
(31,380
)
 
(50,852
)
Financing activities
 

 
 

Borrowings of long-term debt
95,321

 
135,127

Repayments of long-term debt
(63,163
)
 
(167,881
)
Dividends paid – common
(3,998
)
 
(2,920
)
Dividends paid – preferred
(376
)
 
(376
)
Exchange of common stock
(305
)
 
(401
)
Issuance of common stock
—

 
64,097

Net cash provided by financing activities
27,479

 
27,646

Effect of exchange rate changes on cash
(39
)
 
16

Net increase in cash
334

 
13

Cash at beginning of period
609

 
492

Cash at end of period
$
943

 
$
505


9

LIMONEIRA COMPANY


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In thousands)
 
Nine Months Ended
July 31,
 
2019
 
2018
Supplemental disclosures of cash flow information
 

 
 

Cash paid during the period for interest (net of amounts capitalized)
$
2,018

 
$
1,547

Cash paid during the period for income taxes, net of (refunds)
$
130

 
$
210

Non-cash investing and financing activities:
 

 
 

Unrealized holding gain on Calavo investment
$
—

 
$
(5,640
)
(Decrease) increase in real estate development and sale-leaseback deferral
$
(58,330
)
 
$
13,731

Reclassification from real estate development to equity in investments
$
(33,353
)
 
$
—

Increase in equity in investments and other long-term liabilities
$
—

 
$
1,080

Non-cash issuance of note receivable
$
—

 
$
3,000

Non-cash reduction of note receivable
$
—

 
$
79

Capital expenditures accrued but not paid at period-end
$
199

 
$
331

Accrued Series B-2 Convertible Preferred Stock dividends
$
31

 
$
31

Non-cash issuance of note payable
$
—

 
$
1,435

 
In December 2018, the Company terminated its lease agreement with the Joint Venture (as defined herein) that is developing the East Area I real estate development project. As a result, the Company reduced its sale lease-back deferral and corresponding real estate development by $58,330,000 and reclassified $33,353,000 of the Company’s basis in the Joint Venture from real estate development to equity in investments as further described in Note 7 - Real Estate Development and Note 8 - Equity Investments of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q.

In February 2013, the Company entered into an option agreement for the purchase of a 7-acre parcel adjacent to its East Area II real estate development project. In February 2018, the Company exercised its option and purchased the property for $3,145,000, by making a cash payment of $1,444,000 and issuing a note payable for $1,435,000.

In November 2017, the holder of the note receivable from a 2004 sale of property completed the drilling of a water well at the Company’s La Campana Ranch. The fair value of the well drilling services was $79,000 and the Company recorded a non-cash reduction of the note receivable.

In December 2017, the Company sold its Centennial Square (“Centennial”) real estate development property for $3,250,000. The Company received net proceeds of $179,000 and received a $3,000,000 promissory note secured by the property for the balance of the purchase price. 

The accompanying notes are an integral part of these unaudited consolidated financial statements.




10

LIMONEIRA COMPANY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization and Basis of Presentation
Business
Limoneira Company (together with its consolidated subsidiaries, the “Company”) engages primarily in growing citrus and avocados, picking and hauling citrus, and packing, marketing and selling lemons. The Company is also engaged in residential rentals and other rental operations and real estate development activities.

The Company markets and sells lemons directly to food service, wholesale and retail customers throughout the United States, Canada, Asia, Europe and other international markets. The Company is a member of Sunkist Growers, Inc. (“Sunkist”), an agricultural marketing cooperative, and sells its oranges, specialty citrus and other crops to Sunkist-licensed and other third-party packinghouses.

The Company sells all of its avocado production to Calavo Growers, Inc. (“Calavo”), a packing and marketing company listed on the NASDAQ Global Select Market under the symbol CVGW. Calavo’s customers include many of the largest retail and food service companies in the United States and Canada. The Company’s avocados are packed by Calavo, which are then sold and distributed under Calavo brands to its customers.

Basis of Presentation and Preparation
The accompanying unaudited interim consolidated financial statements include the accounts of the Company and the accounts of all the subsidiaries and investments in which a controlling interest is held by the Company. Intercompany accounts and transactions have been eliminated. In the opinion of the Company, the unaudited interim consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these unaudited interim consolidated financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. Because the consolidated financial statements do not include all of the information and notes required by GAAP for a complete set of consolidated financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K.

2. Summary of Significant Accounting Policies

Revenue Recognition

On November 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) – Accounting Standards Update (“ASU”) ASU 2014-09, Revenue from Contracts with Customers (Topic 606), that amends the guidance for the recognition of revenue from contracts with customers. The results for the reporting period beginning after November 1, 2018 are presented in accordance with the new standard which was adopted using the modified-retrospective method and applied to those contracts that were not completed as of November 1, 2018. There was no net effect of applying the standard and therefore no cumulative adjustment to retained earnings was necessary at the date of initial application.

As a result comparative information has not been restated and the results for the reporting periods before November 1, 2018 continue to be reported under the accounting standards and policies in effect for those periods.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

•
Identify the contract(s) with a customer.
•
Identify the performance obligations in the contract.
•
Determine the transaction price.
•
Allocate the transaction price to the performance obligations in the contract.
•
Recognize revenue when (or as) the entity satisfies a performance obligation.

The Company determined the appropriate method by which it recognizes revenue by analyzing the nature of the products or services being provided as well as the terms and conditions of contracts or arrangements entered into with its customers. The Company accounts


11

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. A contract's transaction price is allocated to each distinct good or service (i.e., performance obligation) identified in the contract and each performance obligation is valued based on its estimated relative standalone selling price. 

The Company recognizes the majority of its revenue at a point in time when it satisfies a performance obligation and transfers control of the product to the respective customer. The amount of revenue that is recognized is based on the transaction price, which represents the invoiced amount and includes estimates of variable consideration such as allowances for estimated customer discounts or concessions, where applicable. The amount of variable consideration included in the transaction price may be constrained and is included only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period.

Upon adoption, the Company changed the accounting of certain brokered fruit sales. Under previous guidance, the Company was considered an agent and recorded revenues for certain brokered fruit sales and the costs of such fruit on a net basis in its consolidated statement of operations. Under the new revenue recognition standard, the Company is considered a principal in the transaction and revenues are recorded on a gross basis in the Company’s consolidated statement of operations with the related cost of such fruit included in agribusiness costs and expenses. This change resulted in the recognition of additional agribusiness revenue and agribusiness costs and expenses of $1,781,000, respectively, during the three months ended July 31, 2019 and $2,201,000, respectively, during the nine months ended July 31, 2019. Had it used the previous revenue recognition guidance, the Company would have recorded insignificant net agribusiness revenue for the three and nine months ended July 31, 2019. No cumulative adjustment to retained earnings was necessary as there is no net effect of applying the standard.

Agribusiness revenue - Revenue from lemon sales is generally recognized at a point in time when the customer takes control of the fruit from the Company’s packinghouse, which aligns with the transfer of title to the customer. The Company has elected to treat any shipping and handling costs incurred after control of the goods has been transferred to the customer as agribusiness costs.

The Company’s avocados, oranges, specialty citrus and other specialty crops are packed and sold by Calavo and other third-party packinghouses. The Company delivers all of its avocado production from its orchards to Calavo. These avocados are then packed by Calavo at its packinghouse and sold and distributed under Calavo brands to its customers primarily in the United States and Canada. The Company’s arrangements with other third-party packinghouses related to its oranges, specialty citrus and other specialty crops are similar to its arrangement with Calavo. The Company’s arrangements with its third-party packinghouses are such that the Company is the producer and supplier of the product and the third-party packinghouses are the Company’s customers. 

The revenues the Company recognizes related to the fruits sold to the third-party packinghouses are based on the volume and quality of the fruits delivered, the market price for such fruit, less the packinghouses’ charges to pack and market the fruit. Such packinghouse charges include the grading, sizing, packing, cooling, ripening and marketing of the related fruit. The Company controls the product until it is delivered to the third-party packinghouses at which time control of the product is transferred to the third-party packinghouses and revenue is recognized. Such third-party packinghouse charges are recorded as a reduction of revenue as they are not for distinct services. The identifiable benefit the Company receives from the third-party packinghouses for packaging and marketing services cannot be sufficiently separated from the third-party packinghouses’ purchase of the Company’s products. In addition, the Company is not able to reasonably estimate the fair value of the benefit received from the third-party packinghouses for such services and as such, these costs are characterized as a reduction of revenue in the Company’s consolidated statements of operations.

Revenue from the sales of certain of the Company’s agricultural products is recorded based on estimated proceeds provided by certain of the Company’s sales and marketing partners (Calavo and other third-party packinghouses) due to the time between when the product is delivered by the Company and the closing of the pools for such fruits at the end of each month or harvest period. Calavo and other third-party packinghouses are agricultural cooperatives or function in a similar manner as an agricultural cooperative. The Company
estimates the variable consideration using the most likely amount method, with the most likely amount being the quantities actually shipped extended by the prices reported by Calavo and other third-party packinghouses. Revenue is recognized at time of delivery to
the packinghouses relating to fruits that are in pools that have not yet closed at month end if: (a) the related fruits have been delivered
to and accepted by Calavo and other third-party packinghouses (i.e., Calavo and other third-party packinghouses obtain control) and
(b) sales price information has been provided by Calavo and other third-party packinghouses (based on the marketplace activity for


12

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

the related fruit) to estimate with reasonable certainty the final selling price for the fruit upon the closing of the pools. In such instances the Company has the present right to payment and Calavo and other third-party packinghouses have the present right to direct the use of, and obtain substantially all of the remaining benefits from, the delivered fruit. The Company does not expect that there is a high likelihood that a significant reversal in the amount of cumulative revenue recognized in the early periods of the pool will occur once the final pool prices have been reported by the packinghouses. Historically, the revenue that is recorded based on the sales price information provided to the Company by Calavo and other third-party packinghouses at the time of delivery, have not materially differed from the actual amounts that are paid after the monthly or harvest period pools are closed.

The Company has entered into brokerage arrangements with third-party international packinghouses. In certain of these arrangements, the Company has the exclusive ability to direct the use of and obtains substantially all of the remaining benefits from the fruit, and therefore is acting as a principal. As such, the Company records the related revenue and costs of the fruit gross in the consolidated statement of operations.

Revenue from crop insurance proceeds is recorded when the amount can be reasonably determined and upon establishment of the present right to payment.
 
Rental Revenue - Minimum rental revenues are generally recognized on a straight-line basis over the respective initial lease term. Contingent rental revenues are contractually defined as to the percentage of rent received by the Company and are based on fees collected by the lessee. Such revenues are recognized when actual results, based on collected fees reported by the tenant, are received. The Company's rental arrangements generally require payment on a monthly or quarterly basis.
 
Real Estate Development Revenue - The Company recognizes revenue on real estate development projects with customers at a point in time (i.e., the closing) when the Company satisfies the single performance obligation and transfers control of such real estate to a buyer. The transaction price, which is the amount of consideration the Company receives upon delivery of the completed real estate to the buyer, is allocated to this single obligation and is received at closing. Real estate development projects with non-customers are accounted for in accordance with Accounting Standards Code (“ASC”) 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.
 
Recent Accounting Pronouncements

FASB ASU 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

The amendments in ASU 2016-01, among other things, require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets (i.e., securities or loans and receivables). Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost.

ASU 2016-01 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company’s adoption of this ASU on November 1, 2018 resulted in a cumulative-effect adjustment to the statement of financial position, with the Company reclassifying unrealized holding gains of $15,921,000, net of taxes, in Calavo common stock to retained earnings from accumulated other comprehensive income ("AOCI") at the date of adoption. In addition, the change in the fair value of Calavo common stock has been disclosed as a separate line item in the statement of operations subsequent to the adoption of ASU 2016-01.

FASB ASU 2016-02, Leases (Topic 842) and related ASUs, including ASU 2018-11, Leases (Topic 842): Targeted Improvements

Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:


13

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements (continued)

•
A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and
•
A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.

ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. ASU 2018-11 provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to use the optional transition method when it adopts the ASUs beginning in the first quarter of its fiscal year ending October 31, 2020. The Company is evaluating the effect these ASUs may have on its consolidated financial statements, however it expects to apply the practical expedients provided in the ASUs. Note 20 – Commitments and Contingencies of the notes to consolidated financial statements included in the Company's 2018 Annual Report on Form 10-K describes its operating lease arrangements as of October 31, 2018.

FASB ASU No. 2017-04 -Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

This amendment eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted.  The Company early adopted the standard as of May 1, 2019 and followed this guidance during its annual impairment testing performed during the third quarter.  The adoption did not have an impact on its financial position, results of operations, or cash flows.

FASB ASU 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

The amendment requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.

The amendment is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company’s adoption of this ASU during the first quarter of fiscal year 2019 had no material impact on its consolidated financial statements.

FASB ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income




14

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements (continued)

This amendment provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (the "2017 Act") (or portion thereof) is recorded.

The amendment is effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendment either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the 2017 Act is recognized. The Company early adopted this ASU on November 1, 2018, and as a result recorded a cumulative-effect reclassification in the statement of financial position to retained earnings from AOCI at the date of adoption of $1,724,000 related to the investment in Calavo and pension liability.

FASB ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans

This amendment adds, removes and clarifies the disclosure requirements for employers that sponsor defined benefit pension or other post retirement plans. For public business entities, the amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company is evaluating the effect this ASU may have on its consolidated financial statements. 

SEC Amendments to Certain Disclosure Requirements
 
In August 2018, the SEC adopted amendments to certain disclosure requirements for a number of SEC rules, including Rule 3-04 of Regulation S-X. Rule 3-04 requires that a public registrant’s Form 10-Q include a reconciliation of changes in stockholders’ equity for each period for which a statement of comprehensive income is required to be filed. These amendments are effective for interim periods beginning after November 5, 2018, therefore the Company has included a separate statement of stockholders’ equity and temporary equity in this Quarterly Report on Form 10-Q.

3. Acquisitions
Agriculture Property Acquisition

In January 2019, the Company purchased land for use as a citrus orchard for a cash purchase price of $397,000. The acquisition was for 26 acres of agricultural property adjacent to the Company’s orchards in Lindsay, California. This agriculture property acquisition is included in property, plant and equipment on the Company’s consolidated balance sheet.

San Pablo
 
On July 18, 2018, the Company completed the acquisition of Agricola San Pablo S.A. (“San Pablo”) ranch and related assets in La Serena, Chile, for $13,000,000. The San Pablo ranch consists of 3,317 acres on two parcels, including 247 acres producing lemons, 61 acres producing oranges, the opportunity to immediately plant 120 acres for lemon production, as well as the potential for approximately 500 acres of avocado production. This acquisition was accounted for as an asset purchase and is included in property, plant and equipment in the Company’s consolidated balance sheet. In addition, transaction costs of $111,000 were capitalized as part of total acquisition costs.

Below is a summary of the fair value of the net assets acquired on the acquisition date based on a third-party valuation (in thousands):
Cultural costs
$
579

Land and land improvements
9,114

Buildings and equipment
207

Orchards
2,058

Water rights
1,153

Total assets acquired
$
13,111



15

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

3. Acquisitions (continued)

Agriculture Property Acquisition (continued)

The unaudited, pro forma consolidated statement of operations as if San Pablo had been included in the consolidated results of the Company for the year ended October 31, 2018 would have resulted in revenues of $130,262,000 and net income of $18,785,000.

Business Combinations

Trapani Fresh

On May 30, 2019, the Company acquired a 51% interest in a joint venture, Trapani Fresh, formed with FGF Trapani (“FGF”), a multi-generational, family owned citrus operation in Argentina. To consummate the transaction, the Company formed a subsidiary under the name Limoneira Argentina S.A.U. (“Limoneira Argentina”) as the managing partner and acquired a 51% interest in an Argentine Trust that holds a 75% interest in Finca Santa Clara (“Santa Clara”), a ranch with approximately 1,200 acres of planted lemons. Trapani Fresh controls the trust and grows, packs, markets and sells fresh citrus.

Total consideration paid for the Company’s interest in Trapani Fresh was $15,000,000 of which $7,500,000 was paid to FGF on May 30, 2019. The remaining $7,500,000 was advanced to FGF, $4,000,000 in February 2019 and $3,500,000 in May 2019, as prepayments for the 25% interest in Santa Clara retained by FGF. Transaction costs of approximately $548,000 were included in selling, general and administrative expense. The Company has consolidated Trapani Fresh and has accounted for the acquisition of Trapani Fresh as a business combination, resulting in FGF’s 49% interest in Trapani Fresh being accounted for as a non-controlling interest.

Below is a summary of the preliminary fair value of the net assets acquired on the acquisition date based on a third-party valuation (in thousands):
Cultural costs
$
3,270

Land and land improvements
9,520

Buildings and improvements
870

Orchards
8,410

Customer relationships, trademarks and non-competition agreement (10 year useful life)
6,380

Goodwill
960

Total assets acquired
29,410

Noncontrolling interest
(14,410
)
Net cash paid
$
15,000


Preliminary goodwill of $960,000 relates to synergies of the operations, has been allocated to the fresh lemons segment and is currently not expected to be deductible for tax purposes. Revenue of $11,685,000 and net income of $1,203,000 of Trapani Fresh are included in the Company’s consolidated statement of operations from the acquisition date to the period ended July 31, 2019. The unaudited, pro forma consolidated statement of operations as if Trapani Fresh had been included in the consolidated results of the Company for the entire nine months ended July 31, 2019 would have resulted in revenues of $141,149,000 and net loss of $2,705,000.

Oxnard Lemon
 
On July 24, 2018, the Company and Oxnard Lemon Associates, Ltd., a California limited partnership (“Seller”), entered into an Asset Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, on July 26, 2018 (the “Initial Closing Date”), the Company acquired certain tangible assets of Seller, including a packinghouse and related land (“Oxnard Lemon”), for a purchase price of $24,750,000 (the “Initial Acquisition”). Pursuant to the Purchase Agreement, the closing on the purchase and sale of the intangible assets of Seller, including Seller’s trade names, trademarks and copyrights, took place on October 31, 2018 (the “Final Closing Date”), at which point an additional $250,000 in purchase price was paid to Seller by the Company. The aggregate purchase price for the tangible assets and the intangible assets provided in the Purchase Agreement was $25,000,000. Additionally, the Purchase





16

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

3. Acquisitions (continued)

Business Combinations (continued)

Agreement provided that Seller lease back the tangible assets from the Company until the Final Closing Date, pursuant to a lease executed on the Initial Closing Date. Transaction costs of $142,000 were included in selling, general and administrative expense.

Below is a summary of the fair value of the net assets acquired on the acquisition date based on a third-party valuation (in thousands):
Land and land improvements
$
7,294

Buildings and equipment
14,866

Customer relationships and trade names
2,270

Goodwill
570

Total assets acquired
$
25,000

The unaudited, pro forma consolidated statement of operations as if Oxnard Lemon had been included in the consolidated results of the Company for the year ended October 31, 2018 would have resulted in revenues of $142,253,000 and net income of $19,728,000.

4. Fair Value Measurements
Under the FASB ASC 820, Fair Value Measurement and Disclosures, a fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).

The following table sets forth the Company’s financial assets and liabilities as of July 31, 2019 and October 31, 2018, which are measured on a recurring basis during the period, segregated by level within the fair value hierarchy (in thousands): 
July 31, 2019
Level 1
 
Level 2
 
Level 3
 
Total
Assets at fair value:
 

 
 

 
 

 
 

Equity securities
$
21,226

 
$
—

 
$
—

 
$
21,226

October 31, 2018
Level 1
 
Level 2
 
Level 3
 
Total
Assets at fair value:
 

 
 

 
 

 
 

Equity securities
$
24,250

 
$
—

 
$
—

 
$
24,250


Equity securities consist of marketable securities in Calavo common stock. At July 31, 2019 and October 31, 2018, the Company owned 240,000 and 250,000 shares, respectively, representing approximately 1.4% of Calavo’s outstanding common stock. These securities are measured at fair value by quoted market prices and changes in fair value are included in the statement of operations subsequent to the adoption of ASU 2016-01.

In July 2019, the Company sold 10,000 shares of Calavo common stock for a total of $952,000 recognizing a loss of $6,000. This loss is included in other (expense) income in the consolidated statement of operations. With the adoption of FASB ASU 2016-01 on November 1, 2018, changes in the fair value of the marketable securities result in gains or losses recognized in net income. The Company recorded an unrealized (loss)/gain of $(1,769,000) and $(2,067,000) during the three and nine months ended July 31, 2019, respectively, which is included in other (expense) income in the consolidated statements of operations. The Company recorded unrealized holding (losses)/gains of $(360,000) (($255,000) net of tax) and $5,640,000 ($3,987,000 net of tax), during the three and nine months ended July 31, 2018, which were included in AOCI in the consolidated balance sheet.

Calavo’s stock price at July 31, 2019 and October 31, 2018 was $88.44 and $97.00 per share, respectively. Prior to the adoption of ASU 2016-01, these equity securities were classified as available-for-sale securities and changes in fair value were recorded in AOCI net of tax.



17

LIMONEIRA COMPANY


5. Concentrations
Lemons procured from third-party growers were 59% and 35% of the Company's lemon supply in the three months ended July 31, 2019 and 2018, respectively. Lemons procured from third-party growers were 59% and 44% of the Company's lemon supply in the nine months ended July 31, 2019 and 2018, respectively. The Company sells all of its avocado production to Calavo and the majority of its oranges and specialty citrus to a third-party packinghouse.  

6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands): 
 
July 31,
2019
 
October 31, 2018
Prepaid insurance
$
515

 
$
647

Prepaid supplies
2,093

 
1,196

Lemon supplier advances
3,438

 
170

Note receivable, net
2,599

 
2,797

Real estate development held for sale
5,024

 
5,024

Commercial property held for sale
3,295

 
—

Water assessment fees and other
1,519

 
694

 
$
18,483

 
$
10,528


In the third quarter of fiscal year 2019, the Company entered into an agreement to sell a commercial property, located in Santa Paula, California, to one of its rental tenants for $4,000,000. The transaction closed on August 30, 2019 with the Company receiving net proceeds of $3,978,000. After transaction and other costs, the sale resulted in a gain of $586,000. At July 31, 2019, the $3,295,000 carrying value of the property was classified as held for sale.

7. Real Estate Development
Real estate development assets are comprised primarily of land and land development costs and consist of the following (in thousands):
 
July 31,
2019
 
October 31,
2018
East Area I
$
—

 
$
91,357

Retained Property - East Area I
10,777

 
10,408

East Area II
5,601

 
5,397

 
$
16,378

 
$
107,162


East Area I, Retained Property and East Area II

In fiscal year 2005, the Company began capitalizing the costs of two real estate development projects east of Santa Paula, California, for the development of 550 acres of land into residential units, commercial buildings and civic facilities. On November 10, 2015 (the “Transaction Date”), the Company entered into a joint venture with The Lewis Group of Companies (“Lewis”) for the residential development of its East Area I real estate development project. To consummate the transaction, the Company formed Limoneira Lewis Community Builders, LLC (the “LLC” or “Joint Venture”) as the development entity, contributed its East Area I property to the LLC and sold a 50% interest in the LLC to Lewis for $20,000,000.
 
The Company and the Joint Venture also entered into a Retained Property Development Agreement on the Transaction Date (the "Retained Property Agreement"). Under the terms of the Retained Property Agreement, the Joint Venture transferred certain contributed East Area I property, which is entitled for commercial development, back to the Company (the "Retained Property") and arranged for the design and construction of certain improvements to the Retained Property, subject to certain reimbursements by the Company. In August 2018, the Retained Property, was transferred back to the Company. The net carrying value of the Retained Property as of July 31, 2019 and October 31, 2018 was $10,777,000 and $10,408,000, respectively, and classified as real estate development. Further, on the Transaction Date, the Joint Venture and the Company entered into a Lease Agreement (the "Lease Agreement"), pursuant to which the Joint Venture would lease certain of the contributed East Area I property back to the Company for continuation of agricultural operations, and certain other permitted uses, on the property until the Joint Venture required the property for development. In December 2018, the Company terminated the Lease Agreement pursuant to the terms therein.

18

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

7. Real Estate Development (continued)

East Area I, Retained Property and East Area II (continued)

The Company’s sale of an interest in the LLC in which the Company’s contributed property comprises the LLC’s primary asset, combined with the Lease Agreement was considered a sale-leaseback transaction under FASB ASC 840, Leases, because of the Company’s continuing involvement in the property in the form of its agricultural operations. Accordingly, the property was carried on the consolidated balance sheet as real estate development, rather than being classified as an equity investment and a sale-leaseback deferral had been recorded for the $20,000,000 payment made by Lewis for the purchase of the LLC interest. Lease expense associated with the Lease Agreement was not required under sale-leaseback accounting since the Company was treated as though it continued to own the property. During the three and nine months ended July 31, 2018, the Company recorded $5,306,000 and $13,731,000, respectively, of real estate development costs and corresponding increases in the sale-leaseback deferral to recognize real estate development costs capitalized by the LLC. There were no repayment requirements for the sale-leaseback deferral. When the Lease Agreement was terminated in December 2018 control of the property transferred to the Joint Venture and therefore, the Company reduced the sale leaseback deferral and corresponding real estate development by $58,330,000 and reclassified $33,353,000 to equity in investments upon derecognition of the real estate development. As the fair value of the Company’s ownership interest in the Joint Venture approximated the Company’s historical basis in the real estate development at the inception of the Joint Venture, no gain or loss was recorded.

The Company made contributions to the Joint Venture of $4,000,000 and $3,500,000 in the nine months ended July 31, 2019 and 2018, respectively. Additionally, the Company recorded equity income, net of amortization of basis differences, of $2,573,000 for the nine months ended July 31, 2019.

In fiscal year 2019, the Company announced that its Joint Venture closed the sales of the initial residential lots representing 210 residential units.

Templeton Santa Barbara, LLC

The real estate development parcels within the Templeton Santa Barbara, LLC project are described as The Terraces at Pacific Crest (“Pacific Crest”), and Sevilla. The net carrying values of Pacific Crest and Sevilla were $2,481,000 and $2,543,000, respectively, as of July 31, 2019 and October 31, 2018. These projects were idle during the nine months ended July 31, 2019 and 2018 and, as such, no costs were capitalized and expenses were insignificant.

In October 2018, the Company began negotiations to sell its Pacific Crest and Sevilla properties for a combined total price of $5,200,000. As a result, the Company recorded impairment charges on Pacific Crest and Sevilla of $769,000 and $789,000, respectively, in October 2018. These negotiations have not resulted in a sale and the Company is actively marketing these properties. At July 31, 2019 and October 31, 2018, the $2,481,000 carrying value of Pacific Crest and the $2,543,000 carrying value of Sevilla were classified as held for sale and included in prepaid expenses and other current assets.

8. Equity Investments
Equity investments consist of the following (in thousands): 
 
July 31,
2019
 
October 31, 2018
Limoneira Lewis Community Builders, LLC
$
53,719

 
$
14,060

Limco Del Mar, Ltd.
1,955

 
1,935

Rosales
1,591

 
2,191

Romney Property Partnership
510

 
512

 
$
57,775

 
$
18,698


The Rosales S.A. ("Rosales") equity investment includes the Company’s 35% interest acquired in fiscal year 2014 and an additional 12% interest acquired with the purchase of Fruticola Pan de Azucar S.A. (“PDA”) in fiscal year 2017. The Company’s investment in Rosales is accounted for using the equity method of accounting based on the sum of its direct and indirect ownership.

The Limoneira Lewis Community Builders, LLC investment balance includes the value of the Company's ownership interest in the Joint Venture as described in Note 7 - Real Estate Development.

19

LIMONEIRA COMPANY


8. Equity Investments (continued)

Unconsolidated Significant Subsidiary

The LLC investment balance includes the value of the Company's ownership interest in the LLC. In accordance with Rule 10-01(b)(1) of Regulation S-X, which applies for interim reports on Form 10-Q, the Company must determine if its equity method investees are considered, “significant subsidiaries”. In evaluating its investments, there are two tests utilized to determine if equity method investees are considered significant subsidiaries: the income test and the investment test. Summarized income statement information of an equity method investee is required in an interim report if either of the two tests exceed 20%. During the current year-to-date interim period, this threshold was met for the LLC and thus requires summarized income statement information in this Quarterly Report on Form 10-Q.

The following is unaudited summarized financial information for the LLC (in thousands):
 
Nine Months Ended July 31,
 
2019
 
2018
Revenues
$
36,551

 
$
—

Cost of land sold
26,770

 
—

Operating expenses
444

 
233

Net income (loss)
$
9,336

 
$
(233
)
Net income attributable to Limoneira Company
$
4,021

 
$
—


9. Other Assets
Other assets consist of the following (in thousands):
 
July 31,
2019
 
October 31, 2018
Investments in mutual water companies
$
5,498

 
$
5,026

Acquired water and mineral rights
3,784

 
3,783

Deposit for land purchase
589

 
593

Deferred lease assets and other
323

 
396

Notes receivable
821

 
566

Revolving funds and memberships
240

 
267

Intangibles, net of accumulated amortization
8,458

 
2,442

Goodwill
2,391

 
1,431

 
$
22,104

 
$
14,504

 
10. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 
July 31,
2019
 
October 31, 2018
Compensation
$
2,109

 
$
2,784

Property taxes
205

 
785

Interest
403

 
297

Deferred rental income and deposits
473

 
497

Lease expense
92

 
378

Lemon supplier payables
—

 
1,214

Other
991

 
1,769

 
$
4,273

 
$
7,724


20

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

11. Long-Term Debt
Long-term debt is comprised of the following (in thousands):
 
 
July 31,
2019
 
October 31, 2018
Farm Credit West revolving and non-revolving lines of credit: the interest rate of the revolving line of credit is variable based on the one-month London Interbank Offered Rate (“LIBOR”), which was 2.40% at July 31, 2019, plus 1.85%. Effective July 1, 2018, the interest rate for the $40,000,000 outstanding balance of the non-revolving line of credit was fixed at 4.77%. Interest is payable monthly and the principal is due in full on July 1, 2022.
 
$
85,378

 
$
50,888

Farm Credit West term loan: the interest rate is variable and was 4.95% at July 31, 2019. The loan is payable in quarterly installments through November 2022.
 
2,179

 
2,602

Farm Credit West term loan: the interest rate is variable and was 4.95% at July 31, 2019. The loan is payable in monthly installments through October 2035.
 
1,090

 
1,122

Farm Credit West term loan: the interest rate is fixed at 4.70%. The loan is payable in monthly installments though March 2036.
 
8,912

 
9,172

Farm Credit West term loan: the interest rate is fixed at 3.62% until March 2021, becoming variable for the remainder of the loan. The loan is payable in monthly installments though March 2036.
 
6,594

 
6,808

Wells Fargo term loan: the interest rate is fixed at 3.58%. The loan is payable in monthly installments through January 2023.
 
5,312

 
6,367

Banco de Chile term loan: the interest rate is fixed at 6.48%. The loan is payable in annual installments through January 2025.
 
1,512

 
1,857

Note Payable: the interest rate ranges from 5.00% to 7.00% and was 5.50% at July 31, 2019. The loan includes interest-only monthly payments and principal is due in February 2023.
 
1,435

 
1,435

Subtotal
 
112,412

 
80,251

Less deferred financing costs, net of accumulated amortization
 
135

 
158

Total long-term debt, net
 
112,277

 
80,093

Less current portion
 
3,024

 
3,127

Long-term debt, less current portion
 
$
109,253

 
$
76,966


On June 20, 2017, the Company entered into a Master Loan Agreement (the “Loan Agreement”) with Farm Credit West, FLCA (“Farm Credit West”) that includes a Revolving Credit Supplement and a Non-Revolving Credit Supplement (the “Supplements”). Proceeds from the Supplements were used to pay down all the remaining outstanding indebtedness under the revolving credit facility the Company had with Rabobank, N.A. On January 29, 2018, the Company amended the Revolving Credit Supplement to increase the borrowing capacity from $60,000,000 to $75,000,000. The Supplements provide aggregate borrowing capacity of $115,000,000 comprised of $75,000,000 under the Revolving Credit Supplement and $40,000,000 under the Non-Revolving Credit Supplement. The borrowing capacity based on collateral value was $115,000,000 at July 31, 2019.

All indebtedness under the Loan Agreements, including any indebtedness under the Supplements, is secured by a first lien on certain of the Company’s agricultural properties in Tulare and Ventura counties in California and certain of the Company’s building fixtures and improvements and investments in mutual water companies associated with the pledged agricultural properties. The Loan Agreement includes customary default provisions that provide should an event of default occur, Farm Credit West, at its option, may declare all or any portion of the indebtedness under the Loan Agreement to be immediately due and payable without demand, notice of non-payment, protest or prior recourse to collateral, and terminate or suspend the Company’s right to draw or request funds on any loan or line of credit.

Interest is capitalized on non-bearing orchards, real estate development projects and significant construction in progress. The Company capitalized interest of $366,000 and $688,000 during the three months ended July 31, 2019 and 2018, respectively, and $977,000 and $1,637,000 during the nine months ended July 31, 2019 and 2018, respectively. Capitalized interest is included in property, plant and equipment and real estate development in the Company’s consolidated balance sheets. 
 






21

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

12. Basic and Diluted Net (Loss) Income per Share

Basic net (loss) income per common share is calculated using the weighted-average number of common shares outstanding during the period without consideration of the dilutive effect of conversion of preferred stock. Diluted net (loss) income per common share is calculated using the weighted-average number of common shares outstanding during the period plus the dilutive effect of conversion of unvested, restricted stock and preferred stock. The computations for basic and diluted net (loss) income per common share are as follows (in thousands, except per share amounts):
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Basic net (loss) income per common share:
 

 
 

 
 
 
 
Net (loss) income applicable to common stock
$
(1,115
)
 
$
8,076

 
$
(3,244
)
 
$
23,049

Effect of unvested, restricted stock
(16
)
 
(10
)
 
(49
)
 
(29
)
Numerator: Net (loss) income for basic EPS
(1,131
)
 
8,066

 
(3,293
)
 
23,020

Denominator: Weighted average common shares-basic
17,554

 
15,947

 
17,527

 
14,979

Basic net (loss) income per common share
$
(0.06
)
 
$
0.51

 
$
(0.19
)
 
$
1.54

Diluted net (loss) income per common share:
 

 
 

 
 
 
 
Numerator: Net (loss) income for diluted EPS
$
(1,131
)
 
$
8,201

 
$
(3,293
)
 
$
23,425

Weighted average common shares–basic
17,554

 
15,947

 
17,527

 
14,979

Effect of dilutive unvested, restricted stock and preferred stock
—

 
604

 
—

 
599

Denominator: Weighted average common shares–diluted
17,554

 
16,551

 
17,527

 
15,578

Diluted net (loss) income per common share
$
(0.06
)
 
$
0.50

 
$
(0.19
)
 
$
1.50


Diluted (losses) earnings per common share are computed using the more dilutive method of either the two-class method or the treasury stock method. Unvested stock-based compensation awards that contain non-forfeitable rights to dividends as participating shares are included in computing earnings per share. The Company’s unvested, restricted stock awards qualify as participating shares. The Company excluded 149,000 and 76,000, unvested, restricted shares, as calculated under the treasury stock method, from its computation of diluted (losses) earnings per share for the three months ended July 31, 2019 and 2018, respectively, and 135,000 and 81,000 for the nine months ended July 31, 2019 and 2018, respectively.

13. Related-Party Transactions
The Company rents certain of its residential housing assets to employees on a month-to-month basis. The Company recorded $550,000 and $530,000 of rental revenue from employees in the nine months ended July 31, 2019 and 2018, respectively. There were no rental payments due from employees at July 31, 2019 or October 31, 2018.
 
The Company has representation on the boards of directors of the mutual water companies in which the Company has investments. The Company recorded capital contributions and purchased water and water delivery services from such mutual water companies, in aggregate, of $207,000 and $211,000 in the three months ended July 31, 2019 and 2018, respectively, and $1,065,000 and $1,097,000 in the nine months ended July 31, 2019 and 2018, respectively. Capital contributions are included in other assets in the Company’s consolidated balance sheets and purchases of water and water delivery services are included in agribusiness expense in the Company’s consolidated statements of operations. Water payments due to the mutual water companies were, in aggregate, insignificant at July 31, 2019 and October 31, 2018, respectively.

The Company has representation on the board of directors of a non-profit cooperative association that provides pest control services for the agricultural industry. The Company purchased services and supplies of $302,000 and $396,000 from the association in the three months ended July 31, 2019 and 2018, respectively, and $1,158,000 and $1,211,000 in the nine months ended July 31, 2019 and 2018, respectively, which are included in agribusiness expense in the Company’s consolidated statements of operations. Payments due to the cooperative were insignificant at July 31, 2019 and October 31, 2018.




22

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

13. Related-Party Transactions (continued)

The Company has an investment in and representation on the board of directors of Calavo and Calavo has an investment in and had representation on the board of directors of the Company through December 2018. The Company recorded dividend income of $250,000 and $285,000 in the nine months ended July 31, 2019 and 2018, respectively, on its investment in Calavo, which is included in other income (expense), net in the Company’s consolidated statements of operations. The Company paid $381,000 and $324,000 of dividends to Calavo for the nine months ended July 31, 2019 and 2018, respectively. The Company had $2,519,000 and $5,643,000 in avocado sales to Calavo for the three months ended July 31, 2019 and 2018, respectively, and $3,062,000 and $6,578,000 for the nine months ended July 31, 2019 and 2018, respectively. which are included in agribusiness revenues in the Company's consolidated statements of operations. There was $729,000 and zero receivable from Calavo at July 31, 2019 and October 31, 2018, respectively. The Company leases office space to Calavo and received rental income of $240,000 and $219,000 in the nine months ended July 31, 2019 and 2018, respectively, which is included in rental operations revenues in the Company’s consolidated statements of operations. The Company purchased $261,000 and $57,000 of storage services from Calavo in the three months ended July 31, 2019 and 2018, respectively. The Company purchased $262,000 and $61,000 of storage services from Calavo in the nine months ended July 31, 2019 and 2018, respectively. Amounts due for these services were $260,000 and $3,000 at July 31, 2019 and October 31, 2018, respectively.

Certain members of the Company’s board of directors market lemons through the Company. The aggregate amount of lemons procured from entities owned or controlled by members of the board of directors was insignificant and $329,000 in the three months ended July 31, 2019 and 2018, respectively, and $386,000 and $1,715,000 in the nine months ended July 31, 2019 and 2018, respectively, which are included in agribusiness expense in the Company’s consolidated statements of operations. Payments due to these board members were insignificant and $487,000 at July 31, 2019 and October 31, 2018, respectively. Additionally, the Company leases approximately 31 acres of orchards from entities affiliated with a member on the board of directors and incurred insignificant lease expense related to these leases in the nine months ended July 31, 2019 and 2018.
 
On July 1, 2013, the Company and Cadiz Real Estate LLC (“Cadiz”), a wholly-owned subsidiary of Cadiz Inc., entered into a long-term lease agreement (the “Lease”) for a minimum of 320 acres, with options to lease up to an additional 960 acres, located within 9,600 zoned agricultural acres owned by Cadiz in eastern San Bernardino County, California. The initial term of the Lease runs for 20 years and the annual base rental rate is equal to the sum of $200 per planted acre and 20% of gross revenues from the sale of harvested lemons (less operating expenses) not to exceed $1,200 per acre per year. A member of the Company’s board of directors serves as the CEO, President and a member of the board of directors of Cadiz Inc. Additionally, this board member is an attorney with a law firm that provided services of insignificant amounts to the Company during the nine months ended July 31, 2019 and 2018. Payments due to the law firm were insignificant at July 31, 2019 and October 31, 2018, respectively. The Company incurred insignificant lease and farming expenses in the nine months ended July 31, 2019 and 2018, which are recorded in agribusiness expense in the Company’s consolidated statements of operations.
 
In February 2016, Cadiz assigned this lease to Fenner Valley Farms, LLC (“Fenner”), a subsidiary of Water Asset Management, LLC (“WAM”). An entity affiliated with WAM is the holder of 9,300 shares of Limoneira Company Series B-2 convertible preferred stock. Amounts due to Fenner were insignificant at July 31, 2019 and October 31, 2018.

The Company has representation on the board of directors of Colorado River Growers, Inc. (“CRG”), a non-profit cooperative association of fruit growers engaged in the agricultural harvesting business in Yuma County, Arizona. The Company paid harvest costs to CRG of $3,841,000 and $2,451,000 in the nine months ended July 31, 2019 and 2018, respectively, which are included in agribusiness expense in the Company’s consolidated statements of operations. Our Associated Citrus Packers, Inc. ("Associated") provided harvest management and administrative services to CRG in the amounts of $306,000 and $218,000 during the nine months ended July 31, 2019 and 2018, respectively, which are included in agribusiness revenues in the Company’s consolidated statements of operations. There was zero and $232,000 due to Associated from CRG at July 31, 2019 and October 31, 2018, respectively, which is included in accounts receivable, net in the Company’s consolidated balance sheets.

The Company has representation on the board of directors of Yuma Mesa Irrigation and Drainage District (“YMIDD”). The Company purchased insignificant amounts of water from YMIDD during the nine months ended July 31, 2019 and 2018, respectively, which are included in agribusiness expenses in the Company’s consolidated statements of operations. There were no amounts due to YMIDD at July 31, 2019 or October 31, 2018.

The Company has a 1.3% interest in Limco Del Mar, Ltd. (“Del Mar”) as a general partner and a 26.8% interest as a limited partner. The Company provides Del Mar with farm management, orchard land development and accounting services and received expense reimbursements of insignificant amounts during the nine months ended July 31, 2019 and 2018. The Company procures lemons from Del Mar and fruit proceeds payable to Del Mar were $645,000 and $709,000 at July 31, 2019 and October 31, 2018,

23

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

13. Related-Party Transactions (continued)

respectively, and are included in grower’s payable in the Company’s consolidated balance sheets. The Company received insignificant cash distributions and recorded equity in earnings of this investment of $195,000 and $308,000 in the nine months ended July 31, 2019 and 2018, respectively.

On August 14, 2014, the Company’s wholly owned subsidiary, Limoneira Chile SpA, invested approximately $1,750,000 for a 35% interest in Rosales, a citrus packing, marketing and sales business located in La Serena, Chile. The Company purchased an additional 12% interest in Rosales with the February 2017 acquisition of PDA. The Company recognized $537,000 and $1,009,000 of lemon sales to Rosales in the nine months ended July 31, 2019 and 2018, respectively. Additionally, San Pablo recognized aggregate lemon and orange sales of $1,391,000 and $5,000 to Rosales for the nine months ended July 31, 2019 and 2018, respectively. PDA recognized aggregate lemon and orange sales of $442,000 and $451,000 to Rosales in the three months ended July 31, 2019 and 2018, respectively, and $1,207,000 and $1,154,000 in the nine months ended July 31, 2019 and 2018, respectively, which are recorded in agribusiness revenues in the Company’s consolidated statements of operations. The aggregate amount of lemons and oranges procured from Rosales were $1,900,000 and $1,009,000 in the three months ended July 31, 2019 and 2018, respectively and $2,259,000 and $1,009,000 in the nine months ended July 31, 2019 and 2018, respectively. Amounts payable to Rosales were zero at July 31, 2019 and insignificant at October 31, 2018. The Company recorded insignificant equity in losses and insignificant equity earnings from this equity investment in the nine months ended July 31, 2019 and 2018, respectively, and amortization of fair value basis differences of $253,000 in the nine months ended July 31, 2019 and 2018. The Company received $283,000 and zero cash distributions from this equity investment in the nine months ended July 31, 2019 and 2018, respectively.

As discussed in Note 3, on May 30, 2019, the Company acquired a 51% interest in Trapani Fresh. The Company advanced $907,000 to FGF for fruit purchases and FGF provided farming, packing and administrative services to Trapani Fresh of approximately $4,048,000 from acquisition to July 31, 2019, which are included in agribusiness expense in the Company's consolidated statement of operations. There was $2,907,000 due to FGF from Trapani Fresh at July 31, 2019, which is included in accounts payable in the Company's consolidated balance sheets.

14. Income Taxes

The income tax benefit recorded for the nine months ended July 31, 2019 differs from the income taxes expected at the U.S. federal statutory tax rate of 21.0% due primarily to income attributable to foreign jurisdictions which is taxed at different rates, state taxes, and nondeductible tax items.

The Company has no material uncertain tax positions as of July 31, 2019. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. The Company has not accrued any interest and penalties associated with uncertain tax positions as of July 31, 2019.

The Company applied the guidance in Staff Accounting Bulletin No. 118 (“SAB 118”) when accounting for the enactment-date effects of the 2017 Act throughout fiscal year 2018. At January 31, 2019, the Company completed its evaluation for all of the enactment-date income tax effects of the 2017 Act and no material adjustments noted are to be made on the provisional amounts recorded at January 31, 2018.
 
15. Retirement Plans

The Limoneira Company Retirement Plan (the “Plan”) is a noncontributory, defined benefit, single employer pension plan, which provides retirement benefits for all eligible employees. Benefits paid by the Plan are calculated based on years of service, highest five-year average earnings, primary Social Security benefit and retirement age. Effective June 2004, the Company froze the Plan and no additional benefits accrued to participants subsequent to that date.



24

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

15. Retirement Plans (continued)

The Plan is funded consistent with the funding requirements of federal law and regulations. There were funding contributions of $150,000 during both three months ended July 31, 2019 and 2018, respectively, and $450,000 during both nine months ended July 31, 2019 and 2018, respectively. 

The components of net periodic pension cost for the Plan for the three and nine months ended July 31, 2019 and 2018 were as follows (in thousands):
 
Three Months Ended
July 31,
 
Nine Months Ended
July 31,
 
2019
 
2018
 
2019
 
2018
Administrative expenses
$
47

 
$
64

 
$
141

 
$
190

Interest cost
207

 
192

 
621

 
577

Expected return on plan assets
(272
)
 
(267
)
 
(816
)
 
(803
)
Prior service cost
11

 
11

 
33

 
33

Recognized actuarial loss
101

 
176

 
302

 
526

Net periodic benefit cost
$
94

 
$
176

 
$
281

 
$
523

 
16. Commitments and Contingencies

The Company is from time to time involved in various lawsuits and legal proceedings that arise in the ordinary course of business. At this time, the Company is not aware of any pending or threatened litigation against it that it expects will have a material adverse effect on its business, financial condition, liquidity, or operating results. Legal claims are inherently uncertain, however, and it is possible that the Company’s business, financial condition, liquidity and/or operating results could be adversely affected in the future by legal proceedings.
 
17. Stock-based Compensation

The Company has a stock-based compensation plan (the “Stock Plan”) that allows for the grant of common stock of the Company to members of management based on achievement of certain annual financial performance and other criteria. The number of shares granted is based on a percentage of the employee’s base salary divided by the stock price on the grant date. Shares granted under the Stock Plan vest over two to five-year periods.

In December 2018, 40,094 shares of common stock with a per share value of $18.74 were granted to management under the Stock Plan for fiscal year 2018 performance, resulting in total compensation expense of approximately $751,000, with $343,000 recognized in the year ended October 31, 2018 and the balance to be recognized over the next two years as the shares vest. In addition, 90,000 shares of common stock with a per share value of $19.84 were granted to key executives under the Stock Plan, resulting in a total compensation expense of approximately $1,786,000, to be recognized equally over the next three years as the shares vest.

During January 2019 and 2018, 15,642 and 14,033 shares, respectively, of common stock were granted to the Company’s non-employee directors under the Company’s stock-based compensation plans. The Company recognized $339,000 and $309,000 of stock-based compensation to non-employee directors during the nine months ended July 31, 2019 and 2018, respectively.

18. Segment Information

The Company operates in six reportable operating segments: fresh lemons, lemon packing, avocados, other agribusiness, rental operations and real estate development. The reportable operating segments of the Company are strategic business units with different products and services, distribution processes and customer bases. The fresh lemons segment includes sales, farming and harvesting expenses and third-party grower costs relative to fresh lemons. The lemon packing segment includes packing revenues and shipping and handling revenues relative to lemon packing. The lemon packing segment expenses are comprised of lemon packing costs. The lemon packing segment revenues include intersegment revenues between fresh lemons and lemon packing. The intersegment revenues are included gross in the segment note and a separate line item is shown as an elimination. The avocados segment includes sales, farming and harvest costs. The other agribusiness segment includes sales, farming and harvesting of oranges, specialty citrus and other crops. The rental operations segment includes housing and commercial rental operations, leased land and organic recycling. The real estate development segment includes real estate development operations.

25

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

18. Segment Information (continued)
 
The Company does not separately allocate depreciation and amortization to its fresh lemons, lemon packing, avocados and other agribusiness segments. No asset information is provided for reportable operating segments, as these specified amounts are not included in the measure of segment profit or loss reviewed by the Company’s chief operating decision maker. The Company measures operating performance, including revenues and operating income, of its operating segments and allocates resources based on its evaluation. The Company does not allocate selling, general and administrative expense, other income, interest expense and income taxes, or specifically identify them to its operating segments. The Company earns packing revenue for packing lemons grown on its orchards and lemons procured from third-party growers. Intersegment revenues represent packing revenues related to lemons grown on the Company’s orchards.

Segment information for the three months ended July 31, 2019 (in thousands):
 
Fresh
Lemons(1)
Lemon
Packing
Eliminations
 
Avocados
Other
Agribusiness
Total
Agribusiness
Rental
Operations
Real Estate
Development
Corporate
and Other
Total
Revenues from external customers
$
41,169

$
5,232

$
—

$
2,519

$
711

$
49,631

$
1,238

$
—

$
—

$
50,869

Intersegment revenue
—

10,263

(10,263
)
—

—

—

—

—

—

—

Total net revenues
41,169

15,495

(10,263
)
2,519

711

49,631

1,238

—

—

50,869

Costs and expenses
35,653

13,524

(10,263
)
1,185

825

40,924

798

50

4,899

46,671

Depreciation and amortization
—

—

—

—

—

1,823

195

—

62

2,080

Operating income (loss)
$
5,516

$
1,971

$
—

$
1,334

$
(114
)
$
6,884

$
245

$
(50
)
$
(4,961
)
$
2,118


Segment information for the three months ended July 31, 2018 (in thousands):
 
Fresh
Lemons
Lemon
Packing
Eliminations
 
Avocados
Other
Agribusiness
Total
Agribusiness
Rental
Operations
Real Estate
Development
Corporate
and Other
Total
Revenues from external customers
$
28,457

$
2,279

$
—

$
5,643

$
2,298

$
38,677

$
1,273

$
—

$
—

$
39,950

Intersegment revenue
—

6,340

(6,340
)
—

—

—

—

—

—

—

Total net revenues
28,457

8,619

(6,340
)
5,643

2,298

38,677

1,273

—

—

39,950

Costs and expenses
18,872

6,033

(6,340
)
1,829

2,066

22,460

810

25

3,454

26,749

Depreciation and amortization
—

—

—

—

—

1,523

194

—

59

1,776

Operating income (loss)
$
9,585

$
2,586

$
—

$
3,814

$
232

$
14,694

$
269

$
(25
)
$
(3,513
)
$
11,425


Segment information for the nine months ended July 31, 2019 (in thousands):
 
Fresh
Lemons(1)
Lemon
Packing
Eliminations
 
Avocados
Other
Agribusiness
Total
Agribusiness
Rental
Operations
Real Estate
Development
Corporate
and Other
Total
Revenues from external customers
$
108,090

$
13,289

$
—

$
3,062

$
6,813

$
131,254

$
3,668

$
—

$
—

$
134,922

Intersegment revenue
—

25,464

(25,464
)
—

—

—

—

—

—

—

Total net revenues
108,090

38,753

(25,464
)
3,062

6,813

131,254

3,668

—

—

134,922

Costs and expenses
95,650

32,972

(25,464
)
2,822

7,210

113,190

2,583

102

14,627

130,502

Depreciation and amortization
—

—

—

—

—

5,551

584

—

192

6,327

Operating income (loss)
$
12,440

$
5,781

$
—

$
240

$
(397
)
$
12,513

$
501

$
(102
)
$
(14,819
)
$
(1,907
)












26

LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

18. Segment Information (continued)

Segment information for the nine months ended July 31, 2018 (in thousands):
 
Fresh
Lemons
Lemon
Packing
Eliminations
 
Avocados
Other
Agribusiness
Total
Agribusiness
Rental
Operations
Real Estate
Development
Corporate
and Other
Total
Revenues from external customers
$
83,994

$
8,120

$
—

$
6,578

$
12,183

$
110,875

$
3,803

$
—

$
—

$
114,678

Intersegment revenue
—

18,416

(18,416
)
—

—

—

—

—

—

—

Total net revenues
83,994

26,536

(18,416
)
6,578

12,183

110,875

3,803

—

—

114,678

Costs and expenses
64,363

18,927

(18,416
)
3,408

8,195

76,477

2,461

94

11,369

90,401

Depreciation and amortization
—

—

—

—

—

4,466

584

—

160

5,210

Operating income (loss)
$
19,631

$
7,609

$
—

$
3,170

$
3,988

$
29,932

$
758

$
(94
)
$
(11,529
)
$
19,067


The following table sets forth revenues by category, by segment for the three and nine months ended July 31, 2019 and 2018 (in thousands):
 
Three Months Ended
July 31,
 
Nine Months Ended
July 31,
 
2019
 
2018
 
2019
 
2018
Fresh lemons (1)
$
41,169

 
$
28,457

 
$
108,090

 
$
83,994

Lemon packing
15,495

 
8,619

 
38,753

 
26,536

Intersegment revenue
(10,263
)
 
(6,340
)
 
(25,464
)
 
(18,416
)
Lemon revenues
46,401

 
30,736

 
121,379

 
92,114

 
 
 
 
 
 
 
 
Avocados
2,519

 
5,643

 
3,062

 
6,578

 
 
 
 
 
 
 
 
Navel and Valencia oranges
711

 
1,986

 
3,794

 
8,552

Specialty citrus and other crops
—

 
312

 
3,019

 
3,631

Other agribusiness revenues
711

 
2,298

 
6,813

 
12,183

Agribusiness revenues
49,631

 
38,677

 
131,254

 
110,875

 
 
 
 
 
 
 
 
Residential and commercial rentals
928

 
881

 
2,690

 
2,609

Leased land
224

 
304

 
717

 
958

Organic recycling and other
86

 
88

 
261

 
236

Rental operations revenues
1,238

 
1,273

 
3,668

 
3,803

 
 
 
 
 
 
 
 
Real estate development revenues
—

 
—

 
—

 
—

Total net revenues
$
50,869

 
$
39,950

 
$
134,922

 
$
114,678


(1) During the first quarter of fiscal 2019, the Company adopted a comprehensive new revenue recognition standard using a modified retrospective method that does not restate prior periods to be comparable to the current period presentation. The adoption of this guidance primarily impacted the presentation of certain brokered fruit sales revenue received and the related cost of fruit incurred by the Company. The adoption of this guidance resulted in revenue within the Company’s fresh lemon segment of $1,781,000 and $2,201,000, during the three and nine months ended July 31, 2019, respectively. See Note 2 - Summary of Significant Accounting Policies for additional information.
 
19. Subsequent Events
The Company has evaluated events subsequent to July 31, 2019 through the date of this filing, to assess the need for potential recognition or disclosure in this Quarterly Report on Form 10-Q. Based upon this evaluation, except as described in the notes to the interim consolidated financial statements, it was determined that no other subsequent events occurred that require recognition or disclosure in the unaudited consolidated financial statements.

27

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
Limoneira Company was incorporated in Delaware in 1990 as the successor to several businesses with operations in California since 1893. We are an agribusiness and real estate development company founded and based in Santa Paula, California, committed to responsibly using and managing our approximately 15,700 acres of land, water resources and other assets to maximize long-term stockholder value. Our current operations consist of fruit production, sales and marketing, real estate development and capital investment activities.
  
We are one of California’s oldest citrus growers. According to Sunkist Growers, Inc. (“Sunkist”), we are one of the largest growers of lemons in the United States and, according to the California Avocado Commission, one of the largest growers of avocados in the United States. In addition to growing lemons and avocados, we grow oranges and a variety of other specialty citrus and other crops. We have agricultural plantings throughout Ventura, Tulare, San Bernardino and San Luis Obispo Counties in California, Yuma County in Arizona, La Serena, Chile and Argentina, which collectively consist of approximately 6,200 acres of lemons, 900 acres of avocados, 1,600 acres of oranges and 1,000 acres of specialty citrus and other crops. We also operate our own packinghouses in Santa Paula, California and Yuma, Arizona, where we process and pack lemons that we grow, as well as lemons grown by others. We have a 47% interest in Rosales S.A. (“Rosales”), a citrus packing, marketing and sales business, a 90% interest in Fruticola Pan de Azucar S.A. (“PDA”), a lemon and orange orchard and 100% interest in Agricola San Pablo, SpA ("San Pablo"), a lemon and orange orchard, all of which are located near La Serena, Chile. We have a 51% interest in a joint venture, Trapani Fresh Consorcio de Cooperacion ("Trapani Fresh"), a lemon growing, packing, marketing and selling operation in Argentina.
 
Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. Water for our farming operations is sourced from the existing water resources associated with our land, which includes rights to water in the adjudicated Santa Paula Basin (aquifer) and the un-adjudicated Fillmore and Paso Robles Basins (aquifers). We use ground water from the San Joaquin Valley Basin and water from water districts and irrigation districts in Tulare County, which is in California’s San Joaquin Valley and we use ground water from the Cadiz Valley Basin in San Bernardino County. We also use surface water in Arizona from the Colorado River through the Yuma Mesa Irrigation and Drainage District (“YMIDD”). We use ground water provided by wells and surface water for our PDA and San Pablo farming operations in Chile and our Trapani Fresh farming operations in Argentina.
  
For more than 100 years, we have been making strategic investments in California agribusiness and real estate development. We currently have three real estate development projects in California. These projects include multi-family housing and single-family homes comprised of approximately 260 completed rental units and another approximately 1,500 units in various stages of planning and development.
 
Business Division Summary
 
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, and includes our farming, harvesting, lemon packing and lemon sales operations. The rental operations division includes our residential and commercial rentals, leased land operations and organic recycling. The real estate development division includes our real estate projects and development. Financial information and discussion of our six reportable segments, which includes fresh lemons, lemon packing, avocados, other agribusiness, rental operations and real estate development, are contained in the notes to the accompanying consolidated financial statements of this Quarterly Report on Form 10-Q.
 
Agribusiness Division
 
The agribusiness division is comprised of four of our reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness, which represented approximately 96%, 96% and 95% of our fiscal year 2018, 2017 and 2016 consolidated revenues, respectively, of which fresh lemons and lemon packing combined represented 80%, 78% and 76% of our fiscal year 2018, 2017 and 2016 consolidated revenues, respectively.
 
Our lemon farming is included in our “fresh lemons” and “lemon packing” reportable operating segments within our financial statements. We are one of the largest growers of lemons and avocados in the United States. We market and sell lemons directly to our food service, wholesale and retail customers throughout the United States, Canada, Asia, Australia and certain other international markets. During the nine months ended July 31, 2019, lemon sales were comprised of approximately 79% in domestic and Canadian sales, 17% in sales to domestic exporters and 4% in international sales. Additionally, we had approximately $2.6 million of lemon and orange sales in

28

Chile by PDA and San Pablo and $11.7 million in Argentina by Trapani Fresh in the nine months ended July 31, 2019. We sell a portion of our oranges and specialty citrus to Sunkist-licensed and other third-party packinghouses. We sell our pistachios to a roaster, packager and marketer of nuts, and our wine grapes are sold to various wine producers.
 
Historically, our agribusiness operations have been seasonal in nature with quarterly revenue fluctuating depending on the timing and variety of crops being harvested. Cultural costs in our agribusiness tend to be higher in the first and second quarters and lower in the third and fourth quarters because of the timing of expensing cultural costs in the current year that were inventoried in the prior year. Our harvest costs generally increase in the second quarter and peak in the third quarter coinciding with the increasing production and revenue.
 
Fluctuations in price are a function of global supply and demand with weather conditions, such as unusually low temperatures, typically having the most dramatic effect on the amount of lemons supplied in any individual growing season. We believe we have a competitive advantage by maintaining our own lemon packing operations, even though a significant portion of the costs related to these operations are fixed. As a result, cost per carton is a function of fruit throughput. While we regularly monitor our costs for redundancies and opportunities for cost reductions, we also supplement the number of lemons we pack in our packinghouse with additional lemons procured from other growers. Because the fresh utilization rate for our lemons, or percentage of lemons we harvest and pack that are sold to the fresh market, is directly related to the quality of lemons we pack and, consequently, the price we receive per 40-pound box, we only pack lemons from other growers if we determine their lemons are of good quality.
 
Our avocado producing business is important to us yet faces constraints on growth as there is little additional land that can be cost-effectively acquired to support new avocado orchards in Southern California. Also, avocado production is cyclical as avocados typically bear fruit on a bi-annual basis with large crops in one year followed by smaller crops the next year. While our avocado production can be volatile, the profitability and cash flow realized from our avocados frequently offsets occasional losses in other crops we grow and helps to diversify our fruit production base.
 
In addition to growing lemons and avocados, we grow oranges, specialty citrus and other crops, typically utilizing land not suitable for growing high quality lemons. We regularly monitor the demand for the fruit we grow in the ever-changing marketplace to identify trends. For instance, while per capita consumption of oranges in the United States has been decreasing since 2000 primarily as a result of consumers increasing their consumption of mandarin oranges and other specialty citrus, the international market demand for U.S. oranges has increased. As a result, we have focused our orange production on high quality late season Navel oranges primarily for export to Japan, China and Korea, which are typically highly profitable niche markets. We produce our specialty citrus and other crops in response to consumer trends we identify and believe that we are a leader in the niche production and sale of certain of these high margin fruits. We carefully monitor the respective markets of specialty citrus and other crops and we believe that demand for the types and varieties of specialty citrus and other crops that we grow will continue to increase throughout the world.
 
Rental Operations Division
 
Our rental operations division is provided for in our financial statements as its own reportable operating segment and includes our residential and commercial rentals, leased land operations and organic recycling. Our rental operations division represented approximately 4%, 4% and 5% of our consolidated revenues in fiscal years 2018, 2017 and 2016, respectively. Our residential rental units generate reliable cash flows which we use to partially fund the operations of all three of our business divisions and provide affordable housing to many of our employees, including our agribusiness employees, a unique employment benefit that helps us maintain a dependable, long-term employee base. In addition, our leased land business provides us with a typically profitable diversification. Revenue from our rental operations segment is generally level throughout the year.
 
Real Estate Development Division
 
Our real estate development division is provided for in our financial statements as its own reportable operating segment and includes our real estate development operations. The real estate development division had no significant revenue in fiscal years 2018, 2017 or 2016. We recognize that long-term strategies are required for successful real estate development activities. Our goal is to redeploy real estate earnings and cash flow into the expansion of our agribusiness and other income producing real estate. For real estate development projects and joint ventures, it is not unusual for the timing and amounts of revenues and costs, partner contributions and distributions, project loans and other financing assumptions and project cash flows to be impacted by government approvals, project revenue and cost estimates and assumptions, economic conditions, financing sources and product demand as well as other factors. Such factors could affect our results of operations, cash flows and liquidity. 
 

29

Water Resources
 
Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. Water for our farming operations is sourced from the existing water resources associated with our land, which includes rights to water in the adjudicated Santa Paula Basin (aquifer) and the un-adjudicated Fillmore and Paso Robles Basins (aquifers). We use ground water from the San Joaquin Valley Basin and water from local water and irrigation districts in Tulare County, which is in California’s San Joaquin Valley. We also use ground water from the Cadiz Valley Basin in California’s San Bernardino County and surface water in Arizona from the Colorado River through the YMIDD. We use ground and surface water for our PDA and San Pablo farming operations in Chile and our Trapani Fresh farming operations in Argentina.
 
California has historically experienced periods of below average precipitation. Recent precipitation has brought relief to California’s drought conditions, although the last few years have been among the most severe droughts on record. Rainfall, snow levels and water content of snow pack had previously been significantly below historical averages. These conditions resulted in reduced water levels in streams, rivers, lakes, aquifers and reservoirs. The governor of California declared a drought State of Emergency in February 2014, which was lifted in April 2017. Federal officials oversee the Central Valley Project, California’s largest water delivery system and 100% of the contracted amount of water was provided to San Joaquin Valley farmers in 2018 and 2017 compared to 75% in 2016 and zero for 2015 and 2014.
 
Depending on the location of our agricultural operations, we obtain our water from aquifers, water delivered by water federal, state and local water and irrigation districts and rainfall. Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own.
 
Water for our farming operations located in Ventura County, California is sourced from the existing water resources associated with our land, which includes approximately 8,600 acre feet of adjudicated water rights in Santa Paula Basin (aquifer) and the un-adjudicated Fillmore Basin.
 
We use a combination of ground water provided by wells and water from various local water and irrigation districts in Tulare County, California that is in the agriculturally productive San Joaquin Valley.
 
We use ground water provided by wells that derive water from the Cadiz Valley Basin at the Cadiz Ranch in San Bernardino, California.
 
Our Windfall Investors, LLC (“Windfall”) property located in San Luis Obispo County, California, obtains water from wells deriving water from the Paso Robles Basin.
 
Our Associated Citrus Packers, Inc. (“Associated”) farming operations in Yuma, Arizona sources water from the Colorado River through the YMIDD, where we have access to approximately 11,700 acre feet of Class 3 Colorado River water rights.
 
We use ground water provided by wells and surface water for our PDA and San Pablo farming operations in La Serena, Chile and our Trapani Fresh farming operations in Argentina.
 
Recent Developments  
  
On November 10, 2015, we entered into a joint venture with The Lewis Group of Companies (“Lewis”) for the residential development of our East Area I real estate development project. To consummate the transaction, we formed Limoneira Lewis Community Builders, LLC (the "LLC" or "Joint Venture") as the development entity. The first phase of the project broke ground to commence mass grading on November 8, 2017. Project plans include approximately 632 residential units in Phase 1. Grading began in November 2017 and Phase 1 site improvements have been substantially completed. The Joint Venture received lot deposits from national homebuilders in fiscal year 2018 and initial lot sales representing a total of 210 residential units closed in fiscal year 2019. For further information see Note 7 – Real Estate Development of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q

Late in the third quarter of fiscal year 2018, Ventura County experienced record high temperatures. The effect of these high temperatures resulted in lower avocado crop volume in fiscal year 2019 compared to fiscal year 2018. Offsetting this temporary event will be the benefit of crop insurance for approximately $2.4 million calculated on actual avocado harvest in fiscal year 2019.

In October 2018, we began negotiations to sell both our The Terraces at Pacific Crest ("Pacific Crest") property and the remaining residential portion of our Sevilla property for $5.2 million. As a result, based on the estimated selling prices, we recorded an impairment charge of $1.6 million in fiscal year 2018. These negotiations have not resulted in a sale and we are actively marketing the properties.


30

For fiscal year 2018, we declared cash dividends to our stockholders totaling $0.25 per common share in the aggregate amount of $4.0 million compared to a total of $0.22 per common share in the aggregate amount of $3.2 million for fiscal year 2017. On July 12, 2019, we declared a cash dividend $0.075 per common share which was paid on July 18, 2019, in the aggregate amount of $1.3 million to common stockholders of record as of July 8, 2019. This represented a 20% increase in our dividend compared to dividends paid in 2018.

On May 30, 2019, we acquired a 51% interest in a joint venture, Trapani Fresh, formed with FGF Trapani (“FGF”), a multi-generational, family owned citrus operation in Argentina. To consummate the transaction, we formed a subsidiary under the name Limoneira Argentina S.A.U. (“Limoneira Argentina”) as the managing partner and acquired a 51% interest in an Argentine Trust that holds a 75% interest in Finca Santa Clara (“Santa Clara”), a ranch with approximately 1,200 acres of planted lemons. Trapani Fresh controls the trust and grows, packs, markets and sells fresh citrus.

Total consideration paid for our interest in Trapani Fresh was $15,000,000 of which $7,500,000 was paid to FGF on May 30, 2019. The remaining $7,500,000 was advanced to FGF, $4,000,000 in February 2019 and $3,500,000 in May 2019, as prepayments for the 25% interest in Santa Clara retained by FGF. We have consolidated Trapani Fresh and have accounted for the acquisition of Trapani Fresh as a business combination, resulting in FGF’s 49% interest in Trapani Fresh being accounted for as a non-controlling interest.

In July 2019, we sold 10,000 shares of Calavo Growers, Inc. (“Calavo”) common stock at an average price of $95.21 per share. Net proceeds from the sale were $1.0 million and we recognized a loss of $6 thousand. In October 2018, we sold 50,000 shares of Calavo common stock at an average price of $94.47 per share. Net proceeds from the sale were $4.7 million and we recognized a gain of $4.2 million. We continue to own 240,000 shares of Calavo common stock. With the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-01 on November 1, 2018, changes in the fair value of the equity securities result in gains or losses recognized in net income. The Company recorded unrealized losses of $1.8 million and $2.1 million during the three and nine months ended July 31, 2019, which is included in other income (expense) in the consolidated statements of operations. 

In the third quarter of fiscal year 2019, we entered into an agreement to sell a commercial property, located in Santa Paula, California, to one of our rental tenants for $4.0 million. The transaction closed on August 30, 2019 with us receiving net proceeds of $4.0 million. After transaction and other costs, the sale resulted in a gain of $0.6 million.





31

Results of Operations
 
The following table shows the results of operations (in thousands):
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Revenues:
 

 
 

 
 
 
 
Agribusiness
$
49,631

 
$
38,677

 
$
131,254

 
$
110,875

Rental operations
1,238

 
1,273

 
3,668

 
3,803

Real estate development
—

 
—

 
—

 
—

Total net revenues
50,869

 
39,950

 
134,922

 
114,678

Costs and expenses:
 
 
 
 
 
 
 
Agribusiness
42,747

 
23,983

 
118,741

 
80,943

Rental operations
993

 
1,004

 
3,167

 
3,045

Real estate development
50

 
25

 
102

 
94

Selling, general and administrative
4,961

 
3,513

 
14,819

 
11,529

Total costs and expenses
48,751

 
28,525

 
136,829

 
95,611

Operating income:
 
 
 
 
 
 
 
Agribusiness
6,884

 
14,694

 
12,513

 
29,932

Rental operations
245

 
269

 
501

 
758

Real estate development
(50
)
 
(25
)
 
(102
)
 
(94
)
Selling, general and administrative
(4,961
)
 
(3,513
)
 
(14,819
)
 
(11,529
)
Operating income (loss)
2,118

 
11,425

 
(1,907
)
 
19,067

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(774
)
 
(260
)
 
(1,313
)
 
(1,054
)
Equity in earnings of investments
480

 
123

 
2,449

 
40

Loss on sale of stock in Calavo Growers, Inc.
(6
)
 
—

 
(6
)
 
—

Unrealized loss on stock in Calavo Growers, Inc.
(1,769
)
 
—

 
(2,067
)
 
—

Other income, net
15

 
26

 
375

 
283

Total other (expense) income
(2,054
)
 
(111
)
 
(562
)
 
(731
)
Income (loss) before income tax (provision) benefit
64

 
11,314

 
(2,469
)
 
18,336

Income tax (provision) benefit
(461
)
 
(3,114
)
 
216

 
5,093

Net (loss) income
(397
)
 
8,200

 
(2,253
)
 
23,429

Net (income) loss attributable to noncontrolling interest
(593
)
 
1

 
(615
)
 
(4
)
Net (loss) income attributable to Limoneira Company
$
(990
)
 
$
8,201

 
$
(2,868
)
 
$
23,425

  
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 unrealized gain or loss on stock in Calavo, LLC earnings in equity investment and impairments on real estate development assets when applicable, is an important measure to evaluate our results of operations between periods on a more comparable basis. 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.

EBITDA and adjusted EBITDA are summarized and reconciled to net (loss) income 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):

32

 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Net (loss) income attributable to Limoneira Company
$
(990
)
 
$
8,201

 
$
(2,868
)
 
$
23,425

Interest expense
774

 
260

 
1,313

 
1,054

Income tax provision (benefit)
461

 
3,114

 
(216
)
 
(5,093
)
Depreciation and amortization
2,080

 
1,776

 
6,327

 
5,210

EBITDA
$
2,325

 
$
13,351

 
$
4,556

 
$
24,596

Unrealized loss on stock in Calavo Growers, Inc.
1,769

 
—

 
2,067

 
—

LLC earnings in equity investment
(303
)
 
—

 
(2,573
)
 
—

Adjusted EBITDA
$
3,791

 
$
13,351

 
$
4,050

 
$
24,596

 
Three Months Ended July 31, 2019 Compared to the Three Months Ended July 31, 2018
 
Revenues
 
Total net revenues for the third quarter of fiscal year 2019 was $50.9 million compared to $40.0 million for the third quarter of fiscal year 2018. The 27% increase of $10.9 million was primarily the result of increased agribusiness revenues, as detailed below ($ in thousands):
 
Agribusiness Revenues for the Three Months Ended July 31,
 
2019
2018
 
Change
Lemons
$
46,401

$
30,736

 
$
15,665

51%
Avocados
2,519

5,643

 
(3,124
)
(55)%
Navel and Valencia oranges
711

1,986

 
(1,275
)
(64)%
Specialty citrus and other crops
—

312

 
(312
)
(100)%
Agribusiness revenues
$
49,631

$
38,677

 
$
10,954

28%
 
•
Lemons: The increase in the third quarter of fiscal year 2019 was primarily the result of higher volume offset by lower prices of fresh lemons sold compared to the same period in fiscal year 2018. A portion of the increased revenue was the result of fresh lemon sales of $11.7 million by Trapani Fresh on 609,000 cartons of fresh lemons sold. During the third quarter of fiscal years 2019 and 2018, fresh lemon sales were $35.8 million and $25.7 million, respectively, on 1,876,000 and 992,000 cartons of lemons sold at average per carton prices of $19.09 and $25.91, respectively. Lemon revenues included $5.2 million shipping and handling, $3.6 million lemon by-products and $1.8 million other lemon sales in the third quarter of fiscal year 2019 compared to $2.3 million shipping and handling, $1.4 million lemon by-products and $1.3 million other lemon sales during the same period in fiscal year 2018. Other lemon sales in the third quarter of fiscal year 2019 included $1.0 million in Chile by PDA and San Pablo compared to $0.4 million in Chile by PDA and San Pablo in the third quarter of fiscal year 2018.

•
Avocados: The decrease in the third quarter of fiscal year 2019 was primarily the result of lower volume partially offset by higher prices of avocados sold compared to the same period in fiscal year 2018. During the third quarter of fiscal year 2019, 1.4 million pounds of avocados were sold at an average per pound price of $1.80 compared to 5.3 million pounds of avocados sold at an average per pound price of $1.06 during the same period in fiscal year 2018. The higher prices in fiscal year 2019 are the result of lower supply in the marketplace.

•
Navel and Valencia oranges: The decrease in the third quarter of fiscal year 2019 was primarily result of lower prices partially offset by higher volume of oranges sold compared to the same period in fiscal year 2018. In the third quarter of fiscal year 2019, 382,000 40-pound carton equivalents of oranges were sold at average per carton prices of $1.86 compared to 125,000 40-pound carton equivalents sold at average per carton prices of $15.89 in the third quarter of fiscal year 2018.

•
Specialty citrus and other crops: There were no sales in third quarter of fiscal year 2019. During the third quarter of fiscal year 2018, 5,000 40-pound carton equivalents of specialty citrus were sold at an average per carton price of $62.40.





33

Costs and Expenses
 
Our total costs and expenses in the third quarter of fiscal year 2019 were $48.8 million compared to $28.5 million in the third quarter of fiscal year 2018. The 71% increase of $20.2 million was primarily attributable to increases in our agribusiness and selling, general and administrative costs and expenses. Costs and expenses associated with our agribusiness include packing costs, harvest costs, growing costs, costs related to the fruit we procure and sell for third-party growers and depreciation and amortization expense, as detailed below ($ in thousands):

 
Agribusiness Costs and Expenses for the Three Months Ended July 31,
 
2019
2018
 
Change
Packing costs
$
13,524

$
6,033

 
$
7,491

124%
Harvest costs
6,296

3,609

 
2,687

74%
Growing costs
6,389

4,777

 
1,612

34%
Third-party grower costs
14,715

8,041

 
6,674

83%
Depreciation and amortization
1,823

1,523

 
300

20%
Agribusiness costs and expenses
$
42,747

$
23,983

 
$
18,764

78%

•
Packing costs: Packing costs primarily 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 $12.0 million and $5.5 million in the third quarter of fiscal years 2019 and 2018, respectively. Trapani Fresh lemon packing costs were $3.6 million in the third quarter of fiscal year 2019. During the third quarter of fiscal year 2019, we packed and sold 1,876,000 cartons of lemons at average per carton costs of $6.41 compared to 992,000 cartons of lemons packed and sold at average per carton costs of $5.58 during the same period in fiscal year 2018. The increase in average per carton costs in fiscal year 2019 compared to fiscal year 2018 is primarily due to increased volume of lemon by-products and $1.5 million of operating costs incurred at the Oxnard Lemon facility. Additionally, packing costs included $1.5 million of shipping costs in the third quarter of fiscal year 2019 compared to $0.5 million in the third quarter of fiscal year 2018.

•
Harvest costs: The increase in the third quarter of fiscal year 2019 is primarily attributable to increased volume of lemons and oranges harvested partially offset by decreased volume of avocados 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 the third quarter of fiscal year 2019 was primarily due to net increased cost of $1.6 million for pruning, fertilization and soil amendments, and San Pablo and Trapani Fresh cultural costs compared to the same period in fiscal year 2018. Growing costs reflect farm management decisions based on weather, harvest timing and crop conditions.

•
Third-party grower costs: We sell fruit that we grow and fruit that we procure from other growers. The cost of procuring fruit from other growers is referred to as third-party grower costs. The increase in the third quarter of fiscal year 2019 is primarily attributable to higher volume partially offset by lower price of third-party grower fruit sold. Of the 1,876,000 and 992,000 cartons of lemons packed and sold during the third quarter of fiscal years 2019 and 2018, respectively, 1,101,000 (59%) and 374,000 (38%) cartons were procured from third-party growers at average per carton prices of $11.65 and $21.33, respectively.

•
Depreciation and amortization: Depreciation and amortization expense for the third quarter of fiscal year 2019 was approximately $0.3 million higher than the third quarter of fiscal year 2018 primarily due to the acquisitions of Oxnard Lemon, San Pablo and Trapani Fresh and an increase in assets placed into service.

Selling, general and administrative costs and expenses were $5.0 million in the three months ended July 31, 2019 compared to $3.5 million in the three months ended July 31, 2018. The $1.4 million increase is primarily the result of an increase in administration personnel, salaries and benefits, and increased professional fees associated with our acquisition as of July 31, 2019 compared to July 31, 2018.
 
Other (Expense) Income
 
Other expense, net for the three months ended July 31, 2019 is comprised primarily of $1.8 million unrealized loss on equity securities and $0.8 million of interest expense partially offset by $0.5 million of equity in earnings of investments. Other expense, net for the

34

three months ended July 31, 2018 is comprised primarily of $0.3 million of interest expense partially offset by $0.1 million of equity in earnings of investments.

Interest is capitalized on real estate development projects and significant construction in progress using the weighted average interest rate during the fiscal year. We capitalized $0.4 million and $0.7 million of interest in the third quarter of fiscal years 2019 and 2018, respectively. Interest capitalization is discontinued when a project is substantially complete. Under the equity method of accounting used for our Limoneira/Lewis Joint Venture, interest capitalization ceased upon the commencement of lot sales in February 2019.
 
Income Taxes
 
We recorded an estimated income tax provision of $0.5 million in the third quarter of fiscal year 2019 on pre-tax income of $0.1 million compared to an estimated income tax provision of $3.1 million in the third quarter of fiscal year 2018 on pre-tax income of $11.3 million. The tax benefit recorded for the third quarter of fiscal year 2019 differs from the US federal statutory tax rate of 21.0% due primarily to income attributable to foreign jurisdictions which is taxed at different rates, state taxes, and nondeductible tax items. The discrete driver of the estimated income tax benefit of fiscal year 2018 was the approximately $10.0 million decrease in deferred tax liabilities related to the change in the federal tax rate from the Tax Cuts and Jobs Act of 2017 (the "2017 Act") from 34% to 21%. Our projected annual effective blended tax rate for fiscal year 2019 is approximately 10.3%.
 
Net (Income) Loss Attributable to Noncontrolling Interest
 
Net (income) loss attributable to noncontrolling interest represents 10% and 49% of the net (income) loss of PDA and Trapani Fresh, respectively.

Nine Months Ended July 31, 2019 Compared to the Nine Months Ended July 31, 2018

Revenues
 
Total net revenues for the nine months ended July 31, 2019 was $134.9 million compared to $114.7 million for the nine months ended July 31, 2018. The 18% increase of $20.2 million was primarily the result of increased agribusiness revenues, as detailed below ($ in thousands):

 
Agribusiness Revenues for the Nine Months Ended July 31,
 
2019
2018
 
Change
Lemons
$
121,379

$
92,114

 
$
29,265

32%
Avocados
3,062

6,578

 
(3,516
)
(53)%
Navel and Valencia oranges
3,794

8,552

 
(4,758
)
(56)%
Specialty citrus and other crops
3,019

3,631

 
(612
)
(17)%
Agribusiness revenues
$
131,254

$
110,875

 
$
20,379

18%
 
•
Lemons: The increase in the nine months of fiscal year 2019 was primarily the result of higher volume partially offset by lower prices of fresh lemons sold compared to the same period in fiscal year 2018. A portion of the increased revenue was the result of fresh lemons sales of $11.7 million by Trapani Fresh on 609,000 cartons of fresh lemons sold. During the nine months of fiscal years 2019 and 2018, fresh lemon sales were $93.1 million and $76.8 million, respectively, on 4,448,000 and 3,061,000 cartons of lemons sold at average per carton prices of $20.92 and $25.09, respectively. Lemon revenues included $13.3 million shipping and handling, $9.9 million lemon by-products and $5.1 million other lemon sales in the nine months of fiscal year 2019 compared to $8.1 million shipping and handling, $4.1 million lemon by-product and $3.1 million other lemon sales during the same period in fiscal year 2018. Other lemon sales in the nine months of fiscal year 2019 include $2.4 million in Chile by PDA and San Pablo compared to $0.8 million in Chile by PDA and San Pablo in the nine months of fiscal year 2018.

•
Avocados: The decrease in the nine months of fiscal year 2019 was primarily the result of lower volume offset partially by higher prices of avocados sold compared to the same period in fiscal year 2018. During the nine months of fiscal year 2019 1.8 million pounds of avocados were sold at an average per pound price of $1.71 compared to 6.3 million pounds of avocados sold at an average per pound price of $1.04 during the same period in fiscal year 2018. The higher prices in fiscal year 2019 are the result of lower supply in the marketplace.


35

•
Navel and Valencia oranges: The decrease in the nine months of fiscal year 2019 was primarily the result of lower prices partially offset by higher volume of oranges sold compared to the same period in fiscal year 2018. In the nine months of fiscal year 2019, 863,000 40-pound carton equivalents of oranges were sold at average per carton prices of $4.40 compared to 700,000 40-pound carton equivalents sold at average per carton prices of $12.22 in the same period of fiscal year 2018. Orange sales in the nine months of fiscal year 2019 included $0.2 million in Chile by PDA and San Pablo compared to $0.4 million in Chile by PDA and San Pablo in the nine months of fiscal year 2018.

•
Specialty citrus and other crops: The decrease in the nine months of fiscal year 2019 was primarily the result of lower prices partially offset by higher volume of specialty citrus sold compared to the same period in fiscal year 2018. During the nine months of fiscal year 2019, 358,000 40-pound carton equivalents of specialty citrus were sold at an average per carton price of $8.43 compared to 281,000 40-pound carton equivalents sold at an average per carton price of $12.92 during the same period in fiscal year 2018.

Costs and Expenses
 
Our total costs and expenses in the nine months of fiscal year 2019 were $136.8 million compared to $95.6 million in the nine months of fiscal year 2018. The 43% increase of $41.2 million was primarily attributable to increases in our agribusiness and selling, general and administrative costs and expenses. Costs and expenses associated with our agribusiness include packing costs, harvest costs, growing costs, costs related to the fruit we procure and sell for third-party growers and depreciation and amortization expense, as detailed below ($ in thousands):

 
Agribusiness Costs and Expenses for the Nine Months Ended July 31,
 
2019
2018
 
Change
Packing costs
$
32,972

$
18,927

 
$
14,045

74%
Harvest costs
15,533

11,710

 
3,823

33%
Growing costs
20,667

17,472

 
3,195

18%
Third-party grower costs
44,018

28,368

 
15,650

55%
Depreciation and amortization
5,551

4,466

 
1,085

24%
Agribusiness costs and expenses
$
118,741

$
80,943

 
$
37,798

47%

•
Packing costs: Packing costs primarily 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 $30.2 million and $17.5 million in the nine months of fiscal years 2019 and 2018, respectively. Trapani Fresh lemon packing costs were $3.6 million in the nine months of fiscal year 2019. During the nine months of fiscal year 2019, we packed and sold 4,448,000 cartons of lemons at average per carton costs of $6.78 compared to 3,061,000 cartons of lemons packed and sold at average per carton costs of $5.73 during the same period in fiscal year 2018. The increase in average per carton costs in fiscal year 2019 compared to fiscal year 2018 is primarily due to increased volume of lemon by-products and $4.9 million of operating costs incurred at the Oxnard Lemon facility. Additionally, packing costs included $2.8 million of shipping costs in the nine months of fiscal year 2019 compared to $1.4 million in the nine months of fiscal year 2018.

•
Harvest costs: The increase in the nine months of fiscal year 2019 is primarily attributable to increased volume of lemons and oranges and specialty citrus harvested partially offset by decreased volume of avocados 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 the nine months of fiscal year 2019 was primarily due to net increased costs of $3.2 million primarily for cultivation, fertilization and soil amendments, pest control, pruning, and San Pablo and Trapani Fresh cultural costs compared to the same period of fiscal year 2018. Growing costs reflect farm management decisions based on weather, harvest timing and crop conditions.

•
Third-party grower costs: We sell fruit that we grow and fruit that we procure from other growers. The cost of procuring fruit from other growers is referred to as third-party grower costs. The increase in the nine months of fiscal year 2019 is primarily attributable to higher volume partially offset by lower price of third-party grower fruit sold. Of the 4,448,000 and 3,061,000 cartons of lemons packed and sold during the nine months of fiscal years 2019 and 2018, respectively, 2,628,000 (59%) and 1,350,000 (44%) cartons were procured from third-party growers at average per carton prices of $15.87 and $20.96, respectively.


36

•
Depreciation and amortization: Depreciation and amortization expense for the nine months of fiscal year 2019 was approximately $1.1 million higher than the nine months of fiscal year 2018 primarily due to the acquisitions of Oxnard Lemon, San Pablo and Trapani Fresh and an increase in assets placed into service.

Selling, general and administrative costs and expenses were $14.8 million in the nine months ended July 31, 2019 compared to $11.5 million in the nine months ended July 31, 2018. The $3.3 million increase is primarily the result of an increase in administration personnel, salaries and benefits, and increased professional fees associated with our acquisition as of July 31, 2019 compared to July 31, 2018.
 
Other (Expense) Income
 
Other expense, net for the nine months ended July 31, 2019 is comprised primarily of $2.1 million unrealized loss on equity securities and $1.3 million of interest expense partially offset by $2.4 million of equity in earnings of investments. Other expense, net for the nine months ended July 31, 2018 is comprised primarily of $1.1 million of interest expense partially offset by $0.3 million of dividend income received from Calavo.

Interest is capitalized on real estate development projects and significant construction in progress using the weighted average interest rate during the fiscal year. We capitalized $1.0 million and $1.6 million of interest in the nine months of fiscal years 2019 and 2018, respectively. Interest capitalization is discontinued when a project is substantially complete. Under the equity method of accounting used for our Limoneira/Lewis Joint Venture, interest capitalization ceased upon the commencement of lot sales in February 2019.
 
Income Taxes
 
We recorded an estimated income tax benefit of $0.2 million in the nine months ended July 31, 2019 on pre-tax loss of $2.5 million compared to an estimated income tax benefit of $5.1 million in the nine months ended July 31, 2018 on pre-tax income of $18.3 million. The tax benefit recorded for nine months ended July 31, 2019 differs from the US federal statutory tax rate of 21.0% due primarily to income attributable to foreign jurisdictions which is taxed at different rates, state taxes, and nondeductible tax items. The discrete driver of the estimated income tax benefit of fiscal year 2018 was the approximately $10.0 million decrease in deferred tax liabilities related to the change in the federal tax rate from the Tax Cuts and Jobs Act of 2017 (the "2017 Act") from 34% to 21%. Our projected annual effective blended tax rate for fiscal year 2019 is approximately 10.3%.
 
Net Income Attributable to Noncontrolling Interest
 
Net income attributable to noncontrolling interest represents 10% and 49% of the net income of PDA and Trapani Fresh, respectively.

Segment Results of Operations
 
We operate in six reportable operating segments: fresh lemons, lemon packing, avocados, other agribusiness, rental operations and real estate development. 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 18 - Segment Information of the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding our operating segments.

Three Months Ended July 31, 2019 Compared to the Three Months Ended July 31, 2018
 
The following table shows the segment results of operations for the three months ended July 31, 2019 (in thousands):
 
Fresh
Lemons(1)
Lemon
Packing
Eliminations
 
Avocados
Other
Agribusiness
Total
Agribusiness
Rental
Operations
Real Estate
Development
Corporate
and Other
Total
Revenues from external customers
$
41,169

$
5,232

$
—

$
2,519

$
711

$
49,631

$
1,238

$
—

$
—

$
50,869

Intersegment revenue
—

10,263

(10,263
)
—

—

—

—

—

—

—

Total net revenues
41,169

15,495

(10,263
)
2,519

711

49,631

1,238

—

—

50,869

Costs and expenses
35,653

13,524

(10,263
)
1,185

825

40,924

798

50

4,899

46,671

Depreciation and amortization
—

—

—

—

—

1,823

195

—

62

2,080

Operating income (loss)
$
5,516

$
1,971

$
—

$
1,334

$
(114
)
$
6,884

$
245

$
(50
)
$
(4,961
)
$
2,118



37

The following table shows the segment results of operations for the three months ended July 31, 2018 (in thousands):
 
Fresh
Lemons
Lemon
Packing
Eliminations
 
Avocados
Other
Agribusiness
Total
Agribusiness
Rental
Operations
Real Estate
Development
Corporate
and Other
Total
Revenues from external customers
$
28,457

$
2,279

$
—

$
5,643

$
2,298

$
38,677

$
1,273

$
—

$
—

$
39,950

Intersegment revenue
—

6,340

(6,340
)
—

—

—

—

—

—

—

Total net revenues
28,457

8,619

(6,340
)
5,643

2,298

38,677

1,273

—

—

39,950

Costs and expenses
18,872

6,033

(6,340
)
1,829

2,066

22,460

810

25

3,454

26,749

Depreciation and amortization
—

—

—

—

—

1,523

194

—

59

1,776

Operating income (loss)
$
9,585

$
2,586

$
—

$
3,814

$
232

$
14,694

$
269

$
(25
)
$
(3,513
)
$
11,425


(1) During the first quarter of fiscal 2019, we adopted a comprehensive new revenue recognition standard using a modified retrospective method that does not restate prior periods to be comparable to the current period presentation. The adoption of this guidance primarily impacted the presentation of certain brokered fruit sales revenue received and the related cost of fruit incurred by us. The adoption of this guidance resulted in revenue and costs and expenses within our fresh lemon segment of $1.8 million, respectively, during the three months ended July 31, 2019. Refer to Note 2 - Summary of Significant Accounting Policies for more information regarding the impact from the adoption of this new standard.

The following analysis should be read in conjunction with the previous section “Results of Operations”.
 
Fresh Lemons
 
For the third quarter of fiscal year 2019, our fresh lemons segment total net revenues were $41.2 million compared to $28.5 million for the third quarter of fiscal year 2018; a 45% increase of $12.7 million, primarily due to fresh lemon sales of $11.7 million in Argentina by Trapani Fresh.

Costs and expenses associated with our fresh lemons segment include harvest costs, growing costs and costs of fruit we procure from third-party growers. For the third quarter of fiscal year 2019, our fresh lemons costs and expenses were $35.7 million compared to $18.9 million for the third quarter of fiscal year 2018. The 89% increase of $16.8 million primarily consisted of the following:
  
•
Harvest costs for the third quarter of fiscal year 2019 were $3.0 million higher than the third quarter of fiscal year 2018.

•
Growing costs for the third quarter of fiscal year 2019 were $3.1 million higher than the third quarter of fiscal year 2018.

•
Third-party grower costs for the third quarter of fiscal year 2019 were $6.7 million higher than the third quarter of fiscal year 2018.

•
Intersegment costs and expenses for the third quarter of fiscal year 2019 were $3.9 million higher than the third quarter of fiscal year 2018.

Lemon Packing
 
Lemon packing segment revenue is comprised of intersegment packing revenue and shipping and handling revenue. For the third quarter of fiscal years 2019 and 2018, our lemon packing segment revenues were $15.5 million and $8.6 million, respectively.

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 the third quarter of fiscal years 2019 and 2018, our lemon packing costs and expenses were $13.5 million and $6.0 million, respectively.
 
For the third quarter of fiscal years 2019 and 2018, lemon packing segment operating income per carton sold was $1.05 and $2.61, respectively.
 
In the third quarter of fiscal years 2019 and 2018, the lemon packing segment included $10.3 million and $6.3 million, respectively, of intersegment revenues 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.
 


38

Avocados
 
For the third quarter of fiscal year 2019, our avocados segment revenue was $2.5 million compared to $5.6 million for the third quarter of fiscal year 2018.
 
Costs and expenses associated with our avocados segment include harvest and growing costs. For the third quarter of fiscal years 2019, our avocados segment costs $1.2 million compared to $1.8 million for the third quarter of fiscal year 2018. The 35% decrease of $0.6 million and primarily consisted of the following:
 
•
Harvest costs for the third quarter of fiscal year 2019 were $0.4 million lower than the third quarter of fiscal year 2018.

•
Growing costs for the third quarter of fiscal year 2019 were $0.2 million lower than the third quarter of fiscal year 2018.

Other Agribusiness
 
For the third quarter of fiscal year 2019, our other agribusiness segment total net revenues were $0.7 million compared to $2.3 million for the third quarter of fiscal year 2018. The 69% decrease of $1.6 million primarily consisted of the following:
 
•
Navel and Valencia orange revenues for the third quarter of fiscal year 2019 were $1.3 million lower than the third quarter of fiscal year 2018.

•
Specialty citrus and other crop revenues for the third quarter of fiscal year 2019 were $0.3 million lower than the third quarter of fiscal year 2018.

Costs and expenses associated with our other agribusiness segment include harvest costs and growing costs. For the third quarter of fiscal year 2019, our other agribusiness costs and expenses were $0.8 million compared to $2.1 million for the third quarter of fiscal year 2018. The 60% decrease of $1.2 million primarily consisted of the following: 

•
Harvest costs for the third quarter of fiscal year 2019 were higher than the third quarter of fiscal year 2018.

•
Growing costs for the third quarter of fiscal year 2019 were $1.3 million lower than the third quarter of fiscal year 2018.

Total agribusiness depreciation and amortization expenses for the third quarter of fiscal year 2019 were $0.3 million higher than the third quarter of fiscal year 2018.

Rental Operations
 
Our rental operations segment had total net revenues of $1.2 million and $1.3 million for the third quarter of fiscal years 2019 and 2018, respectively.
 
Costs and expenses in our rental operations segment for the third quarter of fiscal year 2019 were similar to the third quarter of fiscal year 2018. Depreciation and amortization expenses for the third quarter of fiscal year 2019 were similar to the third quarter of fiscal year 2018 at approximately $0.2 million.

Real Estate Development
 
For the third quarter of fiscal years 2019 and 2018, our real estate development segment total net revenues were zero.
 
Costs and expenses in our real estate development segment for the third quarter of fiscal year 2019 were similar to the third quarter of fiscal year 2018.

Selling, General and Administrative Expenses
 
Selling, general and administrative costs and expenses include selling, general and administrative costs and other costs not allocated to the operating segments. Selling, general and administrative costs and expenses for the third quarter of fiscal year 2019 were $1.4 million higher than the third quarter of fiscal year 2018. Depreciation and amortization expense for the third quarter of fiscal year 2019 was similar to the third quarter of fiscal year 2018 at approximately $0.1 million.


39

Nine Months Ended July 31, 2019 Compared to the Nine Months Ended July 31, 2018
 
The following table shows the segment results of operations for the nine months ended July 31, 2019 (in thousands):
 
Fresh
Lemons(1)
Lemon
Packing
Eliminations
 
Avocados
Other
Agribusiness
Total
Agribusiness
Rental
Operations
Real Estate
Development
Corporate
and Other
Total
Revenues from external customers
$
108,090

$
13,289

$
—

$
3,062

$
6,813

$
131,254

$
3,668

$
—

$
—

$
134,922

Intersegment revenue
—

25,464

(25,464
)
—

—

—

—

—

—

—

Total net revenues
108,090

38,753

(25,464
)
3,062

6,813

131,254

3,668

—

—

134,922

Costs and expenses
95,650

32,972

(25,464
)
2,822

7,210

113,190

2,583

102

14,627

130,502

Depreciation and amortization
—

—

—

—

—

5,551

584

—

192

6,327

Operating income (loss)
$
12,440

$
5,781

$
—

$
240

$
(397
)
$
12,513

$
501

$
(102
)
$
(14,819
)
$
(1,907
)

The following table shows the segment results of operations for the nine months ended July 31, 2018 (in thousands):
 
Fresh
Lemons
Lemon
Packing
Eliminations
 
Avocados
Other
Agribusiness
Total
Agribusiness
Rental
Operations
Real Estate
Development
Corporate
and Other
Total
Revenues from external customers
$
83,994

$
8,120

$
—

$
6,578

$
12,183

$
110,875

$
3,803

$
—

$
—

$
114,678

Intersegment revenue
—

18,416

(18,416
)
—

—

—

—

—

—

—

Total net revenues
83,994

26,536

(18,416
)
6,578

12,183

110,875

3,803

—

—

114,678

Costs and expenses
64,363

18,927

(18,416
)
3,408

8,195

76,477

2,461

94

11,369

90,401

Depreciation and amortization
—

—

—

—

—

4,466

584

—

160

5,210

Operating income (loss)
$
19,631

$
7,609

$
—

$
3,170

$
3,988

$
29,932

$
758

$
(94
)
$
(11,529
)
$
19,067


(1) During the first quarter of fiscal 2019, we adopted a comprehensive new revenue recognition standard using a modified retrospective method that does not restate prior periods to be comparable to the current period presentation. The adoption of this guidance primarily impacted the presentation of certain brokered fruit sales revenue received and the related cost of fruit incurred by us. The adoption of this guidance resulted in revenue and costs and expenses within our fresh lemon segment of $2.2 million, respectively, during the nine months ended July 31, 2019. Refer to Note 2 - Summary of Significant Accounting Policies for more information regarding the impact from the adoption of this new standard.

The following analysis should be read in conjunction with the previous section “Results of Operations”.
 
Fresh Lemons
 
For the nine months ended July 31, 2019, our fresh lemons segment total net revenues were $108.1 million compared to $84.0 million for the nine months ended July 31, 2018, a 29% increase of $24.1 million, primarily due to higher volume of fresh lemons sold, fresh lemon sales of $11.7 million in Argentina by Trapani Fresh and an increase in lemon by-products sold of $5.8 million.

Costs and expenses associated with our fresh lemons segment include harvest costs, growing costs and costs of fruit we procure from third-party growers. For the nine months ended July 31, 2019, our fresh lemons costs and expenses were $95.7 million compared to $64.4 million for the nine months ended July 31, 2018. The 49% increase of $31.3 million primarily consisted of the following:
  
•
Harvest costs for the nine months ended July 31, 2019 were $4.1 million higher than the nine months ended July 31, 2018.

•
Growing costs for the nine months ended July 31, 2019 were $4.4 million higher than the nine months ended July 31, 2018.

•
Third-party grower costs for the nine months ended July 31, 2019 were $15.7 million higher than the nine months ended July 31, 2018.

•
Intersegment costs and expenses for the nine months ended July 31, 2019 were $7.0 million higher than the nine months ended July 31, 2018.





40

Lemon Packing

Lemon packing segment revenue is comprised of intersegment packing revenue and shipping and handling revenue. For the nine months ended July 31, 2019 and 2018, our lemon packing segment revenues were $38.8 million and $26.5 million, respectively. 

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 the nine months ended July 31, 2019 and 2018, our lemon packing costs and expenses were $33.0 million and $18.9 million, respectively.
 
For the nine months ended July 31, 2019 and 2018, lemon packing segment operating income per carton sold was $1.30 and $2.49, respectively.
 
In the nine months ended July 31, 2019 and 2018, the lemon packing segment included $25.5 million and $18.4 million, respectively, of intersegment revenues 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
 
For the nine months ended July 31, 2019 our avocados segment revenue was $3.1 million compared to $6.6 million for the nine months ended July 31, 2018.
 
Costs and expenses associated with our avocados segment include harvest and growing costs. For nine months ended July 31, 2019 our avocados segment costs and expenses were $2.8 million compared to $3.4 million for the nine months ended July 31, 2018. The 17% decrease $0.6 million primarily consisted of the following:
 
•
Harvest costs for the nine months ended July 31, 2019 were $0.5 million lower than the nine months ended July 31, 2018.

•
Growing costs for the nine months ended July 31, 2019 were $0.1 million lower than the nine months ended July 31, 2018.

Other Agribusiness
 
For the nine months ended July 31, 2019, our other agribusiness segment total net revenues were $6.8 million compared to $12.2 million for the nine months ended July 31, 2018. The 44% decrease of $5.4 million primarily consisted of the following:
 
•
Navel and Valencia orange revenues for the nine months ended July 31, 2019 were $4.8 million lower than the nine months ended July 31, 2018.

•
Specialty citrus and other crop revenues for the nine months ended July 31, 2019 were $0.6 million lower than the nine months ended July 31, 2018.

Costs and expenses associated with our other agribusiness segment include harvest costs and growing costs. For the nine months ended July 31, 2019, our other agribusiness costs and expenses were $7.2 million compared to $8.2 million for the nine months ended July 31, 2018. The 12% decrease of $1.0 million primarily consisted of the following: 

•
Harvest costs for the nine months ended July 31, 2019 were $0.2 million higher than the nine months ended July 31, 2018.

•
Growing costs for the nine months ended July 31, 2019 were $1.1 million lower than the nine months ended July 31, 2018.

Total agribusiness depreciation and amortization expenses for the nine months ended July 31, 2019 were $1.1 million higher than the nine months ended July 31, 2018.

Rental Operations
Our rental operations segment had total net revenues of $3.7 million and $3.8 million for the nine months ended July 31, 2019 and 2018, respectively.
 
Costs and expenses in our rental operations segment for the nine months ended July 31, 2019 were $0.1 million higher than the nine months ended July 31, 2018. Depreciation and amortization expenses for the nine months ended July 31, 2019 was similar to the nine months ended July 31, 2018 at approximately $0.6 million.

41

Real Estate Development
 
For the nine months ended July 31, 2019 and 2018, our real estate development segment total net revenues were zero.
 
Costs and expenses in our real estate development segment for the nine months ended July 31, 2019 were similar to the nine months ended July 31, 2018.

Selling, General and Administrative Expenses
 
Selling, general and administrative costs and expenses include selling, general and administrative costs and other costs not allocated to the operating segments. Selling, general and administrative costs and expenses for the nine months ended July 31, 2019 were $3.3 million higher than the nine months ended July 31, 2018. Depreciation and amortization expense for the nine months ended July 31, 2019 was similar to the nine months ended July 31, 2018 at approximately $0.2 million.

Seasonal Operations
 
Historically, our agribusiness operations have been seasonal in nature with quarterly revenue fluctuating depending on the timing and the variety of crops being harvested. Cultural costs in our agribusiness tend to be higher in the first and second quarters and lower in the third and fourth quarters because of the timing of expensing cultural costs in the current year that were inventoried in the prior year. Our harvest costs generally increase in the second quarter and peak in the third quarter coinciding with the increasing production and revenue. Due to this seasonality and to avoid the inference that interim results are indicative of the estimated results for a full fiscal year, we present supplemental information for 12-month periods ended at the interim date for the current and preceding years.
 



42

Results of Operations for the Trailing Twelve Months Ended July 31, 2019 and 2018

The following table shows the unaudited results of operations (in thousands):
 
Trailing twelve months ended July 31,
 
2019
 
2018
Revenues:
 

 
 

Agribusiness
$
144,723

 
$
125,508

Rental operations
4,913

 
5,099

Real estate development
—

 
—

Total revenues
149,636

 
130,607

Costs and expenses:
 
 
 
Agribusiness
135,881

 
96,284

Rental operations
4,207

 
4,043

Real estate development
135

 
207

Impairment of real estate development assets
1,558

 
—

Selling, general and administrative
19,343

 
15,284

Total costs and expenses
161,124

 
115,818

Operating (loss) income
(11,488
)
 
14,789

Other income (expense):
 
 
 
Interest expense
(1,381
)
 
(1,460
)
Equity in earnings of investments
2,992

 
80

Gain on sale of stock in Calavo Growers, Inc.
4,217

 
—

Unrealized loss on stock in Calavo Growers, Inc.
(2,067
)
 
—

Other income, net
405

 
411

Total other income (expense)
4,166

 
(969
)
(Loss) income before income tax benefit
(7,322
)
 
13,820

Income tax benefit
1,852

 
6,951

Net (loss) income
(5,470
)
 
20,771

(Income) loss attributable to noncontrolling interest
(635
)
 
4

Net (loss) income attributable to Limoneira Company
$
(6,105
)
 
$
20,775

 
The following analysis should be read in conjunction with the previous section “Results of Operations”.
 
•
Total revenues increased $19.0 million in the twelve months ended July 31, 2019 compared to the twelve months ended July 31, 2018 primarily due to increased agribusiness revenues, particularly increased lemon sales.

•
Total costs and expenses increased $45.3 million in the twelve months ended July 31, 2019 compared to the twelve months ended July 31, 2018 primarily due to increases in our agribusiness costs, real estate impairments and selling, general and administrative expenses. The increase in agribusiness costs is associated with increased agribusiness production and the increase in selling, general and administrative expenses is primarily attributable to increased administrative personnel, salaries and benefits, and increased professional fees associated with our acquisitions.

•
Total other income (expense) increased $5.1 million in the twelve months ended July 31, 2019 compared to the twelve months ended July 31, 2018 primarily due to a $2.9 million increase in equity in earnings of investments and $4.2 million gain on sale of stock in Calavo offset by a $2.1 million increase in unrealized loss on stock in Calavo.

•
Income tax benefit decreased $5.1 million in the twelve months ended July 31, 2019 compared to the twelve months ended July 31, 2018 primarily due to the approximately $10.0 million decrease in deferred tax liabilities related to the change in the federal corporate tax rate from the 2017 Act offset by the effect of earnings before income taxes.
 


43

Liquidity and Capital Resources
 
Overview
 
Our Company’s liquidity and capital position fluctuates during the year depending on seasonal production cycles, weather events and demand for our products. Typically, our second and third quarters tend to generate greater operating income than our first and fourth quarters due to the volume of fruit harvested.

To meet working capital demand and investment requirements of our agribusiness and real estate development segments 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.
 
Cash Flows from Operating Activities
 
For the nine months ended July 31, 2019, net cash provided by operating activities was $4.3 million compared to net cash provided by operating activities of $23.2 million for the nine months ended July 31, 2018. The significant components of our Company’s cash flows provided by operating activities as included in the unaudited consolidated statements of cash flows are as follows:
 
•
Net loss for the nine months ended July 31, 2019 was $2.3 million compared to net income of $23.4 million for the nine months ended July 31, 2018. The decrease in net income of $25.7 million in the nine months ended July 31, 2019 compared to the same period in fiscal year 2018 was primarily attributable to a decrease in operating income of $21.0 million and a decrease in income tax benefit of $4.9 million, offset by an decrease in other expense of $0.2 million.

•
Depreciation and amortization expenses increased $1.1 million in the nine months ended July 31, 2019 compared to the same period in fiscal year 2018 primarily due to the acquisitions of San Pablo and Oxnard Lemon in July 2018, Trapani Fresh in May 2019 and an increase in assets placed into service.

•
The gain on disposals of assets was $11,000 in the nine months ended July 31, 2019 compared to a loss on disposals of assets of $0.2 million in the nine months ended July 31, 2018. Fiscal year 2018 loss was primarily the result of expenses incurred from orchard disposals related to the December 2017 Southern California wildfires and our ongoing orchard redevelopment plans.

•
Stock compensation expense was $1.4 million and $1.2 million in the nine months ended July 31, 2019 and 2018, respectively, and was comprised primarily of vesting and expense recognition of the 2016, 2017, 2018 and 2019 grants to management under our stock-based compensation plan plus non-employee directors’ stock-based compensation.

•
Accounts receivable, net balance at July 31, 2019 was $24.1 million compared to $14.1 million at October 31, 2018, resulting in a corresponding decrease in operating cash flows of approximately $10.0 million in the nine months ended July 31, 2019. Accounts receivable, net balance at July 31, 2018 was $15.0 million compared to $11.0 million at October 31, 2017, resulting in a corresponding decrease in operating cash flows of $4.0 million. The $10.0 million decrease in operating cash flows in the nine months ended July 31, 2019 compared to the $4.0 million decrease in operating cash flows during same period in fiscal year 2018 was primarily due to fluctuations in price and volume related to agribusiness revenues.

•
Cultural costs provided $1.6 million of operating cash flows in the nine months ended July 31, 2019 compared to using $0.2 million of operating cash flows during the same period in fiscal year 2018. This increase in operating cash flows was primarily due to an initial higher amount of capitalized cultural costs carried at the beginning of fiscal year 2019 and the related amortization of such costs during the nine months ended July 31, 2019 compared to the same period in fiscal year 2018.

•
Income taxes receivable balance was zero and $0.4 million at July 31, 2019 and October 31, 2018, respectively. Income taxes receivable balance was $0.3 million at July 31, 2018 compared to $0.6 million at October 31, 2017.

•
Accounts payable and growers payable provided $15.5 million and $3.9 million of operating cash flows in the nine months ended July 31, 2019 and 2018, respectively. The $15.5 million of cash provided in the nine months ended July 31, 2019 was primarily the result of $10.0 million increase in accounts payable, $5.7 million increase in growers payable offset by $0.2 million of capital expenditures accrued but not paid at period end. The $3.9 million of cash provided by the nine months ended July 31, 2018 was primarily the result of $0.5 million increase in accounts payable, $3.8 million increase in growers payable, offset by $0.3 million of capital expenditures accrued but not paid at period end.


44

•
Accrued liabilities used $3.2 million of operating cash flows in the nine months ended July 31, 2019 compared to $0.3 million of operating cash flows used during the same period in fiscal year 2018. The operating cash used in the nine months ended July 31, 2019 was primarily due to payments for incentive compensation, property taxes and lemon suppliers. The operating cash flows used in the nine months ended July 31, 2018 was primarily due to payments for incentive compensation and property taxes offset by accrued lemon supplier expenses.

•
Other long-term liabilities operating cash flows in the nine months ended July 31, 2019 represented $0.3 million of non-cash pension expense offset by $0.5 million of pension contributions for the period. Other long-term liabilities operating cash flows in the nine months ended July 31, 2018 represented $0.5 million of non-cash pension expense offset by $0.5 million of pension contributions for the period.

Cash Flows from Investing Activities
 
For the nine months ended July 31, 2019, net cash used in investing activities was $31.4 million compared to net cash used in investing activities of $50.9 million during the same period in fiscal year 2018. Net cash used in investing activities was primarily comprised of capital expenditures, agriculture property acquisitions, business combinations and investments.
 
Capital expenditures were $12.6 million in the nine months ended July 31, 2019, comprised of $12.0 million for property, plant and equipment primarily related to orchard and vineyard development and the purchase of a photovoltaic solar array and $0.6 million for real estate development projects. Additionally, in the nine months ended July 31, 2019, we purchased an agriculture property for $0.4 million, contributed $4.0 million to the Joint Venture for the development of our East Area I real estate development project and paid $15.0 million for the Trapani Fresh joint venture formation in Argentina. Additionally, we sold 10,000 shares of Calavo stock for net proceeds of $1.0 million.
 
Capital expenditures were $9.0 million in the nine months ended July 31, 2018, comprised of $7.9 million for property, plant and equipment primarily related to orchard and vineyard development and $1.1 million for real estate development projects. Additionally, in the nine months ended July 31, 2018, we purchased San Pablo for $13.1 million, Oxnard Lemon for $25.0 million and a real estate development parcel for $1.4 million. Further we contributed $3.5 million to the Joint Venture for the development of our East Area I real estate development project and received combined net proceeds of $1.5 million from the sale of the commercial portion of Sevilla and the sale of Centennial.
 
Cash Flows from Financing Activities
 
For the nine months ended July 31, 2019, net cash provided by financing activities was $27.5 million compared to net cash provided by financing activities of $27.6 million during the same period in fiscal year 2018.
 
The $27.5 million of cash provided by financing activities during the nine months ended July 31, 2019 was primarily comprised of net borrowings of long-term debt in the amount $32.2 million partially offset by common and preferred dividends, in aggregate, of $4.4 million. The $27.6 million of net cash provided by financing activities in the nine months ended July 31, 2018 was primarily comprised of net repayments of long-term debt in the amount of $32.8 million and net proceeds from our public offering on common stock in the amount of $64.1 million partially offset by common and preferred dividends, in aggregate, of $3.3 million.
 
Transactions Affecting Liquidity and Capital Resources
 
On June 20, 2017, we entered into a Master Loan Agreement (the “Loan Agreement”) with Farm Credit West, FLCA (“Farm Credit West”) which includes a Revolving Credit Supplement and a Non-Revolving Credit Supplement (the “Supplements”). Proceeds from the Supplements were used to pay down all the remaining outstanding indebtedness under the revolving credit facility we had with Rabobank, N.A. On January 29, 2018, we amended the Revolving Credit Supplement to increase the borrowing capacity from $60.0 million to $75.0 million. 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. In May 2018, we locked the interest rate on the Non-Revolving Credit Supplement at 4.77%, effective July 1, 2018.

The interest rate for any amount outstanding under the Supplements is based on the one-month London Interbank Offered Rate (“LIBOR”) rate plus an applicable margin, which is subject to adjustment on a monthly basis. The applicable margin ranges from 1.60% to 2.35% depending on the ratio of current assets plus the remaining available commitment divided by current liabilities. On July 1, 2018, and on each one-year anniversary thereafter, we have the option to convert the interest rate in use under each Supplement from the preceding LIBOR-based calculation to a variable interest rate, or the reverse, as applicable. Any amounts outstanding under the Supplements are due and payable in full on July 1, 2022.

45


All indebtedness under the Loan Agreement, including any indebtedness under the Supplements, is secured by a first lien on certain of our agricultural properties in Tulare and Ventura counties in California and certain of our building fixtures and improvements and investments in mutual water companies associated with the pledged agricultural properties. The Loan Agreement includes customary default provisions that provide that should an event of default occur, Farm Credit West, at its option, may declare all or any portion of the indebtedness under the Loan Agreement to be immediately due and payable without demand, notice of non-payment, protest or prior recourse to collateral, and terminate or suspend our right to draw or request funds on any loan or line of credit. 
 
The Loan Agreement 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 covenant that we will maintain a debt service coverage ratio greater than 1.25:1.0 measured annually at October 31, with which we were in compliance at October 31, 2018.
 
We finance our working capital and other liquidity requirements primarily through cash from operations and our Farm Credit West Credit Facility. In addition, we have the Farm Credit West Term Loans, the Wells Fargo term loan, the Banco de Chile term loan and a note payable to the sellers of a land parcel. Additional information regarding the Farm Credit West Credit Facility, the Farm Credit West Term Loans, the Wells Fargo term loan, the Banco de Chile term loan and the note payable can be found in the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q.
 
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 remainder of fiscal year 2019. In addition, we have the ability to control a portion of our investing cash flows to the extent necessary based on our liquidity demands.
 
Farm Credit West Credit Facility
 
As of July 31, 2019, our outstanding borrowings under the Farm Credit West Credit Facility were $85.4 million and we had $29.6 million of availability. The Farm Credit West revolving line of credit balance of $45.4 million currently bears interest at a variable rate equal to the one-month LIBOR plus 1.85%. The interest rate resets on the first of each month and was 4.25% at July 31, 2019. We have the ability to prepay any amounts outstanding under the Farm Credit West revolving line of credit without penalty. The line of credit provides for maximum borrowings of $115.0 million and the borrowing capacity based on collateral value was $115.0 million at July 31, 2019.
 
We have the option of fixing the interest rate under the Farm Credit West Credit Facility on any portion of outstanding borrowings using interest rate swaps. Effective July 2013, we fixed the interest rate at 4.30% utilizing an interest rate swap on $40.0 million of the Rabobank Credit Facility. In connection with the paydown of the Rabobank debt noted above, on June 20, 2017, we entered into a novation agreement with Rabobank International, Utrecht and CoBank, ACB (“CoBank”). The agreement provided for the prior interest rate swap agreement with Rabobank to be in place with CoBank. This interest rate swap expired June 30, 2018.

Farm Credit West Term Loans
 
As of July 31, 2019, we had an aggregate of approximately $18.8 million outstanding under Farm Credit West Term Loans, which are further discussed here:
 
•
Term Loan Maturing November 2022. As of July 31, 2019, we had $2.2 million outstanding under the Farm Credit West Term Loan that matures in November 2022. This term loan bears interest at a variable rate equal to an internally calculated rate based on Farm Credit West’s internal monthly operations and their cost of funds and generally follows the changes in the 90-day treasury rates in increments divisible by 0.25% and is payable in quarterly installments through November 2022. The interest rate resets monthly and was 4.95% at July 31, 2019. This term loan is secured by certain of our agricultural properties.

•
Term Loan Maturing October 2035. As of July 31, 2019, Windfall had $1.1 million outstanding under the Farm Credit West Term Loan that matures in October 2035. This term loan bears interest at a variable rate equal to an internally calculated rate based on Farm Credit West’s internal monthly operations and their cost of funds and generally follows the changes in the 90-day treasury rates in increments divisible by 0.25% and is payable in monthly installments through October 2035. The interest rate resets monthly and was 4.95% at July 31, 2019. This term loan is secured by the Windfall Farms property.


46

•
Term Loan Maturing March 2036. As of July 31, 2019, we had $8.9 million outstanding under the Farm Credit West Term Loan that matures in March 2036. This loan bears interest at a fixed rate of 4.70% and is payable in monthly installments through March 2036. This term loan is secured by certain of our agricultural properties.

•
Term Loan Maturing March 2036. As of July 31, 2019, we had $6.6 million outstanding under the Farm Credit West Term Loan that matures in March 2036. This loan bears interest at a fixed rate of 3.62% until March 2021, becoming variable for the remainder of the loan at a variable rate equal to an internally calculated rate based on Farm Credit West’s internal monthly operations and their cost of funds and generally follows the changes in the 90-day treasury rates in increments divisible by 0.25%. This term loan is payable in monthly installments through March 2036 and is secured by certain of our agricultural properties.

The Farm Credit West Term Loans contain various conditions, covenants and requirements with which our Company and Windfall must comply. In addition, our Company and Windfall are subject to limitations on, among other things, selling, abandoning or ceasing business operations; merging or consolidating with a third party; disposing of a substantial portion of assets by sale, transfer, gifts or lease except for inventory sales in the ordinary course of business; obtaining credit or loans from other lenders other than trade credit customary in the business; becoming a guarantor or surety on or otherwise liable for the debts or obligations of a third party; and mortgaging, pledging, leasing for over a year, or otherwise making or allowing the filing of a lien on any collateral.
 
Wells Fargo Term Loan
 
As of July 31, 2019, we had $5.3 million outstanding under the Wells Fargo term loan. This term loan bears interest at a fixed rate of 3.58% and is payable in monthly installments through January 2023. The loan is secured by certain equipment associated with our new lemon packing facilities. The loan contains 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. We are also subject to a covenant that our Company will maintain a debt service coverage ratio, as defined in the loan agreement, of less than 1.25 to 1.0 measured annually at October 31, with which we were in compliance at October 31, 2018.
 
Banco de Chile Term Loan
 
Through the acquisition of PDA in February 2017, we assumed a $1.7 million term loan with Banco de Chile that matures in January 2025. This term loan bears interest at a fixed rate of 6.48% and is payable in eight annual installments which began in January 2018. This loan is unsecured and contains certain pre-payment limitations.

Note Payable

In February 2018, we exercised an option to purchase a 7-acre parcel adjacent to our East Area II real estate development project. In connection with this purchase, we issued a note payable for $1.4 million secured by first deed of trust, payable to the sellers. The note is due in February 2023, with interest-only, monthly payments at interest rates ranging from 5.0% to 7.0% and was 5.50% at July 31, 2019.
 
Public Offering of Common Stock

In June 2018, we completed the sale of an aggregate of 3,136,362 shares of our common stock, at a price of $22.00 per share, to a limited number of institutional and other investors in a registered offering under the shelf registration statement. The offering represented 18% of our outstanding common stock on an after-issued basis as of June 25, 2018. Upon completion of the offering and issuance of common stock, we had 17,669,314 shares of common stock outstanding. The net proceeds from the sale of shares, after deducting underwriting discounts and our estimated expenses related to the offering, were approximately $64.1 million. In June and July 2018, we used the offering proceeds to pay down debt, purchase the San Pablo ranch and purchase Oxnard Lemon's packinghouse, related land and certain other assets.

Interest Rate Swap
 
From time to time we enter into interest rate swap agreements to manage the risks and costs associated with our financing activities.
 
Our debt bears interest at fixed and variable rates, ranging from 3.58% to 6.48% at July 31, 2019.



47

Contractual Obligations
 
In January 2018, the Joint Venture entered into a $45.0 million unsecured Line of Credit Loan Agreement and Promissory Note (the “Loan”) with Bank of America, N.A. to fund early development activities. The Loan matures in January 2020, with an option to extend the maturity date until 2021, subject to certain conditions. The interest rate on the Loan is LIBOR plus 2.85%, payable monthly. The Loan contains certain customary default provisions and the Joint Venture may prepay any amounts outstanding under the Loan without penalty. In February 2018, the obligations under the Loan were guaranteed by certain principals from Lewis and by the Company. The Joint Venture recorded a $31.0 million outstanding loan balance at July 31, 2019 related to this Loan.

We believe that the cash flows from our agribusiness and rental operations business segments as well as available borrowing capacity from our existing credit facilities will be sufficient to satisfy our future capital expenditure, debt service, working capital and other contractual obligations for the remainder of fiscal year 2019. In addition, we have the ability to control the timing of a portion of our investing cash flows to the extent necessary based on our liquidity demands.
 
Fixed Rate and Variable Rate Debt
 
Details of amounts included in long-term debt can be found above and in the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
 
Preferred Stock Dividends
 
In 1997, in connection with the acquisition of Ronald Michaelis Ranches, Inc., we issued 30,000 shares of Series B Convertible Preferred Stock at $100.00 par value (the “Series B Stock”), of which 14,790 shares are currently outstanding. The holders of the Series B Stock are entitled to receive cumulative cash dividends at an annual rate of 8.75% of par value. Such dividends are payable quarterly on the first day of January, April, July and October in each year commencing July 1, 1997 and total $0.1 million annually.
 
During March and April 2014, we issued, in aggregate, 9,300 shares of Series B-2 Convertible Preferred Stock at $100.00 par value (the “Series B-2 Preferred Stock”). The holders of the Series B-2 Preferred Stock are entitled to receive cumulative cash dividends at an annual rate of 4% of the liquidation value of $1,000 per share. Such dividends are payable quarterly on the first day of January, April, July and October in each year commencing July 1, 2014 and total $0.4 million annually.
 
Defined Benefit Pension Plan
 
We have a noncontributory, defined benefit, single employer pension plan (the “Plan”), which provides retirement benefits for all eligible employees of the Company. Effective June 2004, the Company froze the Plan and no additional benefits accrued to participants subsequent to that date. We may make discretionary contributions to the Plan and we may be required to make contributions to adhere to applicable regulatory funding provisions, based in part on the Plan’s asset valuations and underlying actuarial assumptions. We made funding contributions of $0.6 million, $0.7 million and $0.5 million in fiscal years 2018, 2017 and 2016, respectively, and we plan to contribute approximately $0.6 million to the Plan in fiscal year 2019.
 
Operating Lease Obligations
 
We have numerous operating lease commitments with remaining terms ranging from less than one year to ten years. In fiscal year 2008, we installed a one mega-watt photovoltaic solar array on one of our agricultural properties located in Ventura County that produces a significant portion of the power to run our lemon packinghouse. The construction of this array was financed by Farm Credit Leasing and we have a long-term lease with Farm Credit Leasing for this array. Annual payments for this lease were $0.5 million, however the operating lease agreement terminated and the solar array was purchased in fiscal year 2018 for $1.1 million. In fiscal year 2009, we entered into a similar transaction with Farm Credit Leasing for a second photovoltaic array at one of our agricultural properties located in the San Joaquin Valley to supply a significant portion of the power to operate four deep water well pumps located on our property. Annual lease payments for this facility ranged from $0.3 million to $0.8 million, however, the operating lease agreement terminated and the solar array was purchased in the first quarter of fiscal year 2019 for $1.3 million.
  
We lease approximately 80 acres of lemons in Lindsay, California at a base rent of $500 per acre plus 50% of the operating profit of the leased acreage as defined in the lease. The lease expires in December 2021 and includes four five-year renewal options. Estimated aggregate lease expense is approximately $0.1 million per year.
 
On July 1, 2013, we entered into a lease agreement with Cadiz, Inc. (“Cadiz”) to develop new lemon orchards on Cadiz’s agricultural property in eastern San Bernardino County, California (the “Cadiz Ranch”). Under the terms of the lease agreement, we have the right

48

to lease and plant up to 1,280 acres of lemons over the next five years at the Cadiz Ranch operations in the Cadiz Valley and have leased 320 acres initially, subject to a mutually agreed upon planting schedule. The lease agreement provides options to plant up to 960 additional acres (320 acres in Option 1 and 640 acres in Option 2) by 2019. The annual rental payment includes a base rent of $200 per planted acre and a lease payment equal to 20% of net cash flow from the harvested crops grown on Cadiz Ranch. Pursuant to the terms of the lease agreement, the annual rental payment will not exceed a total of $1,200 per acre. We incurred approximately $0.1 million of lease expense in fiscal years 2018, 2017 and 2016, respectively.
 
In February 2015, we entered into a Modification of Lease Agreement (the “Amendment”) with Cadiz. The Amendment, among other things, increased by 200 acres the amount of property leased by our Company under the lease agreement dated July 1, 2013. In connection with the Amendment, we paid a total of $1.2 million to acquire existing lemon trees and irrigation systems from Cadiz and a Cadiz tenant. In February 2016, Cadiz assigned this lease to Fenner Valley Farms, LLC, a subsidiary of Water Asset Management, LLC (“WAM”).
 
We lease machinery and equipment for our packing operations and other land for our agricultural operations under leases with annual lease commitments that are individually immaterial.
  
Real Estate Development Activities, Capital Expenditures and Related Capital Resources
 
In November 2015 (the “Transaction Date”), we entered into the Joint Venture with Lewis for the residential development of our East Area I real estate development project. To consummate the transaction, we formed Limoneira Lewis Community Builders, LLC (the "LLC" or “Joint Venture”) 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,
 
Further, on the Transaction Date, the Joint Venture and Limoneira entered into a lease agreement (the "Lease Agreement"), pursuant to which the Joint Venture would lease certain of the contributed East Area I property back to Limoneira for continuation of agricultural operations, and certain other permitted uses, on the property until the Joint Venture required the property for development. Limoneira terminated this Lease Agreement pursuant to the terms therein during the first quarter of fiscal year 2019.

Limoneira and the Joint Venture also entered into a Retained Property Development Agreement on the Transaction Date (the "Retained Property Agreement"). Under the terms of the Retained Property Agreement, the Joint Venture will transfer certain contributed East Area I property, which is entitled for commercial development, back to Limoneira (the "Retained Property") and arrange for the design and construction of certain improvements to the Retained Property, subject to certain reimbursements by Limoneira. In August 2018, the Retained Property was transferred back to Limoneira.
 
We expect to receive approximately $100.0 million from the Joint Venture over the estimated 7 to 10-year life of the project including $20.0 million received on the consummation of the Joint Venture. The Joint Venture partners will share in capital contributions to fund project costs until project loan proceeds and or revenues are sufficient to fund the project. These funding requirements are currently estimated to total $15.0 to $20.0 million for each Joint Venture partner in the first three to four years of the project. We funded $4.0 million in the first nine months of fiscal year 2019, $3.5 million in fiscal year 2018, $7.5 million in fiscal year 2017 and $2.3 million in fiscal year 2016. 

Off-Balance Sheet Arrangements
 
As discussed above and in Note 7 – Real Estate Development and Note 8 – Equity Investments in the Notes to Consolidated Financial Statements included in our fiscal year 2018 Annual Report on Form 10-K, we have investments in joint ventures and partnerships that are accounted for using the equity method of accounting.
 
Critical Accounting Policies and Estimates
 
The preparation of our consolidated financial statements in accordance with GAAP requires us to develop critical accounting policies and make certain estimates 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. Actual results may materially differ from these estimates under different assumptions or conditions as new or additional information become available in future periods. We believe the following critical accounting policies reflect our more significant estimates and judgments used in the preparation of our consolidated financial statements. 
 
Foreign Currency Translation – PDA and San Pablo’s functional currency is the Chilean Peso. Our balance sheets are translated to U.S. dollars at exchange rates in effect at the balance sheet dates and their income statements are translated at average exchange rates

49

during the reporting period. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income.
 
Revenue Recognition – On November 1, 2018, we adopted FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), that amends the guidance for the recognition of revenue from contracts with customers. The results for the reporting period beginning after November 1, 2018 are presented in accordance with the new standard which was adopted using the modified-retrospective method and applied to those contract that were not completed as of November 1, 2018. As a result, comparative information has not been restated and the results for the reporting periods before November 1, 2018 continue to be reported under the accounting standards and policies in effect for those periods.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

•
Identify the contract(s) with a customer;
•
Identify the performance obligations in the contract;
•
Determine the transaction price;
•
Allocate the transaction price to the performance obligations in the contract; and
•
Recognize revenue when (or as) the entity satisfies a performance obligation.

We determine the appropriate method by which we recognize revenue by analyzing the nature of the products or services being provided as well as the terms and conditions of contracts or arrangements entered into with our customers. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. A contracts transaction price is allocated to each distinct good or service (i.e., performance obligation) identified in the contract and each performance obligation is valued based on its estimated relative standalone selling price. 

We recognize the majority of our revenue at a point in time when it satisfies a performance obligation and transfers control of the product to the respective customer. The amount of revenue that is recognized is based on the transaction price, which represents the invoiced amount and includes estimates of variable consideration such as allowances for estimated customer discounts or concessions, where applicable. The amount of variable consideration included in the transaction price may be constrained and is included only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period.

Upon adoption, we changed the accounting of certain brokered fruit sales. Under previous guidance, we were considered an agent and recorded revenues for certain brokered fruit sales and the costs of such fruit on a net basis in its consolidated statement of operations. Under the new revenue recognition standard, we are considered a principal in the transaction and revenues are recorded on a gross basis in our consolidated statement of operations with the related cost of such fruit included in agribusiness costs and expenses. This change resulted in the recognition of additional agribusiness revenue and agribusiness costs and expenses of $1,781,000, respectively, during the three months ended July 31, 2019 and $2,201,000, respectively, during the nine months ended July 31, 2019. Had we used the previous revenue recognition guidance, we would have recorded insignificant net agribusiness revenue for the three and nine months ended July 31, 2019. No cumulative adjustment to retained earnings was necessary as there is no net effect of applying the standard.
Agribusiness revenue – Revenue from lemon sales is generally recognized at a point in time when the customer takes control of the fruit from the Company’s packinghouse which aligns with the transfer of title to the customer. We have elected to treat any shipping and handling costs incurred after control of the goods has been transferred to the customer as agribusiness costs.

Our avocados, oranges, specialty citrus and other specialty crops are packed and sold by Calavo and other third-party packinghouses. We deliver all of our avocado production from our orchards to Calavo. These avocados are then packed by Calavo at its packinghouse and sold and distributed under Calavo brands to its customers primarily in the United States and Canada. Our Company’s arrangements with other third-party packinghouses related to its oranges, specialty citrus and other specialty crops are similar to our arrangement with Calavo. Our arrangements with our third-party packinghouses are such that we are the producer and supplier of the product and the third-party packinghouses are our customers. 

The revenues we recognize related to the fruits sold to the third-party packinghouses are based on the volume and quality of the fruits delivered, the market price for such fruit, less the packinghouses’ charges to pack and market the fruit. Such packinghouse charges include the grading, sizing, packing, cooling, ripening and marketing of the related fruit. We control the product until it is delivered to the third-party packinghouses at which time control of the product is transferred to the third-party packinghouses and revenue is

50

recognized. Such third-party packinghouse charges are recorded as a reduction of revenue as they are not for distinct services. The identifiable benefit we receive from the third-party packinghouses for packaging and marketing services cannot be sufficiently separated from the third-party packinghouses’ purchase of our products. In addition, we are not able to reasonably estimate the fair value of the benefit received from the third-party packinghouses for such services and as such, these costs are characterized as a reduction of revenue in our consolidated statements of operations.

Revenue from the sales of certain of our agricultural products is recorded based on estimated proceeds provided by certain of our sales and marketing partners (Calavo and other third-party packinghouses) due to the time between when the product is delivered by us and the closing of the pools for such fruits at the end of each month or harvest period. Calavo and other third-party packinghouses are agricultural cooperatives or function in a similar manner as an agricultural cooperative. We estimate the variable consideration using the most likely amount method, with the most likely amount being the quantities actually shipped extended by the prices reported by Calavo and other third-party packinghouses. Revenue is recognized at time of delivery to the packinghouses relating to fruits that are in pools that have not yet closed at month end if: (a) the related fruits have been delivered to and accepted by Calavo and other third-party packinghouses (i.e., Calavo and other third-party packinghouses obtain control) and (b) sales price information has been provided by Calavo and other third-party packinghouses (based on the marketplace activity for the related fruit) to estimate with reasonable certainty the final selling price for the fruit upon the closing of the pools. In such instances we have the present right to payment and Calavo and other third-party packinghouses have the present right to direct the use of, and obtain substantially all of the remaining benefits from, the delivered fruit. We do not expect that there is a high likelihood that a significant reversal in the amount of cumulative revenue recognized in the early periods of the pool will occur once the final pool prices have been reported by the packinghouses. Historically, the revenue that is recorded based on the sales price information provided to the Company by Calavo and other third-party packinghouses at the time of delivery, have not materially differed from the actual amounts that are paid after the monthly or harvest period pools are closed.

We have entered into brokerage arrangements with third-party international packinghouses. In certain of these arrangements, we have the exclusive ability to direct the use of, and obtain substantially all of the remaining benefits from the fruit, and are therefore acting as a principal. As such, we record the related revenue and costs of the fruit gross in the consolidated statement of operations.

Revenue from crop insurance proceeds is recorded when the amount can be reasonably determined and upon establishment of the present right to payment.
 
Rental Revenue – Minimum rental revenues are generally recognized on a straight-line basis over the respective initial lease term. Contingent rental revenues are contractually defined as to the percentage of rent received by us and are based on fees collected by the lessee. Such revenues are recognized when actual results, based on collected fees reported by the tenant, are received. Our rental arrangements generally require payment on a monthly or quarterly basis.
 
Real Estate Development Revenue – We recognize revenue on real estate development projects with customers at a point in time (i.e., the closing) when we satisfy the single performance obligation and transfers control of such real estate to a buyer. The transaction price, which is the amount of consideration we receive upon delivery of the completed real estate to the buyer, is allocated to this single obligation and is received at closing. Real estate development projects with non-customers are accounted for in accordance with ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.

Real Estate Development Costs – We capitalize the planning, entitlement, construction and development costs associated with our various real estate projects. Costs that are not capitalized, which include property maintenance and repairs, general and administrative and marketing expenses, are expensed as incurred. A real estate development project is considered substantially complete upon the cessation of construction and development activities. Once a project is substantially completed, future costs are expensed as incurred. Costs incurred to sell the real estate are evaluated for capitalization in accordance with ASC 340-40, and incremental costs of obtaining a contract and costs to fulfill a contract are capitalized only if the costs relate directly to a specifically identified contract, enhance resources to satisfy performance obligations in the future and are expected to be recovered. For fiscal year 2018, we capitalized approximately $32.7 million of costs related to our real estate projects and expensed approximately $1.7 million of costs.

Financing and payment – Our payment terms vary by the type and location of our customer and the products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 60 days from date of shipment or satisfaction of the performance obligation. We do not provide financing with extended payment terms beyond generally standard commercial payment terms for the applicable industry.

Practical expedients and exemptions – Taxes collected from customers and remitted to government authorities and that are related to the sales of the Company’s products are excluded from revenues.


51

We do not disclose the value of unsatisfied performance obligations for (i) contracts with original expected lengths of one year or less or (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for the services performed.
 
Income Taxes – Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.
 
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
 
Business Combinations and Asset Acquisitions – Business combinations are accounted for under the acquisition method in accordance with ASC 805, Business Combinations. The acquisition method requires identifiable assets acquired and liabilities assumed and any noncontrolling interest in the business acquired be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill. Acquisitions that do not meet the definition of a business under the ASC are accounted for as asset acquisitions. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets acquired and liabilities assumed on a relative fair value basis. Goodwill is not recognized in an asset acquisition with any consideration in excess of net assets acquired allocated to acquired assets on a relative fair value basis. Transaction costs are expensed in a business combination and are considered a component of the cost of the acquisition in an asset acquisition.
 
Derivative Financial Instruments - We use derivative financial instruments for purposes other than trading to manage our exposure to interest rates as well as to maintain an appropriate mix of fixed and floating-rate debt. Contract terms of our hedge instruments closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting. If a derivative instrument is a hedge, depending on the nature of the hedge, changes in the fair value of the instrument will be either offset against the change in the fair value of the hedged assets, liabilities or firm commitments through earnings or be recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings. Instruments that do not meet the criteria for hedge accounting, or contracts for which we have not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of change. 
 
Impairment of Long-Lived Assets We evaluate our long-lived assets including our real estate development projects for impairment when events or changes in circumstances indicate the carrying value of these assets may not be recoverable. As a result of various factors, in recent years, we recorded impairment charges of $1.6 million, $0.1 million and zero in fiscal years 2018, 2017 and 2016, respectively.
 
Defined Benefit Retirement Plan As discussed in the notes to our consolidated financial statements, we sponsor a defined benefit retirement plan that was frozen in June 2004, and no future benefits accrued to participants subsequent to that time. Ongoing accounting for this plan under FASB ASC 715 provides guidance as to, among other things, future estimated pension expense, pension liability and minimum funding requirements. This information is provided to us by third-party actuarial consultants. In developing this data, certain estimates and assumptions are used, including among other things, discount rate, long-term rate of return and mortality tables. During 2018, the Society of Actuaries (“SOA”) released a new mortality improvement scale table, referred to as MP-2018, which is believed to better reflect mortality improvements and is to be used in calculating defined benefit pension obligations. In addition, during fiscal year 2018, the assumed discount rate to measure the pension obligation increased to 4.4%. The Company used the latest mortality tables released by the SOA through October 31, 2018 to measure its pension obligation as of October 31, 2018 and combined with the assumed discount rate and other demographic assumptions, its pension liability decreased by approximately $1.5 million as of October 31, 2018. Further changes in any of these estimates could materially affect the amounts recorded that are related to our defined benefit retirement plan.

Recent Accounting Pronouncements
 
Please See Note 2 – "Summary of Significant Accounting Policies" of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q for information concerning recent accounting pronouncements.
 

52

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
There have been no material changes in the disclosures discussed in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2018 as filed with the Securities and Exchange Commission ("SEC") on January 14, 2019.
 
Item 4. Controls and Procedures
 
Disclosure Controls and Procedures. As of July 31, 2019, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
 
Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q or, to our knowledge, in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
  
Limitations on the Effectiveness of Controls. Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Acquisition of Trapani Fresh. We will exclude Trapani Fresh's operations from our management’s report on internal control over financial reporting for the year ended October 31, 2019 as we continue to evaluate its internal controls. This exclusion is in accordance with the general guidance issued by the Staff of the SEC that an assessment of a recent business combination may be omitted from management’s report on internal control over financial reporting in the first year of consolidation.





53

PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
We are from time to time involved in legal proceedings arising in the normal course of business. Other than proceedings incidental to our business, we are not a party to, nor is any of our property the subject of, any material pending legal proceedings and no such proceedings are, to our knowledge, contemplated by governmental authorities.
 
Item 1A. Risk Factors
 
There have been no material changes in the disclosures discussed in the section entitled “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2018, as filed with the SEC on January 14, 2019.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
Item 5. Other Information
 
None.


54

Item 6. Exhibits
Exhibit
Number
Exhibit
3.1
 
 
3.2
 
 
3.3
 
 
3.4
 
 
3.5
 
 
3.6
 
 
3.7
 
 
3.8
 
 
3.8.1
 
 
3.8.2
 
 
3.8.3
 
 
3.8.4
 
 
4.1
 
 
4.2
 
 
4.3
 


55

Exhibit
Number
Exhibit
4.4
 
 
4.5
 
 
4.6
 
 
31.1*
 
 
31.2*
 
 
32.1*
 
 
32.2*
 
 
101.INS*
XBRL Instance Document
 
 
101.SCH*
XBRL Taxonomy Extension Schema Document
 
 
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
 
*
Filed herewith,
 
 
 
 
 
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
 



56

LIMONEIRA COMPANY


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
LIMONEIRA COMPANY
 
 
 
September 9, 2019
By:
/s/ HAROLD S. EDWARDS
 
 
 
Harold S. Edwards
 
 
Director, President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
September 9, 2019
By:
/s/ MARK PALAMOUNTAIN
 
 
 
Mark Palamountain
 
 
Chief Financial Officer,
Treasurer and Corporate Secretary
 
 
(Principal Financial and Accounting Officer)
 



57
Exhibit
Exhibit 31.1


Certification of the Principal Executive Officer
Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a)

I, Harold S. Edwards, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Limoneira Company (the “Registrant”);

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the Registrant and have:

(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
 
 
 
 
September 9, 2019
 
/s/ Harold S. Edwards
 
 
 
Harold S. Edwards,
 
 
Director, President, and Chief Executive Officer
 
 
(Principal Executive Officer)


Exhibit


Exhibit 31.2


Certification of the Principal Financial Officer
Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a)

I, Mark Palamountain, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Limoneira Company (the “Registrant”);

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the Registrant and have:

(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
 
5.
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
 
 
 
 
September 9, 2019
 
/s/ Mark Palamountain
 
 
 
Mark Palamountain,
 
 
Chief Financial Officer, Treasurer and Corporate Secretary
 
 
(Principal Financial and Accounting Officer)

Exhibit


Exhibit 32.1


Certification of the Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

In connection with the Quarterly Report on Form 10-Q for the quarter ended July 31, 2019 (the “Report”) of Limoneira Company (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Harold S. Edwards, hereby certify that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
 
 
 
 
September 9, 2019
 
/s/ Harold S. Edwards
 
 
 
Harold S. Edwards,
 
 
Director, President, and Chief Executive Officer
 
 
(Principal Executive Officer)


Exhibit


Exhibit 32.2


Certification of the Principal Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

In connection with the Quarterly Report on Form 10-Q for the quarter ended July 31, 2019 (the “Report”) of Limoneira Company (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Mark Palamountain, hereby certify that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
 
 
 
 
September 9, 2019
 
/s/ Mark Palamountain
 
 
 
Mark Palamountain,
 
 
Chief Financial Officer, Treasurer and Corporate Secretary
 
 
(Principal Financial and Accounting Officer)