OPERATIONS AND OWNERSHIP

12 Months Ended

Dec. 31, 2012

OPERATIONS AND OWNERSHIP

OPERATIONS AND OWNERSHIP

(1) OPERATIONS AND OWNERSHIP

Royal Hawaiian Orchards, L.P. (the “Partnership”) owns or leases and farms 5,070 tree acres of macadamia orchards on the island of Hawaii. Once the nuts are harvested, the Partnership sells them to another entity in Hawaii, which processes the nuts and markets the finished products.  The Partnership farms approximately 1,100 acres of macadamia orchards in Hawaii for other orchard owners in exchange for a fee.

The Partnership has developed two retail product lines of better for you macadamia snacks being sold under the brand name “Royal Hawaiian Orchards” and reported under Royal Hawaiian Macadamia Nut, Inc. (“Royal”), a wholly owned subsidiary of the Partnership.  Royal has contracted with third party co-packers in California to manufacture its branded products.  The Partnership expects to have products in retail distribution in approximately 5,000 stores in Hawaii and the western United States by the end of 2013.

The Partnership is owned 99% by limited partners and 1% by the Managing General Partner, Royal Hawaiian Resources, Inc. (“RHR”).  On January 6, 2005, the stock of RHR was purchased by the Partnership for $750,000 in cash.  The transaction was accounted for as an asset purchase as opposed to a business combination since RHR had no substantive operations and its principal purpose was to own and hold 75,757 general partner units of the Partnership.  The acquisition of the general partner units held by RHR resulted in the Class A limited partners effectively owning 100% of the Partnership.

Limited partner interests are represented by Class A Units, which are evidenced by depositary receipts that trade publicly on the OTCQX platform.

Liquidity.  The Partnership recorded a net loss of $499,000, generated operating cash flow of $1.4 million during 2012 and had working capital of $2.0 million at December 31, 2012.  The increase in operating expenses and cash paid for Royal’s inventory and development costs of approximately $2.0 million, resulted in the net loss and decreased cash flow for the Partnership in 2012.  Higher price per pound received on the Partnership’s production contributed to the favorable financial results in 2012 for the owned orchard segment.  The Partnership had net income of $712,000 and generated operating cash flow of $2.3 million 2011 and had working capital $1.4 million at December 31, 2011.  The financial results for 2011 were attributable to increased nut sales due to higher annual production from the MLP fields and the Partnership recording full year production from the IASCO orchards.  Higher price per pound received on the IASCO production and lower overall cost per pound on total production contributed to the favorable financial results in 2011.  Higher interest expense was partially offset by higher crop insurance proceeds and increased distribution from American AgCredit, PCA in 2011.  The crop insurance is reflected as cash received for goods and services in the consolidated statement of cash flows and was used for general business purposes.  The Partnership has access to working capital through its line of credit and other borrowing opportunities, if necessary.  Management feels that the Partnership will be able to generate sufficient cash flows from operations to meet current obligations and debt service requirements.  However, if the Partnership were to fully rollout its sales strategy in 2013, the Partnership may require and seek additional funds to support this effort.