NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Barnwell Industries, Inc. and all majority-owned subsidiaries (collectively referred to herein as “Barnwell,” “we,” “our,” “us,” or the “Company”), including a 77.6%-owned land investment general partnership (Kaupulehu Developments), a 75%-owned land investment partnership (KD Kona 2013 LLLP), and a variable interest entity (Teton Barnwell Fund I, LLC) for which the Company is deemed to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated.
Undivided interests in oil and natural gas exploration and production joint ventures are consolidated on a proportionate basis. Barnwell’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in variable interest entities in which the Company is not deemed to be the primary beneficiary are accounted for by the equity method.
Unless otherwise indicated, all references to “dollars” in this Form 10-Q are to U.S. dollars.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements and notes have been prepared by Barnwell in accordance with the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in Barnwell’s September 30, 2022 Annual Report on Form 10-K, as amended by our Form 10-K/A Amendment No. 1 (our “2022 Annual Report”). The Condensed Consolidated Balance Sheet as of September 30, 2022 has been derived from audited consolidated financial statements.
In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at December 31, 2022, results of operations, comprehensive income, equity and cash flows for the three months ended December 31, 2022 and 2021, have been made. The results of operations for the period ended December 31, 2022 are not necessarily indicative of the operating results for the full year.
Use of Estimates in the Preparation of Condensed Consolidated Financial Statements
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management of Barnwell to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates. Significant assumptions are required in the
valuation of deferred tax assets, asset retirement obligations, share-based payment arrangements, obligations for retirement plans, contract drilling estimated costs to complete, proved oil and natural gas reserves, and the carrying value of other assets, and such assumptions may impact the amount at which such items are recorded.
Significant Accounting Policies
Other than as set forth below, there have been no changes to Barnwell's significant accounting policies as described in the Notes to Consolidated Financial Statements included in Item 8 of the Company's 2022 Annual Report.
Advances to Operators for Capital Expenditures
The Company participates in the drilling of crude oil and natural gas wells with other working interest partners. Due to the capital intensive nature of crude oil and natural gas drilling activities, the working interest partner responsible for conducting the drilling operations may request advance payments from other working interest partners for their share of the costs. The Company expects such advances to be applied by working interest partners against joint interest billings for its share of drilling operations within 90 days from when the advance is paid.
2. EARNINGS PER COMMON SHARE
Basic earnings per share is computed using the weighted-average number of common shares outstanding for the period. Diluted earnings per share is calculated using the treasury stock method to reflect the assumed issuance of common shares for all potentially dilutive securities, which consist of outstanding stock options. Potentially dilutive shares are excluded from the computation of diluted earnings per share if their effect is anti-dilutive.
Options to purchase 615,000 shares of common stock were excluded from the computation of diluted shares for the three months ended December 31, 2022 and 2021, as there inclusion would have been anti-dilutive.
Reconciliations between net earnings attributable to Barnwell stockholders and common shares outstanding of the basic and diluted net earnings per share computations are detailed in the following tables:
| | | | | | | | | | | | | | | | | |
| | Three months ended December 31, 2022 |
| | Net Earnings
(Numerator) | | Shares
(Denominator) | | Per-Share
Amount |
| Basic net earnings per share | $ | 1,089,000 | | | 9,956,687 | | | $ | 0.11 | |
| Effect of dilutive securities - | | | | | |
| common stock options | — | | | — | | | |
| Diluted net earnings per share | $ | 1,089,000 | | | 9,956,687 | | | $ | 0.11 | |
| | | | | | | | | | | | | | | | | |
| | Three months ended December 31, 2021 |
| | Net Earnings (Numerator) | | Shares
(Denominator) | | Per-Share
Amount |
| Basic net earnings per share | $ | 1,073,000 | | | 9,446,291 | | | $ | 0.11 | |
| Effect of dilutive securities - | | | | | |
| common stock options | — | | | — | | | |
| Diluted net earnings per share | $ | 1,073,000 | | | 9,446,291 | | | $ | 0.11 | |
3. INVESTMENTS
Investment in Kukio Resort Land Development Partnerships
On November 27, 2013, Barnwell, through a wholly-owned subsidiary, entered into two limited liability limited partnerships, KD Kona 2013 LLLP (“KD Kona”) and KKM Makai, LLLP (“KKM”), and indirectly acquired a 19.6% non-controlling ownership interest in each of KD Kukio Resorts, LLLP, KD Maniniowali, LLLP and KD Kaupulehu, LLLP (“KDK”) for $5,140,000. These entities, collectively referred to hereinafter as the “Kukio Resort Land Development Partnerships,” own certain real estate and development rights interests in the Kukio, Maniniowali and Kaupulehu portions of Kukio Resort, a private residential community on the Kona coast of the island of Hawaii, as well as Kukio Resort’s real estate sales office operations. KDK holds interests in KD Acquisition, LLLP (“KD I”) and KD Acquisition II, LP, formerly KD Acquisition II, LLLP (“KD II”). KD I is the developer of Kaupulehu Lot 4A Increment I (“Increment I”), and KD II is the developer of Kaupulehu Lot 4A Increment II (“Increment II”). Barnwell's ownership interests in the Kukio Resort Land Development Partnerships is accounted for using the equity method of accounting.
In March 2019, KD II admitted a new development partner, Replay Kaupulehu Development, LLC (“Replay”), a party unrelated to Barnwell, in an effort to move forward with development of the remainder of Increment II at Kaupulehu. KDK and Replay hold ownership interests of 55% and 45%, respectively, of KD II and Barnwell has a 10.8% indirect non-controlling ownership interest in KD II through KDK, which is accounted for using the equity method of accounting. Barnwell continues to have an indirect 19.6% non-controlling ownership interest in KD Kukio Resorts, LLLP, KD Maniniowali, LLLP, and KD I.
The partnerships derive income from the sale of residential parcels in Increment I, of which only one lot remains to be sold as of December 31, 2022, as well as from commissions on real estate sales by the real estate sales office and revenues resulting from the sale of private club memberships.
Increment II is not yet under development, and there is no assurance that development of such acreage will occur. No definitive development plans have been made by KD II, the developer of Increment II, as of the date of this report.
Barnwell has the right to receive distributions from the Kukio Resort Land Development Partnerships via its non-controlling interests in KD Kona and KKM, based on its respective partnership sharing ratios of 75% and 34.45%, respectively. During the three months ended December 31, 2022, Barnwell received cash distributions of $538,000 from the Kukio Resort Land Development Partnerships resulting in a net amount of $478,000, after distributing $60,000 to non-controlling interests. During the three months ended December 31, 2021, Barnwell received cash distributions $1,207,000 from the Kukio
Resort Land Development Partnerships resulting in a net amount of $1,075,000, after distributing $132,000 to non-controlling interests.
Equity in income of affiliates was $538,000 for the three months ended December 31, 2022, as compared to equity in income of affiliates of $1,207,000 for the three months ended December 31, 2021.
Summarized financial information for the Kukio Resort Land Development Partnerships is as follows:
| | | | | | | | | | | |
| Three months ended
December 31, |
| 2022 | | 2021 |
| Revenue | $ | 3,712,000 | | | $ | 9,253,000 | |
| Gross profit | $ | 2,422,000 | | | $ | 6,714,000 | |
| Net earnings | $ | 1,307,000 | | | $ | 5,963,000 | |
In the quarter ended June 30, 2021, the Company received cumulative distributions from the Kukio Resort Land Development Partnerships in excess of our investment balance and in accordance with applicable accounting guidance, the Company suspended its equity method earnings recognition and the Kukio Resort Land Development Partnership investment balance was reduced to zero with the distributions received in excess of our investment balance recorded as equity in income of affiliates because the distributions are not refundable by agreement or by law and the Company is not liable for the obligations of or otherwise committed to provide financial support to the Kukio Resort Land Development Partnerships. The Company will record future equity method earnings only after our share of the Kukio Resort Land Development Partnership’s cumulative earnings in excess of distributions during the suspended period exceeds our share of the Kukio Resort Land Development Partnership’s income recognized for the excess distributions, and during this suspended period any distributions received will be recorded as equity in income of affiliates. Accordingly, the amount of equity in income of affiliates recognized in the three months ended December 31, 2022 was equivalent to the $538,000 of distributions received in that period.
Cumulative distributions received from the Kukio Resort Land Development Partnerships in excess of our investment balance was $1,198,000 at December 31, 2022 and $958,000 at September 30, 2022.
Sale of Interest in Leasehold Land
Kaupulehu Developments has the right to receive payments from KD I and KD II resulting from the sale of lots and/or residential units within Increment I and Increment II by KD I and KD II (see Note 17).
With respect to Increment I, Kaupulehu Developments is entitled to receive payments from KD I based on 10% of the gross receipts from KD I’s sales of single-family residential lots in Increment I. One single-family lot was sold during the three months ended December 31, 2022 and one single-family lot, of the 79 lots developed within Increment I, remained to be sold as of December 31, 2022.
The following table summarizes the Increment I revenues from KD I and the amount of fees directly related to such revenues:
| | | | | | | | | | | |
| | Three months ended
December 31, |
| | 2022 | | 2021 |
| Sale of interest in leasehold land: | | | |
| Revenues - sale of interest in leasehold land | $ | 265,000 | | | $ | 600,000 | |
| Fees - included in general and administrative expenses | (32,000) | | | (73,000) | |
| Sale of interest in leasehold land, net of fees paid | $ | 233,000 | | | $ | 527,000 | |
There is no assurance with regards to the amounts of future payments from Increment I or Increment II to be received, or that the remaining acreage within Increment II will be developed. No definitive development plans have been made by KD II, the developer of Increment II, as of the date of this report.
Investment in Leasehold Land Interest - Lot 4C
Kaupulehu Developments holds an interest in an area of approximately 1,000 acres of vacant leasehold land zoned conservation located adjacent to Lot 4A, which currently has no development potential without both a development agreement with the lessor and zoning reclassification. The lease terminates in December 2025.
4. CONSOLIDATED VARIABLE INTEREST ENTITY
In February 2021, Barnwell Industries, Inc. established a new wholly-owned subsidiary named BOK Drilling, LLC (“BOK”) for the purpose of indirectly investing in oil and natural gas exploration and development in Oklahoma. BOK and Gros Ventre Partners, LLC (“Gros Ventre”) entered into the Limited Liability Agreement (the “Teton Operating Agreement”) of Teton Barnwell Fund I, LLC (“Teton Barnwell”), an entity formed for the purpose of directly entering into such oil and natural gas investments. Under the terms of the Teton Operating Agreement, the profits of Teton Barnwell are split between BOK and Gros Ventre at 98% and 2%, respectively, and as the manager of Teton Barnwell, Gros Ventre is paid an annual asset management fee equal to 1% of the cumulative capital contributions made to Teton Barnwell as compensation for its management services. BOK is responsible for 100% of the capital contributions made to Teton Barnwell.
The Company has determined that Teton Barnwell is a variable interest entity (“VIE”) as the entity is structured with non-substantive voting rights and that the Company is the primary beneficiary. This is due to the fact that even though Teton Barnwell has a unanimous consent voting structure, BOK is responsible for 100% of the capital contributions required to fund Teton Barnwell’s future oil exploration and development investments pursuant to the Teton Operating Agreement and thus, BOK has the power to steer the decisions that most significantly impact Teton Barnwell’s economic performance and has the obligation to absorb any potential losses that could be significant to Teton Barnwell. As BOK is the primary beneficiary of the VIE, Teton Barnwell’s operating results, assets and liabilities are consolidated by the Company.
The following table summarizes the carrying value of the assets and liabilities of Teton Barnwell that are consolidated by the Company. Intercompany balances are eliminated in consolidation and thus, are not reflected in the table below.
| | | | | | | | | | | |
| December 31,
2022 | | September 30,
2022 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 447,000 | | | $ | 623,000 | |
| Accounts and other receivables | 464,000 | | | 606,000 | |
| Oil and natural gas properties, full cost method of accounting: | | | |
| Proved properties, net | 607,000 | | | 655,000 | |
| | | |
| Total assets | $ | 1,518,000 | | | $ | 1,884,000 | |
| | | |
| LIABILITIES | | | |
| Accounts payable | $ | 7,000 | | | $ | 15,000 | |
| | | |
| Accrued operating and other expenses | 21,000 | | | 26,000 | |
| Total liabilities | $ | 28,000 | | | $ | 41,000 | |
5. ASSET HELD FOR SALE
In September 2022, the Company entered into a purchase and sale agreement with an independent third party for the sale of a contract drilling segment drilling rig and received a payment of $551,000, net of related costs. At September 30, 2022, the legal title for the drilling rig had not yet transferred to the buyer and therefore, the Company did not record a sale during the year ended September 30, 2022. The proceeds received from the buyer was recognized as a deposit and recorded in “Other Current Liabilities” on the Company's Consolidated Balance Sheet at September 30, 2022. No amount was recorded as assets held for sale at September 30, 2022 as the drilling rig was fully depreciated and therefore had a net book value of zero. In October 2022, the legal title for the drilling rig was transferred to the buyer and as a result, the Company recognized a $551,000 gain on the sale of the drilling rig during the three months ended December 31, 2022.
6. OIL AND NATURAL GAS PROPERTIES
Oil and Natural Gas Investments
In December 2022, Barnwell Texas, LLC (“Barnwell Texas”), a new wholly-owned subsidiary of the Company, entered into a purchase and sale agreement with an independent third party whereby Barnwell Texas acquired a 22.3% non-operated working interest in oil and natural gas leasehold acreage in the Permian Basin in Texas for cash consideration of $806,000. In connection with the purchase of such leasehold interests, Barnwell Texas acquired a 15.4% non-operated working interest in the planned drilling of two oil wells in the Wolfcamp Formation in Loving and Ward Counties, Texas and made a pre-payment of $4,293,000 to pay its share of the estimated costs to drill, complete and equip the wells. As of December 31, 2022, the total costs incurred for these two oil wells was $829,000 and thus, the remaining prepaid balance of $3,464,000 was recorded as “Advances to operators for capital expenditures” on the Company's Condensed Consolidated Balance sheet.
Additionally, in connection with the agreement, the Company is obligated to pay a broker’s fee of 5.0% of the capital invested under this arrangement to Four Pines Exploration LLC - Exploration - Series 1 (“Four Pines”). Four Pines is controlled by Mr. Colin O’Farrell who is an affiliate of Teton Barnwell
(see Note 17 for additional details). During the three months ended December 31, 2022, the Company paid $255,000 in broker fees to Four Pines related to this arrangement.
Oil and Natural Gas Acquisitions
There were no oil and gas working interest acquisitions during the three months ended December 31, 2022. In the quarter ended December 31, 2021, Barnwell acquired working interests in oil and natural gas properties located in the Twining area of Alberta, Canada, for cash consideration of $317,000.
7. RETIREMENT PLANS
Barnwell sponsors a noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all of its U.S. employees and a noncontributory Supplemental Executive Retirement Plan (“SERP”), which covers certain current and former employees of Barnwell for amounts exceeding the limits allowed under the Pension Plan.
The following table details the components of net periodic benefit (income) cost for Barnwell’s retirement plans:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Plan | | SERP |
| | Three months ended December 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Interest cost | $ | 102,000 | | | $ | 73,000 | | | $ | 22,000 | | | $ | 15,000 | |
| Expected return on plan assets | (167,000) | | | (156,000) | | | — | | | — | |
| | | | | | | |
| Amortization of net actuarial gain | — | | | — | | | (20,000) | | | — | |
| | | | | | | |
| Net periodic benefit (income) cost | $ | (65,000) | | | $ | (83,000) | | | $ | 2,000 | | | $ | 15,000 | |
The net periodic benefit (income) cost is included in “General and administrative” expenses in the Company's Condensed Consolidated Statements of Operations.
Currently, no contributions are expected to be made to the Pension Plan during fiscal 2023. The SERP plan is unfunded and Barnwell funds benefits when payments are made. Expected payments under the SERP for fiscal 2023 are not material. Fluctuations in actual equity market returns as well as changes in general interest rates will result in changes in the market value of plan assets and may result in increased or decreased retirement benefits costs and contributions in future periods.
8. INCOME TAXES
The components of earnings before income taxes, after adjusting the earnings for non-controlling interests, are as follows:
| | | | | | | | | | | | | | |
| | Three months ended
December 31, |
| | | 2022 | | 2021 |
| United States | | $ | 18,000 | | | $ | 892,000 | |
| Canada | | 1,150,000 | | | 293,000 | |
| | | $ | 1,168,000 | | | $ | 1,185,000 | |
The components of the income tax provision are as follows:
| | | | | | | | | | | |
| Three months ended
December 31, |
| | 2022 | | 2021 |
| Current | $ | 91,000 | | | $ | 80,000 | |
| Deferred | (12,000) | | | 32,000 | |
| | $ | 79,000 | | | $ | 112,000 | |
Consolidated taxes do not bear a customary relationship to pretax results due primarily to the fact that the Company is taxed separately in Canada based on Canadian source operations and in the U.S. based on consolidated operations, and essentially all deferred tax assets, net of relevant offsetting deferred tax liabilities, are not estimated to have a future benefit as tax credits or deductions. Income from our non-controlling interest in the Kukio Resort Land Development Partnerships is treated as non-unitary for state of Hawaii unitary filing purposes, thus unitary Hawaii losses provide limited sheltering of such non-unitary income. Income from our investment in the Oklahoma oil venture is 100% allocable to Oklahoma, and therefore, receives no benefit from consolidated or unitary losses and, therefore, is subject to Oklahoma state taxes.
In addition, net operating loss carryforwards, all of which had a full valuation allowance at the end of the previous fiscal year, are being partially utilized in the current year to offset taxable income in the U.S. federal and Canadian jurisdictions. The net operating loss carryforwards beyond the current year’s utilization continue to have a full valuation allowance as realization of their benefit is not more likely than not.
9. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following tables provides information about disaggregated revenue by revenue streams, reportable segments, geographical region, and timing of revenue recognition for the three months ended December 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, 2022 |
| | Oil and natural gas | | Contract drilling | | Land investment | | Other | | Total |
| Revenue streams: | | | | | | | | | |
| Oil | $ | 3,484,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,484,000 | |
| Natural gas | 1,302,000 | | | — | | | — | | | — | | | 1,302,000 | |
| Natural gas liquids | 440,000 | | | — | | | — | | | — | | | 440,000 | |
| Drilling and pump | — | | | 1,948,000 | | | — | | | — | | | 1,948,000 | |
| Contingent residual payments | — | | | — | | | 265,000 | | | — | | | 265,000 | |
| Other | — | | | — | | | — | | | 43,000 | | | 43,000 | |
| Total revenues before interest income | $ | 5,226,000 | | | $ | 1,948,000 | | | $ | 265,000 | | | $ | 43,000 | | | $ | 7,482,000 | |
| Geographical regions: | | | | | | | | | |
| United States | $ | 517,000 | | | $ | 1,948,000 | | | $ | 265,000 | | | $ | 2,000 | | | $ | 2,732,000 | |
| Canada | 4,709,000 | | | — | | | — | | | 41,000 | | | 4,750,000 | |
| Total revenues before interest income | $ | 5,226,000 | | | $ | 1,948,000 | | | $ | 265,000 | | | $ | 43,000 | | | $ | 7,482,000 | |
| Timing of revenue recognition: | | | | | | | | | |
| Goods transferred at a point in time | $ | 5,226,000 | | | $ | — | | | $ | 265,000 | | | $ | 43,000 | | | $ | 5,534,000 | |
| Services transferred over time | — | | | 1,948,000 | | | — | | | — | | | 1,948,000 | |
| Total revenues before interest income | $ | 5,226,000 | | | $ | 1,948,000 | | | $ | 265,000 | | | $ | 43,000 | | | $ | 7,482,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, 2021 |
| | Oil and natural gas | | Contract drilling | | Land investment | | Other | | Total |
| Revenue streams: | | | | | | | | | |
| Oil | $ | 2,668,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,668,000 | |
| Natural gas | 849,000 | | | — | | | — | | | — | | | 849,000 | |
| Natural gas liquids | 403,000 | | | — | | | — | | | — | | | 403,000 | |
| Drilling and pump | — | | | 876,000 | | | — | | | — | | | 876,000 | |
| Contingent residual payments | — | | | — | | | 600,000 | | | — | | | 600,000 | |
| Other | — | | | — | | | — | | | 57,000 | | | 57,000 | |
| Total revenues before interest income | $ | 3,920,000 | | | $ | 876,000 | | | $ | 600,000 | | | $ | 57,000 | | | $ | 5,453,000 | |
| Geographical regions: | | | | | | | | | |
| United States | $ | 964,000 | | | $ | 876,000 | | | $ | 600,000 | | | $ | 4,000 | | | $ | 2,444,000 | |
| Canada | 2,956,000 | | | — | | | — | | | 53,000 | | | 3,009,000 | |
| Total revenues before interest income | $ | 3,920,000 | | | $ | 876,000 | | | $ | 600,000 | | | $ | 57,000 | | | $ | 5,453,000 | |
| Timing of revenue recognition: | | | | | | | | | |
| Goods transferred at a point in time | $ | 3,920,000 | | | $ | — | | | $ | 600,000 | | | $ | 57,000 | | | $ | 4,577,000 | |
| Services transferred over time | — | | | 876,000 | | | — | | | — | | | 876,000 | |
| Total revenues before interest income | $ | 3,920,000 | | | $ | 876,000 | | | $ | 600,000 | | | $ | 57,000 | | | $ | 5,453,000 | |
Contract Balances
The following table provides information about accounts receivables, contract assets and contract liabilities from contracts with customers:
| | | | | | | | | | | |
| December 31, 2022 | | September 30, 2022 |
| Accounts receivables from contracts with customers | $ | 4,008,000 | | | $ | 4,038,000 | |
| Contract assets | 607,000 | | | 580,000 | |
| Contract liabilities | 746,000 | | | 1,087,000 | |
| | | |
| | | |
| | | |
Accounts receivables from contracts with customers are included in "Accounts and other receivables, net of allowance for doubtful accounts," and contract assets, which includes costs and estimated earnings in excess of billings and retainage, are included in “Other current assets.” Contract liabilities, which includes billings in excess of costs and estimated earnings are included in “Other current liabilities” in the accompanying Condensed Consolidated Balance Sheets.
Retainage, included in contract assets, represents amounts due from customers, but where payments are withheld contractually until certain construction milestones are met. Amounts retained typically range from 5% to 10% of the total invoice, up to contractually-specified maximums. The Company classifies as a current asset those retainages that are expected to be collected in the next twelve months.
Contract assets represent the Company’s rights to consideration in exchange for services transferred to a customer that have not been billed as of the reporting date. The Company’s rights are generally unconditional at the time its performance obligations are satisfied.
When the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents a contract liability. Such deferred revenue typically results from billings in excess of costs and estimated earnings on uncompleted contracts. As of December 31, 2022 and September 30, 2022, the Company had $746,000 and $1,087,000, respectively, included in “Other current liabilities” on the balance sheets for those performance obligations expected to be completed in the next twelve months.
During the three months ended December 31, 2022 and 2021, the amount of revenue recognized that was previously included in contract liabilities as of the beginning of the respective period was $523,000 and $186,000, respectively.
Contracts are sometimes modified for a change in scope or other requirements. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of the Company’s contract modifications are for goods and services that are not distinct from the existing performance obligations. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or decrease) on a cumulative catchup basis.
Performance Obligations
The Company’s remaining performance obligations for drilling and pump installation contracts (hereafter referred to as “backlog”) represent the unrecognized revenue value of the Company’s contract commitments. The Company’s backlog may vary significantly each reporting period based on the timing of major new contract commitments. In addition, our customers have the right, under some infrequent circumstances, to terminate contracts or defer the timing of the Company’s services and their payments to us. Nearly all of the Company's contract drilling segment contracts have original expected durations of one year or less. At December 31, 2022, the Company had six contract drilling jobs with original expected durations of greater than one year. For these contracts, approximately 70% of the remaining performance obligation of $4,764,000 is expected to be recognized as revenue in the next twelve months and the remaining, thereafter.
Contract Fulfillment Costs
Preconstruction costs, which include costs such as set-up and mobilization, are capitalized and allocated across all performance obligations and deferred and amortized over the contract term on a progress towards completion basis. As of December 31, 2022 and September 30, 2022, the Company had $717,000 and $689,000, respectively, in unamortized preconstruction costs related to contracts that were not completed. During the three months ended December 31, 2022 and 2021, the amortization of preconstruction costs related to contracts were not material and were included in the accompanying Condensed Consolidated Statements of Operations. Additionally, no impairment charges in connection with the Company’s preconstruction costs were recorded during the three months ended December 31, 2022 and 2021.
10. SEGMENT INFORMATION
Barnwell operates the following segments: 1) acquiring, developing, producing and selling oil and natural gas in Canada and the U.S. (oil and natural gas); 2) investing in land interests in Hawaii (land investment); and 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling).
The following table presents certain financial information related to Barnwell’s reporting segments. All revenues reported are from external customers with no intersegment sales or transfers.
| | | | | | | | | | | |
| Three months ended
December 31, |
| | 2022 | | 2021 |
| Revenues: | | | |
| Oil and natural gas | $ | 5,226,000 | | | $ | 3,920,000 | |
| Contract drilling | 1,948,000 | | | 876,000 | |
| Land investment | 265,000 | | | 600,000 | |
| Other | 43,000 | | | 57,000 | |
| Total before interest income | 7,482,000 | | | 5,453,000 | |
| Interest income | 29,000 | | | 1,000 | |
| Total revenues | $ | 7,511,000 | | | $ | 5,454,000 | |
| Depletion, depreciation, and amortization: | | | |
| Oil and natural gas | $ | 796,000 | | | $ | 436,000 | |
| Contract drilling | 43,000 | | | 47,000 | |
| Other | 1,000 | | | — | |
| Total depletion, depreciation, and amortization | $ | 840,000 | | | $ | 483,000 | |
| | | |
| | | |
| | | |
| Operating profit (loss) (before general and administrative expenses): | | | |
| Oil and natural gas | $ | 1,986,000 | | | $ | 1,568,000 | |
| Contract drilling | 48,000 | | | (151,000) | |
| Land investment | 265,000 | | | 600,000 | |
| Other | 42,000 | | | 57,000 | |
| Gain on sale of assets | 551,000 | | | — | |
| Total operating profit | 2,892,000 | | | 2,074,000 | |
| Equity in income of affiliates: | | | |
| Land investment | 538,000 | | | 1,207,000 | |
| General and administrative expenses | (2,249,000) | | | (1,830,000) | |
| Foreign currency gain | 78,000 | | | — | |
| | | |
| Interest income | 29,000 | | | 1,000 | |
| Earnings before income taxes | $ | 1,288,000 | | | $ | 1,452,000 | |
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in each component of accumulated other comprehensive income were as follows:
| | | | | | | | | | | |
| Three months ended
December 31, |
| | 2022 | | 2021 |
| Foreign currency translation: | | | |
| Beginning accumulated foreign currency translation | $ | 222,000 | | | $ | 262,000 | |
| Change in cumulative translation adjustment before reclassifications | 2,000 | | | (25,000) | |
| Income taxes | — | | | — | |
| Net current period other comprehensive income (loss) | 2,000 | | | (25,000) | |
| Ending accumulated foreign currency translation | 224,000 | | | 237,000 | |
| Retirement plans: | | | |
| Beginning accumulated retirement plans benefit income (cost) | 1,072,000 | | | (230,000) | |
| Amortization of net actuarial gain | (20,000) | | | — | |
| | | |
| Income taxes | — | | | — | |
| Net current period other comprehensive loss | (20,000) | | | — | |
| Ending accumulated retirement plans benefit income (cost) | 1,052,000 | | | (230,000) | |
| Accumulated other comprehensive income, net of taxes | $ | 1,276,000 | | | $ | 7,000 | |
The amortization of net actuarial gain for the retirement plans are included in the computation of net periodic benefit (income) cost which is a component of “General and administrative” expenses on the accompanying Condensed Consolidated Statements of Operations (see Note 7 for additional details).
12. FAIR VALUE MEASUREMENTS
The carrying values of cash and cash equivalents, accounts and other receivables, accounts payable and accrued current liabilities approximate their fair values due to the short-term nature of the instruments.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The estimated fair values of oil and natural gas properties and the asset retirement obligation incurred in the drilling of oil and natural gas wells or assumed in the acquisitions of additional oil and natural gas working interests are based on an estimated discounted cash flow model and market assumptions. The significant Level 3 assumptions used in the calculation of estimated discounted cash flows included future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development, operating and asset retirement costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates.
Barnwell estimates the fair value of asset retirement obligations based on the projected discounted future cash outflows required to settle abandonment and restoration liabilities. Such an estimate requires assumptions and judgments regarding the existence of liabilities, the amount and timing of cash outflows required to settle the liability, what constitutes adequate restoration, inflation factors, credit adjusted discount rates, and consideration of changes in legal, regulatory, environmental and political environments. Abandonment and restoration cost estimates are determined in conjunction with Barnwell’s reserve engineers based on historical information regarding costs incurred to abandon and restore similar well sites, information regarding current market conditions and costs, and knowledge of subject well sites
and properties. Asset retirement obligation fair value measurements in the current period were Level 3 fair value measurements.
13. DEBT
Canada Emergency Business Account Loan
In the quarter ended December 31, 2020, the Company’s Canadian subsidiary, Barnwell of Canada, received a loan of CAD$40,000 (in Canadian dollars) under the Canada Emergency Business Account (“CEBA”) loan program for small businesses. In the quarter ended March 31, 2021, the Company applied for an increase to our CEBA loan and received an additional CAD$20,000 for a total loan amount received of CAD$60,000 ($44,000) under the program. In January 2022, the Canadian government announced the extension of the CEBA loan repayment deadline and interest-free period from December 31, 2022 to December 31, 2023. Accordingly, the CEBA loan is interest-free with no principal payments required until December 31, 2023, after which the remaining loan balance is converted to a two year term loan at 5% annual interest paid monthly. If the Company repays 66.7% of the principal amount prior to December 31, 2023, there will be loan forgiveness of 33.3% up to a maximum of CAD$20,000. The current loan balance of $44,000 is included in “Other current liabilities” in the Company's Condensed Consolidated Balance sheet at December 31, 2022.
14. STOCKHOLDERS' EQUITY
Cash Dividend
In December 2022, the Company's Board of Directors declared a cash dividend of $0.015 per share that was paid on January 11, 2023 to stockholders of record on December 27, 2022. No dividends were declared or paid during the three months ended December 31, 2021.
The Tax Benefits Preservation Plan
On October 17, 2022, the Board of Directors of the Company adopted a Tax Benefits Preservation Plan (the “Tax Plan”) designed to protect the availability of the Company’s existing net operating loss carryforwards and certain other tax attributes (collectively, the “Tax Benefits”).
The Company has generated substantial Tax Benefits, which could potentially be used in certain circumstances to reduce its future income tax obligations. Utilization of these NOLs and other Tax Benefits depends on many factors, including the Company’s future taxable income. Additionally, the Company’s ability to use its Tax Benefits would be substantially limited if it were to experience an “ownership change,” as defined under Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). In general, a corporation would experience an ownership change if the percentage of the corporation’s stock owned by one or more “5% stockholders,” as defined under Section 382, were to increase by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period (or, if a shorter period, since the Company’s last ownership change). The purpose of the Tax Plan is to reduce the likelihood that the Company will experience an ownership change under Section 382, which would limit the Company’s future use of its Tax Benefits and, in turn, significantly impair the value of such Tax Benefits.
Absent the adoption of the Tax Plan, the Company would be at a greater risk of experiencing an ownership change under Section 382 in the future as a result of certain changes in its investor base and subsequent shifts in its stock ownership that cannot be predicted or controlled. If the Company were to
undergo an ownership change, limitations would be placed on the Company’s ability to utilize the Tax Benefits in future years in which it has taxable income, and the Company would pay more taxes than if it were able to utilize the Tax Benefits fully. This could result in a negative impact on the Company’s financial position, results of operations, and cash flows. The Tax Plan is designed to preserve the Tax Benefits by reducing the risk of an ownership change under Section 382.
The Tax Plan adopted by the Board of Directors is similar to plans adopted by other publicly held companies with substantial Tax Benefits and has a limited duration of three years. The Tax Plan is not designed to prevent any action that the Board of Directors determines to be in the best interest of the Company and its stockholders.
To implement the Tax Plan, the Board of Directors declared a dividend of one right (a “Right”) for each outstanding share of the Company's common stock. The Rights were issued to stockholders of record at the close of business on October 27, 2022 pursuant to the Tax Plan. The Rights are exercisable if a person or group of persons acquires 4.95% or more of the Company’s common stock. The Rights are also exercisable if a person or group of persons that already owns 4.95% or more of the Company’s common stock acquires an additional share other than as a result of a dividend or a stock split. Existing stockholders that beneficially own in excess of 4.95% of the Company’s common stock are “grandfathered in” at their current ownership level. If the Rights become exercisable, all holders of Rights, other than the person or group of persons triggering the Rights, will be entitled to purchase shares of the Company’s common stock at a 50% discount. Rights held by the person or group of persons triggering the Rights will become void and will not be exercisable.
The Tax Plan also includes an exchange option. At any time after any person or group of persons acquires 4.95% or more of the Company’s common stock, but less than 50% or more of the outstanding shares of the Company’s common stock, the Board of Directors, at its option, may exchange the Rights (other than Rights owned by such person or group of persons which will have become void), in whole or in part, at an exchange ratio of three shares of the Company’s common stock per outstanding Right (subject to adjustment).
The Rights will trade with the Company’s common stock and will expire at the close of business on October 17, 2025. The Rights will expire under other circumstances as described in the Tax Plan, including on the date set by the Board of Directors following a determination that the Tax Plan is no longer necessary or desirable for the preservation of the Tax Benefits or no significant Tax Benefits are available to be carried forward or are otherwise available. The Board of Directors may terminate the Tax Plan prior to the time the Rights are triggered or may redeem the Rights prior to the Distribution Date, as defined in the Tax Plan.
In January 2023, the Company terminated the Tax Plan (see Note 18 for additional details).
At The Market Offering
On March 16, 2021, the Company entered into a Sales Agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners (“A.G.P,”), with respect to an at-the-market offering program (“ATM”) pursuant to which the Company may offer and sell, from time to time, shares of its common stock, par value $0.50 per share, having an aggregate sales price of up to $25 million (subject to certain limitations set forth in the Sales Agreement and applicable securities laws, rules and regulations), through or to A.G.P as the Company’s sales agent or as principal. Sales of our common stock under the ATM, if any, will be made by any methods deemed to be “at the market offerings” as defined in Rule 415(a)(4) under the Securities Act, including sales made directly on the NYSE American, on any other existing trading market for our Common Stock, or to or through a market maker. Shares of common stock sold under the ATM
are offered pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-254365), filed with the Securities and Exchange Commission on March 16, 2021, and declared effective on March 26, 2021 (the "Registration Statement”), and the prospectus dated March 26, 2021, included in the Registration Statement.
In August 2022, the Company’s Board of Directors suspended the sales of our common stock under the ATM until further notice.
15. CONTINGENCIES
Legal and Regulatory Matters
Barnwell is routinely involved in disputes with third parties that occasionally require litigation. In addition, Barnwell is required to maintain compliance with all current governmental controls and regulations in the ordinary course of business. Barnwell’s management is not aware of any claims or litigation involving Barnwell that are likely to have a material adverse effect on its results of operations, financial position or liquidity.
In the quarter ended December 31, 2021, it was determined that a contract drilling segment well completed in the period did not meet the contract specifications for plumbness under a gyroscopic plumbness test which the contract required. While the well did pass the cage plumbness test, the contract uses the gyroscopic test as the measure of plumbness. Barnwell and the customer currently have an arrangement where Barnwell will provide for centralizers, armored cabling and a pump installation and removal test to confirm that plumbness is satisfactory. Barnwell’s management believes the plumbness deviation is not impactful to the performance of the submersible pumps that will be installed in the well. Accordingly, while costs for the centralizers, armored cabling and the pump installation and removal test have been accrued, no accrual has been recorded as of December 31, 2022 for any further costs related to this contract as there is no related probable or estimable contingent liability.
16. INFORMATION RELATING TO THE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Capital expenditure accruals related to oil and natural gas exploration and development decreased $1,405,000 during the three months ended December 31, 2022 and increased $1,851,000 during the three months ended December 31, 2021. Additionally, capital expenditure accruals related to oil and natural gas asset retirement obligations increased $150,000 and $304,000 during the three months ended December 31, 2022 and 2021, respectively.
17. RELATED PARTY TRANSACTIONS
Kaupulehu Developments is entitled to receive payments from the sales of lots and/or residential units by KD I and KD II. KD I and KD II are part of the Kukio Resort Land Development Partnerships in which Barnwell holds indirect 19.6% and 10.8% non-controlling ownership interests, respectively, accounted for under the equity method of investment. The percentage of sales payments are part of transactions which took place in 2004 and 2006 where Kaupulehu Developments sold its leasehold interests in Increment I and Increment II to KD I's and KD II's predecessors in interest, respectively, which was prior to Barnwell’s affiliation with KD I and KD II which commenced on November 27, 2013, the acquisition date of our ownership interest in the Kukio Resort Land Development Partnerships. Changes to the arrangement above, effective March 7, 2019, are discussed in Note 3.
During the three months ended December 31, 2022, Kaupulehu Developments received $265,000 in percentage of sales payments from KD I from the sale of one single-family lot within Phase II of Increment I. During the three months ended December 31, 2021, Kaupulehu Developments received $600,000 in percentage of sales payments from KD I from the sale of three single-family lots within Phase II of Increment I.
Mr. Colin R. O'Farrell, formerly a member of the Board of Directors of the Company through March 7, 2022, is the sole member of Four Pines Operating LLC which owns a 25% interest in Gros Ventre. In February 2021, Gros Ventre and BOK, a wholly-owned subsidiary of Barnwell, entered into the Teton Operating Agreement of Teton Barnwell, an entity formed for the purpose of directly investing in oil and natural gas exploration and development in Oklahoma. Under the terms of the Teton Operating Agreement, Gros Ventre makes no capital contributions and receives 2% of the profits of Teton Barnwell. Additionally, as the manager of Teton Barnwell, Gros Ventre is paid an annual asset management fee equal to 1% of the cumulative capital contributions made to Teton Barnwell as compensation for its management services.
18. SUBSEQUENT EVENTS
Cooperation and Support Agreement
In January 2023, the Company entered into a cooperation and support agreement (the “Agreement”) with Alexander C. Kinzler, the Company’s CEO and President in his capacity as a stockholder, MRMP-Managers LLC, the Ned L. Sherwood Revocable Trust, NLS Advisory Group, Inc. and Ned L. Sherwood (collectively, the “MRMP Stockholders”), with respect to the potential proxy contest pertaining to the election of directors to our Board of Directors (the “Board”). The Agreement extends for two years the standstill terms of the previous agreement entered into with the MRMP Stockholders in 2021, ending the potential of a proxy contest at the 2023 annual meeting of stockholders (the “2023 Annual Meeting”).
Pursuant to the terms of the Agreement, among other things, the Company has agreed to promptly appoint Joshua S. Horowitz and Laurance Narbut to serve on the Board, subject to certain customary board procedures (effective February 9, 2023, Mr. Horowitz and Mr. Narbut became members of the Board). In addition, the Company has agreed to nominate a five-person board comprised of Mr. Kinzler, Kenneth Grossman, Douglas Woodrum, and Messrs. Horowitz and Narbut as candidates for election to the Board at the 2023 Annual Meeting and the 2024 annual meeting of stockholders (the “2024 Annual Meeting”) and Mr. Kinzler and the MRMP Stockholders have agreed to vote their respective shares of common stock of the Company in favor of the election of the Company’s slate at the 2023 Annual Meeting and 2024 Annual Meeting. Additionally, pursuant to the terms of the Agreement, the Company has terminated the previously enacted Tax Benefits Preservation Plan, although the MRMP Stockholders have agreed to limit their beneficial and economic ownership of the Company to 28% of the outstanding common stock of the Company for the next 12 months and 30% for the subsequent 12-month period. In exchange for this arrangement, the Company has agreed to reimburse the MRMP Stockholders and Mr. Kinzler for their reasonable, documented out-of-pocket fees and expenses (including legal expenses) in connection with the negotiation and execution of the Agreement and the transactions contemplated hereby and the proposed nomination of directors by the MRMP Stockholders in connection with the 2023 Annual Meeting.
Cash Dividend
In February 2023, the Company's Board of Directors declared a cash dividend of $0.015 per share payable on March 13, 2023 to stockholders of record on February 23, 2023.