BARNWELL INDUSTRIES, INC. The following discussion is intended to assist in the understanding of the Consolidated Balance Sheets ofBarnwell Industries, Inc. and subsidiaries (collectively referred to herein as "Barnwell," "we," "our," "us" or the "Company") as ofSeptember 30, 2021 and 2020, and the related Consolidated Statements of Operations, Comprehensive Income (Loss), Equity (Deficit), and Cash Flows for the years endedSeptember 30, 2021 and 2020. This discussion should be read in conjunction with the consolidated financial statements and related Notes to Consolidated Financial Statements included in this report.
Current Outlook
Impact of COVID-19
InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak a global pandemic andthe United States and Canadian governments declared the virus a national emergency shortly thereafter. The ongoing global health crisis (including resurgences) resulting from the pandemic have, and continue to, disrupt the normal operations of many businesses, including the temporary closure or scale-back of business operations and/or the imposition of either quarantine or remote work or meeting requirements for employees, either by government order or on a voluntary basis. While the outbreak recently appeared to be trending downward, particularly as vaccination rates increased, new variants of COVID-19 continue emerging, including the highly transmissible Delta variant and the newly-discovered Omicron variant (currently a "variant of concern"), spreading throughout theU.S. and globally and causing significant uncertainty. The global economy, our markets and our business have been, and may continue to be, materially and adversely affected by COVID-19. The COVID-19 outbreak materially and adversely affected our business operations and financial condition as a result of the deteriorating market outlook, the global economic recession and weakened liquidity. Although demand for oil and oil prices has recovered from the lows of March through May of the prior year, uncertainty regarding future oil prices has impacted and continues to impact the Company's financial condition and outlook. While the Company's contract drilling segment remained operational throughout fiscal 2020 and 2021 and continues to work, the continuing potential impact of COVID-19 on the health of our contract drilling segment's crews and ability or desire for customers to continue such work is uncertain, and any discontinuation of contracts currently in backlog would result in a material adverse impact to the Company's financial condition and outlook. Though availability of vaccines and reopening of state and local economies has improved the outlook for recovery from COVID-19's impacts, the impact of the Delta or Omicron variant or other new, more contagious or lethal variants that may emerge, the effectiveness of COVID-19 vaccines against the Delta or Omicron variant or such other variants and the related responses by governments, including reinstated government-imposed lockdowns or other measures, cannot be predicted at this time. Both the health and economic aspects of the COVID-19 pandemic remain highly fluid and the future course of each is uncertain. We cannot foresee whether the outbreak of COVID-19 will be effectively contained on a sustained basis, nor can we predict the severity and duration of its impact. If the outbreak of COVID-19 is not effectively and timely controlled on a sustained basis going forward, our business operations and financial condition may be materially and adversely affected by factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial condition and results of operations. 36 --------------------------------------------------------------------------------
Going Concern
Our ability to sustain our business in the future will depend on the sufficiency of our cash on hand, oil and natural gas operating cash flows, which are highly sensitive to volatile oil and natural gas prices, contract drilling operating cash flows, which are subject to large changes in demand, and future land investment segment proceeds and distributions from the Kukio Resort Land Development Partnerships, the timing of which are both highly uncertain and not within Barnwell's control. A sufficient level of such cash and cash inflows are necessary to fund discretionary oil and natural gas capital expenditures, which must be economically successful to provide sufficient returns, as well as fund our non-discretionary outflows such as oil and natural gas asset retirement obligations and ongoing operating and general and administrative expenses. In addition, as discussed in the "Asset Retirement Obligation" section of "Liquidity and Capital Resources," a significant amount of funds will be required to be put on deposit with Canadian regulatory authorities to fund abandonments at the Company's oil and natural gas properties in theManyberries area. Other sources and potential sources of funding are discussed below.
In fiscal 2020, the Company listed its corporate office on the 29th floor of a
commercial office building in downtown
OnMarch 16, 2021 , the Company initiated 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 under price and volume guidelines set by the Company's Board of Directors and the terms and conditions described in the Registration Statement. The sale of shares under the ATM began inMay 2021 and as ofSeptember 30, 2021 , the Company sold 1,167,987 shares of common stock resulting in net proceeds of$3,784,000 after commissions and fees of$123,000 . InApril 2021 , the Company re-initiated the marketing of its non-core oil and natural gas properties in theSpirit River ,Wood River ,Medicine River , Kaybob, Bonanza, Balsam andThornbury areas for sale. OnJuly 8 2021 , Barnwell entered into and completed a purchase and sale agreement with an independent third party and sold its interests in certain natural gas and oil properties located in theSpirit River area ofAlberta, Canada . The sales price per the agreement was adjusted for customary purchase price adjustments to$1,047,000 in order to, among other things, reflect an economic effective closing date of sale ofJuly 8, 2021 . From Barnwell's net proceeds,$526,000 was withheld for remittance by the buyers to theCanada Revenue Agency for potential amounts due for Barnwell's Canadian income taxes related to the sale. Negotiations regarding the potential sales of other non-core oil and natural gas properties is ongoing, however there is no assurance that the sale of any of the other non-core properties will occur. We have experienced a trend of losses and negative operating cash flows in three of the last four years. During fiscal 2020 and 2021, continuing uncertainties regarding the impacts of the COVID-19 pandemic on our business and the sufficiency of our cash balances and future cash inflows as described above raised substantial doubt about our ability to meet our estimated cash outflows or continue as a going concern. However, due to the$3,784,000 of net proceeds raised by the ATM throughSeptember 30, 2021 , the proceeds received from the sale of the Company's corporate office and its interests in certain natural gas and oil properties in theSpirit River area, as well as the$7,156,000 of net cash inflows in the year endedSeptember 30, 2021 from land segment percentage of sales proceeds and distributions from theKukio Resort Land Development Partnerships, substantial doubt about our ability to meet our estimated cash outflows or continue as a going concern for one year from the date of the filing of this report has been overcome. 37 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The Company considers an accounting estimate to be critical if the accounting estimate requires the Company to make assumptions that are difficult or subjective about matters that were highly uncertain at the time that the accounting estimate was made, and changes in the estimate that are reasonably likely to occur in periods subsequent to the period in which the estimate was made, or use of different estimates that the Company could have used in the current period, would have a material impact on the Company's financial condition or results of operations. The most critical accounting policies inherent in the preparation of the Company's consolidated financial statements are described below. We continue to monitor our accounting policies to ensure proper application of current rules and regulations.
Policy Description
We use the full cost method of accounting for our oil and natural gas properties under which we are required to conduct quarterly calculations of a "ceiling," or limitation, on the carrying value of oil and natural gas properties . The ceiling limitation is the sum of 1) the discounted present value (at 10%), using average first-day-of-the-month prices during the 12-month period ending as of the balance sheet date held constant over the life of the reserves, of Barnwell's estimated future net cash flows from estimated production of proved oil and natural gas reserves, less estimated future expenditures to be incurred in developing and producing the proved reserves but excluding future cash outflows associated with settling asset retirement obligations with the exception of those associated with proved undeveloped reserves from wells that are to be drilled in the future; plus 2) the cost of major development projects and unproven properties not subject to depletion, if any; plus 3) the lower of cost or estimated fair value of unproven properties included in costs subject to depletion; less 4) related income tax effects. If net capitalized costs exceed this limit, the excess is expensed. All items classified as unevaluated and unproved properties are assessed on a quarterly basis for possible impairment or reduction in value. Properties are assessed on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of various factors, including, but not limited to, the following: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; assignment of proved reserves; and economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and become subject to amortization.
Judgments and Assumptions
The estimate of our oil and natural gas reserves is a major component of the
ceiling calculation and represents the component that requires the most
subjective judgments. Estimates of reserves are forecasts based on engineering
data, historical data, projected future rates of production and the timing of
future expenditures. The process of estimating oil and natural gas reserves
requires substantial judgment, resulting in imprecise determinations,
particularly for new discoveries. Our reserve estimates are prepared at least
annually by independent petroleum reserve engineers. The passage of time
provides more quantitative and qualitative information regarding estimates of
reserves, and revisions are made to prior estimates to reflect updated
information. A portion of the revisions are attributable to changes in the
rolling 12-month average first-day-of-the-month prices, which impact the
economics of producible reserves. In the last three fiscal years, annual
revisions to our reserve volume estimates have averaged
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36% of the previous year's estimate, due in large part to the impacts of
volatile oil and natural gas prices which change the economic viability of
producing such reserves and changes in estimated proved undeveloped reserves
which can fluctuate from year to year depending upon the Company's plans and
ability to fund the capital expenditures necessary to develop such reserves.
There can be no assurance that more significant revisions will not be necessary
in the future. If future significant revisions are necessary that reduce
previously estimated reserve quantities, such revisions could result in a
write-down of oil and natural gas properties.
If reported reserve volumes were revised downward by 5% at the end of fiscal
2021, the ceiling limitation would have decreased approximately $398,000 before
income taxes, which would not have resulted in an increase in the ceiling
impairment before income taxes due to sufficient room between the ceiling and
the carrying value of oil and natural gas properties at the end of fiscal 2021
of approximately $5,716,000 .
In addition to the impact of the estimates of proved reserves on the calculation
of the ceiling, estimated proved reserves are also a significant component of
the quarterly calculation of depletion expense. The lower the estimated
reserves, the higher the depletion rate per unit of production. Conversely, the
higher the estimated reserves, the lower the depletion rate per unit of
production. If reported reserve volumes were revised downward by 5% as of the
beginning of fiscal 2021, depletion for fiscal 2021 would have increased by
approximately $26,000 .
While the quantities of proved reserves require substantial judgment, the
associated prices of oil, natural gas and natural gas liquids reserves are the
average first-day-of-the-month prices during the 12-month period ending in the
reporting period on a constant basis as prescribed by SEC regulations.
Additionally, the applicable discount rate that is used to calculate the
discounted present value of the reserves is mandated at 10%. Costs included in
future net revenues are determined in a similar manner. As such, the future net
revenues associated with the estimated proved reserves are not based on an
assessment of future prices or costs.
Contract Drilling Revenues and Operating Expenses
Policy Description
Through contracts which are normally less than twelve months in duration, Barnwell drills water and water monitoring wells and installs and repairs water pumping systems inHawaii . Barnwell recognizes revenue from well drilling or the installation of pumps over time based on total costs incurred on the projects relative to the total expected costs to satisfy the performance obligation as management believes this is an accurate representation of the percentage of completion as control is continuously transferred to the customer. Uninstalled materials, which typically consists of well casing or pumps, are excluded in the costs-to-costs calculation for the duration of the contract as including these costs would result in a distortion of progress towards satisfaction of the performance obligation due to the resulting cumulative catch-up in margin in a single period. An equal amount of cost and revenue is recorded when uninstalled materials are controlled by the customer, which is typically when Barnwell has the right to payment for the materials and when the materials are delivered to the customer's site or location and such materials have been accepted by the customer. Uninstalled materials are held in inventory and included in "Other current assets" on the Company's Consolidated Balance Sheets until control is transferred to the customer. When the estimate on a contract indicates a loss, Barnwell records the entire estimated loss in the period the loss becomes known. 39 -------------------------------------------------------------------------------- Unexpected significant inefficiencies that were not considered a risk at the time of entering into the contract, such as design or construction execution errors that result in significant wasted resources, are excluded from the measure of progress toward completion and the costs are expensed as incurred. To the extent a contract is deemed to have multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract. The contract price may include variable consideration, which includes such items as increases to the transaction price for unapproved change orders and claims for which price has not yet been agreed by the customer. The Company estimates variable consideration using either the most likely amount or expected value method, whichever is a more appropriate reflection of the amount to which it expects to be entitled based on the characteristics and circumstances of the contract. Variable consideration is included in the estimated transaction price to the extent it is probable that a significant reversal of cumulative recognized revenue will not occur. 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.
Judgments and Assumptions
Management evaluates the performance of contracts on an individual basis. In the
ordinary course of business, but at least quarterly, we prepare updated
estimates that may impact the cost and profit or loss for each contract based on
actual results to date plus management's best estimate of costs to be incurred
to complete each performance obligation. Increases or decreases in the estimated
costs to complete a performance obligation without a change to the contract
price has the impact to decrease or increase, respectively, the contract
completion percentage applied to the contract price to calculate the cumulative
contract revenue to be recognized to date. Changes in the cost estimates can
have a material impact on our contract revenue and are reflected in the results
of operations when they become known. The nature of accounting for these
contracts is such that refinements of the estimated costs to complete may occur
and are characteristic of the estimation process due to changing conditions and
new developments. Many factors and assumptions can and do change during a
contract performance obligation period which can result in a change to contract
profitability including unforeseen underground geological conditions (to the
extent that contract remedies are unavailable), the availability and costs of
skilled contract labor, the performance of major material suppliers, the
performance of major subcontractors, unusual weather conditions and unexpected
changes in material costs, changes in the scope and nature of work to be
performed, and unexpected construction execution errors, among others. Any
revisions to estimated costs to complete the performance obligation from period
to period as a result of changes in these factors can materially affect revenue
and operating results in the period such revisions are necessary. In addition,
many contracts give the customer a unilateral right to cancel for convenience or
other than for cause. In accordance with FASB ASC 606-10-32-4, our estimates are
based on the assumption that the existing contract will not be cancelled. Any
unforeseen cancellation of a contract may result in a material revision to our
estimates.
We have a long history of working with multiple types of projects and preparing
cost estimates, and we rely on the expertise of key personnel to prepare what we
believe are reasonable best estimates
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given available facts and circumstances. Due to the nature of the work involved,
however, judgment is involved to estimate the costs to complete and the amounts
estimated could have a material impact on the revenue we recognize in each
accounting period. We can not estimate unforeseen events and circumstances which
may result in actual results being materially different from previous estimates.
Income Taxes
Policy Description
Income taxes are determined using the asset and liability method. Deferred tax
assets and liabilities are recognized for the estimated future tax impacts of
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Deferred income tax assets are routinely assessed for realizability. A valuation
allowance is provided when it is more likely than not that some portion or all
of the deferred tax asset will not be realized.
Barnwell recognizes the financial statement effects of tax positions when it is more likely than not that the position will be sustained by a taxing authority.
Judgments and Assumptions
We make estimates and judgments in determining our income tax expense for each reporting period. Significant changes to these estimates could result in an increase or decrease in our tax provision in future periods. We are also required to make judgments about the recoverability of deferred tax assets and when it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is provided. We consider available positive and negative evidence and available tax planning strategies when assessing the realizability of deferred tax assets. Accordingly, changes in our business performance and unforeseen events could require a further increase in the valuation allowance or a reversal in the valuation allowance in future periods. This could result in a charge to, or an increase in, income in the period such determination is made, and the impact of these changes could be material. In addition, Barnwell operates within theU.S. andCanada and is subject to audit by taxing authorities in these jurisdictions. Barnwell records accruals for the estimated outcomes of these audits, and the accruals may change in the future due to new developments in each matter. Tax benefits are recognized when we determine that it is more likely than not that such benefits will be realized. Management evaluates its potential exposures from tax positions taken that have or could be challenged by taxing authorities. These potential exposures result because taxing authorities may take positions that differ from those taken by management in the interpretation and application of statutes, regulations and rules. Management considers the possibility of alternative outcomes based upon past experience, previous actions by taxing authorities (e.g., actions taken in other jurisdictions) and advice from tax experts. Where uncertainty exists due to the complexity of income tax statutes and where the potential tax amounts are significant, we generally seek independent tax opinions to support our positions. If our evaluation of the likelihood of the realization of benefits is inaccurate, we could incur additional income tax and interest expense that would adversely impact earnings, or we could receive tax benefits greater than anticipated which would positively impact earnings, either of which could be material. 41 --------------------------------------------------------------------------------
Overview
Barnwell is engaged in the following lines of business: 1) acquiring, developing, producing and selling oil and natural gas inCanada andOklahoma (oil and natural gas segment), 2) investing in land interests inHawaii (land investment segment), and 3) drilling wells and installing and repairing water pumping systems inHawaii (contract drilling segment).
Oil and Natural Gas Segment
Barnwell is involved in the acquisition and development of oil and natural gas properties inCanada where we initiate and participate in acquisition and developmental operations for oil and natural gas on properties in which we have an interest, and evaluate proposals by third parties with regard to participation in exploratory and developmental operations elsewhere. Additionally, through its wholly-owned subsidiary BOK, Barnwell is indirectly involved in several non-operated oil and natural gas investments inOklahoma . Barnwell sells all of its oil and natural gas under short-term contracts with marketers based on prices indexed to market prices. The price of natural gas, oil and natural gas liquids is freely negotiated between the buyers and sellers. Oil and natural gas prices are determined by many factors that are outside of our control. Market prices for oil and natural gas products are dependent upon factors such as, but not limited to, changes in market supply and demand, which are impacted by overall economic activity, changes in weather, pipeline capacity constraints, inventory storage levels, and output. Oil and natural gas prices are very difficult to predict and fluctuate significantly. Natural gas prices tend to be higher in the winter than in the summer due to increased demand, although this trend has become less pronounced due to the increased use of natural gas to generate electricity for air conditioning in the summer and increased natural gas storage capacity inNorth America . Oil and natural gas exploration, development and operating costs generally follow trends in product market prices, thus in times of higher product prices the cost of exploring, developing and operating the oil and natural gas properties will tend to escalate as well. Capital expenditures are required to fund the exploration, development, and production of oil and natural gas. Cash outlays for capital expenditures are largely discretionary, however, a minimum level of capital expenditures is required to replace depleting reserves. Due to the nature of oil and natural gas exploration and development, significant uncertainty exists as to the ultimate success of any drilling effort.
Land Investment Segment
Through Barnwell's 77.6% interest in Kaupulehu Developments, 75% interest in KD Kona, and 34.45% non-controlling interest in KKM Makai, the Company's land investment interests include the following:
•The right to receive percentage of sales payments from KD I resulting from the sale of single-family residential lots by KD I, within Increment I of the Kaupulehu Lot 4A area located in theNorth Kona District of the island ofHawaii . Kaupulehu Developments is entitled to receive payments from KD I based on the following percentages of the gross receipts from KD I's sales at Increment I: 10% of such aggregate gross proceeds greater than$100,000,000 up to$300,000,000 ; and 14% of such aggregate gross proceeds in excess 42 --------------------------------------------------------------------------------
of
•The right to receive 15% of the distributions of KD II, the cost of which is to be solely borne by KDK out of its 55% ownership interest in KD II, plus a priority payout of 10% of KDK's cumulative net profits derived from Increment II sales subsequent to Phase 2A, up to a maximum of$3,000,000 . Such interests are limited to distributions or net profits interests and Barnwell does not have any partnership interest in KD II or KDK through its interest in Kaupulehu Developments. Barnwell also has rights to three single-family residential lots in Phase 2A of Increment II, and four single-family residential lots in phases subsequent to Phase 2A when such lots are developed by KD II, all at no cost to Barnwell. Barnwell is committed to commence construction of improvements within 90 days of the transfer of the four lots in the phases subsequent to Phase 2A as a condition of the transfer of such lots. Also, in addition to Barnwell's existing obligations to pay professional fees to certain parties based on percentages of its gross receipts, Kaupulehu Developments is now also obligated to pay an amount equal to 0.72% and 0.20% of the cumulative net profits of KD II toKD Development and a pool of various individuals, respectively, all of whom are partners of KKM and are unrelated to Barnwell. Two developed single-family lots were sold in Increment II in prior years and the remaining 420 developable acres at Increment II are entitled for up to 350 homesites. The remaining acreage within Increment II is not yet under development, and there is no assurance that development of such acreage will in fact occur. No definitive development plans have been made by the developer of Increment II as of the date of this report. •An indirect 19.6% non-controlling ownership interest inKD Kukio Resorts , KD Maniniowali and KD I and an indirect 10.8% non-controlling ownership interest in KD II through KDK. These entities 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 ofHawaii , as well as Kukio Resort's real estate sales office operations. KDK was the developer of Kaupulehu Lot 4A Increments I and II. The partnerships derive income from the sale of residential parcels 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. •Approximately 1,000 acres of vacant leasehold land zoned conservation in the Kaupulehu Lot 4C area, which currently has no development potential without both a development agreement with the lessor and zoning reclassification.
Contract Drilling Segment
Barnwell drills water and water monitoring wells and installs and repairs water pumping systems inHawaii . Contract drilling results are highly dependent upon the quantity, dollar value and timing of contracts awarded by governmental and private entities and can fluctuate significantly. 43 --------------------------------------------------------------------------------
Business Environment
Our operations are located inCanada and in the states ofHawaii andOklahoma . Accordingly, our business performance is directly affected by macroeconomic conditions in those areas, as well as general economic conditions of theU.S. domestic and world economies.
Oil and Natural Gas Segment
Barnwell realized an average price for oil of$51.74 per barrel during the year endedSeptember 30, 2021 , an increase of 53% from$33.85 per barrel realized during the prior year. While oil prices have recovered from the significant lows of March and May of the prior year, the Company is unable to reasonably predict future oil prices and the impacts future oil prices will have on the Company. Barnwell realized an average price for natural gas of$2.62 per Mcf during the year endedSeptember 30, 2021 , an increase of 60% from$1.64 per Mcf realized during the prior year. Land Investment Segment Future land investment payments and any future cash distributions from our investment in the Kukio Resort Land Development Partnerships are dependent upon the sale of the remaining nine residential lots within Increment I by KD I and potential future development or sale of the remaining portion of Increment II by KD II of Kaupulehu Lot 4A. The amount and timing of future land investment segment proceeds from percentage of sales payments and cash distributions from the Kukio Resort Land Development Partnerships are highly uncertain and out of our control, and there is no assurance with regards to the amounts of future sales of residential lots within Increments I and II. No definitive development plans have been made by the developer of Increment II as of the date of this report. Barnwell estimates that it will be partially reliant upon land investment segment proceeds in order to provide sufficient liquidity to fund our operations in 2022 and beyond. However, there can be no assurance that the amount of future land investment segment proceeds will provide the liquidity required.
Contract Drilling Segment
Demand for water well drilling and/or pump installation and repair services is volatile and dependent upon land development activities within the state ofHawaii . Management currently estimates that well drilling activity for fiscal 2022 will be significantly lower than fiscal 2021 based upon the number and value of contracts in backlog.
Results of Operations
Summary
Net earnings attributable to Barnwell for fiscal 2021 totaled$6,253,000 , an$11,009,000 increase in operating results from a net loss of$4,756,000 in fiscal 2020. The following factors affected the results of operations for the current fiscal year as compared to the prior fiscal year: •A$6,653,000 improvement in oil and natural gas segment operating results, before income taxes, primarily attributable to a decrease in the ceiling test impairment which was$4,326,000 in the prior year period, compared to a ceiling test impairment of$630,000 in the current year 44 -------------------------------------------------------------------------------- period. Also contributing to the increase was a significant increase in oil and natural gas prices in the current period as compared to the same period in the prior year;
•A
•A$1,463,000 increase in land investment segment operating results, before non-controlling interests' share of such profits, due to the sale of eight lots in the current period, whereas there were only two lot sales in the same period in the prior year;
•A
•A$3,214,000 decrease in contract drilling segment operating results, before income taxes, primarily resulting from decreased activity attributable to a significant well drilling contract as this contract was essentially completed as ofDecember 31, 2020 ; •A$1,268,000 increase in general and administrative expenses primarily due to increases in share-based compensation expense, bonuses and director fees, and costs related to the cooperation and support agreement with the MRMP Stockholders in the current year period as compared to the same period in the prior year, partially offset by a reduction in legal fees in the current year period as compared to the same period in the prior year; and •A$1,336,000 gain recognized in the prior year period from the sale of the Company's leasehold interest in a three-quarter of an acre contract drilling segment maintenance and storage yard inHonolulu, Hawaii , whereas there was no such gain in the current period.
General
Barnwell conducts operations in theU.S. andCanada . Consequently, Barnwell is subject to foreign currency translation and transaction gains and losses due to fluctuations of the exchange rates between the Canadian dollar and theU.S. dollar. Barnwell cannot accurately predict future fluctuations of the exchange rates and the impact of such fluctuations may be material from period to period. To date, we have not entered into foreign currency hedging transactions. The average exchange rate of the Canadian dollar to theU.S. dollar increased 6% in fiscal 2021, as compared to fiscal 2020, and the exchange rate of the Canadian dollar to theU.S. dollar increased 5% atSeptember 30, 2021 , as compared toSeptember 30, 2020 . Accordingly, the assets, liabilities, stockholders' equity and revenues and expenses of Barnwell's subsidiaries operating inCanada have been adjusted to reflect the change in the exchange rates. Barnwell's Canadian dollar liabilities are greater than its Canadian dollar assets; therefore, increases or decreases in the value of the Canadian dollar to theU.S. dollar generate other comprehensive loss or income, respectively. Other comprehensive income and losses are not included in net earnings (loss). Other comprehensive loss due to foreign currency translation adjustments, net of taxes, for fiscal 2021 was$283,000 , a$137,000 change from other comprehensive loss due to foreign currency translation adjustments, net of taxes, of$146,000 in fiscal 2020. There were no taxes on other comprehensive loss due to foreign currency translation adjustments in fiscal 2021 and 2020 due to a full valuation allowance on the related deferred tax assets. 45 --------------------------------------------------------------------------------
Oil and natural gas
Selected Operating Statistics
The following tables set forth Barnwell's annual average prices per unit of production and annual net production volumes for fiscal 2021 as compared to fiscal 2020. Production amounts reported are net of royalties.
Annual Average Price Per Unit
Increase (Decrease)
2021 2020 $ %
Natural gas (Mcf)* $ 2.62 $ 1.64 $ 0.98 60%
Oil (Bbls) $ 51.74 $ 33.85 $ 17.89 53%
Liquids (Bbls) $ 31.92 $ 17.16 $ 14.76 86%
Annual Net Production
Increase (Decrease)
2021 2020 Units %
Natural gas (Mcf) 694,000 649,000 45,000 7%
Oil (Bbls) 147,000 153,000 (6,000) (4)%
Liquids (Bbls) 24,000 21,000 3,000 14%
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* Natural gas price per unit is net of pipeline charges.
The oil and natural gas segment generated a$2,423,000 operating profit in fiscal 2021 before general and administrative expenses, an increase in operating results of$6,653,000 as compared to$4,230,000 of operating loss in fiscal 2020. There was a$630,000 ceiling test impairment included in the operating profit in the current year as compared to a$4,326,000 ceiling test impairment in the prior year. Oil and natural gas revenues increased$3,561,000 (53%) from$6,693,000 in fiscal 2020 to$10,254,000 in fiscal 2021, primarily due to significant increases in oil, natural gas and natural gas liquids prices as compared to the same periods in the prior as prior year's commodity prices were impacted by the COVID-19 pandemic. Oil and natural gas operating expenses increased$1,706,000 (35%) from$4,850,000 in fiscal 2020 to$6,556,000 in fiscal 2021, primarily due to equalization of operating costs related to processing facilities and workovers in the current year period and to a lesser degree due to carbon taxes, whereas there were no such costs in the prior year period, as well as due to lower operating costs in the prior year period due to the aforementioned low commodity prices. Oil and natural gas segment depletion decreased$1,102,000 from$1,747,000 in fiscal 2020 to$645,000 in fiscal 2021, primarily due to a decrease in the depletion rate for the current year period, as compared to the same period in prior year, due primarily to impairment write-downs in the prior year. Net oil production during the fiscal year endedSeptember 30, 2021 decreased 4% due largely to a natural decline in oil production from theSpirit River area as compared to the prior year period. In addition, the Company sold its oil and natural gas properties in theSpirit River area inJuly 2021 . The 46 -------------------------------------------------------------------------------- decrease was partially offset by an increase in production from the Twining area due largely to the acquisition of additional wells in the area. Net natural gas and natural gas liquids production increased 7% and 14%, respectively, as compared to the same period of the prior year, also due largely to the acquisition of additional wells in the Twining area, partially offset by a decrease in production due to the sale of oil and natural gas properties in theHillsdown area inApril 2021 . While oil prices have recovered from the significant lows of March through May of the prior year, the Company is unable to reasonably predict future oil prices and the impacts future oil prices will have on the Company.
Sale of interest in leasehold land
Kaupulehu Developments is entitled to receive a percentage of the gross receipts from the sales of lots and/or residential units in Increment I by KD I.
The following table summarizes the revenues received from KD I and the amount of fees directly related to such revenues:
Year ended
2021 2020
Sale of interest in leasehold land:
Revenues - sale of interest in leasehold land $ 1,738,000 $ 325,000
Fees - included in general and administrative expenses (212,000) (40,000)
Sale of interest in leasehold land, net of fees paid $ 1,526,000 $ 285,000
During the year ended September 30, 2021 , Barnwell received $1,738,000 in
percentage of sales payments from KD I from the sale of eight single-family lots
within Phase II of Increment I. During the year ended September 30, 2020 ,
Barnwell received $325,000 in percentage of sales payments from KD I from the
sale of two single-family lots within Phase II of Increment I.
Subsequent to the close of the year ended September 30, 2021 , Kaupulehu
Developments received percentage of sales payments totaling $600,000 from the
sale of three lots within Phase II of Increment I. Financial results from the
receipt of these payment will be reflected in Barnwell's quarter ending December
31, 2021 . Accordingly, with the inclusion of the lot sales subsequent to
September 30, 2021 , six single-family lots of the 80 lots developed within
Increment I remained to be sold as of the date of this report. The Company does
not have a controlling interest in Increments I and II, and there is no
assurance with regards to the amounts of future sales from Increments I and II,
or that the remaining acreage within Increment II will be developed. No
definitive development plans have been made by the developer of Increment II as
of the date of this report.
Contract drilling
Contract drilling revenues and costs are associated with well drilling and water
pump installation, replacement and repair in
Contract drilling revenues decreased$5,185,000 (47%) to$5,809,000 in fiscal 2021, as compared to$10,994,000 in fiscal 2020, and contract drilling costs decreased$1,958,000 (26%) to$5,555,000 in fiscal 2021, as compared to$7,513,000 in fiscal 2020. The contract drilling segment generated an$89,000 operating loss before general and administrative expenses during fiscal 2021, a decrease in operating 47 -------------------------------------------------------------------------------- results of$3,214,000 as compared to an operating profit before general and administrative expenses of$3,125,000 in fiscal 2020. The decrease in operating results was primarily due to a significant well drilling contract in the prior year period. The significant well drilling contract was for multiple wells and was based on a fixed rate per day or fixed rate per hour, depending upon the activity, as opposed to the Company's typical contracts that are based on a fixed price per lineal foot drilled. Up to three drilling rigs were being used at this job during the prior year period with crews working extended hours. However, activity related to this contract was essentially completed in the quarter endedDecember 31, 2020 and thus contract drilling revenues and costs have decreased in the current year period as compared to the same period of the prior year. AtSeptember 30, 2021 , there was a backlog of six well drilling and ten pump installation and repair contracts, of which five well drilling and nine pump installation and repair contracts were in progress as ofSeptember 30, 2021 . The backlog of contract drilling revenues as ofDecember 1, 2021 was approximately$9,500,000 , of which$5,900,000 is expected to be realized in fiscal 2022 with the remainder to be recognized in the following fiscal year. Based on these contracts in backlog, contract drilling segment operating profit is estimated to be higher in fiscal 2022 as compared to fiscal 2021. In the quarter endedDecember 31, 2019 , the Company experienced the failure of a hole opener which broke apart leaving pieces in the bottom of a water well being drilled inHawaii . Efforts to remove the items from the well were unsuccessful through the quarter endedMarch 31, 2020 and subsequently the Company determined that the well should be abandoned and a new well drilled at no incremental cost to the customer as per the terms of the contract. Accordingly, all the costs to drill and abandon the first well, which are all wasted costs, were excluded from the measurement of progress toward contract completion and all such costs were fully accrued in the quarter endedMarch 31, 2020 , as this contract was determined to be a loss job. InSeptember 2020 , while making progress towards the drilling of a replacement well in different location, the drill string twisted off and became lodged in the well borehole, which required a stoppage of drilling and the need to dislodge and retrieve the broken drill string. Accordingly, the estimated total rework costs to remediate the situation was accrued atSeptember 30, 2020 . InJanuary 2021 , the broken drill string was retrieved from the well borehole and drilling of the replacement well recommenced. In the year endedSeptember 30, 2019 , two of the water wells drilled by the contract drilling segment for one customer were determined to not meet the contract specifications for plumbness. Subsequently, in the quarter endedMarch 31, 2020 , the Company executed a separate five-year warranty agreement with the customer for one of the wells that did not meet plumbness. Under the terms of the agreement, if the lack of plumbness is determined to be the cause of a pump failure within the warranty period, the Company would be obligated to replace the pump at no cost to the customer. If the Company is unable to replace the pump using industry-standard methods, or if there are two or more pump failures attributable to lack of plumbness within the five-year warranty period, the Company would be obligated to drill a new well at no cost to the customer. Negotiations with the customer are currently ongoing for the other well that the customer claims did not meet plumbness despite the fact that the independent consulting engineer for the job concluded that the most recent plumbness test, completed after the well was cased with casing cemented into place as per the contract, showed that the well meets the plumbness specifications of the contract. Management believes the degrees of deviation for both wells are not impactful to the performance of the submersible pumps that will be installed in those wells. Accordingly, no accruals have been recorded as ofSeptember 30, 2021 as there is no probable or estimable contingent liability. 48 -------------------------------------------------------------------------------- InJuly 2020 , the Staff of theState of Hawaii's Commission on Water Resource Management ("Commission") circulated a draft of a proposed recommendation to the Commission under which the Company, the water utility, the water utility's independent hydrologist firm and the owner of the land on which the two aforementioned water wells were drilled would be assessed penalty fines because each of the wells were calculated to have been drilled beyond the depth permitted by the permit. The wells were drilled to a depth to penetrate certain layers of impermeable rock necessary to access the aquifer at the instructions and on the advice of the hydrologist hired by the owner of the well. The Company's share of the proposed penalties and fines was originally calculated to approximately$1,200,000 . Subsequently, the Staff of the Commission acknowledged that one well had not been drilled to a depth beyond its permitted depth and the fines on that well were eliminated. Additionally, the fines applicable to the depth of the second well were dropped in lieu of the parties entering into an agreement to perform a water quality study and repurpose a current well into a monitoring well. Accordingly, the Company recorded a contingent liability of approximately$300,000 atSeptember 30, 2020 and no subsequent revision to the accrual has been recorded as ofSeptember 30, 2021 . There has been a significant decrease in demand for water well drilling contracts in recent years that has generally led to increased competition for available contracts and lower margins on awarded contracts. The Company is unable to predict the near-term and long-term availability of water well drilling and pump installation and repair contracts as a result of this volatility in demand. While the Company's contract drilling segment remained operational throughout fiscal 2020 and 2021 and continues to work, the continuing potential impact of COVID-19 on the health of our contract drilling segment's crew and ability or desire for customers to continue such work is uncertain, and any discontinuation of contracts currently in backlog for any reason would result in a material adverse impact to the Company's financial condition and outlook.
General and administrative expenses
General and administrative expenses increased$1,268,000 (22%) to$7,088,000 in fiscal 2021, as compared to$5,820,000 in fiscal 2020. The increase was primarily due to increases in share-based compensation expense, bonuses and director fees, and costs related to the cooperation and support agreement with the MRMP Stockholders as discussed below, in the current year period as compared to the same period in the prior year. The increase was partially offset by a reduction in fees related to legal services, proxy solicitation, proxy advisory, and public relation costs in the current year period as compared to the same period in the prior year. InJanuary 2021 , the Company entered into a cooperation and support agreement withMRMP-Managers LLC ,Ned L. Sherwood Revocable Trust , Ned L. Sherwood andBradley M. Tirpak (collectively, the "MRMP Stockholders"), with respect to the potential proxy contest pertaining to the election of directors to our Board of Directors. Pursuant to the terms of the agreement, among other things, the Company and the MRMP Stockholders agreed on certain nominations and voting with respect to the directors nominated to stand for reelection to the Board of Directors at the 2021 annual meeting of stockholders, which was held onApril 20, 2021 . The Company agreed to reimburse the MRMP Stockholders for their reasonable, documented out-of-pocket fees and expenses (including legal expenses) of up to a maximum of$300,000 in connection with the MRMP Stockholders' election contest at the Company's 2020 annual meeting of stockholders and the negotiation of this agreement and accordingly, incurred approximately$296,000 in expenses related to this agreement in the year endedSeptember 30, 2021 . 49
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Depletion, depreciation, and amortization
Depletion, depreciation, and amortization decreased$1,184,000 (55%) in fiscal 2021 as compared to fiscal 2020 primarily due to a decrease in the oil and natural gas depletion rates as a result of ceiling test impairment write-downs in the prior year as discussed in the "Oil and natural gas" section above.
Impairment of assets
Under the full cost method of accounting, the Company performs quarterly oil and natural gas ceiling test calculations. There was a ceiling test impairment of$630,000 during the year endedSeptember 30, 2021 . There was a$4,326,000 ceiling test impairment during the year endedSeptember 30, 2020 . Changes in the mandated 12-month historical rolling average first-day-of-the-month prices for oil, natural gas and natural gas liquids prices, the value of reserve additions as compared to the amount of capital expenditures to obtain them, and changes in production rates and estimated levels of reserves, future development costs and the estimated market value of unproved properties, impact the determination of the maximum carrying value of oil and natural gas properties. InSeptember 2021 , the Company designated a contract drilling segment drilling rig and related ancillary equipment, with an aggregate net carrying value of$725,000 , as assets held for sale and recorded an impairment of$38,000 to reduce the value of these assets to its fair value, less estimated selling costs. The fair value of these assets in the aggregate amount of$687,000 is recorded as "Assets held for sale" on the Company's Consolidated Balance Sheet atSeptember 30, 2021 .
During the year ended
Gain on termination of Post-Retirement Medical plan
InJune 2021 , the Company terminated its Post-retirement Medical plan, which covered officers of the Companywho had attained at least 20 years of service of which at least 10 years were at the position of Vice President or higher, their spouses and qualifying dependents, effectiveJune 4, 2021 . Pursuant to the Post-retirement Medical plan document, the Company, as the sponsor of the Post-retirement Medical plan, had the right to terminate the plan within sixty days' notice to each participant and the plan may be terminated by the resolution of the Board of the Directors of the Company. Further, under the terms of the plan document, the participants in the Post-retirement Medical plan were not entitled to any unpaid vested benefits thereunder upon plan termination.The Post -retirement Medical plan was an unfunded plan and the Company funded benefits when payments were made. As a result of the plan termination, the Company recognized a non-cash gain of$2,341,000 during the year endedSeptember 30, 2021 .
Gain on sale of assets
OnJuly 8, 2021 , Barnwell entered into and completed a purchase and sale agreement with an independent third party and sold its interests in certain natural gas and oil properties located in theSpirit River area ofAlberta, Canada . The sales price per the agreement was adjusted for customary purchase price adjustments to$1,047,000 in order to, among other things, reflect an economic effective closing date of sale ofJuly 8, 2021 . From Barnwell's net proceeds,$526,000 was withheld for remittance by the buyers 50 --------------------------------------------------------------------------------
to the
The difference in the relationship between capitalized costs and proved reserves of theSpirit River properties sold as compared to the properties retained by Barnwell was significant as there was a 93% difference in capitalized costs divided by proved reserves if the gain was recorded versus the gain being credited against the full-cost pool. Accordingly, Barnwell recorded a gain on the sale ofSpirit River of$818,000 in the year endedSeptember 30, 2021 in accordance with the guidance in Rule 4-10(c)(6)(i) of Regulation S-X of the rules and regulations of theSEC , which requires an allocation of capitalized costs to the reserves sold and reserves retained on the basis of the relative fair values of the properties as there was a substantial economic difference between the properties sold and those retained. Also included in the gain calculation were asset retirement obligations of$77,000 assumed by the purchaser.
On
InMarch 2020 , the Company sold its leasehold interest in a three-quarter of an acre contract drilling segment maintenance and storage yard inHonolulu, Hawaii to an unrelated third party for a$1,100,000 cash payment. As a result of the sale transaction, the Company recognized a gain of$1,336,000 , inclusive of a$236,000 gain from the reversal of the storage yard's lease liability in excess of the right-of-use asset, in the year endedSeptember 30, 2020 .
Equity in income of affiliates
Barnwell's investment in the Kukio Resort Land Development Partnerships is accounted for using the equity method of accounting. Barnwell was allocated partnership income of$5,793,000 in fiscal 2021, as compared to allocated income of$352,000 in fiscal 2020. The increase in the allocated partnership income is primarily due to the Kukio Resort Land Development Partnerships' sale of eight lots during the current year, whereas there were two lot sales in the prior year. In addition, there was a significant increase in real estate resale activity in the current year period for which theKukio Resort Land Development Partnerships' real estate sales office earns commissions revenue, as well as an increase in the Kukio Resort Land Development Partnerships' revenues related to an increase in club memberships sold. The increase is also attributed to distributions received from the Kukio Resort Land Development Partnerships in excess of our investment balance of$654,000 which was recorded as income during the year endedSeptember 30, 2021 and$459,000 in preferred return payments received from KKM in the year endedSeptember 30, 2021 . During the year endedSeptember 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 reduced itsKukio Resort Land Development Partnership investment balance to zero as ofSeptember 30, 2021 . In addition, the Company recorded the distributions received in excess of our investment balance of$654,000 as equity in income of affiliates during the year endedSeptember 30, 2021 . The Company records the distributions in excess of our investment in theKukio Resort Land Development Partnerships as income 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 theKukio Resort Land Development Partnerships. The Company will record future equity method earnings only after our share 51 --------------------------------------------------------------------------------
of the
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. Additionally, Barnwell was entitled to a preferred return from KKM on any allocated equity in income of theKukio Resort Land Development Partnerships in excess of its partnership sharing ratio for cumulative distributions to all of its partners in excess of$45,000,000 from those partnerships. Cumulative distributions from theKukio Resort Land Development Partnerships have reached the$45,000,000 threshold and in the quarter endedDecember 31, 2020 , the Kukio Resort Land Development Partnerships made distributions in excess of the threshold out of the proceeds from the sale of two lots in Increment I. Accordingly, Barnwell received a total of$459,000 in preferred return payments, which is reflected as an additional equity pickup in the "Equity in income of affiliates" line item on the accompanying Consolidated Statement of Operations for the year endedSeptember 30, 2021 . The preferred return payments received in the quarter endedDecember 31, 2020 brought the cumulative preferred return total to$656,000 , which is the total amount Barnwell was entitled to, and thus there is no more preferred return outstanding as ofSeptember 30, 2021 . During the year endedSeptember 30, 2021 , Barnwell received net cash distributions in the amount of$6,011,000 from theKukio Resort Land Development Partnerships after distributing$683,000 to non-controlling interests. Of the$6,011,000 net cash distribution received from theKukio Resort Land Development Partnerships,$459,000 represented a partial payment of the preferred return from KKM, as discussed above. During the year endedSeptember 30, 2020 , Barnwell received net cash distributions in the amount of$360,000 from theKukio Resort Land Development Partnerships after distributing$20,000 to non-controlling interests. Of the$360,000 net cash distribution received from theKukio Resort Land Development Partnerships,$197,000 represented a partial payment of the preferred return from KKM. Subsequent to the close of the year endedSeptember 30, 2021 , Kaupulehu Developments received percentage of sales payments totaling$600,000 from the sale of three lots within Phase II of Increment I. Financial results from the receipt of these payment will be reflected in Barnwell's quarter endingDecember 31, 2021 . Accordingly, with the inclusion of the lot sales subsequent toSeptember 30, 2021 , six single-family lots of the 80 lots developed within Increment I remained to be sold as of the date of this report. The Company does not have a controlling interest in Increments I and II, and there is no assurance with regards to the amounts of future sales from Increments I and II, or that the remaining acreage within Increment II will be developed. No definitive development plans have been made by the developer of Increment II as of the date of this report. 52
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Income taxes
The components of earnings (loss) before income taxes, after adjusting the earnings (loss) for non-controlling interests, are as follows:
Year ended September 30,
2021 2020
United States $ 5,436,000 $ 1,518,000
Canada 1,149,000 (6,271,000)
$ 6,585,000 $ (4,753,000)
Barnwell's effective consolidated income tax rate for fiscal 2021, after
adjusting earnings (loss) before income taxes for non-controlling interests, was
5% as compared to nil for fiscal 2020.
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.
On June 28, 2019 , the Government of Alberta reduced its corporate income tax
rate from 12% to 11%, effective July 1, 2019 , with further reductions in the
rate by 1% on January 1 of every year until it reaches 8% on January 1, 2022 . On
June 29, 2020 , the Government of Alberta introduced Alberta's Recovery Plan
which will, among other things, reduce Alberta's general corporate income tax
rate to 8% (from 10%) effective July 1, 2020 . This reduction was enacted in the
quarter ended December 31, 2020 . Canadian deferred tax assets and liabilities
have been measured using the enacted tax rates in effect for the year in which
the differences are expected to reverse. Alberta rate changes have no
significant impact to earnings/loss as a result of a full valuation allowance
being applied to Canadian deferred tax assets.
Net earnings attributable to non-controlling interests
Earnings and losses attributable to non-controlling interests represent the
non-controlling interests' share of revenues and expenses related to the various
partnerships and joint ventures in which Barnwell has controlling interests and
consolidates.
Net earnings attributable to non-controlling interests totaled $950,000 in
fiscal 2021, as compared to net earnings attributable to non-controlling
interests of $79,000 in fiscal 2020. The $871,000 (1,103%) increase is primarily
due to increases in the amount of Kukio Resort Land Development Partnerships'
income and percentage of sales proceeds received in the current year period as
compared to the same period in the prior year.
Retirement plans curtailment
InDecember 2019 , the Company's Board of Directors approved a resolution to freeze all future benefit accruals for all participants under the Company's defined benefit pension plan ("Pension Plan") and Supplemental Executive Retirement Plan ("SERP") effectiveDecember 31, 2019 . Consequently, current participants in the Pension Plan and SERP no longer accrue new benefits under the plans and new employees of the Company are no longer eligible to enter the Pension Plan and SERP as participants after 53 --------------------------------------------------------------------------------December 31, 2019 . The freezing of the Pension Plan and SERP triggered a curtailment which required a remeasurement of the projected benefit obligations of the Pension Plan and SERP and resulted in a$1,726,000 reduction in unrecognized pension benefit costs that were previously included in accumulated other comprehensive loss, with a corresponding curtailment gain in other comprehensive income which was recorded during the year endedSeptember 30, 2020 .
Inflation
The effect of inflation on Barnwell has generally been to increase its cost of operations, general and administrative costs and direct costs associated with oil and natural gas production and contract drilling operations. Oil and natural gas prices realized by Barnwell are essentially determined by world prices for oil and western Canadian/MidwesternU.S. prices for natural gas.
Impact of Recently Issued Accounting Standards on Future Filings
InJune 2016 , the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which replaces the incurred loss model with an expected loss model referred to as the current expected credit loss ("CECL") model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including but not limited to trade receivables. This ASU is effective for annual reporting periods beginning afterDecember 15, 2022 , and interim periods within those annual periods. The FASB has subsequently issued other related ASUs which amend ASU 2016-13 to provide clarification and additional guidance. The Company is currently evaluating the impact of these standards. InDecember 2019 , the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which enhances and simplifies various aspects of the income tax accounting guidance in ASC 740. This ASU is effective for annual reporting periods beginning afterDecember 15, 2020 and interim periods within those annual periods, with early adoption permitted. The adoption of this update is not expected to have a material impact on Barnwell's consolidated financial statements.
Liquidity and Capital Resources
Barnwell's primary sources of liquidity are cash on hand, cash flow generated by operations, land investment segment proceeds, and starting in fiscal 2021, funds generated by the ATM program. AtSeptember 30, 2021 , Barnwell had$12,134,000 in working capital. Cash Flows Cash flows provided by operating activities totaled$831,000 for fiscal 2021, as compared to cash flows provided by operating activities of$750,000 for the same period in fiscal 2020. This$81,000 change in operating cash flows was primarily due to a significant increase in distributions of income from the Kukio Resort Land Development Partnerships in the current year period, as compared to the prior year, and higher operating results, before non-cash impairment expenses, for the oil and natural gas segment, which was partially offset by significantly lower operating results for the contract drilling segment in the current year period as compared to the prior year period. The change was also due to fluctuations in working capital, primarily attributed to fluctuations in other current assets and accounts payable in the current period as compared to the prior year period. 54
-------------------------------------------------------------------------------- Net cash provided by investing activities totaled$3,686,000 for fiscal 2021, as compared to net cash used in investing activities of$833,000 for fiscal 2020. The$4,519,000 increase in investing cash flows was primarily due to a decrease of$1,193,000 in cash paid for oil and natural gas capital expenditures, a$1,241,000 increase in percentage of sales proceeds received, net of fees, an increase of$1,344,000 received in distributions from equity investees in excess of earnings, and a net increase of$764,000 in proceeds from the sale of assets related to the sale of the Company'sHonolulu corporate office in the current year period and the sale of the Company's leasehold interest in a three-quarter of an acre contract drilling segment maintenance and storage yard inHonolulu, Hawaii in the prior year period. Cash flows provided by financing activities totaled$2,192,000 for fiscal 2021, as compared to cash flows provided by financing activities of$60,000 for fiscal 2020. The$2,132,000 change in financing cash flows was primarily attributed to$3,179,000 in proceeds from issuance of stock, net of costs, related to the Company's ATM offering in the current year period as compared to none in the prior year period, which was partially offset by an increase of$947,000 in distributions to non-controlling interests in the current year period.
Paycheck Protection Program Loan
OnApril 28, 2020 , the Company, as obligor, entered into a promissory note evidencing an unsecured loan in the approximate amount of$147,000 under the Paycheck Protection Program ("PPP") pursuant to the Coronavirus Aid, Relief, and Economic Security Act ("CARES") that was signed into law inMarch 2020 . The note was to mature two years after the date of the loan disbursement with interest at a fixed annual rate of 1.00%, and with the principal and interest payments deferred until ten months after the last day of the covered period. InApril 2021 , the Company was notified by the lender of our PPP loan that the entire PPP loan amount and related accrued interest was forgiven by theSmall Business Administration . As a result of the loan forgiveness, the Company recognized a gain on debt extinguishment of$149,000 during the year endedSeptember 30, 2021 .
In the quarter endedDecember 31, 2020 , the Company's Canadian subsidiary, Barnwell ofCanada , received a loan ofCAD$40,000 under theCanada Emergency Business Account ("CEBA") loan program for small businesses. In the quarter endedMarch 31, 2021 , the Company applied for an increase to our CEBA loan and received an additionalCAD$20,000 for a total loan amount received ofCAD$60,000 ($47,000 ) under the program. The CEBA loan is interest-free with no principal payments required untilDecember 31, 2022 , after which the remaining loan balance is converted to a three year term loan at 5% annual interest paid monthly. If the Company repays 66.6% of the principal amount prior toDecember 31, 2022 , there will be loan forgiveness of 33.3% up to a maximum ofCAD$20,000 .
At The Market Offering
OnMarch 16, 2021 , the Company entered into a Sales Agreement with A.G.P./Alliance Global Partners ("A.G.P,"), with respect to the 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 at any time our public float remains under$75 million ), 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 55 -------------------------------------------------------------------------------- sold under the ATM are offered pursuant to the Company's Registration Statement on Form S-3 (File No. 333-254365), filed with theSecurities and Exchange Commission onMarch 16, 2021 , and declared effective onMarch 26, 2021 (the "Registration Statement"), and the prospectus datedMarch 26, 2021 , included in the Registration Statement. The sale of shares under the ATM began inMay 2021 and as ofSeptember 30, 2021 , the Company sold 1,167,987 shares of common stock resulting in net proceeds of$3,784,000 after commissions and fees of$123,000 .
Going Concern
Our ability to sustain our business in the future will depend on the sufficiency of our cash on hand, oil and natural gas operating cash flows, which are highly sensitive to volatile oil and natural gas prices, contract drilling operating cash flows, which are subject to large changes in demand, and future land investment segment proceeds and distributions from the Kukio Resort Land Development Partnerships, the timing of which are both highly uncertain and not within Barnwell's control. A sufficient level of such cash and cash inflows are necessary to fund discretionary oil and natural gas capital expenditures, which must be economically successful to provide sufficient returns, as well as fund our non-discretionary outflows such as oil and natural gas asset retirement obligations and ongoing operating and general and administrative expenses. In addition, as discussed in the "Asset Retirement Obligation" section of "Liquidity and Capital Resources," a significant amount of funds will be required to be put on deposit with Canadian regulatory authorities to fund abandonments at the Company's oil and natural gas properties in theManyberries area. Other sources and potential sources of funding are discussed below.
In fiscal 2020, the Company listed its corporate office on the 29th floor of a
commercial office building in downtown
OnMarch 16, 2021 , the Company initiated 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 under price and volume guidelines set by the Company's Board of Directors and the terms and conditions described in the Registration Statement. The sale of shares under the ATM began inMay 2021 and as ofSeptember 30, 2021 , the Company sold 1,167,987 shares of common stock resulting in net proceeds of$3,784,000 after commissions and fees of$123,000 . InApril 2021 , the Company re-initiated the marketing of its non-core oil and natural gas properties in theSpirit River ,Wood River ,Medicine River , Kaybob, Bonanza, Balsam andThornbury areas for sale. OnJuly 8 2021 , Barnwell entered into and completed a purchase and sale agreement with an independent third party and sold its interests in certain natural gas and oil properties located in theSpirit River area ofAlberta, Canada . The sales price per the agreement was adjusted for customary purchase price adjustments to$1,047,000 in order to, among other things, reflect an economic effective closing date of sale ofJuly 8, 2021 . From Barnwell's net proceeds,$526,000 was withheld for remittance by the buyers to theCanada Revenue Agency for potential amounts due for Barnwell's Canadian income taxes related to the sale. Negotiations regarding the potential sales of other non-core oil and natural gas properties is ongoing, however there is no assurance that the sale of any of the other non-core properties will occur. We have experienced a trend of losses and negative operating cash flows in three of the last four years. During fiscal 2020 and 2021, continuing uncertainties regarding the impacts of the COVID-19 pandemic on our business and the sufficiency of our cash balances and future cash inflows as described 56 -------------------------------------------------------------------------------- above raised substantial doubt about our ability to meet our estimated cash outflows or continue as a going concern. However, due to the$3,784,000 of net proceeds raised by the ATM throughSeptember 30, 2021 , the proceeds received from the sale of the Company's corporate office and its interests in certain natural gas and oil properties in theSpirit River area, as well as the$7,156,000 of net cash inflows in the year endedSeptember 30, 2021 from land segment percentage of sales proceeds and distributions from the Kukio Resort Land Development Partnerships, substantial doubt about our ability to meet our estimated cash outflows or continue as a going concern for one year from the date of the filing of this report has been overcome.
NYSE American Continued Listing Standard
OnJanuary 13, 2020 , the Company received notice from the NYSE American that the Company was not in compliance with Section 1003(a)(i) and Section 1003(a)(ii) of the NYSE American Company Guide (the "Guide"), which respectively require an issuer to have (i) stockholders' equity of$2.0 million or more if such issuer reported losses from continuing operations and/or net losses in two of its three most recent fiscal years and (ii) stockholders' equity of$4.0 million or more if such issuer reported losses from continuing operations and/or net losses in three of its four most recent fiscal years, since we reported stockholders' equity of$1.2 million as ofSeptember 30, 2019 and net losses in three of the last four most recent fiscal years then ended, and that the Company's common stock could be at risk of being delisted. In accordance with the NYSE American's policies and procedures, we subsequently submitted a plan (the "Plan") to the NYSE American detailing the steps we planned to take to raise our stockholders' equity above$4.0 million and regain compliance with Section 1003(a)(i) and Section 1003(a)(ii) of the Guide. OnApril 2, 2020 , the NYSE American notified the Company that it accepted the Plan and granted the Company an extension for its continued listing untilJuly 13, 2021 . OnJuly 13, 2021 , the Company filed a Form 8-K report with theSecurities and Exchange Commission announcing that the Company's pro forma stockholders' equity (unaudited) as ofJuly 13, 2021 was projected to be above the$4.0 million required to comply with Section 1003(a)(i) and Section 1003(a)(ii) of the Guide. Accordingly, in a letter datedJuly 14, 2021 , the NYSE American determined the Company had resolved the continued listing deficiency with respect to Section 1003(a)(i) and Section 1003(a)(ii) of the Guide and notified the Company that it had successfully regained compliance with the NYSE American continued listing standards.
Oil and Natural Gas Capital Expenditures
Barnwell's oil and natural gas capital expenditures, including accrued capital expenditures and acquisitions of oil and natural gas properties and excluding additions and revisions to estimated asset retirement obligations, decreased$934,000 from$3,151,000 in fiscal 2020 to$2,217,000 in fiscal 2021. The Company participated in the drilling of seven gross (0.20 net) non-operated wells inOklahoma during the year endedSeptember 30, 2021 . Capital expenditures incurred by the Company for theseOklahoma wells totaled$1,178,000 for the year endedSeptember 30, 2021 . One gross (0.04 net) well was completed and the well began flowback production in lateMay 2021 and the Company's share of net production, after royalties, from this well was 1,000 barrels of oil, 4,000 MCF of natural gas and 1,000 barrels of natural gas liquids throughSeptember 30, 2021 . The remaining six gross (0.16 net) wells were all producing inOctober 2021 . 57
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The Company did not drill or participate in the drilling of wells in
Oil and Natural Gas Property Acquisitions and Dispositions
Dispositions
InApril 2021 , Barnwell entered into a purchase and sale agreement with an independent third party and sold its interests in properties located in theHillsdown area ofAlberta, Canada . The sales price per the agreement was adjusted for customary purchase price adjustments to$132,000 in order to, among other things, reflect an economic effective date ofOctober 1, 2020 .$72,000 of the sales proceeds was withheld by the buyers for potential amounts due for Barnwell's Canadian income taxes related to the sale. The final determination of the customary adjustments to the purchase price has not yet been made, however it is not expected to result in a material adjustment. The proceeds were credited to the full cost pool, with no gain or loss recognized, as the sale did not result in a significant alteration of the relationship between capitalized costs and proved reserves. InApril 2021 , the Company re-initiated the marketing of its non-core oil and natural gas properties in theSpirit River ,Wood River ,Medicine River , Kaybob, Bonanza, Balsam andThornbury areas for sale. OnJuly 8, 2021 , Barnwell entered into and completed a purchase and sale agreement with an independent third party and sold its interests in certain natural gas and oil properties located in theSpirit River area ofAlberta, Canada . The sales price per the agreement was adjusted for customary purchase price adjustments to$1,047,000 in order to, among other things, reflect an economic effective closing date of sale ofJuly 8, 2021 . From Barnwell's net proceeds,$526,000 was withheld for remittance by the buyers to theCanada Revenue Agency for potential amounts due for Barnwell's Canadian income taxes related to the sale. The difference in the relationship between capitalized costs and proved reserves of theSpirit River properties sold as compared to the properties retained by Barnwell was significant as there was a 93% difference in capitalized costs divided by proved reserves if the gain was recorded versus the gain being credited against the full-cost pool. Accordingly, Barnwell recorded a gain on the sale ofSpirit River of$818,000 in the year endedSeptember 30, 2021 in accordance with the guidance in Rule 4-10(c)(6)(i) of Regulation S-X of the rules and regulations of theSEC , which requires an allocation of capitalized costs to the reserves sold and reserves retained on the basis of the relative fair values of the properties as there was a substantial economic difference between the properties sold and those retained. Also included in the gain calculation were asset retirement obligations of$77,000 assumed by the purchaser. Negotiations regarding the potential sales of other non-core oil and natural gas properties is ongoing, however there is no assurance that the sale of any of the other non-core properties will occur. In the quarter endedDecember 31, 2019 , Barnwell entered into a purchase and sale agreement with an independent third party and sold its interests in properties located in the Progress area ofAlberta, Canada . The sales price per the agreement was adjusted for customary purchase price adjustments to$594,000 in order to, among other things, reflect an economic effective date ofOctober 1, 2019 . The proceeds were credited to the full cost pool, with no gain or loss recognized, as the sale did not result in a significant alteration of the relationship between capitalized costs and proved reserves. 58 --------------------------------------------------------------------------------
Acquisitions
InApril 2021 , Barnwell acquired additional working interests in oil and natural gas properties located in the Twining area ofAlberta, Canada for cash consideration of$348,000 . The purchase price per the agreement was adjusted for customary purchase price adjustments to reflect the economic activity from the effective date to the closing date. The final determination of the customary adjustments to the purchase price has not yet been made, however it is not expected to result in a material adjustment.
There were no significant amounts paid for oil and natural gas property
acquisitions during the year ended
Asset Retirement Obligation
InSeptember 2019 , the AER issued an abandonment/closure order for all wells and facilities in theManyberries area which had been largely operated by LGX, an operating company that went into receivership in 2016. The estimated asset retirement obligation for the Company's interest in the wells and facilities in theManyberries area is included in "Asset retirement obligation" in the Consolidated Balance Sheets. Many 100% LGX-owned wells are to be reclaimed by the OWA. However, as next largest interest holder in 82 of the wells and 7 facilities formerly operated by LGX, averaging 11%, the Company is required to take care and custody of those properties and to coordinate their closure. This area has unique access issues as a result of an Emergency Protection Order to protect the Sage Grouse under the Canadian Government's Species at Risk Act. Access is limited to a window of mid-September to the end of November each year. Recently, the OWA created a WIP program for specific areas where there are a significant number of orphaned wells to abandon. The OWA has the ability and expertise to abandon wells using its internal resources and network of service providers resulting in efficiencies that companies such as Barnwell, would not be able to obtain on its own. Under the WIP program, the Company would be required to provide payment for only Barnwell's working interest share, however, all WIP's would have to participate in the program for the OWA to begin its work. InMarch 2021 , the Company was notified by the OWA that Barnwell'sManyberries wells were confirmed to be in the WIP program. Under the new agreement with the OWA, the Company is required to pay the abandonment and reclamation costs in advance through a cash deposit. The total cash deposit amount was calculated to be approximately$1,525,000 and the Company paid$888,000 of the total deposit in July andAugust 2021 and will need to pay the remaining balance of$637,000 byAugust 2022 . The Company revised its Manyberries ARO liability based on the OWA's revised abandonment and reclamation estimates, which resulted in an increase of approximately$213,000 in the current year. The increase in the ARO liability was a result of higher reclamation and remediation costs than anticipated, partially offset by lower abandonment estimates. Based on a review of the details of the cash deposit calculation provided by the OWA, which includes amounts added for possible contingencies, the Company believes the required cash deposit amount by the OWA is higher than the actual costs of the asset retirement obligation for theManyberries wells and that any excess of the deposit over actual asset retirement costs for the first phase of the work would be credited toward the second phase of the work. A remaining excess deposit, if any, would ultimately be refunded to the Company upon completion of all of the work.
Contractual Obligations
Disclosure is not required as Barnwell qualifies as a smaller reporting company.
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--------------------------------------------------------------------------------Contingencies
For a detailed discussion of contingencies, see Note 18 in the "Notes to Consolidated Financial Statements" in Item 8 of this report.
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