BARNWELL INDUSTRIES INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Relevant to Forward-Looking Information For the Purpose Of “Safe Harbor” Provisions Of The Private Securities Litigation Reform Act of 1995 This Form 10-Q, and the documents incorporated herein by reference, contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). A forward-looking statement is one which is based on current expectations of future events or conditions and does not relate to historical or current facts. These statements include various estimates, forecasts, projections of Barnwell’s future performance, statements of Barnwell’s plans and objectives, and other similar statements. All such statements we make are forward-looking statements made under the safe harbor of the PSLRA, except to the extent such statements relate to the operations of a partnership or limited liability company. Forward-looking statements include phrases such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates,” “assumes,” “projects,” “may,” “will,” “will be,” “should,” or similar expressions. Although Barnwell believes that its current expectations are based on reasonable assumptions, it cannot assure that the expectations contained in such forward-looking statements will be achieved. Forward-looking statements involve risks, uncertainties and assumptions which could cause actual results to differ materially from those contained in such statements. The risks, uncertainties and other factors that might cause actual results to differ materially from Barnwell’s expectations are set forth in the “Forward-Looking Statements” and “Risk Factors” sections of Barnwell’s Annual Report on Form 10-K for the year ended September 30, 2021, “Risk Factors” section of Barnwell’s Quarterly Report on Form 10-Q for the period ended December 31, 2021, and “Risk Factors” section of this Quarterly Report filed on Form 10-Q. Investors should not place undue reliance on these forward-looking statements, as they speak only as of the date of filing of this Form 10-Q, and Barnwell expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein. Critical Accounting Policies and Estimates Management has determined that our most critical accounting policies and estimates are those related to the full-cost ceiling calculation and depletion of our oil and natural gas properties, the estimation of our contract drilling segment's revenues and expenses, and the calculation of our income taxes, all of which are discussed in our Annual Report on Form 10-K, as amended by our Form 10-K/A Amendment No.1, for the fiscal year ended September 30, 2021. There have been no significant changes to these critical accounting policies and estimates during the three and six months ended March 31, 2022. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. Impact of COVID-19 In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic and the 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 Omicron variant, spreading throughout the U.S. and globally 28 and causing significant disruptions. 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 increased significantly from the lows of March through May of 2020, uncertainty regarding future oil prices continues to exist. 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 is uncertain, and any work stoppage or discontinuation of contracts currently in backlog could 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 new, more contagious or lethal variants that may emerge, and the effectiveness of COVID-19 vaccines against 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 impact 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. Impact of Recently Issued Accounting Standards on Future Filings In June 2016, the Financial Accounting Standards Board (“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 after December 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. Overview Barnwell is engaged in the following lines of business: 1) acquiring, developing, producing and selling oil and natural gas in Canada and Oklahoma (oil and natural gas segment), 2) investing in land interests in Hawaii (land investment segment), and 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling segment). Oil and Natural Gas Segment Barnwell is involved in the acquisition and development of oil and natural gas properties in Canada 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 29 participation in such 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 in Oklahoma. 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 the North Kona District of the island of Hawaii. Kaupulehu Developments is entitled to receive payments from KD I based on 10% of the gross receipts from KD I’s sales at Increment I. Increment I is an area zoned for approximately 80 single-family lots, of which three remained to be sold at March 31, 2022. • 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 to KD Development, LLC and a pool of various individuals, respectively, all of whom are partners of KKM and are unrelated to Barnwell. 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 in KD Kukio Resorts, LLLP, KD Maniniowali, LLLP 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 of Hawaii, 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. 30 Contract Drilling Segment Barnwell drills water and water monitoring wells and installs and repairs water pumping systems in Hawaii. 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. Results of Operations Summary The net earnings attributable to Barnwell for the three months ended March 31, 2022 totaled $2,052,000, a $2,908,000 improvement in operating results from a net loss of $856,000 for the three months ended March 31, 2021. The following factors affected the results of operations for the three months ended March 31, 2022 as compared to the prior year period: • A $1,783,000 improvement in oil and natural gas segment operating results, before income taxes, due primarily to a significant increase in oil and natural gas prices in the current period as compared to the same period in the prior year and new production from wells drilled in Oklahoma; • A $1,136,000 increase in equity in income from affiliates as a result of increased operating results of the Kukio Resort Development Partnerships; and • A $695,000 increase in land investment segment operating results, before non-controlling interests’ share of such profits, due to the sale of three lots in the current period, whereas there were no lot sales in the same period in the prior year. The net earnings attributable to Barnwell for the six months ended March 31, 2022 totaled $3,125,000, a $3,397,000 improvement in operating results from a net loss of $272,000 for the six months ended March 31, 2021. The following factors affected the results of operations for the six months ended March 31, 2022 as compared to the prior year period: • A $3,724,000 improvement in oil and natural gas segment operating results, before income taxes, due in part to a ceiling test impairment of $630,000 in the prior year period, whereas there was no such ceiling test impairment in the current year 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 and new production from wells drilled in Oklahoma; • A $1,289,000 increase in equity in income from affiliates as a result of increased operating results of the Kukio Resort Development Partnerships; • An $810,000 increase in land investment segment operating results, before non-controlling interests’ share of such profits, due to the sale of six lots in the current period, whereas there were two lot sales in the same period in the prior year; • An $897,000 decrease in contract drilling segment operating results, before income taxes, primarily due to a significant well drilling contract in the prior year period that was essentially completed as of December 31, 2020; and 31 • A $958,000 increase in general and administrative expenses primarily due to increases in share-based compensation expense, compensation costs, and professional fees related to legal and consulting services in the current year period as compared to the same period in the prior year, partially offset by a reduction in stockholder costs related to the cooperation and support agreement with the MRMP Stockholders in the prior year period as compared to the current year period. General Barnwell conducts operations in the U.S. and Canada. 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 the U.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 the U.S. dollar remained unchanged in the three months ended March 31, 2022 and increased 2% in the six months ended March 31, 2022, as compared to the same periods in the prior year. The exchange rate of the Canadian dollar to the U.S. dollar increased 2% at March 31, 2022, as compared to September 30, 2021. Accordingly, the assets, liabilities, stockholders’ equity and revenues and expenses of Barnwell’s subsidiaries operating in Canada have been adjusted to reflect the change in the exchange rates. Other comprehensive income and losses are not included in net earnings and net loss. Other comprehensive income due to foreign currency translation adjustments, net of taxes, for the three months ended March 31, 2022 was $12,000, a $97,000 change from other comprehensive loss due to foreign currency translation adjustments, net of taxes, of $85,000 for the same period in the prior year. Other comprehensive loss due to foreign currency translation adjustments, net of taxes, for the six months ended March 31, 2022 was $13,000, a $306,000 change from other comprehensive loss due to foreign currency translation adjustments, net of taxes, of $319,000 for the same period in the prior year. There were no taxes on other comprehensive income (loss) due to foreign currency translation adjustments in the three and six months ended March 31, 2022 and 2021 due to a full valuation allowance on the related deferred tax asset. Oil and Natural Gas The following tables set forth Barnwell’s average prices per unit of production and net production volumes. Production amounts reported are net of royalties. Average Price Per Unit Three months ended Increase March 31, (Decrease) 2022 2021 $ % Natural Gas (Mcf)* $ 3.93 $ 2.57 $ 1.36 53 % Oil (Bbls)** $ 87.64 $ 50.03 $ 37.61 75 % Liquids (Bbls)** $ 61.70 $ 31.60 $ 30.10 95 % 32 Average Price Per Unit Six months ended Increase March 31, (Decrease) 2022 2021 $ % Natural Gas (Mcf)* $ 4.00 $ 2.35 $ 1.65 70 % Oil (Bbls)** $ 78.43 $ 42.66 $ 35.77 84 % Liquids (Bbls)** $ 44.37 $ 26.36 $ 18.01 68 % Net Production Three months ended Increase March 31, (Decrease) 2022 2021 Units % Natural Gas (Mcf)* 215,000 175,000 40,000 23 % Oil (Bbls)** 42,000 38,000 4,000 11 % Liquids (Bbls)** 10,000 5,000 5,000 100 % Net Production Six months ended Increase March 31, (Decrease) 2022 2021 Units % Natural Gas (Mcf)* 420,000 346,000 74,000 21 % Oil (Bbls)** 81,000 77,000 4,000 5 % Liquids (Bbls)** 23,000 11,000 12,000 109 % _______________________________________ * Mcf = 1,000 cubic feet. Natural gas price per unit is net of pipeline charges. ** Bbl = stock tank barrel equivalent to 42 U.S. gallons The oil and natural gas segment generated a $2,430,000 operating profit before general and administrative expenses in the three months ended March 31, 2022, an increase in operating results of $1,783,000 as compared to the $647,000 operating profit before general and administrative expenses generated during the same period of the prior year. The oil and natural gas segment generated a $3,998,000 operating profit before general and administrative expenses in the six months ended March 31, 2022, an increase in operating results of $3,724,000 as compared to the $274,000 operating profit before general and administrative expenses generated during the same period of the prior year. There was no ceiling test impairment during the three months ended March 31, 2022 and 2021. There was no ceiling test impairment during the six months ended March 31, 2022 and a $630,000 ceiling test impairment during the six months ended March 31, 2021. Our Oklahoma operations generated $727,000 (30%) and $1,464,000 (37%) of our oil and natural gas segment operating profits for the three and six months ended March 31, 2022, respectively. Oil and natural gas revenues increased $2,581,000 (101%) and $4,614,000 (104%) for the three and six months ended March 31, 2022, respectively, as compared to the same periods in the prior year, primarily due to significant increases in oil and natural gas prices as compared to the same periods in the prior year. Additionally, production increased due to new wells drilled in the Twining area and Oklahoma, as well as due to additional working interests acquired in the Twining area. The increase in production from these areas was partially offset by declines in non-core area production as some of these non-core 33 areas were sold in the prior year, and Canadian net production also decreased as a result of higher royalty rates due to higher prices in the current year periods. Oil and natural gas operating expenses increased $367,000 (21%) and $848,000 (27%) for the three and six months ended March 31, 2022, respectively, as compared to the same periods in the prior year, due to production from the new wells drilled in the Twining area and Oklahoma, as well as due to additional working interests acquired in the Twining area. The increase was also partially attributable to workovers, repairs, higher utilities and hauling costs, and restart costs for certain acquired wells, as well as due to a minor pipeline leak that required remediation. Oil and natural gas segment depletion increased $431,000 (295%) and $672,000 (197%) for the three and six months ended March 31, 2022, respectively, as compared to the same periods in the prior year. The increases were due to depletion attributable to production in Oklahoma, whereas there was no such depletion in the prior year periods, and increases in the depletion rate for Canadian properties as the result of the drilling of three new wells at the Twining area, the acquisition of additional working interests in the Twining area, and facilities development costs in the Twining area. All seven of the non-operated wells in Oklahoma that the Company participated in drilling in the year ended September 30, 2021 were producing during the six months ended March 31, 2022. The Company’s share of net production from these wells plus one well with a minor overriding royalty interest totaled 11,000 barrels of oil, 14,000 barrels of natural gas liquids, and 123,000 Mcf of natural gas for total revenues of $1,956,000 during the six months ended March 31, 2022. Our Oklahoma production is from shale oil wells that as a rule have steep production declines and accordingly, we estimate that their production will decline significantly. Oil prices continue to be volatile over time and thus the Company is unable to reasonably predict future oil, natural gas and natural gas liquids prices and the impacts future 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: Three months ended March 31, Six months ended March 31, 2022 2021 2022 2021 Sale of interest in leasehold land: Revenues - sale of interest in leasehold land $ 695,000 $ — $ 1,295,000 $ 485,000 Fees - included in general and administrative expenses (85,000) — (158,000) (59,000) Sale of interest in leasehold land, net of fees paid $ 610,000 $ — $ 1,137,000 $ 426,000 34 During the three months ended March 31, 2022, Barnwell received $695,000 in percentage of sales payments from KD I from the sale of three single-family lots within Phase II of Increment I. No lots were sold during the three months ended March 31, 2021. During the six months ended March 31, 2022, Barnwell received $1,295,000 in percentage of sales payments from KD I from the sale of six single-family lots within Phase II of Increment I. During the six months ended March 31, 2021, Barnwell received $485,000 in percentage of sales payments from KD 1 from the sale of two single-family lots within Phase II of Increment I. As of March 31, 2022, three single-family lots of the 80 lots developed within Increment I remained to be sold. 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 contract drilling costs decreased $571,000 (41%) and $547,000 (37%), respectively, for the three months ended March 31, 2022, as compared to the same period in the prior year. The contract drilling segment generated a $141,000 operating loss before general and administrative expenses in the three months ended March 31, 2022, an increase in operating results of $12,000 as compared to the $153,000 operating loss generated during the same period of the prior year. Contract drilling revenues and contract drilling costs decreased $1,637,000 (49%) and $675,000 (26%), respectively, for the six months ended March 31, 2022, as compared to the same period in the prior year. The contract drilling segment generated a $292,000 operating loss before general and administrative expenses in the six months ended March 31, 2022, a decrease in operating results of $897,000 as compared to the $605,000 operating profit generated during the same period of the prior year. The decreases in contract drilling revenues and contract drilling costs for the three and six months ended March 31, 2022 as compared to the same periods in the prior year is due to decreased water well drilling activity and a lower amount of revenue and costs recognized for uninstalled materials installations in the current year periods as compared to the same periods in the prior year. The decrease in operating results discussed above for the six months ended March 31, 2022 as compared to the same period of the prior year is 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 two drilling rigs were being used at this job during the prior year period with crews working extended hours. This contract generated a significant amount of operating profit in the prior year period. However, activity related to this relatively high margin contract was completed in the prior year quarter and thus did not contribute to operating results from that point forward. 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 a verbal arrangement where Barnwell will provide for centralizers and armored cabling and a warranty agreement, however 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 and 35 armored cabling have been accrued, no accrual has been recorded as of March 31, 2022 for the warranty as there is no probable or estimable contingent liability. 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. The continuing potential impact of COVID-19 on the health of our contract drilling segment's crew is uncertain, and any work stoppage or discontinuation of contracts currently in backlog due to COVID-19 impacts could result in a material adverse impact to the Company’s financial condition and outlook. General and Administrative Expenses General and administrative expenses increased $313,000 (16%) for the three months ended March 31, 2022 as compared to the same period in the prior year. The increase was primarily due to an increase of $520,000 in professional fees related to legal and consulting services in the current year period as compared to the same period in the prior year, partially offset by a reduction of $298,000 in stockholder costs related to the cooperation and support agreement with the MRMP Stockholders in the prior year period as compared to the current year period. General and administrative expenses increased $958,000 (31%) for the six months ended March 31, 2022 as compared to the same period in the prior year. The increase was primarily due to due to increases of $276,000 in share-based compensation expense, $166,000 in compensation costs, and $659,000 in professional fees related to legal and consulting services in the current year period as compared to the same period in the prior year, partially offset by a reduction of $298,000 in stockholder costs related to the cooperation and support agreement with the MRMP Stockholders in the prior year period as compared to the current year period. Depletion, Depreciation, and Amortization Depletion, depreciation, and amortization increased $391,000 (172%) and $598,000 (119%) for the three and six months ended March 31, 2022, respectively, as compared to the same periods in the prior year. The increases were due to depletion attributable to production in Oklahoma, whereas there was no such depletion in the prior year periods, and increases in the depletion rate for Canadian properties as the result of the drilling of three new wells at the Twining area, the acquisition of additional working interests in the Twining area, and facilities development costs in the Twining area. Impairment of Assets Under the full cost method of accounting, the Company performs quarterly oil and natural gas ceiling test calculations. There was no ceiling test impairment during the three months ended March 31, 2022 and 2021. There was no ceiling test impairment during the six months ended March 31, 2022 and a $630,000 ceiling test impairment during the six months ended March 31, 2021. 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. 36 Equity in Income of Affiliates Barnwell recognized equity in income of affiliates of $1,760,000 and $2,967,000 during the three and six months ended March 31, 2022, respectively, as compared to equity in income of affiliates of $624,000 and $1,678,000 during the three and six months ended March 31, 2021, respectively. The increase in partnership income is primarily due to the Kukio Resort Land Development Partnerships' sale of six lots during the current year, of which three lots were sold in the quarter ended March 31, 2022, as compared to two lot sales in the prior year period, and more club memberships sold, partially offset by $459,000 in preferred return payments received from KKM in the prior year period as compared to none in the current year period. During the six months ended March 31, 2022, Barnwell received cash distributions of $2,967,000 from the Kukio Resort Land Development Partnership resulting in a net amount of $2,643,000, after distributing $324,000 to non-controlling interests. During the six months ended March 31, 2021, Barnwell received net cash distributions in the amount of $2,205,000 after distributing $215,000 to non-controlling interests. Of the $2,205,000 net cash distributions received, $459,000 represented a payment of the preferred return from KKM, as discussed in Note 4 of the Notes to Condensed Consolidated Financial Statements. 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 six months ended March 31, 2022 was equivalent to the $2,967,000 of distributions received in that period. Income Taxes Barnwell’s effective consolidated income tax rate, after adjusting earnings (loss) before income taxes for non-controlling interests, was 6% and 7% for the three and six months ended March 31, 2022, respectively, as compared to (4)% and (55)% for the three and six months ended March 31, 2021. 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 Barnwell receives no benefit from consolidated or unitary losses and, therefore, is subject to Oklahoma state taxes. In addition, net operating loss carryforwards, the benefit of which had not 37 previously been recognized due to the Company's continuing full valuation allowance, are estimated to be partially utilized in the current year periods as the recognized benefit is now more likely than not. 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 $346,000 and $613,000 for the three and six months ended March 31, 2022, respectively, as compared to net earnings attributable to non-controlling interests of $62,000 and $221,000 for the same periods in the prior year. The changes of $284,000 (458%) and $392,000 ( 177%) for the three and six months, respectively, are primarily due to increases in the amount of equity in income of affiliates and percentage of sales revenues in the current year periods as compared to the same periods in the prior year. 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. At March 31, 2022, Barnwell had $11,026,000 in working capital. Cash Flows Cash flows provided by operations totaled $1,699,000 for the six months ended March 31, 2022, as compared to cash flows used in operations of $338,000 for the same period in the prior year. This $2,037,000 change in operating cash flows was primarily due to 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. Additionally, the change was also due to an increase in distributions of income from the Kukio Resort Land Development Partnerships in the current year period as compared to the prior year period and fluctuations in working capital. Cash flows used in investing activities totaled $5,141,000 during the six months ended March 31, 2022, as compared to cash flows provided by investing activities of $413,000 during the same period of the prior year. This $5,554,000 change in investing cash flows was primarily due to an increase of $1,563,000 in payments to acquire oil and natural gas properties and an increase of $4,671,000 in cash paid for oil and natural gas capital expenditures, partially offset by a $687,000 increase in proceeds from the sale of contract drilling assets in the current year period as compared to none in the prior year period. Cash flows provided by financing activities totaled $1,799,000 for the six months ended March 31, 2022, as compared to cash flows used in financing activities of $285,000 for the six months ended March 31, 2021. The $2,084,000 change in financing cash flows was primarily attributed to $2,356,000 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 $248,000 in distributions to non-controlling interests in the current year period as compared to the same period in the prior year. 38 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 ($47,000) 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 66.6% 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. 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 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 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. During the six months ended March 31, 2022, the Company sold 509,467 shares of common stock resulting in net proceeds of $2,356,000 after commissions and fees of $75,000 and ATM-related professional services of $22,000. Oil and Natural Gas Capital Expenditures Barnwell’s oil and natural gas capital expenditures, including accrued capital expenditures and excluding acquisitions and additions and revisions to estimated asset retirement obligations, totaled $2,796,000 and $5,666,000 for the three and six months ended March 31, 2022, respectively, as compared to $32,000 and $171,000 for the same periods in the prior year. The Company participated in the drilling of one operated and two non-operated for a total of three gross (1.6 net) wells in the Twining area of Alberta, Canada. The wells were completed and began producing in the three months ending March 31, 2022. Capital expenditures incurred for the drilling of these wells in the six months ended March 31, 2022 totaled approximately $4,258,000. Barnwell estimates that investments in oil and natural gas properties for fiscal 2022 will range from $8,300,000 to $13,300,000. This estimated amount may increase or decrease as dictated by cash flows and management's assessment of the oil and natural gas environment and prospects. 39 Oil and Natural Gas Property Acquisitions 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. In January 2022, Barnwell acquired additional working interests in oil and natural gas properties located in the Twining area of Alberta, Canada for consideration of $1,246,000. 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. Barnwell also assumed $1,500,000 in asset retirement obligations associated with the acquisition. There were no oil and natural gas working interest acquisitions during the six months ended March 31, 2021.