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 2021 Annual Report, “Risk Factors” section of Barnwell’s Quarterly Report on Form 10-Q for the periods ended December 31, 2021 and March 31, 2022, 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 2021 Annual Report on Form 10-K. There have been no significant changes to these critical accounting policies and estimates during the three and nine months ended June 30, 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 variants, spreading throughout the U.S. and 29 globally 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 primarily in the Twining area of Alberta, 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 30 third parties with regard to 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 two remained to be sold at June 30, 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. 31 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 June 30, 2022 totaled $2,531,000, a $2,447,000 decrease in operating results from net earnings of $4,978,000 for the three months ended June 30, 2021. The following factors affected the results of operations for the three months ended June 30, 2022 as compared to the prior year period: • A $3,108,000 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 the Twining area and Oklahoma; • A $514,000 decrease in general and administrative expenses primarily due to decreases in professional fees, share-based compensation expense, and bad debt expense in the current year period as compared to the same period in the prior year; • Equity in income from affiliates decreased $2,915,000 and land investment segment operating results, before non-controlling interests’ share of such profits, decreased $1,253,000 due to the Kukio Resort Development Partnerships' sale of fewer lots in the current period. No lots were sold during the current year period, whereas there were six lots sold in the prior year period; and • In the prior year period, the Company recognized a $2,341,000 gain from the termination of the Company's Post-retirement Medical plan, whereas there was no such gain in the current year period. The net earnings attributable to Barnwell for the nine months ended June 30, 2022 totaled $5,656,000, a $950,000 improvement in operating results from net earnings of $4,706,000 for the nine months ended June 30, 2021. The following factors affected the results of operations for the nine months ended June 30, 2022 as compared to the prior year period: • A $6,832,000 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, Also contributing to the increase was 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; • Equity in income from affiliates decreased $1,626,000 and land investment segment operating results, before non-controlling interests’ share of such profits, decreased $443,000 due to the Kukio Resort Development Partnerships' sale of six lots in the current year period, whereas there were eight lot sales in the prior year period; 32 • Contract drilling segment operating results, before income taxes, decreased $861,000 primarily due to a significant well drilling contract in the prior year period that was essentially completed as of December 31, 2020; • General and administrative expenses increased $444,000 primarily due to increases in professional fees and share-based compensation expense in the current year period as compared to the same period in the prior year, partially offset by a decrease in stockholder costs in the prior year period as compared to the current year period; and • In the prior year period, the Company recognized a $2,341,000 gain from the termination of the Company's Post-retirement Medical plan, whereas there was no such gain in the current 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 decreased 4% in the three months ended June 30, 2022 and remained unchanged in the nine months ended June 30, 2022, as compared to the same periods in the prior year. The exchange rate of the Canadian dollar to the U.S. dollar decreased 1% at June 30, 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 loss due to foreign currency translation adjustments, net of taxes, for the three months ended June 30, 2022 was $108,000, a $34,000 change from other comprehensive loss due to foreign currency translation adjustments, net of taxes, of $74,000 for the same period in the prior year. Other comprehensive loss due to foreign currency translation adjustments, net of taxes, for the nine months ended June 30, 2022 was $121,000, a $272,000 change from other comprehensive loss due to foreign currency translation adjustments, net of taxes, of $393,000 for the same period in the prior year. There were no taxes on other comprehensive loss due to foreign currency translation adjustments in the three and nine months ended June 30, 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 June 30, (Decrease) 2022 2021 $ % Natural Gas (Mcf)* $ 6.40 $ 2.70 $ 3.70 137 % Oil (Bbls)** $ 104.83 $ 61.31 $ 43.52 71 % Natural Gas Liquids (Bbls)** $ 53.08 $ 36.17 $ 16.91 47 % 33 Average Price Per Unit Nine months ended Increase June 30, (Decrease) 2022 2021 $ % Natural Gas (Mcf)* $ 4.91 $ 2.47 $ 2.44 99 % Oil (Bbls)** $ 88.12 $ 48.49 $ 39.63 82 % Natural Gas Liquids (Bbls)** $ 47.50 $ 29.82 $ 17.68 59 % Net Production Three months ended Increase June 30, (Decrease) 2022 2021 Units % Natural Gas (Mcf)* 254,000 185,000 69,000 37 % Oil (Bbls)** 47,000 35,000 12,000 34 % Natural Gas Liquids (Bbls)** 13,000 6,000 7,000 117 % Net Production Nine months ended Increase June 30, (Decrease) 2022 2021 Units % Natural Gas (Mcf)* 674,000 531,000 143,000 27 % Oil (Bbls)** 128,000 112,000 16,000 14 % Natural Gas Liquids (Bbls)** 36,000 17,000 19,000 112 % _______________________________________ * 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 $4,123,000 operating profit before general and administrative expenses in the three months ended June 30, 2022, an increase in operating results of $3,108,000 as compared to the $1,015,000 operating profit before general and administrative expenses generated during the same period of the prior year. The oil and natural gas segment generated a $8,121,000 operating profit before general and administrative expenses in the nine months ended June 30, 2022, an increase in operating results of $6,832,000 as compared to the $1,289,000 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 June 30, 2022 and 2021. There was no ceiling test impairment during the nine months ended June 30, 2022 and a $630,000 ceiling test impairment during the nine months ended June 30, 2021. Our Oklahoma operations generated $642,000 (16%) and $2,106,000 (26%) of our oil and natural gas segment operating profits for the three and nine months ended June 30, 2022, respectively. Oil and natural gas revenues increased $4,405,000 (153%) and $9,019,000 (123%) for the three and nine months ended June 30, 2022, respectively, as compared to the same periods in the prior year, primarily due to significant increases in the prices of all products 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 34 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 $680,000 (40%) and $1,528,000 (31%) for the three and nine months ended June 30, 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 $617,000 (398%) and $1,289,000 (260%) for the three and nine months ended June 30, 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 new wells, acquisition of additional working interests, and facilities expansion and upgrade costs, all in the Twining area. Six of the seven non-operated wells in Oklahoma that the Company participated in drilling in the year ended September 30, 2021 were producing during the nine months ended June 30, 2022, with one (0.04 net) well currently shut in. The Company’s share of net production from these wells plus another well with a minor overriding royalty interest totaled 14,000 barrels of oil, 20,000 barrels of natural gas liquids, and 162,000 Mcf of natural gas for total revenues of $2,796,000 during the nine months ended June 30, 2022. Our Oklahoma production is from shale oil wells that typically 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 June 30, Nine months ended June 30, 2022 2021 2022 2021 Sale of interest in leasehold land: Revenues - sale of interest in leasehold land $ — $ 1,253,000 $ 1,295,000 $ 1,738,000 Fees - included in general and administrative expenses — (153,000) (158,000) (212,000) Sale of interest in leasehold land, net of fees paid $ — $ 1,100,000 $ 1,137,000 $ 1,526,000 35 No lots were sold during the three months ended June 30, 2022. During the three months ended June 30, 2021, Barnwell received $1,253,000 in percentage of sales payments from KD I from the sale of six single-family lots within Increment I. During the nine months ended June 30, 2022, Barnwell received $1,295,000 in percentage of sales payments from KD I from the sale of six single-family lots within Increment I. During the nine months ended June 30, 2021, Barnwell received $1,738,000 in percentage of sales payments from KD 1 from the sale of eight single-family lots within Increment I. As of June 30, 2022, two 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 $153,000 (17%) and $154,000 (15%), respectively, for the three months ended June 30, 2022, as compared to the same period in the prior year. The contract drilling segment generated a $177,000 operating loss before general and administrative expenses in the three months ended June 30, 2022, an increase in operating results of $36,000 as compared to the $213,000 operating loss generated during the same period of the prior year. Contract drilling revenues and contract drilling costs decreased $1,790,000 (42%) and $829,000 (23%), respectively, for the nine months ended June 30, 2022, as compared to the same period in the prior year. The contract drilling segment generated a $469,000 operating loss before general and administrative expenses in the nine months ended June 30, 2022, a decrease in operating results of $861,000 as compared to the $392,000 operating profit generated during the same period of the prior year. The decrease in contract drilling revenues and contract drilling costs for the three months ended June 30, 2022 is due to slightly less water well drilling activity in the current year period as compared to the same period in the prior year. The decrease in contract drilling revenues and contract drilling costs for the nine months ended June 30, 2022 as compared to the same period 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 period as compared to the same period in the prior year. The decrease in operating results discussed above for the nine months ended June 30, 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 essentially completed as of December 31, 2020 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 an 36 arrangement where Barnwell will provide for centralizers, armored cabling and a pump installation and removal test to confirm that plumbness is satisfactory. Barnwell’s management believes the plumbness deviation is not impactful to the performance of the submersible pumps that will be installed in the well. Accordingly, while costs for the centralizers, armored cabling and the pump installation and removal test have been accrued, no accrual has been recorded as of June 30, 2022 for any further costs as there is no related 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 decreased $514,000 (23%) for the three months ended June 30, 2022 as compared to the same period in the prior year. The decrease was primarily due to decreases of $153,000 in professional fees related to land investment segment proceeds, $124,000 in share-based compensation expense, $97,000 in bad debt expense related to receivables from oil and gas partners, $39,000 in rent expense for our Canadian office, and $28,000 in post-retirement medical plan costs. General and administrative expenses increased $444,000 (8%) for the nine months ended June 30, 2022 as compared to the same period in the prior year. The increase was primarily due to increases of $656,000 in professional fees primarily related to legal and consulting services and $152,000 in share-based compensation expense in the current year period as compared to the same period in the prior year, partially offset by a reduction of $111,000 in post-retirement medical plan costs and $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 $579,000 (246%) and $1,177,000 (159%) for the three and nine months ended June 30, 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 new wells, acquisition of additional working interests, and facilities expansion and upgrade costs, all 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 June 30, 2022 and 2021. There was no ceiling test impairment during the nine months ended June 30, 2022 and a $630,000 ceiling test impairment during the nine months ended June 30, 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, 37 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. Gain on Termination of Post-retirement Medical Plan In June 2021, the Company terminated its Post-retirement Medical plan, which covered officers of the Company who 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, effective June 4, 2021. The Post-retirement Medical plan was an unfunded plan and the Company funded benefits when payments were made. As result of the plan termination, the Company recognized a non-cash gain of $2,341,000 during the three and nine months ended June 30, 2021. Equity in Income of Affiliates Barnwell recognized equity in income of affiliates of $433,000 and $3,400,000 during the three and nine months ended June 30, 2022, respectively, as compared to equity in income of affiliates of $3,348,000 and $5,026,000 during the three and nine months ended June 30, 2021, respectively. The decrease in partnership income is primarily due to the Kukio Resort Land Development Partnerships' sale of eight lots during the prior year period, of which six lots were sold in the quarter ended June 30, 2021, as compared to six lot sales in the current year period, of which no lots were sold in the quarter ended June 30, 2022, 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 nine months ended June 30, 2022, Barnwell received cash distributions of $3,400,000 from the Kukio Resort Land Development Partnership resulting in a net amount of $3,028,000, after distributing $372,000 to non-controlling interests. During the nine months ended June 30, 2021, Barnwell received net cash distributions in the amount of $5,328,000 after distributing $599,000 to non-controlling interests. Of the $5,328,000 net cash distributions received during the nine months ended June 30, 2021, $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 nine months ended June 30, 2022 was equivalent to the $3,400,000 of distributions received in that period. 38 Income Taxes Barnwell’s effective consolidated income tax rate, after adjusting earnings before income taxes for non-controlling interests, was 3% and 5% for the three and nine months ended June 30, 2022, respectively, as compared to 4% and 6% for the three and nine months ended June 30, 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, all of which had a full valuation allowance at the end of the previous fiscal year, are being partially utilized in the current year periods to offset taxable income in the U.S. federal and Canadian jurisdictions. The net operating loss carryforwards beyond the current year’s utilization continue to have a full valuation allowance as realization of their benefit is not more likely than not. Included in the current income tax provision for the three and nine months ended June 30, 2022 is a $61,000 expense for income tax penalties and interest thereon for the non-filing of IRS Form 8858 in each of our U.S. federal income tax returns for fiscal years 2019, 2020 and 2021. The Company is in the process of amending its U.S. federal tax returns to include Form 8858 and plans to request abatement of the potential penalties and interest. There was no such expense included in the current income tax provision for the three and nine months ended June 30, 2021. 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 $58,000 and $671,000 for the three and nine months ended June 30, 2022, respectively, as compared to net earnings attributable to non-controlling interests of $576,000 and $797,000 for the same periods in the prior year. The changes of $518,000 (90%) and $126,000 ( 16%) for the three and nine months, respectively, are primarily due to decreases 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 and land investment segment proceeds. At June 30, 2022, Barnwell had $12,339,000 in working capital. 39 Cash Flows Cash flows provided by operations totaled $5,669,000 for the nine months ended June 30, 2022, as compared to cash flows provided by operations of $2,105,000 for the same period in the prior year. This $3,564,000 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 lower operating results for the contract drilling segment in the current year period as compared to the prior year period, and fluctuations in working capital. Cash flows used in investing activities totaled $6,063,000 during the nine months ended June 30, 2022, as compared to cash flows provided by investing activities of $1,955,000 during the same period of the prior year. This $8,018,000 change in investing cash flows was primarily due to an increase of $1,215,000 in payments to acquire oil and natural gas properties, an increase of $5,637,000 in cash paid for oil and natural gas capital expenditures, and a decrease of $1,419,000 received in distributions from equity investees in excess of earnings in the current year period as compared to the prior year period, 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 $1,727,000 for the nine months ended June 30, 2022, as compared to cash flows provided by financing activities of $832,000 for the nine months ended June 30, 2021. The $895,000 change in financing cash flows was primarily attributed to an increase of $620,000 in proceeds from issuance of stock, net of costs, related to the Company's ATM offering and a decrease of $322,000 in distributions to non-controlling interests in the current year period as compared to the same period in the prior year. Cash Dividend In August 2022, the Company's Board of Directors declared a cash dividend of $0.015 per share payable on September 6, 2022 to stockholders of record on August 23, 2022. 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. Paycheck Protection Program Loan In April 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. The note was to mature two years after the date 40 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. In April 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 the Small Business Administration. As a result of the loan forgiveness, the Company recognized a gain on debt extinguishment of $149,000 during the three and nine months ended June 30, 2021. 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 nine months ended June 30, 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. During the nine months ended June 30, 2021, the Company sold 586,546 shares of common stock resulting in net proceeds of $1,736,000 after commissions and fees of $59,000 and ATM-related professional services of $124,000. In August 2022, the Company’s Board of Directors suspended the sales of our common stock under the ATM until further notice. 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 $1,687,000 and $7,353,000 for the three and nine months ended June 30, 2022, respectively, as compared to $726,000 and $897,000 for the same periods in the prior year. The Company participated in the drilling of three gross (1.6 net) wells, of which one is operated and two are non-operated, in the Twining area of Alberta, Canada, that were completed and began producing in the quarter ended March 31, 2022. In the three months ended June 30, 2022, the Company participated in the drilling of one gross (0.29 net) non-operated well in the Twining area with completion and production expected to occur in the quarter ending September 30, 2022. Capital expenditures incurred for the drilling of these four wells in the nine months ended June 30, 2022 totaled approximately $4,858,000. The Company has also committed to participating in the additional drilling of three gross (0.87 net) non-operated wells in the Twining area with drilling, completion and production expected to occur in the quarter ended September 30, 2022. 41 Barnwell estimates that investments in oil and natural gas properties for fiscal 2022 will range from $11,000,000 to $12,000,000. 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. Oil and Natural Gas Property Acquisitions 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. In April 2021, Barnwell acquired additional working interests in oil and natural gas properties located in the Twining area of Alberta, 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. Dispositions There were no significant oil and natural gas property dispositions during the nine months ended June 30, 2022. In April 2021, Barnwell entered into a purchase and sale agreement with an independent third party and sold its interests in properties located in the Hillsdown area of Alberta, 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 of October 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 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.