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Item 7. Management’s Discussion and Analysis

2022-12-29 compared with 2021-12-21 · 165 added, 229 removed, 267 unchanged (60% of the section changed)

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The following discussion is intended to assist in the understanding of the Consolidated Balance Sheets of Barnwell Industries, Inc.

and subsidiaries (collectively referred to herein as “Barnwell,” “we,” “our,” “us” or the “Company”) as of September 30, 2021 and 2020, and the related Consolidated Statements of Operations, Comprehensive Income (Loss), Equity (Deficit), and Cash Flows for the years ended September 30, 2021 and 2020.

and subsidiaries (collectively referred to herein as “Barnwell,” “we,” “our,” “us” or the “Company”) as of September 30, 2022 and 2021, and the related Consolidated Statements of Operations, Comprehensive Income, Equity, and Cash Flows for the years ended September 30, 2022 and 2021.

This discussion should be read in conjunction with the consolidated financial statements and related Notes to Consolidated Financial Statements included in this report.

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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.

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic and the U.S.

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 the U.S.

and globally and causing significant uncertainty.

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 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 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.

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 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.

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.

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 the Manyberries 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 Honolulu, Hawaii for sale and on September 30, 2021, the Company’s Honolulu corporate office was sold for approximately $1,864,000, net of related costs.

On March 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 in May 2021 and as of September 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.

In April 2021, the Company re-initiated the marketing of its non-core oil and natural gas properties in the Spirit River, Wood River, Medicine River, Kaybob, Bonanza, Balsam and Thornbury areas for sale.

On July 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 the Spirit River area of Alberta, 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 of July 8, 2021.

From Barnwell's net proceeds, $526,000 was withheld for remittance by the buyers to the Canada 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 through September 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 the Spirit River area, as well as the $7,156,000 of net cash inflows in the year ended September 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.

Critical Accounting Policies and Estimates

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If reported reserve volumes were revised downward by 5% at the end of fiscal 2022, the ceiling limitation would have decreased approximately $1,664,000 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 2022 of approximately $20,064,000.

The significant amount of room between the ceiling and the carrying value of oil and natural gas properties at the end of fiscal 2022 was due primarily to the fact that the carrying value was significantly reduced in prior years by impairment write-downs due to the extremely low average historical prices that were used in the ceiling test for those prior periods, whereas the prices used in the ceiling test at the end of fiscal 2022 reflects the significantly higher average historical prices used in that ceiling test.

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.

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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.

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.

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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.

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

given available facts and circumstances.

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 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.

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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.

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.

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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 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 in Oklahoma.

Barnwell sells all of its oil and natural gas under short-term contracts with marketers based on prices indexed to market prices.

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 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 non-operated oil and natural gas investments in Oklahoma.

Barnwell sells all of its Canadian 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.

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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 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

of $300,000,000.

Inventory of unsold lots at Increment I were nine single-family lots at September 30, 2021.

• 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 September 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.

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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 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.

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 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, KD Maniniowali and KD I and an indirect 10.8% non-controlling ownership interest in KD II through KDK.

• 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.

The partnerships derive income from the sale of residential parcels, of which two remained to be sold at September 30, 2022, as well as from commissions on real estate sales by the real estate sales office and revenues resulting from the sale of private club memberships.

• 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.

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Barnwell realized an average price for oil of $86.73 per barrel during the year ended September 30, 2022, an increase of 68% from $51.74 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.

Oil prices continue to be volatile over time and thus, 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 $4.63 per Mcf during the year ended September 30, 2022, an increase of 77% from $2.62 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.

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 two 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 of Hawaii.

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.

Management currently estimates that well drilling activity for fiscal 2023 is expected to be higher than fiscal 2022 based upon the number and value of contracts in backlog and anticipated job starts and durations.

Results of Operations

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.

Net earnings attributable to Barnwell for fiscal 2022 totaled $5,513,000, a $740,000 decrease in operating results from net earnings of $6,253,000 in fiscal 2021.

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

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 $5,441,000 increase in equity in income from affiliates as a result of increased operating results of the Kukio Resort Land Development Partnerships;

• 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 $2,341,000 gain recognized in the current year period from the termination of the Company’s Post-retirement Medical plan and $1,982,000 in gains from the sales of assets in the current year period;

• 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 of December 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;

• 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 in Honolulu, Hawaii, whereas there was no such gain in the current period.

• In the prior year period, the Company recognized $4,472,000 in gains that did not occur in fiscal 2022, which included a $2,341,000 gain from the termination of the Company's Post-retirement Medical plan, $1,982,000 in gains from the sales of assets, and a $149,000 gain on debt extinguishment;

• An $8,113,000 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 $2,393,000 and land investment segment operating results, before non-controlling interests’ share of such profits, decreased $532,000 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;

• General and administrative expenses increased $956,000 primarily due to increases in professional fees 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;

• A $484,000 foreign currency loss recorded in the current year period due to the effects of foreign exchange rate changes on intercompany loans and advances as a result of the strengthening of the U.S.

dollar against the Canadian dollar.

Barnwell conducts operations in the U.S.

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To date, we have not entered into foreign currency hedging transactions.

Foreign currency gains or losses on intercompany loans and advances that are not considered long-term investments in nature because management intends to settle these intercompany balances in the future are included in our statements of operations.

The average exchange rate of the Canadian dollar to the U.S.

dollar increased 6% in fiscal 2021, as compared to fiscal 2020, and the exchange rate of the Canadian dollar to the U.S.

dollar increased 5% at September 30, 2021, as compared to September 30, 2020.

dollar decreased 1% in fiscal 2022, as compared to fiscal 2021, and the exchange rate of the Canadian dollar to the U.S.

dollar decreased 7% at September 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.

Barnwell’s Canadian dollar liabilities are greater than its Canadian dollar assets;

therefore, increases or decreases in the value of the Canadian dollar to the U.S.

dollar generate other comprehensive loss or income, respectively.

Other comprehensive income and losses are not included in net earnings (loss).

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 fiscal 2022 was $40,000, a $243,000 change from other comprehensive loss due to foreign currency translation adjustments, net of taxes, of $283,000 in fiscal 2021.

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Oil (Bbls) $ 86.73 $ 51.74 $ 34.99 68%

Liquids (Bbls) $ 31.92 $ 17.16 $ 14.76 86%

Natural gas liquids (Bbls) $ 48.06 $ 31.92 $ 16.14 51%

Annual Net Production

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Oil (Bbls) 182,000 147,000 35,000 24%

Liquids (Bbls) 24,000 21,000 3,000 14%

Natural gas liquids (Bbls) 48,000 24,000 24,000 100%

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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 ended September 30, 2021 decreased 4% due largely to a natural decline in oil production from the Spirit River area as compared to the prior year period.

In addition, the Company sold its oil and natural gas properties in the Spirit River area in July 2021.

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 the Hillsdown area in April 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.

The oil and natural gas segment generated a $10,536,000 operating profit in fiscal 2022 before general and administrative expenses, an increase in operating results of $8,113,000 as compared to $2,423,000 of operating profit in fiscal 2021.

There was no ceiling test impairment during the year ended September 30, 2022 and a $630,000 ceiling test impairment during the year ended September 30, 2021.

Our Oklahoma operations generated $2,667,000 (25%) of our oil and natural gas segment operating profits for the year ended September 30, 2022 as compared to $80,000 (3%) of our oil and natural gas segment operating profits for the year ended September 30, 2021.

Oil and natural gas revenues increased $12,327,000 (120%) from $10,254,000 in fiscal 2021 to $22,581,000 in fiscal 2022, primarily due to significant increases in oil, natural gas and natural gas liquids prices as compared to the same period 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 net production from Canadian areas was partially offset by an increase in royalty rates attributed to the increase in commodity prices.

Oil and natural gas operating expenses increased $2,883,000 (44%) from $6,556,000 in fiscal 2021 to $9,439,000 in fiscal 2022, primarily 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 to the remediation of a minor pipeline leak.

Oil and natural gas segment depletion increased $1,961,000 (304%) from $645,000 in fiscal 2021 to $2,606,000 in fiscal 2022, primarily due to increases in the depletion rate for Canadian properties and also new production from those properties, both of which were the result of the drilling of new wells, acquisition of additional working interests, and facilities expansion and upgrade costs, all in the Twining area.

The increase also was due to increased depletion from production in Oklahoma, whereas there was only a minor amount of such depletion in the prior year period.

All seven non-operated wells in Oklahoma were producing during the year ended September 30, 2022.

The Company’s share of net production from these wells plus another well with a minor overriding royalty interest totaled 42,000 barrels of oil and natural gas liquids and 192,000 Mcf of natural gas for total revenues of $3,496,000 during the year ended September 30, 2022.

Our Oklahoma production is from shale oil wells that typically have steep production declines and accordingly, we estimate that their production will continue to 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

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Sale of interest in leasehold land, net of fees paid $ 1,137,000 $ 1,526,000

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.

During the year ended September 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 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 Increment I.

In November 2022, Kaupulehu Developments received a percentage of sales payment of $265,000 from the sale of one lot within Increment I.

Financial results from the receipt of this payment will be reflected in Barnwell's first quarter of fiscal 2023 ending December 31, 2022.

Accordingly, with the inclusion of the lot sale subsequent to September 30, 2022, one single-family lot 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.

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Contract drilling revenues decreased $1,269,000 (22%) to $4,540,000 in fiscal 2022, as compared to $5,809,000 in fiscal 2021, and contract drilling costs decreased $964,000 (17%) to $4,591,000 in fiscal 2022, as compared to $5,555,000 in fiscal 2021.

The contract drilling segment generated an $89,000 operating loss before general and administrative expenses during fiscal 2021, a decrease in operating

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 ended December 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.

At September 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 of September 30, 2021.

The contract drilling segment generated a $222,000 operating loss before general and administrative expenses during fiscal 2022, a decrease in operating results of $133,000 as compared to an operating loss before general and administrative expenses of $89,000 in fiscal 2021.

The decrease in contract drilling revenues, costs, and operating results for the year ended September 30, 2022 is due to decreased water well drilling activity in the current year period as compared to the same period in the prior year, primarily due to a significant well drilling contract in a portion of the prior year period, which was essentially completed as of December 31, 2020 and thus, did not contribute to operating results from that point forward.

At September 30, 2022, there was a backlog of seven well drilling and 14 pump installation and repair contracts, of which four well drilling and 10 pump installation and repair contracts were in progress as of September 30, 2022.

The backlog of contract drilling revenues as of December 1, 2022 was approximately $11,200,000, of which $8,600,000 is expected to be realized in fiscal 2023 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 ended December 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 in Hawaii.

Efforts to remove the items from the well were unsuccessful through the quarter ended March 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 ended March 31, 2020, as this contract was determined to be a loss job.

In September 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 at September 30, 2020.

In January 2021, the broken drill string was retrieved from the well borehole and drilling of the replacement well recommenced.

In the year ended September 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 ended March 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 of September 30, 2021 as there is no probable or estimable contingent liability.

In July 2020, the Staff of the State 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 at September 30, 2020 and no subsequent revision to the accrual has been recorded as of September 30, 2021.

Based on these contracts in backlog, contract drilling segment operating results are estimated to be higher in fiscal 2023 as compared to fiscal 2022.

In the quarter ended December 31, 2021, it was determined that a contract drilling segment well completed in the period did not meet the contract specifications for plumbness under a gyroscopic plumbness test which the contract required.

While the well did pass the cage plumbness test, the contract uses the gyroscopic test as the measure of plumbness.

Barnwell and the customer currently have an arrangement where Barnwell will provide for centralizers, armored cabling and a pump installation and removal test to confirm that plumbness is satisfactory.

Barnwell’s management believes the plumbness deviation is not impactful to the performance of the submersible pumps that will be installed in the well.

Accordingly, while costs for the centralizers, armored cabling and the pump installation and removal test have been accrued, no accrual has been recorded as of September 30, 2022 for any further costs related to this contract 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.

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.

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 $956,000 (13%) to $8,044,000 in fiscal 2022, as compared to $7,088,000 in fiscal 2021.

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.

In January 2021, the Company entered into a cooperation and support agreement with MRMP-Managers LLC, Ned L.

Sherwood Revocable Trust, Ned L.

Sherwood and Bradley 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 on April 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 ended September 30, 2021.

The increase was primarily due to increases of $1,245,000 in professional fees primarily related to legal and consulting services and $65,000 in director fees in the current year period as compared to the same period in the prior year, partially offset by a reduction of $191,000 in pension and post-retirement medical plan costs and $296,000 in stockholder costs related to

the cooperation and support agreement executed with the MRMP Stockholders in the prior year period as compared to the current year period.

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.

Depletion, depreciation, and amortization increased $1,815,000 (188%) from $963,000 in fiscal 2021 to $2,778,000 in fiscal 2022, primarily due to increases in the depletion rate for Canadian properties and also new production from those properties, both of which were the result of the drilling of new wells, acquisition of additional working interests, and facilities expansion and upgrade costs, all in the Twining area.

The increase was also due to increased depletion from production in Oklahoma, whereas there was only a minor amount of such depletion in the prior year period.

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 ended September 30, 2021.

There was a $4,326,000 ceiling test impairment during the year ended September 30, 2020.

There was no ceiling test impairment during the year ended September 30, 2022 and a $630,000 ceiling test impairment during the year ended September 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, 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.

In September 2022, the Company determined that the right-of-use asset related to the operating lease for the Lot 4C leasehold land zoned conservation held by Kaupulehu Developments was fully impaired as of September 30, 2022.

As a result, the Company recognized an $89,000 right-of-use asset impairment expense during the year ended September 30, 2022.

The operating lease terminates in December 2025.

In September 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 at September 30, 2021.

During the year ended September 30, 2020, the Company recorded a $50,000 impairment in the carrying value of its investment in leasehold land interest in Lot 4C as a result of recent uncertainty regarding the timing of future development and potential use of water rights within Lot 4C prior to the expiration of the lease term.

The lease terminates in December 2025.

The impairment expense was included in the “Impairment of assets” line item in the accompanying Consolidated Statements of Operations for the year ended September 30, 2021.

Foreign currency loss

Foreign currency loss was $484,000 during the year ended September 30, 2022, as compared to none during the year ended September 30, 2021 due to the effects of foreign exchange rate changes on intercompany loans and advances as a result of the strengthening of the U.S.

dollar against the Canadian dollar.

The foreign currency loss from intercompany balances was included in our consolidated net earnings as the intercompany balances were not considered long-term in nature because management estimates that these intercompany balances will be settled in the future.

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.

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.

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 a result of the plan termination, the Company recognized a non-cash gain of $2,341,000 during the year ended September 30, 2021.

As result of the plan termination, the Company recognized a non-cash gain of $2,341,000 during the year ended September 30, 2021.

Gain on sale of assets

On July 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 the Spirit River area of Alberta, Canada.

In July 2021, Barnwell completed a purchase and sale agreement with an independent third party and sold its interests in certain natural gas and oil properties located in the Spirit River area of Alberta, Canada.

From Barnwell's net proceeds, $526,000 was withheld for remittance by the buyers

to the Canada Revenue Agency for potential amounts due for Barnwell’s Canadian income taxes related to the sale.

Income taxes were withheld by the buyers from Barnwell's net proceeds for potential amounts due to the Canada Revenue Agency related to the sale, and the amount was subsequently refunded to Barnwell in fiscal 2022.

The difference in the relationship between capitalized costs and proved reserves of the Spirit 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.

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Also included in the gain calculation were asset retirement obligations of $77,000 assumed by the purchaser.

On September 30, 2021, the Company’s Honolulu corporate office was sold for approximately $1,864,000, net of related costs, resulting in a gain of $1,164,000, which was recognized in the year ended September 30, 2021.

In March 2020, the Company sold its leasehold interest in a three-quarter of an acre contract drilling segment maintenance and storage yard in Honolulu, 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 ended September 30, 2020.

In September 2021, the Company’s Honolulu corporate office was sold for approximately $1,864,000, net of related costs, resulting in a gain of $1,164,000, which was recognized in the year ended September 30, 2021.

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 the Kukio 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 ended September 30, 2021 and $459,000 in preferred return payments received from KKM in the year ended September 30, 2021.

During the year ended September 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 its Kukio Resort Land Development Partnership investment balance to zero as of September 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 ended September 30, 2021.

The Company records the distributions in excess of our investment in the Kukio 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 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 during the suspended period exceeds our share of the Kukio Resort Land Development Partnership’s income recognized for the excess distributions.

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 the Kukio 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 the Kukio Resort Land Development Partnerships have reached the $45,000,000 threshold and in the quarter ended December 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 ended September 30, 2021.

The preferred return payments received in the quarter ended December 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 of September 30, 2021.

During the year ended September 30, 2021, Barnwell received net cash distributions in the amount of $6,011,000 from the Kukio Resort Land Development Partnerships after distributing $683,000 to non-controlling interests.

Of the $6,011,000 net cash distribution received from the Kukio Resort Land Development Partnerships, $459,000 represented a partial payment of the preferred return from KKM, as discussed above.

Barnwell recognized equity in income of affiliates of $3,400,000 for the year ended September 30, 2022, as compared to equity in income of affiliates of $5,793,000 for the year ended September 30, 2021.

The decrease in partnership income is primarily due to the Kukio Resort Land Development Partnerships' sale of eight lots during the prior year period, as compared to six lot sales in the current year period, and $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 year ended September 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.

Of the $360,000 net cash distribution received from the Kukio Resort Land Development Partnerships, $197,000 represented a partial payment of the preferred return from KKM.

Financial results from the receipt of these payment will be reflected in Barnwell's quarter ending December 31, 2021.

Of the $6,011,000 net cash distribution received from the Kukio Resort Land Development Partnerships, $459,000 represented a payment of the preferred return from KKM, as discussed in Note 3 of the Notes to 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 year ended September 30, 2022 was equivalent to the $3,400,000 of distributions received in that period.

Cumulative distributions received from the Kukio Resort Land Development Partnerships in excess of our investment balance was $958,000 at September 30, 2022 and $654,000 at September 30, 2021.

In November 2022, Barnwell received a net cash distribution in the amount of $478,000 from the Kukio Resort Land Development Partnerships.

Financial results from this distribution will be reflected in Barnwell's first quarter of fiscal 2023 ending December 31, 2022.

Additionally, in November 2022, Kaupulehu Developments received a percentage of sales payment of $265,000 from the sale of one lot within Increment I.

Financial results from the receipt of this payment will be reflected in Barnwell's first quarter of fiscal 2023 ending December 31, 2022.

Accordingly, with the inclusion of the lot sale subsequent to September 30, 2022, one single-family lot of the 80 lots developed within Increment I remained to be sold as of the date of this report.

No definitive development plans have been made by the developer of Increment II as of the date of this report.

The components of earnings (loss) before income taxes, after adjusting the earnings (loss) for non-controlling interests, are as follows:

The components of earnings before income taxes, after adjusting the earnings for non-controlling interests, are as follows:

Year ended September 30,

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$ 5,860,000 $ 6,585,000

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.

Barnwell’s effective consolidated income tax rate for fiscal 2022, after adjusting earnings before income taxes for non-controlling interests, was 6% as compared to 5% for fiscal 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.

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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.

Income from our investment in the Oklahoma oil venture is 100% allocable to Oklahoma, and therefore, receives no benefit from consolidated or unitary losses and, therefore, is subject to Oklahoma state taxes.

In addition, net operating loss carryforwards, all of which had a full valuation allowance at the end of the previous fiscal year, are being partially utilized in the current year to offset taxable income in the U.S.

federal and Canadian jurisdictions.

The net operating loss carryforwards beyond the current year’s utilization continue to have a full valuation allowance as realization of their benefit is not more likely than not.

Included in the current income tax provision for the year ended September 30, 2022 is a $62,000 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 year ended September 30, 2021.

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.

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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.

Alberta rate changes had 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

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Net earnings attributable to non-controlling interests totaled $659,000 in fiscal 2022, as compared to net earnings attributable to non-controlling interests of $950,000 in fiscal 2021.

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

In December 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”) effective December 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

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 ended September 30, 2020.

The $291,000 (31%) decrease is primarily due to decreases in the amount of equity in income of affiliates and percentage of sales revenue received in the current year period as compared to the same period in the prior year.

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.

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Impact of Recently Issued Accounting Standards on Future Filings

In June 2016, the FASB issued ASU No.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2016-13, “Financial Instruments - Credit Losses (Topic 326):

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The Company is currently evaluating the impact of these standards.

In December 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 after December 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.

Barnwell’s primary sources of liquidity are cash on hand, cash flow generated by operations, and land investment segment proceeds.

Prior to the suspension of the at-the-market offering program (“ATM”) in August 2022, the Company received $2,356,000 in net proceeds from the shares of common stock sold under the ATM in fiscal 2022.

At September 30, 2022, Barnwell had $11,170,000 in working capital.

Cash flows provided by operating activities totaled $7,291,000 for fiscal 2022, as compared to cash flows provided by operating activities of $831,000 for the same period in fiscal 2021.

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.

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's Honolulu 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 in Honolulu, Hawaii in the prior year period.

This $6,460,000 change in operating cash flows was primarily due to significantly higher operating results for the oil and natural gas segment, which was partially offset by lower operating results for the contract drilling segment and a decrease in distributions from the Kukio Resort Land Development Partnerships in the current year period as compared to the prior year period.

The change was also due to fluctuations in working capital.

Cash flows used in investing activities totaled $7,112,000 for fiscal 2022, as compared to cash flows provided by investing activities of $3,686,000 for fiscal 2021.

This $10,798,000 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 $7,084,000 in cash paid for oil and natural gas capital expenditures, a decrease of $1,419,000 received in distributions from equity investees in excess of earnings, and a net decrease of $1,177,000 in proceeds from the sale of assets in the current year period as compared to same period in the prior year.

Cash flows provided by financing activities totaled $1,560,000 for fiscal 2022, as compared to cash flows provided by financing activities of $2,192,000 for fiscal 2021.

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.

The $632,000 change in financing cash flows was primarily attributed to a decrease of $823,000 in proceeds from issuance of stock, net of costs, related to the Company's ATM offering, a $149,000 increase in dividend payments, and a decrease of $387,000 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 that was paid 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 ($44,000) under the program.

In January 2022, the Canadian government announced the extension of the CEBA loan repayment deadline and interest-free period from December 31, 2022 to December 31, 2023.

Accordingly, the CEBA loan is interest-free with no principal payments required until December 31, 2023, after which the remaining loan balance is converted to a two year term loan at 5% annual interest paid monthly.

If the Company repays 66.7% of the principal amount prior to December 31, 2023, there will be loan forgiveness of 33.3% up to a maximum of CAD$20,000.

Paycheck Protection Program Loan

On April 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 in March 2020.

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 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.

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As a result of the loan forgiveness, the Company recognized a gain on debt extinguishment of $149,000 during the year ended September 30, 2021.

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 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.

The CEBA loan is interest-free with no principal payments required until December 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 to December 31, 2022, 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 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.

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.

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.

Going Concern

Other sources and potential sources of funding are discussed below.

From Barnwell's net proceeds, $526,000 was withheld for remittance by the buyers to the Canada 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.

NYSE American Continued Listing Standard

On January 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 of September 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.

On April 2, 2020, the NYSE American notified the Company that it accepted the Plan and granted the Company an extension for its continued listing until July 13, 2021.

On July 13, 2021, the Company filed a Form 8-K report with the Securities and Exchange Commission announcing that the Company’s pro forma stockholders’ equity (unaudited) as of July 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 dated July 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.

During the year ended September 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 year ended September 30, 2021, the Company sold 1,167,987 shares of common stock resulting in net proceeds of $3,179,000 after commissions and fees of $123,000 and ATM-related professional services of $605,000.

As of September 30, 2022, the Company has received $5,535,000 in cumulative net proceeds from the shares sold under the ATM program.

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 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 in Oklahoma during the year ended September 30, 2021.

Capital expenditures incurred by the Company for these Oklahoma wells totaled $1,178,000 for the year ended September 30, 2021.

One gross (0.04 net) well was completed and the well began flowback production in late May 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 through September 30, 2021.

The remaining six gross (0.16 net) wells were all producing in October 2021.

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, increased $8,835,000 from $2,217,000 in fiscal 2021 to $11,052,000 in fiscal 2022.

The Company participated in the drilling of six gross (1.7 net) non-operated wells in the Twining area during the year ended September 30, 2022.

Capital expenditures incurred by the Company for these non-operated wells totaled $4,366,000 for the year ended September 30, 2022.

Five gross (1.4 net) wells were producing at September 30, 2022 and the remaining one gross (0.3 net) well is awaiting tie in and is expected to produce in fiscal 2023.

The Company drilled one gross (1.0 net) operated well in the Twining area which was producing at September 30, 2022.

Capital expenditures incurred by the Company for this operated well was $2,852,000.

The Company did not drill or participate in the drilling of wells in Canada during the year ended September 30, 2021.

Drilling opportunities in the Company's core Twining area are being investigated for potential investment in the forthcoming months.

The Company did not drill or participate in the drilling of wells in Oklahoma during the year ended September 30, 2022.

In fiscal 2021, the Company participated in the drilling of seven gross (0.2 net) non-operated wells in Oklahoma.

Capital expenditures incurred by the Company for these Oklahoma wells totaled $1,178,000 for the year ended September 30, 2021.

Oil and Natural Gas Property Acquisitions and Dispositions

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.

There were no significant oil and natural gas property dispositions during the year ended September 30, 2022.

The $503,000 of proceeds from sale of oil and natural gas properties included in the Consolidated Statement of Cash Flows for the year ended September 30, 2022 primarily represents the

refund of income taxes previously withheld from what otherwise would have been proceeds on prior year's oil and natural gas property sales.

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.

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$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.

From Barnwell's net proceeds, $526,000 was withheld for remittance by the buyers to the Canada Revenue Agency for potential amounts due for Barnwell’s Canadian income taxes related to the sale.

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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 ended December 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 of Alberta, 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 of October 1, 2019.

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.

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 September 30, 2020.

Asset Retirement Obligation

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The estimated asset retirement obligation for the Company's interest in the wells and facilities in the Manyberries 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.

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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 and August 2021 and will need to pay the remaining balance of $637,000 by August 2023.

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 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 year ended September 30, 2021.

The increase in the ARO liability was a result of higher reclamation and remediation costs than anticipated, partially offset by lower abandonment estimates.

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A remaining excess deposit, if any, would ultimately be refunded to the Company upon completion of all of the work.

As of September 30, 2022, the Company recognized a cumulative reduction in the deposit balance of $113,000 for work performed under this program.

Contractual Obligations

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis