What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-02-12 compared with 2023-08-14 · 100 added, 175 removed, 112 unchanged (71% of the section changed)

14 unchanged sentences

Management has determined that our most critical accounting policies and estimates are those related to the full-cost ceiling calculation and depletion of our oil and natural gas properties, the estimation of our contract drilling segment's revenues and expenses, and the calculation of our income taxes, all of which are discussed in our 2023 Annual Report.

There have been no significant changes to these critical accounting policies and estimates during the three and nine months ended June 30, 2023.

There have been no significant changes to these critical accounting policies and estimates during the three months ended December 31, 2023.

We continue to monitor our accounting policies to ensure proper application of current rules and regulations.

Impact of COVID-19

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic and the 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 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 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 through fiscal 2022 and continues to work, the continuing potential impact of COVID-19 on the health of our contract drilling segment's crews is uncertain, and any work stoppage or discontinuation of contracts currently in backlog could result in a material adverse impact to the Company’s financial condition and outlook.

Though availability of vaccines and reopening of state and local economies has improved the outlook for recovery from COVID-19's impacts, the impact of new, more contagious or lethal variants that may emerge, and the effectiveness of COVID-19 vaccines against variants and the related responses by governments, including reinstated government-imposed lockdowns or other measures, cannot be predicted at this time.

Both the health and economic aspects of the COVID-19 pandemic remain highly fluid and the future course of each is uncertain.

We cannot foresee whether the outbreak of COVID-19 will be effectively contained on a sustained basis, nor can we predict the severity and duration of its impact.

If the impact of COVID-19 is not effectively and timely controlled on a sustained basis going forward, our business operations and financial condition may be materially and adversely affected by factors that we cannot foresee.

Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial condition and results of operations.

We face various risks and uncertainties related to public health crises, including the global COVID-19 pandemic, which has disrupted financial markets and significantly impacted worldwide economic activity.

The future impact of the COVID-19 pandemic as well as mandatory and voluntary actions taken to mitigate the public health impact of the pandemic may have a material adverse effect on our financial condition.

The COVID-19 pandemic and social and governmental responses to the pandemic have caused, and may continue to cause, severe economic, market and other disruptions worldwide.

Although the COVID-19 pandemic and related societal and government responses have not, to date, had a material impact on our business or financial results, the extent to which COVID-19 and related actions may, in the future, impact our operations cannot be predicted with any degree of confidence.

As a result, we cannot at this time predict the direct or indirect impact on us of the COVID-19 pandemic, but it could

have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects .

Impact of Recently Issued Accounting Standards on Future Filings

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

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

Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss model with an expected loss model referred to as the current expected credit loss (“CECL”) model.

The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including but not limited to trade receivables.

This ASU is effective for annual reporting periods beginning after December 15, 2022, and interim periods within those annual periods.

The FASB has subsequently issued other related ASUs which amend ASU 2016-13 to provide clarification and additional guidance.

The Company is currently evaluating the impact of these standards.

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2023-07 “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures”, which expands reportable segment disclosure requirements on an annual and interim basis, primarily through enhanced disclosures about significant segment expenses.

This ASU is effective for annual reporting periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

The Company is currently evaluating the impact of this standard on Barnwell’s consolidated financial statements.

In December 2023, the FASB issued ASU No.

2023-09 “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures”, which requires disclosure of incremental income tax information within the tax rate reconciliation and expanded disclosures of income taxes paid both in the U.S.

and foreign jurisdiction, among other disclosure requirements.

This ASU is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted.

The Company is currently evaluating the impact of this standard on Barnwell’s consolidated financial statements.

Barnwell is engaged in the following lines of business:

8 unchanged sentences

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 79 single-family lots, of which one remained to be sold at June 30, 2023.

Increment I is an area zoned for approximately 80 single-family lots, of which two remained to be sold at December 31, 2023.

• 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.

12 unchanged sentences

Contract Drilling Segment

Barnwell drills water and water monitoring wells and installs and repairs water pumping systems in Hawaii.

Barnwell’s wholly-owned subsidiary, Water Resources International, Inc.

(“Water Resources”), drills water and water monitoring wells and installs and repairs water pumping systems in Hawaii.

Contract drilling results are highly dependent upon the quantity, dollar value and timing of contracts awarded by governmental and private entities and can fluctuate significantly.

Results of Operations

The net loss attributable to Barnwell for the three months ended June 30, 2023 totaled $717,000, a $3,248,000 decrease in operating results from net earnings of $2,531,000 for the three months ended June 30, 2022.

The following factors affected the results of operations for the three months ended June 30, 2023 as compared to the prior year period:

• A $3,836,000 decrease in oil and natural gas segment operating results, before income taxes, due primarily to significant decreases in natural gas, oil, and natural gas liquid prices, partially offset by an increase in production in the current period as compared to the same period in the prior year from new wells drilled in Texas and in the Twining area;

• A $182,000 improvement in contract drilling segment operating results, before income taxes, due to work performed on higher value water well drilling contracts in the current year period as compared to the prior year period;

• General and administrative expenses decreased $385,000, primarily due to a reduction in accrued bonus expense and decreases in share-based compensation and professional fees in the current year period as compared to the same period in the prior year.

The net loss attributable to Barnwell for the nine months ended June 30, 2023 totaled $865,000, a $6,521,000 decrease in operating results from a net earnings of $5,656,000 for the nine months ended June 30, 2022.

The following factors affected the results of operations for the nine months ended June 30, 2023 as compared to the prior year period:

• A $5,147,000 decrease in oil and natural gas segment operating results, before income taxes, due to significant decreases in natural gas, oil, and natural gas liquid prices and a decrease in the net production from wells in Oklahoma in the current year period as compared to the same period in the prior year.

The decrease in operating results was partially offset by an increase in net production of oil and natural gas primarily due to the additional working interests acquired and wells drilled in the Twining area and from new wells drilled in Texas;

• Equity in income from affiliates decreased $2,862,000 and land investment segment operating results, before non-controlling interests’ share of such profits, decreased $1,030,000 due to the Kukio Resort Development Partnerships' sale of one lot in the current year period, whereas there were six lot sales in the prior year period;

• A $579,000 increase in contract drilling segment operating results, before income taxes, primarily resulting from increased activity and an increase in the work performed on higher value water well drilling contracts in the current year period as compared to the prior year period;

• A $551,000 gain recognized in the current year period from the sale of a contract drilling segment drilling rig;

• A $201,000 foreign currency gain 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 weakening of the U.S.

dollar against the Canadian dollar.

The net loss attributable to Barnwell for the three months ended December 31, 2023 totaled $664,000, a $1,753,000 decrease in operating results from net earnings of $1,089,000 for the three months ended December 31, 2022.

The following factors affected the results of operations for the three months ended December 31, 2023 as compared to the same period in the prior year:

• A $1,105,000 decrease in oil and natural gas segment operating results, before income taxes, due primarily to significant decreases in natural gas, oil, and natural gas liquid prices, partially offset

by an increase in new production from wells in Texas and from wells in the Twining area in the current period as compared to the same period in the prior year;

• Equity in income from affiliates decreased $538,000 and land investment segment operating results, before non-controlling interests’ share of such profits, decreased $265,000 due to the Kukio Resort Development Partnerships' sale of one lot in the prior year period, whereas there were no lot sales in the current year period;

• A $551,000 gain recognized in the prior year period from the sale of a contract drilling segment drilling rig, whereas there was no such gain in the current period;

• General and administrative expenses decreased $845,000 primarily due to decreases in professional fees, accrued bonus expense, and share-based compensation in the current period as compared to the same period in the prior year.

Barnwell conducts operations in the U.S.

4 unchanged sentences

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

dollar decreased 5% and 6% in the three and nine months ended June 30, 2023, respectively, as compared to the same periods in the prior year.

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

dollar increased 3% at June 30, 2023, as compared to September 30, 2022.

dollar remained unchanged in the three months ended December 31, 2023 as compared to the same period in the prior year, and the exchange rate of the Canadian dollar to the U.S.

dollar increased 3% at December 31, 2023 as compared to September 30, 2023.

Accordingly, the assets, liabilities, stockholders’ equity and revenues and expenses of Barnwell’s subsidiaries operating in Canada have been adjusted to reflect the change in the exchange rates.

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

Other comprehensive income due to foreign currency translation adjustments, net of taxes, for the three months ended June 30, 2023 was $15,000, a $123,000 change from other comprehensive loss due to foreign currency translation adjustments, net of taxes, of $108,000 for the same period in the prior year.

Other comprehensive income due to foreign currency translation adjustments, net of taxes, for the nine months ended June 30, 2023 was $17,000, a $138,000 change from other comprehensive loss due to foreign currency translation adjustments, net of taxes, of $121,000 for the same period in the prior year.

There were no taxes on other comprehensive (loss) income due to foreign currency translation adjustments in the three and nine months ended June 30, 2023 and 2022 due to a full valuation allowance on the related deferred tax asset.

Other comprehensive income due to foreign currency translation adjustments, net of taxes, for the three months ended December 31, 2023 was $30,000, a $28,000 change from other comprehensive income due to foreign currency translation adjustments, net of taxes, of $2,000 for the same period in the prior year.

There were no taxes on other comprehensive (loss) income due to foreign currency translation adjustments in the three months ended December 31, 2023 and 2022 due to a full valuation allowance on the related deferred tax assets.

Oil and natural gas

3 unchanged sentences

Three months ended Increase

June 30, (Decrease)

2023 2022 $ %

Natural Gas (Mcf)* $ 1.82 $ 6.40 $ (4.58) (72 %)

Oil (Bbls)** $ 65.96 $ 104.83 $ (38.87) (37 %)

Natural gas liquids (Bbls)** $ 28.63 $ 53.08 $ (24.45) (46 %)

Average Price Per Unit

Nine months ended Increase

June 30, (Decrease)

December 31, (Decrease)

2023 2022 $ %

4 unchanged sentences

Three months ended Increase

June 30, (Decrease)

2023 2022 Units %

Natural Gas (Mcf)* 330,000 254,000 76,000 30 %

Oil (Bbls)** 53,000 47,000 6,000 13 %

Natural gas liquids (Bbls)** 16,000 13,000 3,000 23 %

Net Production

Nine months ended Increase

June 30, (Decrease)

December 31, (Decrease)

2023 2022 Units %

6 unchanged sentences

** Bbl = stock tank barrel equivalent to 42 U.S.

The oil and natural gas segment generated a $287,000 operating profit before general and administrative expenses in the three months ended June 30, 2023, a decrease in operating results of $3,836,000 as compared to the $4,123,000 operating profit before general and administrative expenses generated during the same period of the prior year.

The oil and natural gas segment generated a $2,974,000 operating profit before general and administrative expenses in the nine months ended June 30, 2023, a decrease in operating results of $5,147,000 as compared to the $8,121,000 operating profit before general and administrative expenses generated during the same period of the prior year.

The following table sets forth Barnwell’s oil and natural gas segment operating profits before general and administrative expenses by geographic location:

The oil and natural gas segment generated an $881,000 operating profit before general and administrative expenses in the three months ended December 31, 2023, a decrease in operating results of $1,105,000 as compared to a $1,986,000 operating profit before general and administrative expenses generated during the same period of the prior year.

The following table sets forth Barnwell’s oil and natural gas segment operating profit before general and administrative expenses by geographic location:

Three months ended

June 30, Nine months ended

2023 2022 2023 2022

Operating profit (loss)

(before general and administrative expenses)

Operating profit (before general and administrative expenses)

Canada $ 536,000 $ 1,599,000

2 unchanged sentences

Total operating profit $ 881,000 $ 1,986,000

Oil and natural gas revenues decreased $2,789,000 (38%) for the three months ended June 30, 2023, as compared to the same period in the prior year, primarily due to significant decreases in natural gas, oil, and natural gas liquid prices, which decreased 72%, 37%, and 46%, respectively, as compared to the same period in the prior year.

The decrease was partially offset by 13% and 30% increases in oil and natural gas production, respectively, as compared to the same period in the prior year.

Oil and natural gas revenues decreased $2,930,000 (18%) for the nine months ended June 30, 2023, as compared to the same period in the prior year, primarily due to 41%, 23%, and 27% decreases in natural gas, oil, and natural gas liquid prices, respectively, and was partially offset by 13% and 27% increases in oil and natural gas production, respectively, as compared to the same period in the prior year.

The increase in oil and natural gas production in the nine months of the current year was due to new wells drilled in the Twining area and from new wells drilled in Texas, partially offset by a decrease in production from the Oklahoma wells.

The two gross (0.3 net) non-operated wells drilled in Texas began producing in late April 2023 and the Company’s share of net production from these wells totaled 6,000 barrels of oil, 5,000 barrels of natural gas liquids, and 53,000 Mcf of natural gas for total revenues of $590,000 during the three and nine months ended June 30, 2023.

Our Oklahoma operations generated $279,000 (6%) and $1,105,000 (8%) of our oil and natural gas segment revenues for the three and nine months ended June 30, 2023, respectively, as compared to $840,000 (12%) and $2,796,000 (17%) of our oil and natural gas segment revenues for the three and nine months ended June 30, 2022, respectively.

Oil and natural gas operating expenses increased $609,000 (25%) and $1,278,000 (20%) for the three and nine months ended June 30, 2023, respectively, as compared to the same periods in the prior year, primarily due to costs associated with new production from wells drilled in the Twining area and from new wells drilled in Texas and was partially offset by a decrease in production from wells in Oklahoma in the current year periods as compared to the prior year periods.

Oil and natural gas segment depletion increased $438,000 (57%) and $939,000 (53%) for the three and nine months ended June 30, 2023, respectively, as compared to the same periods in the prior year.

The increases were due to depletion attributable to production in Texas, whereas there was no such depletion in the prior year periods, and 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 increases in oil and natural gas depletion was partially offset by decreases in depletion for Oklahoma properties due to the decrease in production from wells in Oklahoma in the current year periods as compared to the prior year periods.

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.

Oil and natural gas segment revenues decreased $96,000 (2%) for the three months ended December 31, 2023, as compared to the same period in the prior year, primarily due to significant decreases in natural gas, oil, and natural gas liquid prices, which decreased 57%, 7%, and 34%, respectively, as compared to the same period in the prior year.

The decrease was partially offset by increases of 26%, 21%, and 80% in natural gas, oil, and natural gas liquid production, respectively, as compared to the same period in the prior year.

In the quarter ended December 31, 2023, the Company amended certain of its Canadian purchase and sales contracts to change the sales price on 1,055 gross Mcf per day of the Canadian natural gas that it

will sell during the period from April 1, 2024 to October 31, 2024 to a fixed price of $2.55 Canadian dollars per Mcf, with remaining volumes continuing to be sold at spot prices.

This per day volume of natural gas under fixed price contract is equivalent to approximately 30% of what Canadian natural gas gross production per day was for the three months ended December 31, 2023.

Additionally, the Company also amended the sales price on 225 gross barrels per day of the Canadian oil that it will sell during the period from January 1, 2024 to June 30, 2024 to a fixed price of $69.46 per net barrel, with remaining volumes continuing to be sold at spot prices.

This per day volume of oil under fixed price contract is equivalent to approximately 30% of what Canadian oil gross production per day was for the three months ended December 31, 2023.

These natural gas and oil contracts were eligible for and elected as normal purchase and normal sales exception contracts and were thus excluded from derivative accounting.

Oil and natural gas segment operating expenses increased $347,000 (14%) for the three months ended December 31, 2023, as compared to the same period in the prior year, primarily due to costs associated with new production from wells in Texas and from wells in the Twining area.

Oil and natural gas segment depletion increased $662,000 (83%) for the three months ended December 31, 2023, as compared to the prior year period.

The increase was due to depletion attributable to production in Texas, whereas there was no such depletion in the prior year period, and was due to an increase 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 and facilities expansion and upgrade costs, all in the Twining area.

Under the full cost method of accounting, the Company performs quarterly oil and natural gas ceiling test calculations.

There were no reductions to the carrying value of our oil and natural gas properties during the three months ended December 31, 2023 and 2022.

Changes in the 12-month 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 market value of unproved properties, impact the determination of the maximum carrying value of oil and natural gas properties.

Based on the 12-month rolling average first-day-of-the-month prices for January and February 2024, it is reasonably possible that we will incur a ceiling test impairment in the Company's second quarter ending March 31, 2024.

The Company is currently unable to estimate a range of the amount of any potential future reduction in carrying value as variables that impact the ceiling limitation are dependent upon actual results through the end of March 2024.

Sale of interest in leasehold land

2 unchanged sentences

Three months ended

June 30, Nine months ended

2023 2022 2023 2022

Sale of interest in leasehold land:

2 unchanged sentences

Sale of interest in leasehold land, net of fees paid $ — $ 233,000

No lots were sold during the three months ended June 30, 2023 and 2022.

During the nine months ended June 30, 2023, Barnwell received $265,000 in percentage of sales payments from KD I from the sale of one single-family lot within Increment I.

During the nine months ended June 30, 2022, Barnwell received $1,295,000 in percentage of sales payments from KD 1 from the sale of six single-family lots within Increment I.

As of June 30, 2023, only one single-family lot of the 79 lots developed within Increment I remained to be sold and it is not expected to be sold in the Company's fiscal 2023.

No lots were sold during the three months ended December 31, 2023.

During the three months ended December 31, 2022, Barnwell received $265,000 in percentage of sales payments from KD I from the sale of one single-family lot within Increment I.

As of December 31, 2023, only two single-family lots of the 80 lots developed within Increment I remain to be sold.

The Company does not have a controlling interest in Increments I and II, and there is no assurance with regards to the amounts of future sales from Increments I and II, or that the remaining acreage within Increment II will be developed.

1 unchanged sentence

Contract drilling

Contract drilling revenues and contract drilling costs increased $398,000 (54%) and $210,000 (24%), respectively, for the three months ended June 30, 2023, as compared to the same period in the prior year.

The contract drilling segment generated a $5,000 operating profit before general and administrative expenses in the three months ended June 30, 2023, an increase in operating results of $182,000 as compared to the $177,000 operating loss generated during the same period of the prior year.

Contract drilling revenues and contract drilling costs increased $2,153,000 (89%) and $1,570,000 (57%), respectively, for the nine months ended June 30, 2023, as compared to the same period in the prior year.

The contract drilling segment generated a $110,000 operating profit before general and administrative expenses in the nine months ended June 30, 2023, an increase in operating results of $579,000 as compared to the $469,000 operating loss generated during the same period of the prior year.

The increases in contract drilling revenues and contract drilling costs for the three and nine months ended June 30, 2023 as compared to the same periods in the prior year are due to a higher level of activity in the current year nine month period and work performed on higher value water well drilling contracts in the three and nine month current year periods as compared to the same periods in the prior year.

Additionally, the increases in contract drilling revenues and contract drilling costs for the nine months ended June 30, 2023 was also due to a higher amount of revenues and expenses recognized from previously uninstalled materials during the current year period.

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 June 30, 2023 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.

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.

The contract drilling segment generated a $228,000 operating loss before general and administrative expenses in the three months ended December 31, 2023, a decrease in operating results of $276,000 as compared to a $48,000 operating profit during the same period of the prior year.

Contract drilling revenues and contract drilling costs decreased $955,000 (49%) and $688,000 (37%), respectively, for the three months ended December 31, 2023, as compared to the same period in the prior year.

These decreases were primarily due to less water well drilling activity in the current year period as compared to the same period in the prior year;

additionally, contract drilling costs did not decrease as much as contract drilling revenues as additional costs were incurred on one of the well drilling jobs due to operational issues during drilling.

On December 13, 2023, the Company entered into a stock purchase agreement with a construction company for the sale of Water Resources for gross proceeds of $2,000,000, subject to customary post-closing price adjustments and the purchaser’s completion of due diligence.

On December 27, 2023, the stock purchase agreement was terminated by the buyer prior to closing.

The Company continues to investigate strategies regarding Water Resources' future including, but not limited to, other potential opportunities for a sale of its stock or assets to any other interested parties, or the potential for eventual wind-down after all contracts in backlog are completed along with liquidation of its drilling rigs and equipment.

No definitive plans have been made as of the date of this Quarterly Report as to the future direction of Water Resources.

Management estimates that contracts in backlog will be completed in December 2024 or soon thereafter.

In January 2024, a significant well drilling contract, which previously had an estimated contract drilling revenue backlog of $2,400,000 and which had not yet started, was cancelled by mutual agreement of Water Resources and the counterparty.

General and administrative expenses

General and administrative expenses decreased $385,000 (22%) for the three months ended June 30, 2023 as compared to the same period in the prior year.

The decrease was due to decreases of $127,000 in share-based compensation expense, $98,000 in accrued bonus expense, and $129,000 in professional fees primarily related to legal services in the current year period as compared to the same period in the prior year.

General and administrative expenses decreased $157,000 (3%) for the nine months ended June 30, 2023 as compared to the same period in the prior year.

The decrease was primarily due to decreases of $363,000 in share-based compensation expense, $92,000 in accrued bonus expense, $70,000 in compensation costs, and $126,000 in professional fees related to land investment segment proceeds in the current year period as compared to the same period in the prior year.

The decrease in general and administrative expenses was partially offset by an increase of $492,000 in stockholders costs primarily attributed to the cooperation and support agreement and associated fees to certain directors, as discussed below, in the current year period as compared to the same period in the prior year.

In January 2023, the Company entered into a cooperation and support agreement (the “Cooperation Agreement”) with Alexander C.

Kinzler , the Company’s CEO and President in his capacity as a stockholder , MRMP-Managers LLC, the Ned L.

Sherwood Revocable Trust, NLS Advisory Group, Inc.

Sherwood (collectively, the “MRMP Stockholders”), with respect to a potential proxy contest pertaining to the election of directors to our Board of Directors (the “Board”).

Pursuant to the terms of the Cooperation Agreement, among other things, the Company agreed to promptly appoint Joshua S.

Horowitz and Laurance Narbut, effective February 9, 2023, to serve on the Board.

In addition, the Company agreed to nominate a five-person board comprised of Mr.

Kinzler, Kenneth Grossman, Douglas Woodrum, and Messrs.

Horowitz and Narbut as candidates for election to the Board at the 2023 Annual Meeting, which was held on April 17, 2023, and the 2024 annual meeting of stockholders (the “2024 Annual Meeting”) and Mr.

Kinzler and the MRMP Stockholders agreed to vote their respective shares of common stock of the Company in favor of the election of the Company’s slate at the 2023 Annual Meeting and the 2024 Annual Meeting.

Additionally, pursuant to the terms of the Cooperation Agreement,

the Company terminated the previously adopted Tax Benefits Preservation Plan.

In exchange for this arrangement, the Company agreed to reimburse the MRMP Stockholders and Mr.

Kinzler for their reasonable, documented out-of-pocket fees and expenses (including legal expenses) in connection with the negotiation and execution of the Cooperation Agreement and the transactions contemplated hereby and the proposed nomination of directors at the 2023 Annual Meeting.

T he Company incurred approximately $339,000 in expenses under the Cooperation Agreement in the nine months ended June 30, 2023 with respect to the such reimbursements to the MRMP Stockholders and Mr.

In May 2023, the Company’s Board of Directors approved and ratified the payment of one-time special director fees to directors Messrs.

Grossman and Woodrum for their services on behalf of the Company and the Board pertaining to the negotiations of the Cooperation Agreement and the settlement of the potential proxy contest.

Grossman received a one-time special director fee of $100,000, which was paid in $40,000 cash and a stock grant of 22,728 shares of Barnwell common stock (valued at $60,000 using the closing price of Barnwell's common stock on May 11, 2023, the date of grant).

Woodrum received a one-time special director fee of $50,000, which was paid in $20,000 cash and a stock grant of 11,363 shares of Barnwell common stock (valued at $30,000 using the closing price of Barnwell's common stock on May 11, 2023, the date of grant).

General and administrative expenses decreased $845,000 (38%) for the three months ended December 31, 2023, as compared to the same period in the prior year.

The decrease was due to decreases of $694,000 in professional fees primarily related to legal and consulting services, $75,000 in accrued bonus expense, and $50,000 in share-based compensation in the current year period as compared to the same period in the prior year.

Depletion, depreciation, and amortization

Depletion, depreciation, and amortization increased $443,000 (54%) and $943,000 (49%) for the three and nine months ended June 30, 2023, respectively, as compared to the same periods in the prior year, due to depletion attributable to production in Texas and increases in the depletion rates for Canadian properties and also new production from those properties, partially offset by a decrease in depletion for Oklahoma properties as discussed in the “Oil and natural gas” section above.

Depletion, depreciation, and amortization increased $671,000 (80%) for the three months ended December 31, 2023, as compared to the same period in the prior year, primarily due to depletion attributable to production in Texas and increases in the depletion rate for Canadian properties and also new production from those properties as discussed in the “Oil and natural gas” section above.

Foreign currency gain

Foreign currency gain was $121,000 and $201,000 during the three and nine months ended June 30, 2023, respectively, as compared to none during the three and nine months ended June 30, 2022, due to the effects of foreign exchange rate changes on intercompany loans and advances as a result of the weakening of the U.S.

Foreign currency gain was $126,000 and $78,000 during the three months ended December 31, 2023 and 2022, respectively, due to the effects of foreign exchange rate changes on intercompany loans and advances as a result of the weakening of the U.S.

dollar against the Canadian dollar.

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Gain on sale of assets

In October 2022, the Company completed the sale of a contract drilling segment drilling rig to an independent third party for proceeds of $551,000, net of related costs.

The drilling rig was fully depreciated and had a net book value of zero and as a result of the sale, the Company recognized a $551,000 gain during the nine months ended June 30, 2023.

In October 2022, the Company completed the sale of a contract drilling segment drilling rig to an independent third part for proceeds of $551,000, net of related costs.

The drilling rig was fully depreciated and had a net book value of zero and as a result of the sale, the Company recognized a $551,000 gain during the three months ended December 31, 2022.

Equity in income of affiliates

Equity in income of affiliates was nil and $538,000 during the three and nine months ended June 30, 2023, respectively, as compared to equity in income of affiliates of $433,000 and $3,400,000 during the three and nine months ended June 30, 2022, respectively.

The decrease in partnership income is primarily due to the Kukio Resort Land Development Partnerships' sale of one lot during the current year

period, as compared to six lot sales in the prior year period.

The Kukio Resort Land Development Partnerships have only one lot to sell in Increment I and we are not anticipating any more lot sales in fiscal 2023.

During the nine months ended June 30, 2023, Barnwell received cash distributions of $538,000 from the Kukio Resort Land Development Partnerships resulting in a net amount of $478,000, after distributing $60,000 to non-controlling interests.

During the nine months ended June 30, 2022, Barnwell received cash distributions of $3,400,000 from the Kukio Resort Land Development Partnerships resulting in a net amount of $3,028,000 after distributing $372,000 to non-controlling interests.

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 Partnerships 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 Partnerships’ cumulative earnings in excess of distributions during the suspended period exceeds our share of the Kukio Resort Land Development Partnerships’ income recognized for the excess distributions, and during this suspended period any distributions received will be recorded as equity in income of affiliates.

Accordingly, the amount of equity in income of affiliates recognized in the nine months ended June 30, 2023 was equivalent to the $538,000 of distributions received in that period.

Cumulative distributions received from the Kukio Resort Land Development Partnerships in excess of our investment balance was $993,000 at June 30, 2023 and $958,000 at September 30, 2022.

Barnwell’s effective consolidated income tax rate, after adjusting (loss) earnings before income taxes for non-controlling interests, was 19% and 9% for the three and nine months ended June 30, 2023, respectively, as compared to 3% and 5% for the three and nine months ended June 30, 2022, respectively.

Equity in income of affiliates was nil for the three months ended December 31, 2023, as compared to $538,000 for the three months ended December 31, 2022.

The decrease in partnership income was primarily due to the Kukio Resort Land Development Partnerships' sale of one lot during the prior year period, whereas there were no lot sales in the current year period.

No cash distributions were received from the Kukio Resort Land Development Partnerships during the three months ended December 31, 2023.

During the three months ended December 31, 2022, Barnwell received cash distributions $538,000 from from the Kukio Resort Land Development Partnerships resulting in a net amount of $478,000, after distributing $60,000 to non-controlling interests.

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, no equity in income of affiliates was recognized during the three months ended December 31, 2023.

Cumulative distributions received from the Kukio Resort Land Development Partnerships in excess of our investment balance was $630,000 at December 31, 2023 and $708,000 at September 30, 2023.

Barnwell’s effective consolidated income tax rate for the three months ended December 31, 2023, after adjusting earnings before income taxes for non-controlling interests, was (11)%, as compared to an effective income tax rate of 7% for the three months ended December 31, 2022.

Consolidated taxes do not bear a customary relationship to pretax results due primarily to the fact that the Company is taxed separately in Canada based on Canadian source operations and in the U.S.

based on consolidated operations, and essentially all deferred tax assets, net of relevant offsetting deferred tax liabilities, are not estimated to have a future benefit as tax credits or deductions.

The Company operates two subsidiaries in Canada, one of which is a U.S.

corporation operating as a branch in Canada that is treated as a non-resident for Canadian tax purposes and thus has operating results that cannot be offset against or combined with the other Canadian subsidiary that files as a resident for Canadian tax purposes.

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.

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As such, Barnwell receives no benefit from consolidated or unitary losses and, therefore, is subject to Oklahoma state taxes.

Consolidated taxes also include the impacts of favorable state jurisdiction provision to tax return true-ups.

In addition, net operating loss carryforwards, the benefit of which had not previously been recognized due to the Company's continuing full valuation allowance, are estimated to be partially utilized in the Canadian tax jurisdiction in the current year periods as the recognized benefit is now considered more likely to occur than not.

Our operations in Texas are subject to a franchise tax assessed by the state of Texas, however no significant amounts have been incurred to date.

Net earnings attributable to non-controlling interests

Earnings and losses attributable to non-controlling interests represent the non-controlling interests’ share of revenues and expenses related to the various partnerships and joint ventures in which Barnwell has controlling interests and consolidates.

Net earnings attributable to non-controlling interests totaled $2,000 and $124,000 for the three and nine months ended June 30, 2023, respectively, as compared to net earnings attributable to non-controlling interests of $58,000 and $671,000 for the same periods in the prior year.

The changes of $56,000 (97%) and $547,000 ( 82%) for the three and nine months, respectively, are primarily due to decreases in the amount of equity in income of affiliates and percentage of sales revenues received in the current year periods as compared to the same periods in the prior year.

Net earnings attributable to non-controlling interests for the three months ended December 31, 2023 totaled $2,000, as compared to net earnings attributable to non-controlling interests of $120,000 for the same period in the prior year.

The decrease of $118,000 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.

Liquidity and Capital Resources

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

At June 30, 2023, Barnwell had $1,581,000 in working capital.

Cash flows provided by operations totaled $157,000 for the nine months ended June 30, 2023, as compared to cash flows provided by operations of $5,669,000 for the same period in the prior year.

This $5,512,000 change in operating cash flows was due to significantly lower operating results for the oil and natural gas segment in the current year period as compared to the prior year period.

Additionally, the change was also due to a decrease in distributions of income from the Kukio Resort Land Development Partnerships in the current year period as compared to the prior year period and fluctuations in working capital.

Cash flows used in investing activities totaled $9,875,000 during the nine months ended June 30, 2023, as compared to cash flows used in investing activities of $6,063,000 during the same period of the prior year.

This $3,812,000 change in investing cash flows was due to an increase of $3,481,000 in cash paid for oil and natural gas capital expenditures, a decrease of $904,000 in proceeds from sale of interest in leasehold land, net of costs paid, and a decrease of $687,000 in proceeds from the sale of assets in the current year period as compared to same period in the prior year, partially offset by a $1,563,000 decrease in payments to acquire oil and natural gas properties in the current year period as compared to the same period in the prior year.

Cash flows used in financing activities totaled $577,000 for the nine months ended June 30, 2023, as compared to cash flows provided by financing activities of $1,727,000 for the nine months ended June 30, 2022.

The $2,304,000 change in financing cash flows was due to a $499,000 increase in payment of dividends and a $2,356,000 decrease in proceeds from issuance of common stock, net of costs, related to the Company's ATM offering in the prior year period, partially offset by a $501,000 decrease in distributions to non-controlling interests in the current year period as compared to the same period in the prior year.

Cash Dividends

In December 2022, the Company's Board of Directors declared a cash dividend of $0.015 per share that was paid on January 11, 2023 to stockholders of record on December 27, 2022.

In February 2023, the Company's Board of Directors declared a cash dividend of $0.015 per share that was paid on March 13, 2023 to stockholders of record on February 23, 2023.

In May 2023, the Company's Board of Directors declared a cash dividend of $0.015 per share that was paid on June 12, 2023 to stockholders of record on May 25, 2023.

No dividends were declared or paid during the nine months ended June 30, 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 ($45,000) under the program.

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

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

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

The current loan balance of $45,000 is included in “Other current liabilities” in the Company's Condensed Consolidated Balance sheet at June 30, 2023.

At December 31, 2023, Barnwell had $2,478,000 in working capital.

Cash flows provided by operating activities increased $478,000 to $1,375,000 for the three months ended December 31, 2023, as compared to cash flows provided by operating activities of $897,000 for the three months ended December 31, 2022.

This increase was primarily due to the timing of the collection of current assets, partially offset by lower operating results for the oil and natural gas segment in the current year period as compared to the same period in the prior year.

Cash flows used in investing activities totaled $1,019,000 during the three months ended December 31, 2023, as compared to cash flows used in investing activities of $6,891,000 during the same period of the prior year.

This $5,872,000 change in investing cash flows was due to a decrease of $6,316,000 in cash paid for investments in oil and natural gas properties, partially offset by a decrease of $219,000 in distributions from equity investees in excess of earnings and a decrease of $233,000 in proceeds from sale of interest in leasehold land in the current year period as compared to same period in the prior year.

Cash flows used in financing activities totaled $4,000 during the three months ended December 31, 2023, as compared to cash flows used in financing activities of $108,000 for the same period in the prior year.

The $104,000 change in financing cash flows was primarily due to a decrease in distributions to non-controlling interests in the current year period as compared to the same period in the prior year.

Cash Dividend

No dividends were declared or paid during the three months ended December 31, 2023.

During the three months ended December 31, 2022, the Company's Board of Directors declared a cash dividend of $0.015 per share that was paid on January 11, 2023 to stockholders of record on December 27, 2022.

At The Market Offering

On March 16, 2021, the Company entered into a Sales Agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners (“A.G.P,”), with respect to the ATM pursuant to which the Company may offer and sell, from time to time, shares of its common stock, par value $0.50 per share, having an aggregate sales price of up to $25 million (subject to certain limitations set forth in the Sales Agreement and applicable securities laws, rules and regulations), through or to A.G.P as the Company’s sales agent or as principal.

On March 16, 2021, the Company entered into a Sales Agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners (“A.G.P,”), with respect to an at-the-market offering program (“ATM”) pursuant to which the Company may offer and sell, from time to time, shares of its common stock, par value $0.50 per share, having an aggregate sales price of up to $25 million (subject to certain limitations set forth in the Sales Agreement and applicable securities laws, rules and regulations), through or to A.G.P as the Company’s sales agent or as principal.

Sales of our common stock under the ATM, if any, will be made by any methods deemed to be “at the market offerings” as defined in Rule 415(a)(4) under the Securities Act, including sales made directly on the NYSE American, on any other existing trading market for our Common Stock, or to or through a market maker.

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333-254365), filed with the Securities and Exchange Commission on March 16, 2021, and declared effective on March 26, 2021 (the "Registration Statement”), and the prospectus dated March 26, 2021, included in the Registration Statement.

During the nine months ended June 30, 2022, the Company sold 509,467 shares of common stock resulting in net proceeds of $2,356,000 after commissions and fees of $75,000 and ATM-related professional services of $22,000.

In August 2022, the Company’s Board of Directors suspended the sales of our common stock under the ATM until further notice.

Oil and Natural Gas Capital Expenditures

Barnwell’s oil and natural gas capital expenditures, including accrued capital expenditures and excluding acquisitions and additions and revisions to estimated asset retirement obligations, totaled $2,336,000 and $10,016,000 for the three and nine months ended June 30, 2023, respectively, as compared to $1,687,000 and $7,353,000 for the same periods in the prior year.

Barnwell’s oil and natural gas capital expenditures, including accrued capital expenditures and excluding additions and revisions to estimated asset retirement obligations, totaled $495,000 for the three months ended December 31, 2023, as compared to $5,928,000 for the same period in the prior year.

In December 2022, Barnwell Texas, LLC (“Barnwell Texas”), a new wholly-owned subsidiary of the Company, entered into a purchase and sale agreement with an independent third party whereby Barnwell Texas acquired a 22.3% non-operated working interest in oil and natural gas leasehold acreage in the Permian Basin in Texas for cash consideration of $806,000.

In connection with the purchase of such leasehold interests, Barnwell Texas acquired a 15.4% non-operated working interest in two oil wells in the Wolfcamp Formation in Loving and Ward Counties, Texas and has paid $4,293,000 for its share of the costs to drill, complete and equip the wells through the nine months ended June 30, 2023.

The two gross (0.3 net) non-operated wells began producing in late April 2023 and the Company’s share of net production from these wells totaled 6,000 barrels of oil, 5,000 barrels of natural gas liquids, and 53,000 Mcf of natural gas during the three and nine months ended June 30, 2023.

In the quarter ended March 31, 2023, the Company participated in the drilling of three gross (0.9 net) non-operated wells in the Twining area of Alberta, Canada.

All three wells were completed and began producing during the latter part of the three months ended June 30, 2023.

Capital expenditures incurred for the drilling of these wells and Twining facilities in the nine months ended June 30, 2023 totaled approximately $4,649,000.

In fiscal 2022, the Company participated in the drilling of one operated and three non-operated for a total of four gross (1.9 net) wells in the Twining area of Alberta, Canada and the capital expenditures incurred for the drilling these wells in the nine months ended June 30, 2022 totaled approximately $4,858,000.

Additionally, in connection with the purchase of such leasehold interests, Barnwell Texas acquired a 15.4% non-operated working interest in two oil wells in the Wolfcamp Formation in Loving and Ward Counties, Texas and had paid $4,293,000 for its share of the costs to drill, complete, and equip the wells in the three months ended December 31, 2022.

Barnwell estimates that investments in oil and natural gas properties for fiscal 2024 will range from $4,000,000 to $6,000,000.

This estimated amount may increase or decrease as dictated by cash flows and management's assessment of the oil and natural gas environment and prospects.

Oil and Natural Gas Property Acquisitions

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 the quarter ended March 31, 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.

Barnwell also assumed $1,500,000 in asset retirement obligations associated with the acquisition.

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-Q

Item 2. Management’s Discussion and Analysis