BARNWELL INDUSTRIES INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Relevant to Forward-Looking Information For the Purpose Of “Safe Harbor” Provisions Of The Private Securities Litigation Reform Act of 1995 This Form 10-Q, and the documents incorporated herein by reference, contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). A forward-looking statement is one which is based on current expectations of future events or conditions and does not relate to historical or current facts. These statements include various estimates, forecasts, projections of Barnwell’s future performance, statements of Barnwell’s plans and objectives, and other similar statements. All such statements we make are forward-looking statements made under the safe harbor of the PSLRA, except to the extent such statements relate to the operations of a partnership or limited liability company. Forward-looking statements include phrases such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates,” “assumes,” “projects,” “may,” “will,” “will be,” “should,” or similar expressions. Although Barnwell believes that its current expectations are based on reasonable assumptions, it cannot assure that the expectations contained in such forward-looking statements will be achieved. Forward-looking statements involve risks, uncertainties and assumptions which could cause actual results to differ materially from those contained in such statements. The risks, uncertainties and other factors that might cause actual results to differ materially from Barnwell’s expectations are set forth in the “Forward-Looking Statements” and “Risk Factors” sections of Barnwell’s 2023 Annual Report. Investors should not place undue reliance on these forward-looking statements, as they speak only as of the date of filing of this Form 10-Q, and Barnwell expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein. Critical Accounting Policies and Estimates Management has determined that our most critical accounting policies and estimates are those related to the full-cost ceiling calculation and depletion of our oil and natural gas properties, the estimation of our contract drilling segment's revenues and expenses, and the calculation of our income taxes, all of which are discussed in our 2023 Annual Report. There have been no significant changes to these critical accounting policies and estimates during the three and six months ended March 31, 2024. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. Impact of Recently Issued Accounting Standards on Future Filings 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 27 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 . Overview Barnwell is engaged in the following lines of business: 1) acquiring, developing, producing and selling oil and natural gas in Canada and the U.S. (oil and natural gas segment), 2) investing in land interests in Hawaii (land investment segment), and 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling segment). Oil and Natural Gas Segment Barnwell is involved in the acquisition and development of oil and natural gas properties in Canada where we initiate and participate in acquisition and developmental operations for oil and natural gas on properties in which we have an interest, and evaluate proposals by third parties with regard to participation in exploratory and developmental operations elsewhere. Additionally, through its wholly-owned subsidiaries, Barnwell is involved in several non-operated oil and natural gas investments in Oklahoma and Texas. Land Investment Segment Through Barnwell’s 77.6% interest in Kaupulehu Developments, 75% interest in KD Kona, and 34.45% non-controlling interest in KKM Makai, the Company’s land investment interests include the following: • The right to receive percentage of sales payments from KD I resulting from the sale of single-family residential lots by KD I, within Increment I of the Kaupulehu Lot 4A area located in the North Kona District of the island of Hawaii. Kaupulehu Developments was 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. During the three months ended March 31, 2024, the last two remaining single-family lots in Increment I were sold. • The right to receive 15% of the distributions of KD II, the cost of which is to be solely borne by KDK out of its 55% ownership interest in KD II, plus a priority payout of 10% of KDK's cumulative net profits derived from Increment II sales subsequent to Phase 2A, up to a maximum of $3,000,000. Such interests are limited to distributions or net profits interests and Barnwell does not have any partnership interest in KD II or KDK through its interest in Kaupulehu Developments. Barnwell also has rights to three single-family residential lots in Phase 2A of Increment II, and four single-family residential lots in phases subsequent to Phase 2A when such lots are developed by KD II, all at no cost to Barnwell. Barnwell is committed to commence construction of improvements within 90 days of the transfer of the four lots in the phases subsequent to Phase 2A as a condition of the transfer of such lots. Also, in addition to Barnwell's existing obligations to pay professional fees to certain parties based on percentages of its gross receipts, Kaupulehu Developments is 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 28 development of such acreage will occur. No definitive development plans have been made by KD II, the developer of Increment II, as of the date of this report. • An indirect 19.6% non-controlling ownership interest in KD Kukio Resorts, LLLP, KD Maniniowali, LLLP and KD I and an indirect 10.8% non-controlling ownership interest in KD II through KDK. These entities, collectively referred to as the “Kukio Resort Land Development Partnerships,” 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 in Increment I, which is now completely sold, 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 Kukio Resort Land Development Partnerships have remaining Increment I obligations to complete project amenities, infrastructure, beautification, and restoration of certain areas and therefore has yet to fully recognize its deferred profit on the Increment I project as a whole. The Increment I deferred profit at March 31, 2024 for the Kukio Resort Land Development Partnerships as a whole was approximately $4,500,000; the recognition of which is dependent upon the completion of the Increment I obligations. The Kukio Resort Land Development Partnerships have accrued estimated costs of these obligations of approximately $3,000,000. The Kukio Resort Land Development Partnerships currently appears to have the ability to fund those obligations but there are no assurances that it can ultimately do so in the future if unforeseen events occur. The Kukio Resort Land Development Partnerships will recognize the Increment I deferred revenue and costs of sales on a percentage completion basis as the cash outlays to complete the remaining project obligations are made. The Kukio Resort Land Development Partnerships’ deferred profit and accrued costs to complete are not reflected in Barnwell’s Condensed Consolidated Balance Sheets as we account for our investment in the Kukio Resort Land Development Partnerships under the equity method of accounting. No percentage of sales payments will be earned by Barnwell on any future recognition of Increment I deferred profit as such payments were already fully earned and received based on cash received by the Kukio Resort Land Development Partnerships as the Increment I lots were sold. • 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. The lease terminates in December 2025. Contract Drilling Segment 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. 29 Results of Operations Summary The net loss attributable to Barnwell for the three months ended March 31, 2024 totaled $1,772,000, a $535,000 decrease in operating results from net loss of $1,237,000 for the three months ended March 31, 2023. The following factors affected the results of operations for the three months ended March 31, 2024 as compared to the prior year period: • A $1,906,000 decrease in oil and natural gas segment operating results, before income taxes, primarily attributable to a $1,677,000 non-cash ceiling test impairment in the current year period primarily due to lower 12-month rolling average first-day-of-the-month prices, whereas there was no such ceiling test impairment in the prior year period; • A $424,000 decrease in contract drilling segment operating results, before income taxes, due to an increase in estimated costs resulting from labor cost increases and operational issues encountered on a job; • Equity in income from affiliates increased $1,071,000 and land investment segment operating results, before non-controlling interests’ share of such profits, increased $500,000 due to the Kukio Resort Land Development Partnerships' sale of two lots in the current year period, whereas there were no lots sold in the prior year period; and • General and administrative expenses decreased $669,000 primarily due to decreases in stockholders costs 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 six months ended March 31, 2024 totaled $2,436,000, a $2,288,000 decrease in operating results from a net loss of $148,000 for the six months ended March 31, 2023. The following factors affected the results of operations for the six months ended March 31, 2024 as compared to the prior year period: • A $3,011,000 decrease in oil and natural gas segment operating results, before income taxes, primarily attributable to a $1,677,000 non-cash ceiling test impairment in the current year period and an increase in oil and natural gas depletion in the current year period as compared to the same period in the prior year; • A $700,000 decrease in contract drilling segment operating results, before income taxes, due to an increase in estimated costs resulting from labor cost increases and operational issues encountered on jobs; • Equity in income from affiliates increased $533,000 and land investment segment operating results, before non-controlling interests’ share of such profits, increased $235,000 due to the Kukio Resort Land Development Partnerships' sale of two lots in the current year period, whereas there was one lot sold in the prior year period; • General and administrative expenses decreased $1,514,000 primarily due to decreases in stockholders costs and professional fees in the current period as compared to the same period in the prior year; and 30 • 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 the current period. General Barnwell conducts operations in the U.S. and Canada. Consequently, Barnwell is subject to foreign currency translation and transaction gains and losses due to fluctuations of the exchange rates between the Canadian dollar and the U.S. dollar. Barnwell cannot accurately predict future fluctuations of the exchange rates and the impact of such fluctuations may be material from period to period. To date, we have not entered into foreign currency hedging transactions. 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 remained unchanged in the three and six months ended March 31, 2024, respectively, as compared to the same periods in the prior year. The exchange rate of the Canadian dollar to the U.S. dollar also remained unchanged at March 31, 2024, 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 loss due to foreign currency translation adjustments, net of taxes, for the three months ended March 31, 2024 was $22,000, a $22,000 change from other comprehensive loss due to foreign currency translation adjustments, net of taxes, of nil for the same period in the prior year. Other comprehensive income due to foreign currency translation adjustments, net of taxes, for the six months ended March 31, 2024 was $8,000, a $6,000 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 income (loss) due to foreign currency translation adjustments in the three and six months ended March 31, 2024 and 2023 due to a full valuation allowance on the related deferred tax asset. Oil and Natural Gas The following tables set forth Barnwell’s average prices per unit of production and net production volumes. Production amounts reported are net of royalties. Average Price Per Unit Three months ended Increase March 31, (Decrease) 2024 2023 $ % Natural Gas (Mcf)* $ 1.91 $ 2.61 $ (0.70) (27 %) Oil (Bbls)** $ 60.62 $ 64.61 $ (3.99) (6 %) Natural gas liquids (Bbls)** $ 30.06 $ 35.13 $ (5.07) (14 %) 31 Average Price Per Unit Six months ended Increase March 31, (Decrease) 2024 2023 $ % Natural Gas (Mcf)* $ 1.87 $ 3.54 $ (1.67) (47 %) Oil (Bbls)** $ 64.09 $ 68.68 $ (4.59) (7 %) Natural gas liquids (Bbls)** $ 29.60 $ 40.09 $ (10.49) (26 %) Net Production Three months ended Increase March 31, (Decrease) 2024 2023 Units % Natural Gas (Mcf)* 334,000 227,000 107,000 47 % Oil (Bbls)** 50,000 43,000 7,000 16 % Natural gas liquids (Bbls)** 16,000 8,000 8,000 100 % Net Production Six months ended Increase March 31, (Decrease) 2024 2023 Units % Natural Gas (Mcf)* 713,000 527,000 186,000 35 % Oil (Bbls)** 108,000 91,000 17,000 19 % Natural gas liquids (Bbls)** 34,000 18,000 16,000 89 % _______________________________________ * Mcf = 1,000 cubic feet. Natural gas price per unit is net of pipeline charges. ** Bbl = stock tank barrel equivalent to 42 U.S. gallons The oil and natural gas segment generated a $1,205,000 operating loss before general and administrative expenses in the three months ended March 31, 2024, a decrease in operating results of $1,906,000 as compared to the $701,000 operating profit before general and administrative expenses generated during the same period of the prior year. The oil and natural gas segment generated a $324,000 operating loss before general and administrative expenses in the six months ended March 31, 2024, a decrease in operating results of $3,011,000 as compared to the $2,687,000 operating profit before general and administrative expenses generated during the same period of the prior year. The operating losses for the three and six months ended March 31, 2024 were due to a non-cash ceiling test impairment of $1,677,000. There was no ceiling test impairment during the three and six months ended March 31, 2023. The decrease in operating results for both the three and six month periods of the current year were also due to an increase in depletion expense, as further discussed below. 32 The following table sets forth Barnwell’s oil and natural gas segment operating (loss) profit before general and administrative expenses by geographic location: Three months ended March 31, Six months ended March 31, 2024 2023 2024 2023 Operating profit (loss) (before general and administrative expenses) Canada (1) $ (1,511,000) $ 489,000 $ (975,000) $ 2,088,000 United States 306,000 212,000 651,000 599,000 Total operating (loss) profit $ (1,205,000) $ 701,000 $ (324,000) $ 2,687,000 ________________________ (1) The operating losses for Canada for the three and six months ended March 31, 2024 include a non-cash ceiling test impairment of $1,677,000. Oil and natural gas revenues increased $458,000 (12%) and $362,000 (4%) for the three and six months ended March 31, 2024, respectively, as compared to the same periods in the prior year. The increases were primarily due to increases in natural gas, oil, and natural gas liquid production from wells drilled in 2023 in the Twining area and from wells in Texas, partially offset by decreases in the prices of all the commodities in the current year periods as compared to the same periods 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 index 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 index price contract is equivalent to approximately 34% of what Canadian natural gas gross production per day was for the three months ended March 31, 2024. Additionally, the Company also amended the sales price on 225 gross barrels per day of the Canadian oil for sale for the period from January 1, 2024 to June 30, 2024 to a fixed index price of $69.46 per net barrel, with remaining volumes continuing to be sold at spot prices. This per day volume of oil under this fixed index price contract is equivalent to approximately 37% of what Canadian oil gross production per day was for the three months ended March 31, 2024. 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 operating expenses increased $63,000 (3%) and $410,000 (9%) for the three and six months ended March 31, 2024, respectively, as compared to the same periods in the prior year, primarily due to costs associated with new production from wells in the Twining area and from wells in Texas. Oil and natural gas segment depletion increased $624,000 (87%) and $1,286,000 (85%) for the three and six months ended March 31, 2024, respectively, as compared to the same periods in the prior year. The increases were primarily due to increases in the depletion rate for Canadian properties and also increased production from those properties, both of which were the result of the wells drilled in 2023 and facilities expansion and upgrade costs, all in the Twining area. The increases were also due to depletion attributable to production in Texas, whereas there was no such depletion in the prior year periods. 33 Sale of Interest in Leasehold Land Kaupulehu Developments was entitled to receive a percentage of the gross receipts from the sales of lots and/or residential units in Increment I by KD I. The following table summarizes the revenues received from KD I and the amount of fees directly related to such revenues: Three months ended March 31, Six months ended March 31, 2024 2023 2024 2023 Sale of interest in leasehold land: Revenues - sale of interest in leasehold land $ 500,000 $ — $ 500,000 $ 265,000 Fees - included in general and administrative expenses (61,000) — (61,000) (32,000) Sale of interest in leasehold land, net of fees paid $ 439,000 $ — $ 439,000 $ 233,000 During the three and six months ended March 31, 2024, Barnwell received $500,000 in percentage of sales payments from KD I from the sale of the last two single-family lots within Increment I. No lots were sold during the three months ended March 31, 2023. During the six months ended March 31, 2023, Barnwell received $265,000 in percentage of sales payments from KD I from the sale of one single-family lot within Increment I. There is an Increment II owned by KD II in which the Company has a 10.8% indirect non-controlling ownership interest. There is no assurance with regards to the amounts of future sales from Increment II or that the remaining acreage within Increment II will be developed. No definitive development plans have been made by KD II, the developer of Increment II, as of the date of this report. Contract Drilling Contract drilling revenues and contract drilling costs decreased $431,000 (29%) and $14,000 (1%), respectively, for the three months ended March 31, 2024, as compared to the same period in the prior year. The contract drilling segment generated a $367,000 operating loss before general and administrative expenses in the three months ended March 31, 2024, a decrease in operating results of $424,000 as compared to the $57,000 operating profit generated during the same period of the prior year. Contract drilling revenues and contract drilling costs decreased $1,386,000 (40%) and $702,000 (22%), respectively, for the six months ended March 31, 2024, as compared to the same period in the prior year. The contract drilling segment generated a $595,000 operating loss before general and administrative expenses in the six months ended March 31, 2024, a decrease in operating results of $700,000 as compared to the $105,000 operating profit generated during the same period of the prior year. The decreases in contract drilling revenues and contract drilling costs for the three and six months ended March 31, 2024 as compared to the same periods in the prior year were due to less progress made on jobs due to drilling difficulties and increases in estimated costs to complete as a result of these drilling difficulties, and a decrease in revenues and costs recognized from materials deliveries and installations as compared to the same periods in the prior year. Also, during the quarter ended March 31, 2024, the Company commenced compensation adjustments for contract drilling segment personnel to decrease 34 potential attrition of workers and enable the Company to complete its drilling obligations. These factors resulted in contract drilling expenses decreasing less than the decreases in contract drilling revenues. 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. If no sale of its stock or assets along with contract backlog can be secured, Water Resources will be wound down after all contracts in backlog are completed and any remaining drilling rigs and equipment will be liquidated. 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 $669,000 (33%) for the three months ended March 31, 2024 as compared to the same period in the prior year. The decrease was due to decreases of $153,000 in professional fees and $535,000 in stockholders costs primarily attributed to the cooperation and support agreement and associated fees to certain directors in the prior year period as compared to the same period in the current year. General and administrative expenses decreased $1,514,000 (35%) for the six months ended March 31, 2024 as compared to the same period in the prior year. The decrease was due to decreases of $80,000 in share-based compensation, $847,000 in professional fees primarily related to legal and consulting services, and $545,000 in stockholders costs primarily attributed to the cooperation and support agreement and associated fees to certain directors in the prior year period as compared to the same period in the current year. Depletion, Depreciation, and Amortization Depletion, depreciation, and amortization increased $631,000 (83%) and $1,302,000 (81%) for the three and six months ended March 31, 2024, respectively, as compared to the same periods in the prior year, primarily due to increases in the depletion rate for Canadian properties and also new production from those properties and due to depletion attributable to production in Texas as discussed in the “Oil and natural gas” section above. Impairment of Assets Under the full cost method of accounting, the Company performs quarterly oil and natural gas ceiling test calculations. During the three and six months ended March 31, 2024, the Company incurred a non-cash ceiling test impairment for our Canadian oil and natural gas propertries of $1,677,000. There was no ceiling test impairment during the three and six months ended March 31, 2023. 35 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. If oil and natural gas prices decline sufficiently from the 12-month historical rolling average first-day-of-the-month prices used in the ceiling test at March 31, 2024, it is more likely than not that the Company will incur further impairment write-downs in future periods in the absence of any offsetting factors that are not currently known or projected. Foreign Currency Loss (Gain) Foreign currency loss was $128,000 and $2,000 during the three and six months ended March 31, 2024, respectively, as compared to foreign currency gain of $2,000 and $80,000 during the three and six months ended March 31, 2023, respectively, due to the effects of foreign exchange rate changes on intercompany loans and advances as a result of changes in the U.S. dollar against the Canadian dollar. The foreign currency loss (gain) from intercompany balances are included in our condensed 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 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 six months ended March 31, 2023. Equity in Income of Affiliates Equity in income of affiliates was $1,071,000 during the three and six months ended March 31, 2024, as compared to equity in income of affiliates of nil and $538,000 during the three and six months ended March 31, 2023, respectively. The increase in partnership income is primarily due to the Kukio Resort Land Development Partnerships' sale of the last two lots in Increment I during the current year period, as compared to one lot sale in the prior year period. During the six months ended March 31, 2024, Barnwell received cash distributions of $1,071,000 from the Kukio Resort Land Development Partnerships resulting in a net amount of $953,000, after distributing $118,000 to non-controlling interests. During the six months ended March 31, 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. 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 36 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 six months ended March 31, 2024 was equivalent to the $1,071,000 of distributions received in that period. Cumulative distributions received from the Kukio Resort Land Development Partnerships in excess of our investment balance was $225,000 at March 31, 2024 and $708,000 at September 30, 2023. Income Taxes Barnwell’s effective consolidated income tax rate, after adjusting loss before income taxes for non-controlling interests, was (6)% and (7)% for the three and six months ended March 31, 2024, respectively, as compared to nil and (106)% for the three and six months ended March 31, 2023, respectively. 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. Income from our investment in the Oklahoma oil venture is 100% allocable to Oklahoma. As such, Barnwell receives no benefit from consolidated or unitary losses and, therefore, is subject to Oklahoma state taxes. 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 $222,000 and $224,000 for the three and six months ended March 31, 2024, respectively, as compared to net earnings attributable to non-controlling interests of $2,000 and $122,000 for the same periods in the prior year. The changes of $220,000 (11,000%) and $102,000 ( 84%) for the three and six months, respectively, are primarily due to increases in the amount of equity in income of affiliates and percentage of sales revenues received in the current year periods as compared to the same periods in the prior year. Liquidity and Capital Resources At March 31, 2024, Barnwell had $3,332,000 in working capital. Barnwell’s primary sources of liquidity are cash on hand and cash flow generated by our oil and natural gas operations as minimal, if any, cash flow is expected from our land investment segment. 37 The Company has generated a significant amount of cash inflows from its land investment segment, however, the last lots at Increment I were sold during the quarter ended March 31, 2024 and there are no more lots available for sale in Increment I. In addition, no definitive development plans have been made by the developer of Increment II as of the date of this report and thus future cash inflows from the land investment segment are uncertain. Management estimates that cash flows from the sale of the contract drilling segment business or its operating assets will provide some level of liquidity in the near-term. The Company will primarily be reliant upon sufficient operating cash inflows from its oil and natural gas segment, which in turn will be largely determined by prices and production levels. A certain level of oil and natural gas capital expenditures will be necessary to grow reserves and production or at a minimum replace declining production from aging wells. Such a level of oil and natural gas capital expenditures may require funding from external debt or equity sources that are not currently in place. While management estimates that it is more likely than not that there is sufficient cash on hand, contract drilling segment asset sales and cash flows from oil and natural gas segment operations to continue as a going concern for the twelve months from the filing of this report, the aforementioned factors will influence the Company’s liquidity beyond that twelve month period. Cash Flows Cash flows provided by operations totaled $2,262,000 for the six months ended March 31, 2024, as compared to cash flows provided by operations of $734,000 for the same period in the prior year. This $1,528,000 change in operating cash flows was due to an increase in distributions of income from the Kukio Resort Land Development Partnerships and a decrease in general and administrative costs in the current year period as compared to the prior year period, partially offset by lower operating results for the contract drilling segment in the current year period as compared to the same period in the prior year. Cash flows used in investing activities totaled $1,186,000 during the six months ended March 31, 2024, as compared to cash flows used in investing activities of $7,370,000 during the same period of the prior year. This $6,184,000 change in investing cash flows was primarily due to a decrease of $6,163,000 in cash paid for investments in 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 $223,000 for the six months ended March 31, 2024, as compared to cash flows used in financing activities of $423,000 for the six months ended March 31, 2023. The $200,000 change in financing cash flows was due to a decrease of $299,000 in payment of dividends, partially offset by an increase of $99,000 in distributions to non-controlling interests in the current year period as compared to the same period in the prior year. Cash Dividends No dividends were declared or paid during the six months ended March 31, 2024. 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. 38 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 $560,000 and $1,055,000 for the three and six months ended March 31, 2024, respectively, as compared to $1,752,000 and $7,680,000 for the same periods in the prior year. The oil and natural gas capital expenditures for the six months ended March 31, 2024 were primarily for completion, improvement and equipping costs in the Twining area of Alberta, Canada. 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. 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 six months ended March 31, 2024. 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. Capital expenditures incurred for the drilling of these wells and Twining facilities in the six months ended March 31, 2023 totaled approximately $2,236,000. 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.