The condensed consolidated financial statements include the accounts of Barnwell Industries, Inc. and all majority-owned subsidiaries (collectively referred to herein as “Barnwell,” “we,” “our,” “us,” or the “Company”), including a 77.6%-owned land investment general partnership (Kaupulehu Developments) and a 75%-owned land investment partnership (KD Kona 2013 LLLP). All significant intercompany accounts and transactions have been eliminated.

 

Undivided interests in oil and natural gas exploration and production joint ventures are consolidated on a proportionate basis. Barnwell’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in variable interest entities in which the Company is not deemed to be the primary beneficiary are accounted for by the equity method.

 

Unless otherwise indicated, all references to “dollars” in this Form 10-Q are to U.S. dollars.

 

The accompanying unaudited condensed consolidated financial statements and notes have been prepared by Barnwell in accordance with the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission.SEC. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in Barnwell’s September 30, 20182019 Annual Report on Form 10-K.10-K, as amended by our Form 10-K/A Amendment No. 1 and Form 10-K/A Amendment No. 2. The Condensed Consolidated Balance Sheet as of September 30, 20182019 has been derived from audited consolidated financial statements.

 

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at March 31, 2019,2020, results of operations and comprehensive (loss) income for the three and six months ended March 31, 20192020 and 2018,2019, and equity and cash flows for the six months ended March 31, 20192020 and 2018,2019, have been made. The results of operations for the period ended March 31, 20192020 are not necessarily indicative of the operating results for the full year.

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management of Barnwell to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates. Significant assumptions are required in the valuation of deferred tax assets, asset retirement obligations, share-based payment arrangements, obligations for

Other than the change to Barnwell's "Revenue Recognition" policy noted above,accounting policies implemented in connection with the adoption of Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” discussed in Note 12, there have been no other changes to Barnwell’sBarnwell's significant accounting policies as described in the Notes to Consolidated Financial Statements included in Item 8 of the Company’sCompany's most recently filed Annual Report on Form 10-K.

In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers2016-02, “Leases (Topic 606)842),” which requires an entity to recognize a right-of-use asset and a lease liability on the amount of revenue to which it expects to be entitledbalance sheet for all leases with terms greater than 12 months at the transfer of promised goods or services to customers. The impacts of Topic 606 on Barnwell are described in the "Revenue Recognition" accounting policy noted above as well as Note 7.

In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income,” which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The Company adopted the provisions of this ASU effective October 1, 2019. The adoption of this update did not have an impact on Barnwell's consolidated financial statements.

In August 2016,July 2018, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,2018-09, “Codification Improvements,” which addressesprovides further clarification to the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees.codification literature. The Company adopted the provisions of this ASU effective October 1, 2018. The adoption of this update did not have an impact on Barnwell's consolidated financial statements

In February 2016, the FASB issued ASU No. 2016-02, “Leases,”quarter ended March 31, 2020, the COVID-19 outbreak caused significant reductions in demand for oil and oil prices, which seekshas caused the Company to increase transparencysuspend the development of proved undeveloped reserves and comparability among organizationshas impacted the Company’s financial condition and outlook. Additionally, demand for real estate in the area where the Company’s land investment segment holds interests has declined as evidenced by recognizing lease assets and lease liabilitiesno developer lot sales in the recent period. While the Company’s contract drilling segment continues to work as allowed under applicable government exemptions for such work, the impact of COVID-19 on the balance sheetability or desire for customers to continue such work is uncertain, and by disclosing key information about leasing arrangements. In general,any discontinuation of contracts currently in backlog would result in a right-of-use asset and lease obligation will be recorded for leases exceeding a twelve-month term whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption must be calculated using the applicable incremental borrowing rate at the date of adoption. Subsequentmaterial adverse impact to the issuance of ASU No. 2016-02,Company’s financial condition and outlook.

Both the FASB issued ASU No. 2018-01, “Land Easement Practical Expedient for Transition to Topic 842,” which provides an optional transition practical expedient to not evaluate existing or expired land easements under the new lease standard, ASU No. 2018-10, “Clarifying Pre-Effective Amendments to the Forthcoming Lease Accounting Rules,” which provides further clarification on certain guidance within ASU No. 2016-02, “Leases,” ASU No. 2018-11, “Leases (Topic 842) - Targeted Improvements,” which allows for a transitional method of adopting the new lease standard,health and ASU No. 2019-01, "Leases (Topic 842) - Codification Improvements," which amended certaineconomic aspects of the new leasing standard. These ASUsCOVID-19 pandemic are effective for annual reporting periods beginning after December 15, 2018,highly fluid and interim periods within those annual periods,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 allow forduration of its impact. If the useoutbreak of eitherCOVID-19 is not effectively and timely controlled, our business operations and financial condition may continue to be materially and adversely affected as a full retrospective approach for all periods presentedresult of the deteriorating market outlook, the global economic recession, weakened liquidity or 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 periodregions 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 adoption, or a modified retrospective transition approach. Barnwell is currently evaluating the effect that the adoption of this update will have on the consolidated financial statements.operations.

Basic (loss) earningsloss per share is computed using the weighted-average number of common shares outstanding for the period. Diluted (loss) earningsloss per share is calculated using the treasury stock method to reflect the assumed issuance of common shares for all potentially dilutive securities, which consist of outstanding stock options. Potentially dilutive shares are excluded from the computation of diluted (loss) earningsloss per share if their effect is anti-dilutive.

Options to purchase 318,75060,000 and 493,750318,750 shares of common stock were excluded from the computation of diluted shares for the three and six months ended March 31, 20192020 and 2018, respectively,2019, as their inclusion would have been antidilutive.anti-dilutive.

 

Reconciliations between net (loss) earningsloss attributable to Barnwell stockholders and common shares outstanding of the basic and diluted net (loss) earningsloss per share computations are detailed in the following tables:

On November 27, 2013, Barnwell, through a wholly-owned subsidiary, entered into two limited liability limited partnerships, KD Kona 2013 LLLP and KKM Makai, LLLP ("KKM"(“KKM”), and indirectly acquired a 19.6% non-controlling ownership interest in each of KD Kukio Resorts, LLLP, KD Maniniowali, LLLP and KD Kaupulehu, LLLP ("KDK"(“KDK”) for $5,140,000. These entities, collectively referred to hereinafter as the "Kukio“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 holds interests in KD Acquisition, LLLP (“KD I”) and KD Acquisition II, LP, formerly KD Acquisition II, LLLP (“KD II”). KD I is the developer of Kaupulehu Lot 4A Increment I ("(“Increment I"I”), and KD II is the developer of Kaupulehu Lot 4A Increment II ("(“Increment II"II”). Barnwell’s ownership interests in the Kukio Resort Land Development Partnerships is accounted for using the equity method of accounting. The partnerships derive income from the sale of residential parcels, of which 19 lots remain to be sold at Increment I as of March 31, 2019,2020, as well as from commissions on real estate sales by the real estate sales office.

In March 2019, KD II admitted a new development partner, Replay Kaupulehu Development, LLC (“Replay”), a party unrelated to Barnwell, in an effort to move forward with development of the remainder of Increment II at Kaupulehu. Effective March 7, 2019, KDK and Replay hold ownership interests of 55% and 45%, respectively, of KD II. Accordingly, Barnwell has a 10.8% indirect non-controlling ownership interest in KD II through KDK as of that date that will continue to be accounted for using the equity method of accounting. Barnwell continues to have an indirect 19.6% non-controlling ownership interest in KD Kukio Resorts, LLLP, KD Maniniowali, LLLP, and KD I.

There were no cash distributions from the Kukio Resort Land Development Partnerships for the six months ended March 31, 2020. During the six months ended March 31, 2019, Barnwell received net cash distributions in the amount of $314,000 from the Kukio Resort Land Development Partnerships after distributing $38,000 to non-controlling interests. There were no cash distributions from the Kukio Resort Land Development Partnership for the six months ended March 31, 2018.

Barnwell has the right to receive distributions from its non-controlling interest in KKM in proportion to its partner capital sharing ratio of 34.45%. Barnwell is entitled to a 100% preferred return up to $1,000,000 from KKM on any allocated equity in income of the Kukio Resort Land Development Partnerships for cumulative distributions to all of its partners in excess of $45,000,000 from those partnerships. With the distribution in the six months ended March 31, 2019, cumulativeCumulative distributions from the Kukio Resort Land Development Partnerships totaled $45,000,000. Becausehave reached the $45,000,000 threshold. However, because we have no control over the distributions from the Kukio Resort Land Development Partnerships and the ability of the Kukio Resort Land Development Partnerships to make such distributions is dependent upon their future sales of lots, we have not recorded any estimated potential preferred return from KKM in our equity in income to date. However, if sufficient distributions are made by the Kukio Resort Land Development Partnerships in the future, Barnwell will have

 

Summarized financial information for the Kukio Resort Land Development partnershipsPartnerships is as follows:

Kaupulehu Developments has the right to receive payments from KD I and KD II resulting from the sale of lots and/or residential units within Increment I and Increment II by KD I and KD II (see Note 12)15).

 

With respect to Increment I, Kaupulehu Developments is entitled to receive payments from KD I based on the following percentages of the gross receipts from KD I’s sales of single-family residential lots in Increment I: 10% of such aggregate gross proceeds greater than $100,000,000 up to $300,000,000; and 14% of such aggregate gross proceeds in excess of $300,000,000. During the six months ended March 31, 2019, one single-family lot in Increment I was sold bringing theThe total amount of gross proceeds from single-family lotlots sales was $216,400,000 through March 31, 2019 to $216,400,000. As of2020. No single-family lots were sold during

Concurrent with the transaction whereby KD II admitted Replay as a new development partner, Kaupulehu Developments entered into new agreements with KD II whereby the aforementioned terms of the former Increment II arrangement were eliminated and Kaupulehu Developments will instead be entitled to 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 as to the priority payout. Such interests are limited to distributions or net profits interests and Barnwell will not have any partnership interests in KD II or KDK through its interest in Kaupulehu Developments. The new arrangement also gives Barnwell rights to three single-family residential lots in Phase 2A of Increment II, and four single-family residential lots in phases subsequent to Phase 2A when such lots are developed by KD II, all at no cost to Barnwell. Barnwell is committed to commence construction of improvements within 90 days of the transfer of the four lots in the phases subsequent to Phase 2A as a condition of the transfer of such lots. Also, in addition to Barnwell’s existing obligations to pay professional fees to certain parties based on percentages of its gross receipts, Kaupulehu Developments is now also obligated to pay an amount equal to 0.72% and 0.2% 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, in compensation for the agreement of these parties to admit the new development partner for Increment II. Such compensation will be reflected as the obligation becomes probable and the amount of the obligation can be reasonably estimated. The new agreements also specify that Kaupulehu Developments was to be paid $1,000,000 by KD II prior to admission of Replay as a partner. This $1,000,000 payment had already been received in June 2018 and is included in the $3,500,000 cumulative total as of March 6, 2019 discussed above.

The Increment I percentage of sales arrangement between Barnwell and KD I remains unchanged.

The following table summarizes the Increment I and Increment II revenues from KD I and KD II and the amount of fees directly related to such revenues:

Kaupulehu Developments holds an interest in an area of approximately 1,000 acres of vacant leasehold land zoned conservation located adjacent to Lot 4A, which currently has no development potential without both a development agreement with the lessor and zoning reclassification. The lease terminates in December 2025. 

In October 2017,2019, Barnwell entered into a Purchasepurchase and Sale Agreementsale agreement with an independent third party and sold its oil and natural gasinterests in properties located in the Pouce CoupeProgress area of Alberta, Canada. The sales price per the agreement was adjusted to $72,000 for customary purchase price adjustments to $594,000 in order to, among other things, reflect thean economic activity from the effective date of MayOctober 1, 20172019. The final determination of the customary adjustments to the closing date. From Barnwell's netpurchase price has not yet been made however it is not expected to result in a material adjustment. The proceeds $37,000 was withheld and remitted by the buyerwere credited to the Canada Revenue Agency for potential amounts due for Barnwell’s Canadian income taxes. Nofull cost pool, with no gain or loss was recognized, on thisas the sale as it did not result in a significant alteration of the relationship between capitalized costs and proved reserves. Proceeds from the disposition were credited to the full cost pool.

In February 2018, Barnwell sold itsThere were no oil properties located inand natural gas property dispositions during the Red Earth area of Alberta, Canada. As a result of the significant impact that the sale of Red Earth had on the relationship between capitalized costs and proved reserves of the sold property and retained properties, Barnwell did not credit the sales proceeds to the full cost pool, but instead calculated a gain on the sale of Red Earth of $2,135,000 which was recognized in the three and six months ended March 31, 2018, in accordance with the guidance in Rule 4-10(c)(6)(i) of Regulation S-X.

In the quarter ended December 31, 2018, Barnwell acquired additional working interests in oil and natural gas properties located in the Wood River and Twining areas of Alberta, Canada for cash consideration of $355,000. The purchase priceprices per the agreements were adjusted for customary purchase price adjustments to reflect the economic activity from the effective date to the closing date. The final determination of the customary adjustments to the

There were no oil and natural gas property acquisitions during the quarter ended March 31, 2019.

Under the full cost method of accounting, the Company performs quarterly oil and natural gas ceiling test calculations. Barnwell's net capitalized costs exceeded the ceiling limitations by $243,000 and $2,413,000 for the three and six months ended March 31, 2019, respectively. There were no ceiling test impairments in the same periods of the prior year.

Prior to the three months ended March 31, 2020, the ceiling test is also impacted by any changes in management's quarterly evaluation ofcalculation included management’s estimation that the Company'sCompany had the ability to fund the approximately $14,000,000$12,000,000 of future capital expenditures necessary over the next five years to develop the proved undeveloped reserves that are largely in the Twining area of Alberta, Canada. However, due to the value of which is included inimpact on oil prices and the calculation ofextreme uncertainties created by the ceiling limitation. If facts, circumstances, estimates and assumptions underlying management's assessment ofCOVID-19 pandemic during the three months ended March 31, 2020 on the Company's ability to fund such capital expenditures change such that itfinancial outlook, management is no longer reasonably certain that allthe Company will have the financial resources necessary to make any of the approximately $14,000,000$12,000,000 of capital expenditures necessary to develop the proved undeveloped reserves. Therefore, the proved undeveloped reserves can be made, it is likely that we will incurhave been excluded from the ceiling test calculation and the Company incurred a further$1,637,000 ceiling test impairment in the three and six months ended March 31, 2020.

As discussed above, the ceiling test mandates the use of the 12-month historical rolling average first-day-of-the-month prices. Given the recent decline in oil prices, current oil prices are now lower than the 12-month historical rolling average first-day-of-the-month oil price used in our ceiling test calculation for the quarter ended March 31, 2020. If oil prices remain at current levels or decline further, it is more likely than not that time.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, as the 12-month historical rolling average first-day-of-the-month oil prices used in our oil and natural gas ceiling test would continue to decline during each rolling quarterly period in 2020. Based on the oil prices for April 1 and May 1 and the estimated oil price for June 1 of 2020, oil prices are estimated to be approximately 65% lower than April 1, May 1, and June 1 of 2019 oil prices, which will result in an approximately 18% decrease in the 12-month historical rolling first-day-of-the-month average oil price for the quarter ending June 30, 2020.

Barnwell sponsors a noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all of its U.S. employees. Additionally, Barnwell sponsors a Supplemental Employee Retirement Plan (“SERP”), a noncontributory supplemental retirement benefit plan which covers certain current and former employees of Barnwell for amounts exceeding the limits allowed under the Pension Plan, and a postretirement medical insurance benefits plan (“Postretirement Medical”) covering eligible U.S. employees.

 

The following tables detailsdetail the components of net periodic benefit (income) cost for Barnwell’s retirement plans:

The components of net periodic benefit (income) cost, including service cost, areis included in "General“General and administrative"administrative” expenses in the Company's Condensed Consolidated Statements of Operations.

Currently, no contributions are expected to be made to the Pension Plan during the six months ended March 31, 2019 and estimates that it will not make any further cash contributions during the remainder of fiscal 2019.2020. The SERP and Postretirement Medical plans are unfunded, and Barnwell funds benefits when payments are made. Expected payments under the Postretirement Medical plan and the SERP for fiscal 20192020 are not material. Fluctuations in actual equity market returns as well as changes in general interest rates will result in changes

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

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

The repealOn March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law to provide economic relief to businesses that were negatively impacted by the COVID-19 pandemic. Key tax provisions of the corporate Alternative Minimum Tax ("AMT"CARES Act currently impacting the Company include the modification of rules related to alternative minimum tax (“AMT”) bycredits and net operating losses (“NOL”). Other provisions of the Tax Cuts and JobsCARES Act of 2017 (“TCJA”), enacted on December 22, 2017, provides a mechanism for the refund over time of any unused AMT credit carryovers. Priorare currently inapplicable to the enactmentCompany and/or do not impact the Company’s U.S. federal current and deferred income taxes.

Under previous legislation, 50% of the TCJA, it was not more likely than not that the Company’s AMT credit carryovers would provide a future benefit, as such the AMT deferred tax asset had a full valuation allowance. As a result of the TCJA provision for refundability of the AMT, the Company recorded a current income tax benefit of $460,000 in the quarter ended December 31, 2017 to reflect the undiscounted unusedtotal AMT credit carryover balance as a non-currentwas refundable upon the filing of the Company's U.S. federal income tax receivable. Therereturn for the year ended September 30, 2019 and was no significant impactreclassified to current taxes receivable as of September 30, 2019. The CARES Act provides for an election, which the TCJA duringCompany has made, to take the three and six monthsentire refundable credit in the Company’s U.S. federal income tax return for the year ended March 31,September 30, 2019. Respective portions of this balance will beAs such, the Company reclassified the remaining 50% from non‑current income taxes receivable to current income taxes receivable when amounts are eligibleas of March 31, 2020 as a result of CARES Act.

The following tables providesprovide information about disaggregated revenue by revenue streams, reportable segments, geographical region, and timing of revenue recognition for the three and six months ended March 31, 2020 and 2019.