Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II - Other Information
Item 6. Exhibits
Exhibits
EX-10.1
exhibit101agreementtorelea.htm
EX-10.2
ex102retainedright.htm
EX-31.1
exhibit311_033119.htm
EX-31.2
exhibit312_033119.htm
EX-32.1
exhibit32_033119.htm
Barnwell Industries Earnings 2019-03-31
BRN 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 brn10q03312019.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 1-5103
BARNWELL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
72-0496921
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1100 Alakea Street, Suite 2900, Honolulu, Hawaii
96813
(Address of principal executive offices)
(Zip code)
(808) 531-8400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
x
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of May 7, 2019 there were 8,277,160 shares of common stock, par value $0.50, outstanding.
Accounts and other receivables, net of allowance for doubtful accounts of: $40,000 at March 31, 2019; $42,000 at September 30, 2018
2,066,000
1,965,000
Income taxes receivable
102,000
2,461,000
Other current assets
2,198,000
950,000
Total current assets
10,793,000
12,082,000
Income taxes receivable, net of current portion
460,000
429,000
Asset for retirement benefits
997,000
848,000
Investments
970,000
1,608,000
Property and equipment
71,874,000
73,010,000
Accumulated depletion, depreciation, and amortization
(58,949,000
)
(56,599,000
)
Property and equipment, net
12,925,000
16,411,000
Total assets
$
26,145,000
$
31,378,000
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
$
1,615,000
$
1,191,000
Accrued capital expenditures
121,000
232,000
Accrued compensation
246,000
568,000
Accrued operating and other expenses
1,057,000
1,140,000
Current portion of asset retirement obligation
648,000
444,000
Other current liabilities
1,913,000
54,000
Total current liabilities
5,600,000
3,629,000
Deferred rent
150,000
107,000
Liability for retirement benefits
4,515,000
4,410,000
Asset retirement obligation
6,500,000
6,678,000
Deferred income tax liabilities
205,000
315,000
Total liabilities
16,970,000
15,139,000
Commitments and contingencies
Equity:
Common stock, par value $0.50 per share; authorized, 20,000,000 shares: 8,445,060 issued at March 31, 2019 and September 30, 2018
4,223,000
4,223,000
Additional paid-in capital
1,350,000
1,350,000
Retained earnings
6,548,000
13,253,000
Accumulated other comprehensive loss, net
(764,000
)
(514,000
)
Treasury stock, at cost: 167,900 shares at March 31, 2019 and September 30, 2018
(2,286,000
)
(2,286,000
)
Total stockholders' equity
9,071,000
16,026,000
Non-controlling interests
104,000
213,000
Total equity
9,175,000
16,239,000
Total liabilities and equity
$
26,145,000
$
31,378,000
See Notes to Condensed Consolidated Financial Statements
3
BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
Six months ended March 31,
2019
2018
2019
2018
Revenues:
Oil and natural gas
$
1,924,000
$
859,000
$
3,156,000
$
1,812,000
Contract drilling
987,000
1,016,000
2,150,000
1,858,000
Sale of interest in leasehold land
—
—
165,000
—
Gas processing and other
52,000
100,000
87,000
161,000
2,963,000
1,975,000
5,558,000
3,831,000
Costs and expenses:
Oil and natural gas operating
1,249,000
575,000
2,586,000
1,233,000
Contract drilling operating
1,231,000
883,000
2,547,000
1,704,000
General and administrative
1,461,000
1,563,000
3,009,000
3,044,000
Depletion, depreciation, and amortization
758,000
227,000
1,577,000
507,000
Impairment of assets
243,000
37,000
2,413,000
37,000
Interest expense
—
—
4,000
—
Gain on sales of assets
—
(2,250,000
)
—
(2,250,000
)
4,942,000
1,035,000
12,136,000
4,275,000
(Loss) earnings before equity in loss of affiliates and income taxes
(1,979,000
)
940,000
(6,578,000
)
(444,000
)
Equity in loss of affiliates
(207,000
)
(80,000
)
(286,000
)
(233,000
)
Loss (earnings) before income taxes
(2,186,000
)
860,000
(6,864,000
)
(677,000
)
Income tax (benefit) provision
(35,000
)
197,000
(140,000
)
(306,000
)
Net (loss) earnings
(2,151,000
)
663,000
(6,724,000
)
(371,000
)
Less: Net (loss) earnings attributable to non-controlling interests
(26,000
)
(16,000
)
1,000
(33,000
)
Net (loss) earnings attributable to Barnwell Industries, Inc.
$
(2,125,000
)
$
679,000
$
(6,725,000
)
$
(338,000
)
Basic and diluted net (loss) earnings per common share attributable to Barnwell Industries, Inc. stockholders
$
(0.26
)
$
0.08
$
(0.81
)
$
(0.04
)
Weighted-average number of common shares outstanding:
Basic and diluted
8,277,160
8,277,160
8,277,160
8,277,160
See Notes to Condensed Consolidated Financial Statements
4
BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
Three months ended March 31,
Six months ended March 31,
2019
2018
2019
2018
Net (loss) earnings
$
(2,151,000
)
$
663,000
$
(6,724,000
)
$
(371,000
)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of taxes of $0
130,000
(181,000
)
(283,000
)
(187,000
)
Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0
16,000
39,000
33,000
63,000
Total other comprehensive income (loss)
146,000
(142,000
)
(250,000
)
(124,000
)
Total comprehensive (loss) income
(2,005,000
)
521,000
(6,974,000
)
(495,000
)
Less: Comprehensive (loss) income attributable to non-controlling interests
(26,000
)
(16,000
)
1,000
(33,000
)
Comprehensive (loss) income attributable to Barnwell Industries, Inc.
$
(1,979,000
)
$
537,000
$
(6,975,000
)
$
(462,000
)
See Notes to Condensed Consolidated Financial Statements
5
BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Six months ended March 31, 2019 and 2018
(Unaudited)
Shares
Outstanding
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated Other Comprehensive Loss
Treasury
Stock
Non-controlling
Interests
Total
Equity
Balance at September 30, 2017
8,277,160
$
4,223,000
$
1,350,000
$
15,023,000
$
(1,058,000
)
$
(2,286,000
)
$
931,000
$
18,183,000
Distributions to non-controlling interests
—
—
—
—
—
—
(506,000
)
(506,000
)
Net loss
—
—
—
(338,000
)
—
—
(33,000
)
(371,000
)
Share-based compensation
—
—
1,000
—
—
—
—
1,000
Foreign currency translation adjustments, net of taxes of $0
—
—
—
—
(187,000
)
—
—
(187,000
)
Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0
—
—
—
—
63,000
—
—
63,000
Balance at March 31, 2018
8,277,160
$
4,223,000
$
1,351,000
$
14,685,000
$
(1,182,000
)
$
(2,286,000
)
$
392,000
$
17,183,000
Balance at September 30, 2018
8,277,160
$
4,223,000
$
1,350,000
$
13,253,000
$
(514,000
)
$
(2,286,000
)
$
213,000
$
16,239,000
Cumulative impact from the adoption of ASU No. 2014-09
—
—
—
20,000
—
—
—
20,000
Distributions to non-controlling interests
—
—
—
—
—
—
(110,000
)
(110,000
)
Net loss (earnings)
—
—
—
(6,725,000
)
—
—
1,000
(6,724,000
)
Foreign currency translation adjustments, net of taxes of $0
—
—
—
—
(283,000
)
—
—
(283,000
)
Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0
—
—
—
—
33,000
—
—
33,000
Balance at March 31, 2019
8,277,160
$
4,223,000
$
1,350,000
$
6,548,000
$
(764,000
)
$
(2,286,000
)
$
104,000
$
9,175,000
See Notes to Condensed Consolidated Financial Statements
6
BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended March 31,
2019
2018
Cash flows from operating activities:
Net loss
$
(6,724,000
)
$
(371,000
)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of affiliates
286,000
233,000
Depletion, depreciation, and amortization
1,577,000
507,000
Gain on sale of oil and natural gas properties
—
(2,250,000
)
Impairment of assets
2,413,000
37,000
Retirement benefits expense
109,000
148,000
Income tax receivable, noncurrent
(31,000
)
(460,000
)
Deferred rent liability
43,000
43,000
Accretion of asset retirement obligation
300,000
136,000
Deferred income tax (benefit) expense
(106,000
)
523,000
Asset retirement obligation payments
(288,000
)
(538,000
)
Share-based compensation benefit
(23,000
)
(26,000
)
Retirement plan contributions and payments
(119,000
)
(210,000
)
Sale of interest in leasehold land, net of fees paid
(124,000
)
—
Increase (decrease) from changes in current assets and liabilities
1,866,000
(1,233,000
)
Net cash used in operating activities
(821,000
)
(3,461,000
)
Cash flows from investing activities:
Purchase of certificates of deposit
—
(3,958,000
)
Proceeds from the maturity of certificates of deposit
741,000
3,176,000
Distribution from equity investees in excess of earnings
352,000
—
Net proceeds (fees paid on) from sale of interest in leasehold land
124,000
(343,000
)
Proceeds from sale of oil and natural gas assets
1,519,000
763,000
Payments to acquire oil and natural gas properties
(355,000
)
—
Capital expenditures - oil and natural gas
(168,000
)
(288,000
)
Capital expenditures - all other
(488,000
)
(65,000
)
Increase in notes receivable
(300,000
)
—
Net cash provided by (used in) investing activities
1,425,000
(715,000
)
Cash flows from financing activities:
Distributions to non-controlling interests
(110,000
)
(506,000
)
Net cash used in financing activities
(110,000
)
(506,000
)
Effect of exchange rate changes on cash and cash equivalents
(32,000
)
(206,000
)
Net increase (decrease) in cash and cash equivalents
462,000
(4,888,000
)
Cash and cash equivalents at beginning of period
5,965,000
16,281,000
Cash and cash equivalents at end of period
$
6,427,000
$
11,393,000
See Notes to Condensed Consolidated Financial Statements
7
BARNWELL INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
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.
Unaudited Interim Financial Information
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. 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, 2018 Annual Report on Form 10-K. The Condensed Consolidated Balance Sheet as of September 30, 2018 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, results of operations and comprehensive (loss) income for the three and six months ended March 31, 2019 and 2018, and equity and cash flows for the six months ended March 31, 2019 and 2018, have been made. The results of operations for the period ended March 31, 2019 are not necessarily indicative of the operating results for the full year.
Use of Estimates in the Preparation of Condensed Consolidated Financial Statements
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
8
retirement plans, contract drilling estimated costs to complete, proved oil and natural gas reserves, and the carrying value of other assets, and such assumptions may impact the amount at which such items are recorded.
Revenue Recognition
On October 1, 2018, the Company adopted Accounting Standards Updates (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“Topic 606”) using the modified retrospective method applied to all contracts. Results for reporting periods beginning October 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded an adjustment to retained earnings on October 1, 2018 due to the cumulative impact of adopting Topic 606. See Note 7 “Revenue from Contracts with Customers” for the required disclosures related to the impact of adopting this standard and a discussion of the Company’s updated policies related to revenue recognition discussed below.
Barnwell operates in and derives revenue from the following three principal business segments:
•
Oil and Natural Gas Segment - Barnwell engages in oil and natural gas development, production, acquisitions and sales in Canada.
•
Land Investment Segment - Barnwell invests in land interests in Hawaii.
•
Contract Drilling Segment - Barnwell provides well drilling services and water pumping system installation and repairs in Hawaii.
Oil and Natural Gas - Barnwell’s investments in oil and natural gas properties are located in Alberta, Canada. These property interests are principally held under governmental leases or licenses. Barnwell sells the large majority of its oil, natural gas and natural gas liquids production under short-term contracts between itself and marketers based on prices indexed to market prices and recognizes revenue at a point in time when the oil, natural gas and natural gas liquids are delivered, as this is where Barnwell’s performance obligation is satisfied and title has passed to the customer. Under Topic 606, there were no changes to revenue recognition for the Oil and Natural Gas segment.
Land Investment - Barnwell is entitled to receive contingent residual payments from the entities that previously purchased Barnwell’s land investment interests under contracts entered into in prior years. The residual payments under those contracts become due when the entities sell lots and/or residential units in the areas that were previously sold under the aforementioned contracts or when a preferred payment threshold is achieved. Prior to the adoption of Topic 606, the payments received by Barnwell were deemed contingent revenues under the full accrual method and were recognized as revenues when payment is assured, which was generally when a lot sale occurred or the preferred payments were made. The adoption of Topic 606 did not fundamentally change the way Barnwell recognizes these contingent residual revenue payments due primarily to the variable consideration constraint provision of Topic 606, whereby the constraint is removed only when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. As such, there were no significant changes to revenue recognition for the Land Investment segment under Topic 606.
Contract Drilling - Through fixed price contracts which are normally less than twelve months in duration, Barnwell drills water and water monitoring wells and installs and repairs water pumping systems in Hawaii. Under the Topic 606 requirements, Barnwell recognizes revenue from well drilling or the installation of pumps over time based on total costs incurred on the projects relative to the total expected
9
costs to satisfy the performance obligation as management believes this is an accurate representation of the percentage of completion as control is continuously transferred to the customer. Uninstalled materials, which typically consists of well casing or pumps, are excluded in the costs-to-costs calculation for the duration of the contract as including these costs would result in a distortion of progress towards satisfaction of the performance obligation due to the resulting cumulative catch-up in margin in a single period. An equal amount of cost and revenue is recorded when uninstalled materials are controlled by the customer, which is typically when Barnwell has the right to payment for the materials and when the materials are delivered to the customer’s site or location and such materials have been accepted by the customer. Uninstalled materials are held in inventory and included in “Other current assets” on the Company’s Condensed Consolidated Balance Sheets until control is transferred to the customer. When the estimate on a contract indicates a loss, Barnwell records the entire estimated loss in the period the loss becomes known.
Contract price and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the costs incurred to date to total estimated costs at completion are reflected in contract revenues in the reporting period when such estimates are revised. The nature of accounting for these contracts is such that refinements of the estimating process for changing conditions and new developments may occur and are characteristic of the process. Many factors can and do change during a contract performance obligation period which can result in a change to contract profitability including differing site conditions (to the extent that contract remedies are unavailable), the availability of skilled contract labor, the performance of major material suppliers, the performance of major subcontractors, unusual weather conditions and unexpected changes in material costs, among others. These factors may result in revisions to costs and income and are recognized in the period in which the revisions become known. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.
Management evaluates the performance of contracts on an individual basis. In the ordinary course of business, but at least quarterly, we prepare updated estimates that may impact the cost and profit or loss for each contract. The cumulative effect of revisions in estimates of the total forecasted revenue and costs, including any unapproved change orders and claims, during the course of the contract is reflected in the accounting period in which the facts that caused the revision become known. Changes in the cost estimates can have a material impact on our consolidated financial statements and are reflected in the results of operations when they become known.
To the extent a contract is deemed to have multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract.
Billings in excess of costs and estimated earnings represent advanced billings on certain drilling and pump contracts and are included in “Other current liabilities” on the Company’s Condensed Consolidated Balance Sheets. Costs and estimated earnings in excess of billings represent certain amounts under customer contracts that were earned and billable, but yet not invoiced, and are included in “Other current assets” on the Company’s Condensed Consolidated Balance Sheets.
Significant Accounting Policies
Other than the change to Barnwell's "Revenue Recognition" policy noted above, there have been no other changes to Barnwell’s significant accounting policies as described in the Notes to Consolidated Financial Statements included in Item 8 of the Company’s most recently filed Annual Report on Form 10-K.
10
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which requires an entity to recognize the amount of revenue to which it expects to be entitled for 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 January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities," which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. 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 August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which addresses 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. 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 October 2016, the FASB issued ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” which provides guidance on recognition of current income tax consequences for intra-entity asset transfers (other than inventory) at the time of transfer. This represents a change from current GAAP, where the consolidated tax consequences of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. 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 November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows - Restricted Cash," which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Thus, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statement of cash flows. 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 as Barnwell did not have restricted cash at the time of adoption.
In February 2017, the FASB issued ASU No. 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets,” which clarifies the scope of Subtopic 610-20 and adds guidance for partial sales of nonfinancial assets. 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 March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires employers to report the service cost component separate from the other components of net pension benefit costs. The changes to the standard require employers to report the service cost component in the same line item as other compensation costs
11
arising from services rendered by employees during the reporting period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. If a separate line item is not used, the line item used in the income statement must be disclosed. The Company adopted the provisions of this ASU effective October 1, 2018. The adoption of this update changed the disclosure of net pension benefit costs in Note 5.
In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation - Scope of Modification Accounting,” which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. 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.
Impact of Pending Adoption of Significant Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. In general, 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. Subsequent to the issuance of ASU No. 2016-02, 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, and ASU No. 2019-01, "Leases (Topic 842) - Codification Improvements," which amended certain aspects of the new leasing standard. These ASUs are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, and allow for the use of either a full retrospective approach for all periods presented in the period 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.
2. (LOSS) EARNINGS PER COMMON SHARE
Basic (loss) earnings per share is computed using the weighted-average number of common shares outstanding for the period. Diluted (loss) earnings 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) earnings per share if their effect is anti-dilutive.
Options to purchase 318,750 and 493,750 shares of common stock were excluded from the computation of diluted shares for the three and six months ended March 31, 2019 and 2018, respectively, as their inclusion would have been antidilutive.
12
Reconciliations between net (loss) earnings attributable to Barnwell stockholders and common shares outstanding of the basic and diluted net (loss) earnings per share computations are detailed in the following tables:
Three months ended March 31, 2019
Net Loss (Numerator)
Shares
(Denominator)
Per-Share
Amount
Basic net loss per share
$
(2,125,000
)
8,277,160
$
(0.26
)
Effect of dilutive securities -
common stock options
—
—
Diluted net loss per share
$
(2,125,000
)
8,277,160
$
(0.26
)
Six months ended March 31, 2019
Net Loss (Numerator)
Shares (Denominator)
Per-Share Amount
Basic net loss per share
$
(6,725,000
)
8,277,160
$
(0.81
)
Effect of dilutive securities -
common stock options
—
—
Diluted net loss per share
$
(6,725,000
)
8,277,160
$
(0.81
)
Three months ended March 31, 2018
Net Earnings (Numerator)
Shares
(Denominator)
Per-Share
Amount
Basic net earnings per share
$
679,000
8,277,160
$
0.08
Effect of dilutive securities -
common stock options
—
—
Diluted net earnings per share
$
679,000
8,277,160
$
0.08
Six months ended March 31, 2018
Net Loss (Numerator)
Shares
(Denominator)
Per-Share
Amount
Basic net loss per share
$
(338,000
)
8,277,160
$
(0.04
)
Effect of dilutive securities -
common stock options
—
—
Diluted net loss per share
$
(338,000
)
8,277,160
$
(0.04
)
13
3. INVESTMENTS
A summary of Barnwell’s non-current investments is as follows:
March 31, 2019
September 30, 2018
Investment in Kukio Resort Land Development Partnerships
$
920,000
$
1,558,000
Investment in leasehold land interest – Lot 4C
50,000
50,000
Total non-current investments
$
970,000
$
1,608,000
Investment in Kukio Resort Land Development Partnerships
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"), 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") for $5,140,000. These entities, collectively referred to hereinafter 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 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"), and KD II is the developer of Kaupulehu Lot 4A Increment II ("Increment 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, 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.
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, cumulative distributions from the Kukio Resort Land Development Partnerships totaled $45,000,000. 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
14
equity in income of affiliates for the recognition of the preferred return. There is no assurance that any future distributions and resulting preferred returns will occur.
Equity in loss of affiliates was $207,000 and $286,000 for the three and six months ended March 31, 2019, respectively, and $80,000 and $233,000 for the three and six months ended March 31, 2018, respectively. The equity in the underlying net assets of the Kukio Resort Land Development partnerships exceeds the carrying value of the investment in affiliates by approximately $313,000 as of March 31, 2019, which is attributable to differences in the value of capitalized development costs and a note receivable. The basis difference will be recognized as the partnerships sell lots and recognize the associated costs and sell memberships for the Kuki`o Golf and Beach Club for which the receivable relates. There was no basis difference adjustment for the three months ended March 31, 2019 and 2018. The basis difference adjustments of $1,000 and $3,000 for the six months ended March 31, 2019 and 2018, respectively, increased equity in income of affiliates.
Summarized financial information for the Kukio Resort Land Development partnerships is as follows:
Three months ended March 31,
2019
2018
Revenue
$
371,000
$
2,230,000
Gross profit
$
205,000
$
1,048,000
Net loss
$
(904,000
)
$
(185,000
)
Six months ended March 31,
2019
2018
Revenue
$
2,319,000
$
3,790,000
Gross profit
$
851,000
$
1,734,000
Net loss
$
(1,062,000
)
$
(688,000
)
Sale of Interest in Leasehold Land
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).
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 the total amount of gross proceeds from single-family lot sales through March 31, 2019 to $216,400,000. As of March 31, 2019, 19 single-family lots, of the 80 lots developed within Increment I, remained to be sold.
Under the terms of the former Increment II agreement with KD II, Kaupulehu Developments was entitled to receive payments from KD II resulting from the sale of lots and/or residential units by KD II within Increment II. Through March 6, 2019, the payments were based on a percentage of gross receipts from KD II's sales ranging from 8% to 10% of the price of improved or unimproved lots or 2.60% to 3.25% of the price of units constructed on a lot, to be determined in the future depending upon a number of variables, including whether the lots are sold prior to improvement. Two ocean front parcels approximately two to three
15
acres in size fronting the ocean were developed within Increment II by KD II, of which one was sold in fiscal 2017 and one was sold in fiscal 2016. The remaining acreage within Increment II is not yet under development.
Through March 6, 2019, Kaupulehu Developments was also entitled to receive 50% of distributions otherwise payable from KD II to its members after the members of KD II have received distributions equal to the original basis of capital invested in the project, up to $8,000,000. Through March 6, 2019, a cumulative total of $3,500,000 was received from KD II under this arrangement, out of the $8,000,000 maximum. The former arrangement also included the rights to three single-family residential lots in Phase 2 of Increment II when developed, at no cost to Barnwell, with a commitment by Barnwell to begin to construct a residence upon each lot within six months of transfer.
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 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:
Three months ended March 31,
Six months ended March 31,
2019
2018
2019
2018
Sale of interest in leasehold land:
Revenues - sale of interest in leasehold land
$
—
$
—
$
165,000
$
—
Fees - included in general and administrative expenses
—
—
(20,000
)
—
Sale of interest in leasehold land, net of fees
$
—
$
—
$
145,000
$
—
16
Investment in Leasehold Land Interest - Lot 4C
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.
4. OIL AND NATURAL GAS PROPERTIES
Dispositions
In October 2017, Barnwell entered into a Purchase and Sale Agreement with an independent third party and sold its oil and natural gas properties located in the Pouce Coupe area of Alberta, Canada. The sales price per the agreement was adjusted to $72,000 for customary purchase price adjustments to reflect the economic activity from the effective date of May 1, 2017 to the closing date. From Barnwell's net proceeds, $37,000 was withheld and remitted by the buyer to the Canada Revenue Agency for potential amounts due for Barnwell’s Canadian income taxes. No gain or loss was recognized on this 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 its oil properties located in 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.
Also included in gain on sales of assets for the three and six months ended March 31, 2018 is a $115,000 gain on the sale of Barnwell's interest in natural gas transmission lines and related surface facilities in the Stolberg area in February 2018.
There were no such gains or losses on sales of operating assets recognized in the same periods of the current year.
The $1,519,000 of proceeds from sale of oil and gas properties included in the Condensed Consolidated Statement of Cash Flows for the six months ended March 31, 2019 primarily represents the refund of income taxes previously withheld from what otherwise would have been proceeds on prior years' oil and gas property sales.
Acquisitions
During 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 price 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 purchase price has not yet been made however it is not expected to result in a material adjustment.
There were no oil and natural gas property acquisitions during the quarter ended March 31, 2019.
17
Impairment of Oil and Natural Gas Properties
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.
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. In addition, the ceiling test is also impacted by any changes in management's quarterly evaluation of the Company's ability to fund the approximately $14,000,000 of future capital expenditures necessary over the next five years to develop the proved undeveloped reserves that are largely in the Twining area, the value of which is included in the calculation of the ceiling limitation. If facts, circumstances, estimates and assumptions underlying management's assessment of the Company's ability to fund such capital expenditures change such that it is no longer reasonably certain that all of the approximately $14,000,000 of capital expenditures necessary to develop the proved undeveloped reserves can be made, it is likely that we will incur a further ceiling test impairment at that time.
5. RETIREMENT PLANS
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 details the components of net periodic benefit (income) cost for Barnwell’s retirement plans:
Pension Plan
SERP
Postretirement Medical
Three months ended March 31,
2019
2018
2019
2018
2019
2018
Service cost
$
50,000
$
55,000
$
9,000
$
13,000
$
—
$
—
Interest cost
94,000
89,000
21,000
23,000
25,000
19,000
Expected return on plan assets
(160,000
)
(148,000
)
—
—
—
—
Amortization of prior service cost (credit)
2,000
2,000
(1,000
)
(1,000
)
—
—
Amortization of net actuarial loss
1,000
27,000
1,000
7,000
13,000
3,000
Net periodic benefit (income) cost
$
(13,000
)
$
25,000
$
30,000
$
42,000
$
38,000
$
22,000
18
Pension Plan
SERP
Postretirement Medical
Six months ended March 31,
2019
2018
2019
2018
2019
2018
Service cost
$
100,000
$
108,000
$
18,000
$
20,000
$
—
$
—
Interest cost
187,000
178,000
42,000
38,000
50,000
38,000
Expected return on plan assets
(321,000
)
(296,000
)
—
—
—
—
Amortization of prior service cost (credit)
3,000
3,000
(2,000
)
(3,000
)
—
—
Amortization of net actuarial loss
4,000
49,000
2,000
7,000
26,000
6,000
Net periodic benefit (income) cost
$
(27,000
)
$
42,000
$
60,000
$
62,000
$
76,000
$
44,000
The components of net periodic benefit (income) cost, including service cost, are included in "General and administrative" expenses in the Company's Condensed Consolidated Statements of Operations.
Barnwell contributed $115,000 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. 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 2019 are not material. Fluctuations in actual equity market returns as well as changes in general interest rates will result in changes in the market value of plan assets and may result in increased or decreased retirement benefits costs and contributions in future periods.
6. INCOME TAXES
The components of (loss) earnings before income taxes, after adjusting the (loss) earnings for non-controlling interests, are as follows:
Three months ended March 31,
Six months ended March 31,
2019
2018
2019
2018
United States
$
(1,298,000
)
$
(982,000
)
$
(2,422,000
)
$
(2,125,000
)
Canada
(862,000
)
1,858,000
(4,443,000
)
1,481,000
$
(2,160,000
)
$
876,000
$
(6,865,000
)
$
(644,000
)
The components of the income tax (benefit) provision are as follows:
Three months ended March 31,
Six months ended March 31,
2019
2018
2019
2018
Current
$
(1,000
)
$
(256,000
)
$
(34,000
)
$
(829,000
)
Deferred
(34,000
)
453,000
(106,000
)
523,000
$
(35,000
)
$
197,000
$
(140,000
)
$
(306,000
)
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
19
liabilities and any amounts estimated to be realizable through tax carryback strategies, are not estimated to have a future benefit as tax credits or deductions. Income from our non-controlling interest in the Kukio Resort Land Development Partnerships is treated as non-unitary for state of Hawaii unitary filing purposes, thus unitary Hawaii losses provide limited sheltering of such non-unitary income.
The repeal of the corporate Alternative Minimum Tax ("AMT") by the Tax Cuts and Jobs Act of 2017 (“TCJA”), enacted on December 22, 2017, provides a mechanism for the refund over time of any unused AMT credit carryovers. Prior to the enactment 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 unused AMT credit carryover balance as a non-current income tax receivable. There was no significant impact of the TCJA during the three and six months ended March 31, 2019. Respective portions of this balance will be reclassified to current income taxes receivable when amounts are eligible for refund within one year of the balance sheet date.
7. REVENUE FROM CONTRACTS WITH CUSTOMERS
Adoption
On October 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to all contracts. Results for operating periods beginning October 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. Changes in other current assets and other current liabilities are primarily due to Topic 606's required treatment for the contract drilling segment's uninstalled materials and the related impact on billings in excess of costs and estimated earnings, which is now referred to as contract liabilities. Additionally, the Company recorded a net increase to beginning retained earnings of $20,000 as of October 1, 2018 due to the cumulative impact of adopting Topic 606, as detailed below. The increase to beginning retained earnings was due entirely to the impact of adoption of Topic 606 on the contract drilling business segment.
October 1, 2018
Pre-606 Balances
606 Adjustments
Adjusted Balances
ASSETS
Current assets:
Accounts and other receivables, net of allowance for doubtful accounts
$
1,965,000
$
(308,000
)
$
1,657,000
Other current assets
950,000
687,000
1,637,000
LIABILITIES AND EQUITY
Current liabilities:
Other current liabilities
54,000
359,000
413,000
Equity:
Retained earnings
13,253,000
20,000
13,273,000
20
The following tables summarize the impact of adopting Topic 606 on the Company’s Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets:
Three months ended March 31, 2019
Impact of changes in accounting policies
As Reported
Balances without adoption of Topic 606
Effect of change increase (decrease)
Revenues:
Contract drilling
$
987,000
$
677,000
$
310,000
Costs and expenses:
Contract drilling operating
1,231,000
917,000
314,000
Loss before equity in loss of affiliates and income taxes
(1,979,000
)
(1,975,000
)
(4,000
)
Loss before income taxes
(2,186,000
)
(2,182,000
)
(4,000
)
Net loss
(2,151,000
)
(2,147,000
)
(4,000
)
Less: Net loss attributable to non-controlling interests
(26,000
)
(26,000
)
—
Net loss attributable to Barnwell Industries, Inc. stockholders
$
(2,125,000
)
$
(2,121,000
)
$
(4,000
)
Basic and diluted net loss per common share attributable to Barnwell Industries, Inc. stockholders
$
(0.26
)
$
(0.26
)
$
—
Six months ended March 31, 2019
Impact of changes in accounting policies
As Reported
Balances without adoption of Topic 606
Effect of change increase (decrease)
Revenues:
Contract drilling
$
2,150,000
$
1,418,000
$
732,000
Costs and expenses:
Contract drilling operating
2,547,000
1,810,000
737,000
Loss before equity in loss of affiliates and income taxes
(6,578,000
)
(6,573,000
)
(5,000
)
Loss before income taxes
(6,864,000
)
(6,859,000
)
(5,000
)
Net loss
(6,724,000
)
(6,719,000
)
(5,000
)
Less: Net earnings attributable to non-controlling interests
1,000
1,000
—
Net loss attributable to Barnwell Industries, Inc. stockholders
$
(6,725,000
)
$
(6,720,000
)
$
(5,000
)
Basic and diluted net loss per common share attributable to Barnwell Industries, Inc. stockholders
$
(0.81
)
$
(0.81
)
$
—
21
March 31, 2019
Impact of changes in accounting policies
As Reported
Balances without adoption of Topic 606
Effect of change increase (decrease)
ASSETS
Current assets:
Accounts and other receivables, net of allowance for doubtful accounts
$
2,066,000
$
2,443,000
$
(377,000
)
Other current assets
2,198,000
1,352,000
846,000
LIABILITIES AND EQUITY
Current liabilities:
Other current liabilities
1,913,000
1,459,000
454,000
Equity:
Retained earnings
6,548,000
6,533,000
15,000
The impact in revenue recognition due to the adoption of Topic 606 is primarily from the timing of revenue recognition for uninstalled materials. Refer to Note 1 “Summary of Significant Accounting Policies” for a summary of the Company’s significant policies for revenue recognition. There were no impacts to the oil and natural gas or land investment segments.
Disaggregation of Revenue
The following tables provides 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, 2019.
Three months ended March 31, 2019
Oil and natural gas
Contract drilling
Land investment
Other
Total
Revenue streams:
Oil
$
1,477,000
$
—
$
—
$
—
$
1,477,000
Natural gas
336,000
—
—
—
336,000
Natural gas liquids
111,000
—
—
—
111,000
Drilling and pump
—
987,000
—
—
987,000
Other
—
—
—
40,000
40,000
Total revenues before interest income
$
1,924,000
$
987,000
$
—
$
40,000
$
2,951,000
Geographical regions:
United States
$
—
$
987,000
$
—
$
1,000
$
988,000
Canada
1,924,000
—
—
39,000
1,963,000
Total revenues before interest income
$
1,924,000
$
987,000
$
—
$
40,000
$
2,951,000
Timing of revenue recognition:
Goods transferred at a point in time
$
1,924,000
$
—
$
—
$
40,000
$
1,964,000
Services transferred over time
—
987,000
—
—
987,000
Total revenues before interest income
$
1,924,000
$
987,000
$
—
$
40,000
$
2,951,000
22
Six months ended March 31, 2019
Oil and natural gas
Contract drilling
Land investment
Other
Total
Revenue streams:
Oil
$
2,373,000
$
—
$
—
$
—
$
2,373,000
Natural gas
498,000
—
—
—
498,000
Natural gas liquids
285,000
—
—
—
285,000
Drilling and pump
—
2,150,000
—
—
2,150,000
Contingent residual payments
—
—
165,000
—
165,000
Other
—
—
—
54,000
54,000
Total revenues before interest income
$
3,156,000
$
2,150,000
$
165,000
$
54,000
$
5,525,000
Geographical regions:
United States
$
—
$
2,150,000
$
165,000
$
1,000
$
2,316,000
Canada
3,156,000
—
—
53,000
3,209,000
Total revenues before interest income
$
3,156,000
$
2,150,000
$
165,000
$
54,000
$
5,525,000
Timing of revenue recognition:
Goods transferred at a point in time
$
3,156,000
$
—
$
165,000
$
54,000
$
3,375,000
Services transferred over time
—
2,150,000
—
—
2,150,000
Total revenues before interest income
$
3,156,000
$
2,150,000
$
165,000
$
54,000
$
5,525,000
Contract Balances
The following table provides information about accounts receivables, contract assets and contract liabilities from contracts with customers:
October 1, 2018
March 31, 2019
Accounts receivables from contracts with customers
$
1,245,000
$
1,428,000
Contract assets
267,000
273,000
Contract liabilities
400,000
1,901,000
Accounts receivables from contracts with customers are included in "Accounts and other receivables, net of allowance for doubtful accounts," and contract assets, which includes costs and estimated earnings in excess of billings and retainage, are included in “Other current assets.” Contract liabilities, which includes billings in excess of costs and estimated earnings are included in “Other current liabilities” in the accompanying Condensed Consolidated Balance Sheets.
Retainage, included in contract assets, represents amounts due from customers, but where payments are withheld contractually until certain construction milestones are met. Amounts retained typically range from 5% to 10% of the total invoice, up to contractually-specified maximums. The Company classifies as a current asset those retainages that are expected to be collected in the next twelve months.
Contract assets represent the Company’s rights to consideration in exchange for services transferred to a customer that have not been billed as of the reporting date. The Company’s rights are generally unconditional at the time its performance obligations are satisfied.
When the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents a contract liability. Such deferred revenue typically results from billings in excess of costs and estimated earnings on uncompleted contracts. As of March 31,
23
2019, the Company had $1,901,000 included in “Other current liabilities” on the Condensed Consolidated Balance Sheets for those performance obligations expected to be completed in the next twelve months.
The change in contract assets and liabilities was due primarily to normal business operations. For the six months ended March 31, 2019, the Company recognized revenue of $22,000 that was previously included in the beginning balance of contract liabilities. Of the increase in contract liabilities, $1,250,000 represents an advance partial payment received from a contract drilling segment customer on a contract that has not yet commenced work. In order to perform the work under contract, the Company has committed to acquire a new drilling rig and ancillary equipment for an amount that is estimated to approximate the advance payment. The drilling rig and ancillary equipment will be owned by the Company and will be freely available for use on other jobs after completion of the subject contract. The total estimated value of the subject contract is included in the backlog amount disclosed in the Backlog section below.
Contracts are sometimes modified for a change in scope or other requirements. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of the Company’s contract modifications are for goods and services that are not distinct from the existing performance obligations. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or decrease) on a cumulative catchup basis.
The Company elected to utilize the modified retrospective transition practical expedient which allows the Company to evaluate the impact of contract modifications as of the adoption date rather than evaluating the impact of the modifications at the time they occurred prior to the adoption date. Given the nature of our typical contract modifications, which are generally limited to contract price change orders and extensions of time, the effect of the use of this practical expedient is not estimated to be significant.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. Performance obligations are satisfied as of a point in time or over time and are supported by contracts with customers.
The Company's contract drilling segment recognizes revenues over time. For most of the Company’s well drilling and pump installation and repair contracts, there are multiple promises of good or services. Typically, the Company provides a significant service of integrating a complex set of tasks and components such as site preparation, well drilling/pump installation, and testing for a project contract. The bundle of goods and services are provided to deliver one output for which the customer has contracted. In these cases, the Company considers the bundle of goods and services to be a single performance obligation. If the contract is separated into more than one performance obligation, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation.
For the oil and natural gas segment, revenues are recognized at a point in time and the performance obligation is considered satisfied when oil, natural gas and natural gas liquids are delivered and control has passed to the customer. This is generally at the time the customer obtains legal title to the product and when it is physically transferred to the contractual delivery point. For the land investment segment, which recognizes revenues at a point in time, the performance obligation is considered satisfied when the contingent residual payment revenue recognition criteria has been met and we release any previously retained right to such contingent residual payment.
24
There are no significant or unusual payment terms related to Barnwell’s oil and natural gas or land investment segments. For Barnwell’s contract drilling segment, customer contracts determine payment terms which typically allow for progress payments and 5% to 10% retainage. For the contract drilling contracts, Barnwell typically serves as the principal and records related revenue and expenses on a gross basis. In the unusual circumstances where Barnwell acts as an agent, the related revenues and expenses are recognized on a net basis. Barnwell does not typically provide extended warranties on well drilling or pump contracts beyond the normal assurance-type warranties that the product complies with agreed upon specifications.
For oil and natural gas contracts, Barnwell evaluates its arrangements with third parties and partners to determine if the Company acts as the principal or as an agent. In making this evaluation, management considers if Barnwell retains control of the product being delivered to the end customer. As part of this assessment, management considers whether the Company retains the economic benefits associated with the good being delivered to the end customer. Management also considers whether the Company has the primary responsibility for the delivery of the product, the ability to establish prices or the inventory risk. If Barnwell acts in the capacity of an agent rather than as a principal in a transaction, then the revenue is recognized on a net basis, only reflecting the fee, if any, realized by the Company from the transaction.
Backlog - The Company’s remaining performance obligations for drilling and pump installation contracts (hereafter referred to as “backlog”) represent the unrecognized revenue value of the Company’s contract commitments. The Company’s backlog may vary significantly each reporting period based on the timing of major new contract commitments. In addition, our customers have the right, under some infrequent circumstances, to terminate contracts or defer the timing of the Company’s services and their payments to us. At March 31, 2019, nearly all of the Company's contract drilling segment contracts, for which revenues are recognized over time on a percentage-of-completion basis, have original expected durations of one year or less. For such contracts, the Company has elected the optional exemption from disclosure of remaining performance obligations allowed under ASC 606-10-50-14. The Company has three contract drilling jobs with original expected durations of greater than one year. For those contracts with original expected durations greater than a year, approximately 41% of the remaining performance obligation of $2,962,000 is expected to be recognized in the next twelve months and the remaining, thereafter.
Contract Fulfillment Costs
In connection with the adoption of Topic 606, the Company is required to account for certain fulfillment costs over the life of the contract, consisting primarily of preconstruction costs such as set-up and mobilization costs. Preconstruction costs are capitalized and allocated across all performance obligations and deferred and amortized over the contract term on a progress towards completion basis.
As of March 31, 2019, the Company had $287,000 in unamortized preconstruction costs related to contracts that were not completed. During the three and six months ended March 31, 2019, the amortization of preconstruction costs related to contracts were not material and have been included in the accompanying Condensed Consolidated Statements of Operations. Additionally, no impairment charges in connection with the Company’s preconstruction costs were recorded during the period ended March 31, 2019.
25
8. SEGMENT INFORMATION
Barnwell operates the following segments: 1) acquiring, developing, producing and selling oil and natural gas in Canada (oil and natural gas); 2) investing in land interests in Hawaii (land investment); and 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling).
The following table presents certain financial information related to Barnwell’s reporting segments. All revenues reported are from external customers with no intersegment sales or transfers.
Three months ended March 31,
Six months ended March 31,
2019
2018
2019
2018
Revenues:
Oil and natural gas
$
1,924,000
$
859,000
$
3,156,000
$
1,812,000
Contract drilling
987,000
1,016,000
2,150,000
1,858,000
Land investment
—
—
165,000
—
Other
40,000
42,000
54,000
70,000
Total before interest income
2,951,000
1,917,000
5,525,000
3,740,000
Interest income
12,000
58,000
33,000
91,000
Total revenues
$
2,963,000
$
1,975,000
$
5,558,000
$
3,831,000
Depletion, depreciation, and amortization:
Oil and natural gas
$
684,000
$
157,000
$
1,433,000
$
356,000
Contract drilling
60,000
53,000
117,000
114,000
Other
14,000
17,000
27,000
37,000
Total depletion, depreciation, and amortization
$
758,000
$
227,000
$
1,577,000
$
507,000
Impairment:
Oil and natural gas
$
243,000
$
—
$
2,413,000
$
—
Land investment
—
37,000
—
37,000
Total impairment
$
243,000
$
37,000
$
2,413,000
$
37,000
Operating (loss) profit (before general and administrative expenses):
Oil and natural gas
$
(252,000
)
$
127,000
$
(3,276,000
)
$
223,000
Land investment
—
(37,000
)
165,000
(37,000
)
Contract drilling
(304,000
)
80,000
(514,000
)
40,000
Other
26,000
25,000
27,000
33,000
Gain on sales of assets
—
2,250,000
—
2,250,000
Total operating (loss) profit
(530,000
)
2,445,000
(3,598,000
)
2,509,000
Equity in loss of affiliates:
Land investment
(207,000
)
(80,000
)
(286,000
)
(233,000
)
General and administrative expenses
(1,461,000
)
(1,563,000
)
(3,009,000
)
(3,044,000
)
Interest expense
—
—
(4,000
)
—
Interest income
12,000
58,000
33,000
91,000
(Loss) earnings before income taxes
$
(2,186,000
)
$
860,000
$
(6,864,000
)
$
(677,000
)
26
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in each component of accumulated other comprehensive loss were as follows:
Amortization of net actuarial loss and prior service cost
16,000
39,000
33,000
63,000
Income taxes
—
—
—
—
Net current period other comprehensive income
16,000
39,000
33,000
63,000
Ending accumulated retirement plans benefit cost
(1,406,000
)
(2,048,000
)
(1,406,000
)
(2,048,000
)
Accumulated other comprehensive loss, net of taxes
$
(764,000
)
$
(1,182,000
)
$
(764,000
)
$
(1,182,000
)
The amortization of accumulated other comprehensive loss components for the retirement plans are included in the computation of net periodic benefit (income) cost which is a component of "General and administrative" expenses on the accompanying Condensed Consolidated Statements of Operations (see Note 5 for additional details).
10. FAIR VALUE MEASUREMENTS
The carrying values of cash and cash equivalents, certificates of deposit, accounts and other receivables, accounts payable and accrued current liabilities approximate their fair values due to the short-term nature of the instruments.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The estimated fair values of oil and natural gas properties and the asset retirement obligation incurred in the drilling of oil and natural gas wells or assumed in the acquisitions of additional oil and natural gas working interests are based on an estimated discounted cash flow model and market assumptions. The significant Level 3 assumptions used in the calculation of estimated discounted cash flows included future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development, operating and asset retirement costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates.
Barnwell estimates the fair value of asset retirement obligations based on the projected discounted future cash outflows required to settle abandonment and restoration liabilities. Such an estimate requires
27
assumptions and judgments regarding the existence of liabilities, the amount and timing of cash outflows required to settle the liability, what constitutes adequate restoration, inflation factors, credit adjusted discount rates, and consideration of changes in legal, regulatory, environmental and political environments. Abandonment and restoration cost estimates are determined in conjunction with Barnwell’s reserve engineers based on historical information regarding costs incurred to abandon and restore similar well sites, information regarding current market conditions and costs, and knowledge of subject well sites and properties. Asset retirement obligation fair value measurements in the current period were Level 3 fair value measurements.
11. INFORMATION RELATING TO THE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS