LEASES

On October 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842),” using the modified retrospective transition approach and applied the new standard to leases in place as of the adoption date. Results for reporting periods prior to October 1, 2019 have not been adjusted. The Company elected the package of practical expedients allowed upon adoption of Accounting Standards Codification (“ASC”) 842 which, among other things, allowed us to (1) not reassess whether any expired or existing contracts contain leases, (2) carry forward the historical lease classification, and (3) not have to reassess any initial direct cost of any expired or existing leases.

As a result of the adoption of ASC 842, the Company recorded operating lease right-of-use (“ROU”) assets of $2,589,000 and corresponding total operating lease liabilities of $2,589,000 in the Condensed Consolidated Balance Sheets as of October 1, 2019. There was no impact to retained earnings or the Condensed Consolidated Statements of Operations.

The Company’s ROU assets and lease liabilities primarily relate to non-cancelable operating leases for our Canadian office space, our contract drilling maintenance and storage yard, and our leasehold land interest for Lot 4C held by Kaupulehu Developments. Management determines if a contract is or contains a lease at inception of the contract or modification of the contract. A contract is or contains a lease if the contract conveys the right to control the use of the asset for a period in exchange for consideration.

Operating lease ROU assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. The Company’s leases do not provide a readily determinable implicit rate; therefore, management uses the Company’s incremental borrowing rate to discount lease payments based on information available at lease commencement. Our lease terms may include options to extend or terminate the lease when it is reasonably certain we will exercise that potion. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease terms.

The Company has lease agreements with lease and non-lease components and the non-lease components are excluded in the calculation of the ROU asset and lease liability and expensed as incurred. None of the Company’s lease agreements contain material residual value guarantees or material restrictions or covenants.

A ROU asset and corresponding lease liability is not recorded for leases with an initial term of 12 months or less (short-term leases) as the Company recognizes lease expense for these leases as incurred over the lease term.

In the quarter ended December 31, 2019, Barnwell initiated discussions with a potential buyer of Barnwell's leasehold interest in its three-quarter of an acre contract drilling segment maintenance and storage yard in Honolulu, Hawaii. The lease has terms that are favorable as compared to market lease rates for comparable properties in the area. The ROU asset related to this lease has been classified as “Operating lease right-of-use asset held for sale” and the related lease liability is included in the “Operating lease liability held for sale” in the Condensed Consolidated Balance Sheet as of December 31, 2019.

Leases recorded on the balance sheet consist of the following:



		December 31, 2019
Assets:
	Operating lease right-of-use asset held for sale	$	2,226,000
	Operating lease right-of-use assets	331,000
	Total right-of-use assets	$	2,557,000
Liabilities:
	Operating lease liability held for sale	$	2,441,000
	Current portion of operating lease liabilities	108,000
	Operating lease liabilities	230,000
	Total lease liabilities	$	2,779,000

The components of lease expenses are as follows:



	Three months ended December 31, 2019
Operating lease cost	$	102,000
Short-term lease cost	17,000
Total lease cost	$	119,000

Supplemental information related to leases is as follows:



		December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
	Operating cash flows from operating leases	$	64,000
Operating leases:
	Weighted-average remaining lease term (in years)	24.6
	Weighted-average discount rate	6.77%

The remaining lease payments for our operating leases as of December 31, 2019, are as follows:



Fiscal year ending:
Remainder of 2020	$	194,000
2021	258,000
2022	202,000
2023	193,000
2024	193,000
Thereafter through 2047	5,574,000
Total lease payments	6,614,000
Less: amounts representing interest	(3,835,000		)
Present value of lease liabilities	$	2,779,000