0001104659-15-010121.txt : 20150213 0001104659-15-010121.hdr.sgml : 20150213 20150213121209 ACCESSION NUMBER: 0001104659-15-010121 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20141231 FILED AS OF DATE: 20150213 DATE AS OF CHANGE: 20150213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARNWELL INDUSTRIES INC CENTRAL INDEX KEY: 0000010048 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 720496921 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05103 FILM NUMBER: 15611473 BUSINESS ADDRESS: STREET 1: 1100 ALAKEA ST. STREET 2: SUITE 2900 CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 808-531-8400 MAIL ADDRESS: STREET 1: 1100 ALAKEA ST. STREET 2: SUITE 2900 CITY: HONOLULU STATE: HI ZIP: 96813 FORMER COMPANY: FORMER CONFORMED NAME: BMA CORP/TN DATE OF NAME CHANGE: 19770324 FORMER COMPANY: FORMER CONFORMED NAME: BARNWELL OFFSHORE INC DATE OF NAME CHANGE: 19671101 10-Q 1 a15-1316_110q.htm 10-Q

Table of Contents

 

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 December 31, 2014

 

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, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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

 

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 February 10, 2015 there were 8,277,160 shares of common stock, par value $0.50, outstanding.

 



Table of Contents

 

BARNWELL INDUSTRIES, INC.

AND SUBSIDIARIES

 

INDEX

 

 

 

PART I.

FINANCIAL INFORMATION:

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets -

December 31, 2014 and September 30, 2014

3

 

 

 

 

Condensed Consolidated Statements of Operations -

three months ended December 31, 2014 and 2013

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss -

three months ended December 31, 2014 and 2013

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows -

three months ended December 31, 2014 and 2013

6

 

 

 

 

Condensed Consolidated Statements of Equity -

three months ended December 31, 2014 and 2013

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

22

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

PART II.

OTHER INFORMATION:

 

 

 

 

Item 1A.

Risk Factors

34

 

 

 

Item 6.

Exhibits

35

 

 

 

 

Signature

36

 

 

 

 

Index to Exhibits

37

 



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.                                     FINANCIAL STATEMENTS

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

December 31,

 

September 30,

 

 

2014

 

2014

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

14,188,000

 

 

 

$

16,104,000

 

Accounts and other receivables, net of allowance for doubtful accounts of:

 

 

 

 

 

 

 

 

$33,000 at December 31, 2014; $34,000 at September 30, 2014

 

 

2,467,000

 

 

 

2,910,000

 

Note receivable

 

 

891,000

 

 

 

-       

 

Prepaid expenses

 

 

362,000

 

 

 

221,000

 

Investment held for sale

 

 

-       

 

 

 

1,139,000

 

Real estate held for sale

 

 

5,448,000

 

 

 

5,448,000

 

Other current assets

 

 

701,000

 

 

 

698,000

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

24,057,000

 

 

 

26,520,000

 

 

 

 

 

 

 

 

 

 

Investments

 

 

5,988,000

 

 

 

5,900,000

 

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

216,705,000

 

 

 

223,023,000

 

Accumulated depletion, depreciation, and amortization

 

 

(195,098,000

)

 

 

(200,673,000

)

Property and equipment, net

 

 

21,607,000

 

 

 

22,350,000

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

$

51,652,000

 

 

 

$

54,770,000

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

$

2,418,000

 

 

 

$

3,453,000

 

Accrued operating and other expenses

 

 

2,427,000

 

 

 

2,464,000

 

Accrued incentive and other compensation

 

 

916,000

 

 

 

1,085,000

 

Current portion of long-term debt

 

 

5,697,000

 

 

 

4,449,000

 

Other current liabilities

 

 

2,891,000

 

 

 

3,072,000

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

14,349,000

 

 

 

14,523,000

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

5,000,000

 

 

 

6,650,000

 

 

 

 

 

 

 

 

 

 

Liability for retirement benefits

 

 

4,074,000

 

 

 

4,266,000

 

 

 

 

 

 

 

 

 

 

Asset retirement obligation

 

 

8,033,000

 

 

 

8,185,000

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

1,074,000

 

 

 

1,201,000

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

32,530,000

 

 

 

34,825,000

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.50 per share; authorized, 20,000,000 shares:

 

 

 

 

 

 

 

 

8,445,060 issued at December 31, 2014 and September 30, 2014

 

 

4,223,000

 

 

 

4,223,000

 

Additional paid-in capital

 

 

1,322,000

 

 

 

1,315,000

 

Retained earnings

 

 

15,737,000

 

 

 

16,204,000

 

Accumulated other comprehensive loss, net

 

 

(639,000

)

 

 

(258,000

)

Treasury stock, at cost:

 

 

 

 

 

 

 

 

167,900 shares at December 31, 2014 and September 30, 2014

 

 

(2,286,000

)

 

 

(2,286,000

)

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

18,357,000

 

 

 

19,198,000

 

Non-controlling interests

 

 

765,000

 

 

 

747,000

 

 

 

 

 

 

 

 

 

 

Total equity

 

 

19,122,000

 

 

 

19,945,000

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

 

$

51,652,000

 

 

 

$

54,770,000

 

 

See Notes to Condensed Consolidated Financial Statements

 

3



Table of Contents

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Three months ended

 

December 31,

 

2014

 

2013

Revenues:

 

 

 

 

 

 

 

Oil and natural gas

 

$

2,972,000

 

 

 

$

5,327,000

 

Contract drilling

 

1,933,000

 

 

 

1,609,000

 

Sale of interest in leasehold land, net

 

1,032,000

 

 

 

120,000

 

Gas processing and other

 

95,000

 

 

 

145,000

 

 

 

 

 

 

 

 

 

 

 

6,032,000

 

 

 

7,201,000

 

Costs and expenses:

 

 

 

 

 

 

 

Oil and natural gas operating

 

1,623,000

 

 

 

2,621,000

 

Contract drilling operating

 

1,525,000

 

 

 

1,312,000

 

General and administrative

 

2,275,000

 

 

 

1,856,000

 

Depletion, depreciation, and amortization

 

979,000

 

 

 

2,164,000

 

Interest expense

 

90,000

 

 

 

163,000

 

 

 

 

 

 

 

 

 

 

 

6,492,000

 

 

 

8,116,000

 

 

 

 

 

 

 

 

 

Loss before equity in income (loss) of affiliates and income taxes

 

(460,000

)

 

 

(915,000

)

 

 

 

 

 

 

 

 

Equity in income (loss) of affiliates

 

88,000

 

 

 

(147,000

)

 

 

 

 

 

 

 

 

Loss before income taxes

 

(372,000

)

 

 

(1,062,000

)

 

 

 

 

 

 

 

 

Income tax benefit

 

(89,000

)

 

 

(62,000

)

 

 

 

 

 

 

 

 

Net loss

 

(283,000

)

 

 

(1,000,000

)

 

 

 

 

 

 

 

 

Less: Net income (loss) attributable to non-controlling interests

 

184,000

 

 

 

(11,000

)

 

 

 

 

 

 

 

 

Net loss attributable to Barnwell Industries, Inc.

 

$

(467,000

)

 

 

$

(989,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share attributable to Barnwell Industries, Inc. stockholders

 

$

(0.06

)

 

 

$

(0.12

)

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

Basic and diluted

 

8,277,160

 

 

 

8,277,160

 

 

See Notes to Condensed Consolidated Financial Statements

 

4



Table of Contents

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

 

Three months ended

 

December 31,

 

2014

 

2013

 

 

 

 

 

 

 

 

Net loss

 

$

(283,000

)

 

 

$

(1,000,000

)

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of taxes of $0

 

(407,000

)

 

 

(780,000

)

Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0

 

26,000

 

 

 

8,000

 

 

 

 

 

 

 

 

 

Total other comprehensive loss

 

(381,000

)

 

 

(772,000

)

 

 

 

 

 

 

 

 

Total comprehensive loss

 

(664,000

)

 

 

(1,772,000

)

 

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to non-controlling interests

 

184,000

 

 

 

(11,000

)

 

 

 

 

 

 

 

 

Comprehensive loss attributable to Barnwell Industries, Inc.

 

$

(848,000

)

 

 

$

(1,761,000

)

 

See Notes to Condensed Consolidated Financial Statements

 

5



Table of Contents

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Three months ended

 

December 31,

 

2014

 

2013

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(283,000

)

 

 

$

(1,000,000

)

Adjustments to reconcile net loss to net cash

 

 

 

 

 

 

 

(used in) provided by operating activities:

 

 

 

 

 

 

 

Equity in (income) loss of affiliates

 

(88,000

)

 

 

147,000

 

Depletion, depreciation, and amortization

 

979,000

 

 

 

2,164,000

 

Loss on sale of investment

 

16,000

 

 

 

-       

 

Retirement benefits expense

 

85,000

 

 

 

91,000

 

Accretion of asset retirement obligation

 

142,000

 

 

 

126,000

 

Deferred income tax benefit

 

(92,000

)

 

 

67,000

 

Asset retirement obligation payments

 

(52,000

)

 

 

(10,000

)

Share-based compensation expense (benefit)

 

20,000

 

 

 

(175,000

)

Retirement plan contributions

 

(251,000

)

 

 

(1,000

)

Sale of interest in leasehold land, net

 

(1,032,000

)

 

 

(120,000

)

Decrease from changes in current assets and liabilities

 

(1,000,000

)

 

 

(290,000

)

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(1,556,000

)

 

 

999,000

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Proceeds from sale of interest in leasehold land, net of fees paid

 

1,032,000

 

 

 

120,000

 

Proceeds from sale of investment, net of closing costs

 

266,000

 

 

 

-       

 

Proceeds from gas over bitumen royalty adjustments

 

-       

 

 

 

5,000

 

Payment to acquire oil and natural gas properties

 

(526,000

)

 

 

-       

 

Payment to acquire interest in affiliates

 

-       

 

 

 

(4,140,000

)

Capital expenditures - oil and natural gas

 

(293,000

)

 

 

(1,617,000

)

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

479,000

 

 

 

(5,632,000

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from long-term debt borrowings

 

-       

 

 

 

4,186,000

 

Repayments of long-term debt

 

(402,000

)

 

 

(134,000

)

Increase in restricted cash

 

-       

 

 

 

(2,000,000

)

Contributions from non-controlling interests

 

45,000

 

 

 

64,000

 

Distributions to non-controlling interests

 

(211,000

)

 

 

-       

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(568,000

)

 

 

2,116,000

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(271,000

)

 

 

(42,000

)

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(1,916,000

)

 

 

(2,559,000

)

Cash and cash equivalents at beginning of period

 

16,104,000

 

 

 

7,828,000

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

14,188,000

 

 

 

$

5,269,000

 

 

See Notes to Condensed Consolidated Financial Statements

 

6



Table of Contents

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Three months ended December 31, 2014 and 2013

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Non-controlling

 

Total

 

Outstanding

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Stock

 

Interests

 

Equity

Balance at September 30, 2013

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,289,000

 

 

 

$

15,532,000

 

 

 

$

2,991,000

 

 

 

$

(2,286,000

)

 

 

$

571,000

 

 

 

$

22,320,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64,000

 

 

 

64,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(989,000

)

 

 

 

 

 

 

 

 

 

 

(11,000

)

 

 

(1,000,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(780,000

)

 

 

 

 

 

 

 

 

 

 

(780,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,000

 

 

 

 

 

 

 

 

 

 

 

8,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,291,000

 

 

 

$

14,543,000

 

 

 

$

2,219,000

 

 

 

$

(2,286,000

)

 

 

$

624,000

 

 

 

$

20,614,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2014

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,315,000

 

 

 

$

16,204,000

 

 

 

$

(258,000

)

 

 

$

(2,286,000

)

 

 

$

747,000

 

 

 

$

19,945,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45,000

 

 

 

45,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(211,000

)

 

 

(211,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

(467,000

)

 

 

 

 

 

 

 

 

 

 

184,000

 

 

 

(283,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

7,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(407,000

)

 

 

 

 

 

 

 

 

 

 

(407,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,000

 

 

 

 

 

 

 

 

 

 

 

26,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,322,000

 

 

 

$

15,737,000

 

 

 

$

(639,000

)

 

 

$

(2,286,000

)

 

 

$

765,000

 

 

 

$

19,122,000

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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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), a 75%-owned land investment partnership (KD Kona 2013 LLLP) and two 80%-owned joint ventures (Kaupulehu 2007, LLLP and Kaupulehu Investors, LLC). All significant intercompany accounts and transactions have been eliminated.

 

Barnwell’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in variable interest entities (“VIE”) 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, 2014 Annual Report on Form 10-K. The Condensed Consolidated Balance Sheet as of September 30, 2014 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 December 31, 2014, results of operations, comprehensive loss, cash flows and equity for the three months ended December 31, 2014 and 2013, have been made. The results of operations for the period ended December 31, 2014 are not necessarily indicative of the operating results for the full year.

 

Acquisitions

 

Acquisitions of businesses are accounted for using the acquisition method of accounting. Purchase prices are allocated to acquired assets and assumed liabilities based on their estimated fair value at the time of the acquisition. A business combination may result in the recognition of a gain or goodwill based on the fair value of the assets acquired and liabilities assumed at the acquisition date as compared to the fair value of consideration transferred.

 

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Note Receivable

 

The note receivable consists of a purchase money mortgage related to the sale of one residential parcel. Barnwell estimates an allowance for this financing receivable based on an evaluation of the credit worthiness of the counterparty and has determined that no allowance is needed at December 31, 2014. This financing receivable is considered in default if not paid in full on the maturity date at which time the amount in default will accrue interest. Amounts deemed uncollectible will be written off against an established allowance.

 

Use of Estimates

 

The preparation of the 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 Accounting Policies

 

Barnwell’s significant accounting policies are 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.

 

Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” This update provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. Examples of obligations within this guidance are debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The Company adopted the provisions of this ASU effective October 1, 2014. The adoption of this update did not have a material impact on Barnwell’s consolidated financial statements.

 

In March 2013, the FASB issued ASU No. 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This update provides guidance on releasing cumulative translation adjustments when a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, these amendments provide guidance on the release of cumulative translation adjustments in partial sales of equity method investments and in step acquisitions. The Company adopted the provisions of this ASU effective October 1, 2014. The adoption of this update did not have a material impact on Barnwell’s consolidated financial statements.

 

In April 2013, the FASB issued ASU No. 2013-07, “Liquidation Basis of Accounting,” which provides guidance on when and how to apply the liquidation basis of accounting and on what to disclose. The update requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent, as defined in the update. The Company adopted the provisions of this ASU effective October 1, 2014. The adoption of this update did not have a material impact on Barnwell’s consolidated financial statements.

 

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In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for an net operating loss (“NOL”) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The Company adopted the provisions of this ASU effective October 1, 2014. The adoption of this update did not have a material impact on Barnwell’s consolidated financial statements.

 

In November 2014, the FASB issued ASU 2014-17, “Pushdown Accounting,” which provides companies with the option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity.  The election to apply pushdown accounting can be made either in the period in which the change of control occurred or in a subsequent period.  If the election is made in a subsequent period, it would be considered a change in accounting principle and treated in accordance with Topic 250, “Accounting Changes and Error Corrections.” The Company adopted the provisions of this ASU on November 18, 2014, as the amendments in the update were effective upon issuance. The adoption of this update did not have a material impact on Barnwell’s consolidated financial statements.

 

 

2.                                    LOSS PER COMMON SHARE

 

Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) 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 earnings (loss) per share if their effect is anti-dilutive.

 

Options to purchase 621,250 and 837,250 shares of common stock were excluded from the computation of diluted shares for the three months ended December 31, 2014 and 2013, respectively, as their inclusion would have been antidilutive.

 

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

 

 

Three months ended December 31, 2014

 

Net Loss

 

Shares

 

Per-Share

 

(Numerator)

 

(Denominator)

 

Amount

Basic net loss per share

 

$

(467,000

)

 

 

8,277,160

 

 

 

$

(0.06

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities -

 

 

 

 

 

 

 

 

 

 

 

common stock options

 

-      

 

 

 

-      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net loss per share

 

$

(467,000

)

 

 

8,277,160

 

 

 

$

(0.06

)

 

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Three months ended December 31, 2013

 

Net Loss

 

Shares

 

Per-Share

 

(Numerator)

 

(Denominator)

 

Amount

Basic net loss per share

 

$

(989,000

)

 

 

8,277,160

 

 

 

$

(0.12

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities -

 

 

 

 

 

 

 

 

 

 

 

common stock options

 

-      

 

 

 

-      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net loss per share

 

$

(989,000

)

 

 

8,277,160

 

 

 

$

(0.12

)

 

 

3.                                    NOTE RECEIVABLE

 

In October 2014, Barnwell sold one residential parcel for $1,250,000 and received a down payment of $343,000 and a purchase money mortgage from the buyer for the remainder of the sales price. The note is due 270 days from the closing date and the residential parcel is collateral for the note. The note is non-interest bearing and has accordingly been recorded at a discount using an interest rate based on market rates for similar instruments. See Note 5 for additional information regarding the sale of the residential parcel.

 

 

4.                                    REAL ESTATE HELD FOR SALE

 

Kaupulehu 2007, LLLP (“Kaupulehu 2007”) currently owns one luxury residence that is available for sale in the Lot 4A Increment I area located in the North Kona District of the island of Hawaii, north of Hualalai Resort at Historic Ka`upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean.

 

 

5.                                    INVESTMENTS

 

A summary of Barnwell’s investments is as follows:

 

 

December 31,

 

September 30,

 

2014

 

2014

 

 

 

 

 

 

 

 

Investment in land

 

$

1,192,000

 

 

 

$

1,192,000

 

Investment in land development partnerships

 

4,746,000

 

 

 

4,658,000

 

Investment in leasehold land interest – Lot 4C

 

50,000

 

 

 

50,000

 

 

 

 

 

 

 

 

 

Total investments

 

$

5,988,000

 

 

 

$

5,900,000

 

 

Investment in residential parcels

 

At December 31, 2014, Kaupulehu 2007 owned one residential parcel in the Lot 4A Increment I area located in the North Kona District of the island of Hawaii, north of Hualalai Resort at Historic Ka`upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean.

 

A second residential parcel, which was included in investment held for sale at September 30, 2014, was sold in October 2014 for $1,250,000 for a nominal loss which is included in general and administrative expenses in the Condensed Consolidated Statements of Operations.

 

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Investment in 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, and indirectly acquired a 19.6% non-controlling ownership interest in each of KD Kukio Resorts, LLLP, KD Maniniowali, LLLP and KD Kaupulehu, LLLP for $5,140,000. These entities 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. KD Kaupulehu, LLLP, which is comprised of KD Acquisition, LLLP (“KD I”) and KD Acquisition II, LLLP (“KD II”), is the developer of Kaupulehu Lot 4A Increments I and II, the area in which Barnwell has interests in percentage of sales payments. Barnwell’s investment in these entities is accounted for using the equity method of accounting.

 

The limited liability limited partnership agreements provide for a priority return of Barnwell’s investment prior to profit distributions. Net profits, losses and cash flows of the partnerships are allocated to Barnwell and the other partners at varying percentages based on whether the initial and any additional capital contributions have been repaid to the investors.

 

Barnwell’s share of the income of its equity affiliates was $88,000 for the three months ended December 31, 2014 and the share of the loss of its equity affiliates was $147,000 for the three months ended December 31, 2013. 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 $324,000 as of December 31, 2014, which is attributable to differences in the value of capitalized development costs and a note receivable. The basis difference for the capitalized development costs will be recognized as the partnerships sell lots and recognize the associated costs. The basis difference for the note receivable will be recognized as the partnerships sell memberships for the Kukio Golf and Beach Club for which the receivable relates. The basis difference adjustment for the three months ended December 31, 2014 was inconsequential and there was no basis difference adjustment for the three months ended December 31, 2013.

 

Barnwell, as well as KD I, KD II and certain other owners of the partnerships, have jointly and severally executed a surety indemnification agreement. Bonds issued by the surety at December 31, 2014 totaled approximately $4,830,000 and relate to certain construction contracts of KD I and KD II. If any such performance bonds are called, we may be obligated to reimburse the issuer of the performance bond as Barnwell, KD I, KD II and certain other partners are jointly and severally liable, however we believe that it is remote that a material amount of any currently outstanding performance bonds will be called. Performance bonds do not have stated expiration dates. Rather, the performance bonds are released as the underlying performance is completed.

 

As of December 31, 2014, Barnwell’s maximum loss exposure as a result of its investment in the Kukio Resort land development partnerships was approximately $9,576,000, consisting of the carrying value of the investment of $4,746,000 and $4,830,000 from the surety indemnification agreement of which we are jointly and severally liable.

 

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Table of Contents

 

Summarized financial information for the Kukio Resort land development partnerships is as follows:

 

 

 

Three months ended

 

November 27, 2013 -

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

4,626,000

 

 

$

269,000

 

 

Gross profit

 

$

1,427,000

 

 

$

211,000

 

 

Net earnings (loss)

 

$

420,000

 

 

$

(381,000

)

 

 

Percentage of sales payments

 

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 approximately 870 acres of the Kaupulehu Lot 4A area by KD I and KD II in two increments (“Increment I” and “Increment II”) (see Note 15).

 

The following table summarizes the Increment I percentage of sales payment revenues received from KD I.

 

 

 

Three months ended

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Sale of interest in leasehold land:

 

 

 

 

 

 

 

 

 

 

 

Proceeds

 

 

$

1,200,000

 

 

 

$

140,000

 

 

Fees

 

 

 

(168,000

)

 

 

 

(20,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues – sale of interest in leasehold land, net

 

 

$

1,032,000

 

 

 

$

120,000

 

 

 

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. The lease terminates in December 2025.

 

 

 

6.                                    ACQUISITION OF OIL AND NATURAL GAS PROPERTIES

 

On November 13, 2014, Barnwell completed the acquisition of additional non-operated working interests in oil and natural gas properties located in the Progress area of Alberta, Canada for cash consideration of $526,000, subject to further customary post-closing adjustments. The final determination of the customary adjustments to the purchase price will be made by the parties approximately 180 days after closing. The results of operations for the Progress acquisition have been included in the consolidated financial statements from the closing date. Pro forma information is not presented as the pro forma results would not be materially different from the information presented in the Condensed Consolidated Statements of Operations.

 

The Progress acquisition was accounted for under the acquisition method of accounting, and as such, Barnwell estimated the fair value of the acquired property as of the November 13, 2014 acquisition date. The purchase price allocation for the acquisition has been finalized except for the settlement of certain post-closing adjustments with the seller to reflect an economic effective date of July 1, 2014. 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. The following table

 

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Table of Contents

 

summarizes the allocation of the purchase price to the assets acquired and liabilities assumed in the transaction as of the acquisition date. See Note 12 for further information regarding the fair value measurement inputs.

 

Property and equipment

 

$

751,000

 

Asset retirement obligation

 

(225,000

)

 

 

 

 

Net identifiable assets acquired

 

$

526,000

 

 

 

 

7.                                    LONG-TERM DEBT

 

A summary of Barnwell’s long-term debt is as follows:

 

 

 

December 31,

 

September 30,

 

 

 

2014

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Canadian revolving credit facility

 

 

$

7,000,000

 

 

 

$

7,000,000

 

 

Real estate loan

 

 

 

3,697,000

 

 

 

 

4,099,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,697,000

 

 

 

 

11,099,000

 

 

Less: current portion

 

 

 

(5,697,000

)

 

 

 

(4,449,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total long-term debt

 

 

$

5,000,000

 

 

 

$

6,650,000

 

 

 

Canadian revolving credit facility

 

At December 31, 2014, Barnwell’s credit facility at Royal Bank of Canada was $11,800,000 Canadian dollars, or US$10,172,000 at the December 31, 2014 exchange rate. At December 31, 2014, borrowings under this facility were US$7,000,000 and the interest rate on the facility was 2.66%.

 

Under the financing agreement with Royal Bank of Canada, the facility is reviewed annually with the next review planned for April 2015. Subject to that review, the facility may be renewed for one year at the current borrowing capacity or at an adjusted borrowing capacity, based on the bank’s assessment of the value of Barnwell’s oil and natural gas properties, or it may be converted to a two-year term loan by the bank. If the facility is renewed at an adjusted borrowing capacity below our outstanding borrowings, we would be required to repay the difference upon renewal. If the facility is converted to a two-year term loan, Barnwell has agreed to the following repayment schedule of the then outstanding loan balance: first year of the term period – 20% (5% per quarter), and in the second year of the term period – 80% (5% per quarter for the first three quarters and 65% in the final quarter).

 

Pursuant to discussions between Barnwell and Royal Bank of Canada subsequent to December 31, 2014, the Company projects that upon the April 2015 renewal of the credit facility the borrowing capacity will be reduced from $11,800,000 Canadian dollars to $6,500,000 Canadian dollars. This reduction in the borrowing capacity is largely due to significant declines in the bank’s forecast of oil and natural gas prices. Accordingly, the Company estimates that the required repayment upon the April 2015 renewal will be approximately $2,000,000, which is included in the current portion of long-term debt at December 31, 2014.

 

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Table of Contents

 

Real estate loan

 

Barnwell, together with its real estate joint venture, Kaupulehu 2007, has a non-revolving real estate loan with a Hawaii bank. In January 2015, the loan was amended from monthly principal and interest payments to monthly interest-only payments effective February 1, 2015. All other terms of the loan remained unchanged. The principal balance and any accrued interest will be due and payable on April 1, 2018. The interest rate adjusts each April for the remaining term of the loan to the lender’s then prevailing interest rate for similarly priced commercial mortgage loans or a floating rate equal to the lender’s base rate. The interest rate at December 31, 2014 was 3.41%.

 

The loan is collateralized by, among other things, a first mortgage on Kaupulehu 2007’s lots together with all improvements thereon. Kaupulehu 2007 will be required to make a principal payment upon the sale of the house or the residential parcel in the amount of the net sales proceeds of the house or residential parcel; the loan agreement defines net sales proceeds as the gross sales proceeds for the house or residential parcel, less reasonable commissions and normal closing costs.

 

As a result of the sale of one of the residential parcels in October 2014, Kaupulehu 2007 repaid $266,000 of the real estate loan, as required from the net proceeds of the sale, in addition to the scheduled monthly payments.

 

The loan agreement contains provisions requiring us to maintain compliance with certain covenants including a consolidated debt service coverage ratio and a consolidated total liabilities to tangible net worth ratio.

 

The home collateralizing the loan is currently available for sale; therefore, the entire balance outstanding at December 31, 2014 under the term loan has been classified as a current liability.

 

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Table of Contents

 

8.                                    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 table details the components of net periodic benefit cost for Barnwell’s retirement plans:

 

 

 

Pension Plan

 

SERP

 

Postretirement Medical

 

 

 

Three months ended December 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

 

$

51,000

 

 

 

$

59,000

 

 

 

$

15,000

 

 

 

$

12,000

 

 

 

$

-     

 

 

 

$

3,000

 

Interest cost

 

 

 

87,000

 

 

 

 

85,000

 

 

 

 

18,000

 

 

 

 

16,000

 

 

 

 

13,000

 

 

 

 

13,000

 

Expected return on plan assets

 

 

 

(125,000

)

 

 

 

(105,000

)

 

 

 

-     

 

 

 

 

-     

 

 

 

 

-     

 

 

 

 

-     

 

Amortization of prior service cost (credit)

 

 

 

1,000

 

 

 

 

1,000

 

 

 

 

(1,000

)

 

 

 

(1,000

)

 

 

 

-     

 

 

 

 

3,000

 

Amortization of net actuarial loss (gain)

 

 

 

21,000

 

 

 

 

9,000

 

 

 

 

6,000

 

 

 

 

1,000

 

 

 

 

(1,000

)

 

 

 

(5,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

 

$

35,000

 

 

 

$

49,000

 

 

 

$

38,000

 

 

 

$

28,000

 

 

 

$

12,000

 

 

 

$

14,000

 

 

Barnwell contributed $250,000 to the Pension Plan during the three months ended December 31, 2014 and does not expect to make any further contributions during the remainder of fiscal 2015. The SERP and Postretirement Medical plans are unfunded, and Barnwell funds benefits when payments are made. Barnwell does not expect to make any benefit payments under the Postretirement Medical plan during fiscal 2015 and expected payments under the SERP for fiscal 2015 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.

 

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Table of Contents

 

9.                                    INCOME TAXES

 

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

 

 

 

Three months ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

 

$

(236,000

)

 

 

$

(850,000

)

 

Canada

 

 

 

(320,000

)

 

 

 

(201,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(556,000

)

 

 

$

(1,051,000

)

 

 

The components of the income tax benefit are as follows:

 

 

 

Three months ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

$

3,000

 

 

 

$

(129,000

)

 

Deferred

 

 

 

(92,000

)

 

 

 

67,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(89,000

)

 

 

$

(62,000

)

 

 

Consolidated taxes do not bear a customary relationship to pretax results due primarily to the fact that Canadian taxable income is not sheltered by U.S. source losses, Canadian income taxes are not estimated to have a current or future benefit as foreign tax credits or deductions for U.S. tax purposes, and U.S. consolidated net operating losses are not estimated to have any future U.S. tax benefit prior to expiration.

 

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10.                            SEGMENT INFORMATION

 

Barnwell operates the following segments: 1) exploring for, developing, acquiring, producing and selling oil and natural gas in Canada (oil and natural gas); 2) investing in land interests in Hawaii (land investment); 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling); and 4) developing homes for sale in Hawaii (residential real estate).

 

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

 

December 31,

 

2014

 

2013

Revenues:

 

 

 

 

 

 

 

Oil and natural gas

 

$

2,972,000

 

 

 

$

5,327,000

 

Land investment

 

1,032,000

 

 

 

120,000

 

Contract drilling

 

1,933,000

 

 

 

1,609,000

 

Other

 

78,000

 

 

 

141,000

 

Total before interest income

 

6,015,000

 

 

 

7,197,000

 

Interest income

 

17,000

 

 

 

4,000

 

Total revenues

 

$

6,032,000

 

 

 

$

7,201,000

 

 

 

 

 

 

 

 

 

Depletion, depreciation, and amortization:

 

 

 

 

 

 

 

Oil and natural gas

 

$

883,000

 

 

 

$

2,059,000

 

Contract drilling

 

71,000

 

 

 

78,000

 

Other

 

25,000

 

 

 

27,000

 

 

 

 

 

 

 

 

 

Total depletion, depreciation, and amortization

 

$

979,000

 

 

 

$

2,164,000

 

 

 

 

 

 

 

 

 

Operating profit (before general and administrative expenses):

 

 

 

 

 

 

 

 

Oil and natural gas

 

$

466,000

 

 

 

$

647,000

 

Land investment

 

1,032,000

 

 

 

120,000

 

Contract drilling

 

337,000

 

 

 

219,000

 

Other

 

53,000

 

 

 

114,000

 

 

 

 

 

 

 

 

 

Total operating profit

 

1,888,000

 

 

 

1,100,000

 

 

 

 

 

 

 

 

 

Equity in income (loss) of affiliates:

 

 

 

 

 

 

 

Land investment

 

88,000

 

 

 

(147,000

)

 

 

 

 

 

 

 

 

General and administrative expenses

 

(2,275,000

)

 

 

(1,856,000

)

Interest expense

 

(90,000

)

 

 

(163,000

)

Interest income

 

17,000

 

 

 

4,000

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

$

(372,000

)

 

 

$

(1,062,000

)

 

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11.                            ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

 

The changes in each component of accumulated other comprehensive (loss) income were as follows:

 

 

Three months ended

 

December 31,

 

2014

 

2013

Foreign currency translation:

 

 

 

 

 

 

 

Beginning accumulated foreign currency translation

 

$

1,692,000

 

 

 

$

3,701,000

 

 

 

 

 

 

 

 

 

Change in cumulative translation adjustment before reclassifications

 

(407,000

)

 

 

(780,000

)

Income taxes

 

-       

 

 

 

-       

 

 

 

 

 

 

 

 

 

Net current period other comprehensive loss

 

(407,000

)

 

 

(780,000

)

 

 

 

 

 

 

 

 

Ending accumulated foreign currency translation

 

1,285,000

 

 

 

2,921,000

 

 

 

 

 

 

 

 

 

Retirement plans:

 

 

 

 

 

 

 

Beginning accumulated retirement plans benefit cost

 

(1,950,000

)

 

 

(710,000

)

 

 

 

 

 

 

 

 

Amortization of net actuarial loss and prior service cost

 

26,000

 

 

 

8,000

 

Income taxes

 

-       

 

 

 

-       

 

 

 

 

 

 

 

 

 

Net current period other comprehensive income

 

26,000

 

 

 

8,000

 

 

 

 

 

 

 

 

 

Ending accumulated retirement plans benefit cost

 

(1,924,000

)

 

 

(702,000

)

 

 

 

 

 

 

 

 

Accumulated other comprehensive (loss) income, net of taxes

 

$

(639,000

)

 

 

$

2,219,000

 

 

The amortization of accumulated other comprehensive loss components for the retirement plans are included in the computation of net periodic benefit cost which is a component of general and administrative expenses on the accompanying Condensed Consolidated Statements of Operations (see Note 8 for additional details).

 

 

12.                            FAIR VALUE MEASUREMENTS

 

The carrying values of cash and cash equivalents, accounts and other receivables, accounts payable and accrued current liabilities approximate their fair values due to the short-term nature of the instruments. The carrying value of the note receivable approximates fair value as it has been recorded at a discount using an interest rate based on market rates for similar instruments. The carrying value of long-term debt approximates fair value as the terms approximate current market terms for similar debt instruments of comparable risk and maturities.

 

The estimated fair values of oil and natural gas properties and the asset retirement obligation assumed in the acquisition of additional non-operated working interests located in the Progress area of Alberta, Canada, 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. See Note 6 for additional information regarding the Progress acquisition.

 

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13.                            COMMITMENTS AND CONTINGENCIES

 

Environmental Matters

 

As of December 31, 2014 and September 30, 2014, environmental remediation costs of $460,000 and $501,000, respectively, which have not been discounted, were accrued in “Accrued operating and other expenses” on the Condensed Consolidated Balance Sheets. The amounts accrued represent the estimated liability for probable environmental remediation costs for soil contamination from infrastructure issues at the Dunvegan and Wood River properties. Because of the inherent uncertainties associated with environmental assessment and remediation activities, future expenses to remediate the currently identified sites, and sites identified in the future, if any, could be incurred.

 

Guarantee

 

See Note 5 for a discussion of Barnwell’s guarantee of the Kukio Resort land development partnership’s performance bonds.

 

 

14.                            INFORMATION RELATING TO THE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Three months ended
December 31,

 

2014

 

2013

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid (received) during the year for:

 

 

 

 

 

 

 

Interest

 

$

86,000

 

 

 

$

138,000

 

Income taxes paid (refunded)

 

$

-       

 

 

 

$

(78,000

)

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

Note receivable for sale of investment

 

$

907,000

 

 

 

$

-       

 

Payable to affiliate for investment in land development partnerships

 

$

-       

 

 

 

$

1,000,000

 

 

Capital expenditure accruals related to oil and natural gas exploration and development increased $106,000 and $82,000 during the three months ended December 31, 2014 and 2013, respectively. Additionally, capital expenditure accruals related to oil and natural gas asset retirement obligations decreased $76,000 during the three months ended December 31, 2014 and increased $57,000 during the three months ended December 31, 2013.

 

 

15.                            RELATED PARTY TRANSACTIONS

 

Kaupulehu Developments is entitled to receive a percentage of the gross receipts from the sales of single-family residential lots in Increment I from KD I, a land development partnership in which Barnwell holds a 19.6% non-controlling ownership interest accounted for under the equity method of investment. The percentage payments are part of a 2004 transaction where Kaupulehu Developments sold its leasehold interest in Increment I, which was prior to Barnwell’s affiliation with KD I which commenced on November 27, 2013, the acquisition date of our ownership interest in the Kukio Resort land development partnerships.

 

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During the three months ended December 31, 2014, Barnwell received $1,200,000 in percentage of sales payments from KD I from the sale of six contiguous lots within Phase I of Increment I to a single buyer and two lots within Phase II of Increment I. The lot sale during the three months ended December 31, 2013 occurred prior to our purchase of ownership interests in the Kukio Resort land development partnerships.

 

 

16.                            SUBSEQUENT EVENTS

 

In January 2015, the real estate loan was amended from monthly principal and interest payments to monthly interest-only payments effective February 1, 2015. All other terms of the loan remained unchanged.

 

On January 30, 2015, Kaupulehu Developments received a percentage of sales payment of $640,000 from the sale of two lots within Phase II of Increment I. Financial results from the receipt of this payment will be reflected in Barnwell’s quarter ending March 31, 2015.

 

In January 2015, there was an oil and salt water spill at one of our operated oil properties in Alberta. Total clean up expenses are expected to be approximately $880,000. Barnwell’s working interest in the well is 58% and we expect to recover monies from the other working interest owners for their share of the costs. We have notified our insurance carrier of our intent to file a claim under our policy which has a deductible of approximately $220,000. The estimated impact of the spill will be reflected in Barnwell’s quarter ending March 31, 2015.

 

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ITEM 2.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement Relevant to Forward-Looking Information

For the Purpose Of “Safe Harbor” Provisions Of The

Private Securities Litigation Reform Act of 1995

 

This Form 10-Q, and the documents incorporated herein by reference, contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement is one which is based on current expectations of future events or conditions and does not relate to historical or current facts. These statements include various estimates, forecasts, projections of Barnwell’s future performance, statements of Barnwell’s plans and objectives, and other similar statements. Forward-looking statements include phrases such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates,” “assumes,” “projects,” “may,” “will,” “will be,” “should,” or similar expressions. Although Barnwell believes that its current expectations are based on reasonable assumptions, it cannot assure that the expectations contained in such forward-looking statements will be achieved. Forward-looking statements involve risks, uncertainties and assumptions which could cause actual results to differ materially from those contained in such statements. The risks, uncertainties and other factors that might cause actual results to differ materially from Barnwell’s expectations are set forth in the “Forward-Looking Statements” and “Risk Factors” sections of Barnwell’s Annual Report on Form 10-K for the year ended September 30, 2014 and the “Risk Factors” section in this Form-10Q. Investors should not place undue reliance on these forward-looking statements, as they speak only as of the date of filing of this Form 10-Q, and Barnwell expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein.

 

 

Critical Accounting Policies and Estimates

 

Management has determined that our most critical accounting policies and estimates are those related to the evaluation of recoverability of assets, depletion of our oil and natural gas properties, income taxes and asset retirement obligation which are discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014. There have been no significant changes to these critical accounting policies and estimates during the three months ended December 31, 2014. We continue to monitor our accounting policies to ensure proper application of current rules and regulations.

 

 

Impact of Recently Issued Accounting Standards on Future Filings

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU relates to discontinued operations reporting for disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity’s operations and financial results. The standard expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation. The amendments are effective for annual periods beginning after December 15, 2014 and subsequent interim periods. The adoption of this update is not expected to have a material impact on Barnwell’s consolidated financial statements.

 

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In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” 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 ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The amendments in this update also require disclosure of sufficient information to allow users to understand the nature, amount, timing and uncertainty of revenue and cash flow arising from contracts. The amendments are effective for annual reporting periods beginning after December 15, 2016, and subsequent interim periods, using one of two retrospective application methods. Early application is not permitted. Barnwell is currently evaluating the effect that the adoption of this update will have on the consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires an entity to evaluate at each reporting period whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year from the date the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is permitted. The adoption of this update is not expected to have a material impact on Barnwell’s consolidated financial statements.

 

In January 2015, the FASB issued ASU 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items,” which eliminates the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to separately classify, present and disclose extraordinary events and transactions. The amendment is effective for annual reporting periods beginning after December 15, 2015 and subsequent interim periods. The adoption of this update is not expected to have a material impact on Barnwell’s consolidated financial statements.

 

 

Overview

 

Barnwell is engaged in the following lines of business: 1) exploring for, developing, acquiring, producing and selling oil and natural gas in Canada (oil and natural gas segment), 2) investing in land interests in Hawaii (land investment segment), 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling segment), and 4) developing homes for sale in Hawaii (residential real estate segment).

 

Oil and Natural Gas Segment

 

Barnwell is involved in the acquisition, exploration and development of oil and natural gas properties in Canada where we acquire or initiate and participate in exploratory and developmental operations for oil and natural gas on properties in which we have an interest, and evaluate proposals by third parties with regard to participation in such exploratory and developmental operations elsewhere.

 

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Land Investment Segment

 

The land investment segment is comprised of the following components:

 

1)   Through Barnwell’s 77.6% controlling interest in Kaupulehu Developments, a Hawaii general partnership, 75% controlling interest in KD Kona 2013 LLLP, a Hawaii limited liability limited partnership, and 34.45% non-controlling interest in KKM Makai, LLLP, a Hawaii limited liability limited partnership, the Company’s land investment interests include the following:

 

·                 The right to receive payments from KD Acquisition, LLLP (“KD I”) and KD Acquisition II, LLLP (“KD II”), resulting from the sale of lots and/or residential units within approximately 870 acres of the Kaupulehu Lot 4A area, located approximately six miles north of the Kona International Airport in the North Kona District of the island of Hawaii, adjacent to Hualalai Resort at Historic Ka`upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean, by KD I and KD II in two increments (“Increment I” and “Increment II”). Increment I is an area zoned for approximately 80 single-family lots and a beach club on the portion of the property bordering the Pacific Ocean, and is partially developed. The purchasers of the 80 single-family lots will have the right to apply for membership in the Kuki`o Golf and Beach Club, which is located adjacent to and south of the Four Seasons Resort Hualalai at Historic Ka`upulehu. Increment II is the remaining portion of the approximately 870-acre property and is zoned for single-family and multi-family residential units and a golf course and clubhouse. Two residential lots approximately two to three acres in size fronting the ocean are currently being developed within Increment II by KD II, and the remaining acreage within Increment II is not yet under development.

 

·                 An indirect 19.6% non-controlling ownership interest in each of KD Kukio Resorts, LLLP, KD Maniniowali, LLLP and KD Kaupulehu, LLLP. These entities 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. KD Kaupulehu, LLLP, which wholly owns KD I and KD II, is the developer of Kaupulehu Lot 4A Increments I and II, the area in which Barnwell has interests in percentage of sales payments.

 

·                 Approximately 1,000 acres of vacant leasehold land zoned conservation in the Kaupulehu Lot 4C area located adjacent to the 870-acre Lot 4A described above.

 

2)   Barnwell owns an 80% controlling interest in Kaupulehu 2007, LLLP (“Kaupulehu 2007”), a Hawaii limited liability limited partnership. Kaupulehu 2007 owns one residential parcel in the Kaupulehu area that is held for investment.

 

Contract Drilling Segment

 

Barnwell drills water and water monitoring wells and installs and repairs water pumping systems in Hawaii. Contract drilling results are highly dependent upon the quantity, dollar value and timing of contracts awarded by governmental and private entities and can fluctuate significantly.

 

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Residential Real Estate Segment

 

Barnwell, through its 80%-owned real estate joint venture, Kaupulehu 2007, constructs and sells luxury single-family homes. Kaupulehu 2007, in addition to the parcel described above, owns a luxury residence in the Kaupulehu area that is available for sale. Kaupulehu 2007 does not currently have any homes under construction.

 

 

Changes in Business Environment

 

Oil and Natural Gas Segment

 

Our revenue, profitability, and future rate of growth are substantially dependent on oil and natural gas prices. During our first quarter of fiscal 2015 and through the date of this filing the industry has experienced a significant decline in oil and natural gas prices. Barnwell realized a quarterly average price for oil of $62.81 per barrel in the first quarter of fiscal 2015, down 25% from $83.72 per barrel realized in the fourth quarter of fiscal 2014. Barnwell realized a quarterly average price for natural gas of $2.93 per Mcf in the first quarter of fiscal 2015, down 19% from $3.60 per Mcf realized in the fourth quarter of fiscal 2014.

 

Pursuant to discussions between Barnwell and Royal Bank of Canada subsequent to December 31, 2014, we project that upon the April 2015 renewal of our Canadian credit facility the borrowing capacity will be reduced from $11,800,000 Canadian dollars to $6,500,000 Canadian dollars. This reduction in the borrowing capacity is largely due to significant declines in the bank’s forecast of oil and natural gas prices. Based on borrowings of US$7,000,000 at December 31, 2014, such a reduction would result in the need to repay approximately US$2,000,000 upon renewal and no available credit in the absence of further debt repayments.

 

If oil and natural gas prices continue to decline, or if prices remain at the current low levels for an extended period of time, we will experience a significant reduction of our cash flow available for acquiring and exploring for oil and natural gas reserves relative to the past and may experience a reduction in the amount of oil and natural gas that is economic to produce from our oil and natural gas properties, potential shut ins of certain oil and natural gas wells, and further reductions of our Canadian revolving credit facility borrowing capacity. Additionally, oil and natural gas prices affect the value of our oil and natural gas properties as determined in our full cost ceiling calculation and sustained low prices will result in future reductions of the full cost ceiling value which could result in future reductions of the carrying value of our oil and natural gas properties and a charge to operating results.

 

Negative impacts to our future oil and natural gas segment taxable income due to the decline in prices or other factors may result in the conclusion that it is not more likely than not that our deferred tax assets for which no valuation allowance has been provided are realizable.  Such a conclusion would result in a write down or write off of these deferred tax assets.

 

In response to the declines in oil and natural gas prices the Company has reduced the planned level of oil and natural gas capital expenditures until pricing improves.

 

Our oil and natural gas segment’s operations are denominated in Canadian dollars, which has weakened significantly relative to the U.S. dollar since fiscal 2014 and further through the date of this filing. The weakening Canadian dollar negatively impacts the reported operating results of our oil and natural gas segment. Additionally, further declines in the exchange rate, coupled with the projected decrease in our Canadian revolving credit facility borrowing capacity, will result in required repayments in excess of the current portion estimated.

 

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Results of Operations

 

Summary

 

Net loss attributable to Barnwell for the three months ended December 31, 2014 totaled $467,000, a $522,000 improvement in operating results from a net loss of $989,000 for the three months ended December 31, 2013. The following factors affected the results of operations for the three months ended December 31, 2014 as compared to the prior year period:

 

·                 A $912,000 increase in land investment segment operating profit, before income taxes and non-controlling interests’ share of such profits, due to increased percentage of sales receipts;

 

·                 A $181,000 decrease in oil and natural gas segment operating profit, before income taxes, primarily due to a reduction in revenue partially offset by a reduction in operating expenses and the benefit from a decreased depletion rate all primarily related to the divestitures of certain oil and natural gas properties in fiscal 2014 and the resulting decrease in production;

 

·                 A $118,000 increase in contract drilling operating profit, before taxes, primarily resulting from work on higher value water well drilling contracts; and

 

·