ckx20190331b_10q.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2019

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

Commission File Number 1-31905

 

CKX Lands, Inc.

 

(Exact name of registrant as specified in its charter)

 

Louisiana

 

72-0144530

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

 

 

 

One Lakeside Plaza, 4th Floor

 

 

Lake Charles, LA

 

70601

(Address of principal executive offices)

 

(Zip Code)

 

 

 

 

(337) 493-2399

 

 

(Registrant’s telephone number)

 

 

 

 

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.     Yes  ☒     No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).     Yes  ☒     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

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☐  

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐     No  ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock with no par value

CKX

NYSE American

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 1,942,495 shares of common stock are issued and outstanding as of May 2, 2019.

 

 

 
 

 

TABLE OF CONTENTS

 

 

Page

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

BALANCE SHEETS AS OF MARCH 31, 2019 (UNAUDITED) AND DECEMBER 31, 2018

STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (UNAUDITED)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (UNAUDITED)

STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (UNAUDITED)

NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 2019 (UNAUDITED)

1

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

10

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

14

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

14

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

ITEM 1

LEGAL PROCEEDINGS

14

 

 

 

ITEM 1A.

RISK FACTORS

14

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

14

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

14

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

14

 

 

 

ITEM 5.

OTHER INFORMATION

14

 

 

 

ITEM 6.

EXHIBITS

15

 

 

 

SIGNATURES

15

  

 

 
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

CKX LANDS, INC.

BALANCE SHEETS

 

 

 

   

March 31, 2019

   

December 31, 2018

 
   

(Unaudited)

         

ASSETS

               

Current assets:

               

Cash

  $ 2,022,558     $ 1,860,736  

Restricted cash

    103,975       -  

Certificates of deposit

    3,394,000       3,370,000  

Equity investment in mutual funds

    246,528       244,825  

Accounts receivable

    58,626       118,463  

Prepaid expense and other assets

    144,435       36,989  

Total current assets

    5,970,122       5,631,013  

Long-term certificate of deposit

    480,000       725,000  

Property and equipment, net

    9,235,033       9,245,988  

Total assets

  $ 15,685,155     $ 15,602,001  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Current liabilities:

               

Trade payables and accrued expenses

    194,248       205,161  

Income tax payable

    -       11,654  

Total current liabilities

    194,248       216,815  

Deferred income tax payable

    187,664       187,664  

Total liabilities

    381,912       404,479  
                 

Stockholders' equity:

               

Common stock, 3,000,000 authorized, no par value, 1,942,495 issued and outstanding as of March 31, 2019 and December 31, 2018

    59,335       59,335  

Retained earnings

    15,243,908       15,138,187  

Total stockholders' equity

    15,303,243       15,197,522  

Total liabilities and stockholders' equity

  $ 15,685,155     $ 15,602,001  

 

The accompanying notes are an integral part of these unaudited financial statements.

 

1

 
 

 

CKX LANDS, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
                 

Revenues:

               

Oil and gas

  $ 94,228     $ 124,577  

Timber sales

    14,481       178,449  

Surface revenue

    35,183       34,513  

Surface revenue - related party

    9,583       9,156  

Total revenue

    153,475       346,695  

Costs, expenses and (gains):

               

Oil and gas costs

    14,524       16,656  

Timber costs

    4,397       20,594  

Surface costs

    578       6,990  

General and administrative expense

    120,035       132,561  

Depreciation expense

    507       233  

Gain on sale of land

    (75,926 )     (878,320 )

Total costs, expenses and (gains)

    64,115       (701,286 )

Income from operations

    89,360       1,047,981  
                 

Interest income

    26,524       12,922  

Income before income taxes

    115,884       1,060,903  

Federal and state income tax expense:

               

Current

    10,163       223,542  

Deferred

    -       -  

Total income taxes

    10,163       223,542  

Net income

  $ 105,721     $ 837,361  
                 

Per common stock, basic and diluted

               

Net income

  $ 0.05     $ 0.43  

Dividends

  $ -     $ 0.12  
                 

Weighted average shares outstanding, basic and diluted

    1,942,495       1,942,495  

 

The accompanying notes are an integral part of these unaudited financial statements.

 

2

 
 

 

CKX LANDS, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(Unaudited)

 

   

Common Stock

   

Retained

   

Total

 
   

Shares

   

Amount

   

Earnings

   

Equity

 

Balances, December 31, 2018

    1,942,495     $ 59,335     $ 15,138,187     $ 15,197,522  

Net income

    -       -       105,721       105,721  

Balances, March 31, 2019 (unaudited)

    1,942,495     $ 59,335     $ 15,243,908     $ 15,303,243  

 

   

Common Stock

   

Retained

   

Total

 
   

Shares

   

Amount

   

Earnings

   

Equity

 

Balances, December 31, 2017

    1,942,495     $ 59,335     $ 14,256,226     $ 14,315,561  

Net income

    -       -       837,361       837,361  

Dividends declared

    -       -       (233,099 )     (233,099 )

Balances, March 31, 2018 (unaudited)

    1,942,495     $ 59,335     $ 14,860,488     $ 14,919,823  

 

The accompanying notes are an integral part of these unaudited financial statements.

 

3

 
 

 

 CKX LANDS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 105,721     $ 837,361  

Less non-cash expenses included in net income:

               

Depreciation, depletion and amortization expense

    616       8,735  

Gain on sale of land

    (75,926 )     (878,320 )

Unrealized gain on equity investment in mutual funds

    (245 )     -  

Changes in operating assets and liabilities:

               

Increase (decrease) in current assets

    (47,609 )     (55,817 )

Increase (decrease) in current liabilities

    (22,567 )     44,330  

Net cash used in operating activities

    (40,010 )     (43,711 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Purchases of certificates of deposit

    (489,000 )     (965,000 )

Proceeds from maturity of certificates of deposit

    710,000       980,000  

Purchases of mutual funds

    (1,458 )     -  

Purchases of fixed assets

    (17,970 )     (37,743 )

Proceeds from the sale of fixed assets

    104,235       993,160  

Net cash provided by investing activities

    305,807       970,417  
                 

NET INCREASE IN CASH AND RESTRICTED CASH

    265,797       926,706  

Cash and restricted cash, beginning of the period

    1,860,736       1,652,404  

Cash and restricted cash, end of the period

  $ 2,126,533     $ 2,579,110  
                 

SUPPLEMENTAL CASH FLOW INFORMATION

               

Cash paid for interest

  $ -     $ -  

Cash paid for income taxes

  $ 60,500     $ 183,000  

 

The accompanying notes are an integral part of these unaudited financial statements.

 

4

 

 

CKX LANDS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

 

 

The “Company,” “we,” “us,” and “our,” refer to CKX Lands, Inc.

 

 

Note 1:      Significant Accounting Policies and Recent Accounting Pronouncements

 

Significant Accounting Policies

 

 Basis of Presentation

 

The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with our audited financial statements and notes thereto for the fiscal year ended December 31, 2018 included in our Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of results to be expected for the full fiscal year or any other periods.

 

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make a number of estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures. Actual results may differ from these estimates.

 

Concentration of Credit Risk

 

The Company maintains its cash balances in seven financial institutions. The amount on deposit in each financial institution is insured by the Federal Deposit Insurance Corporation up to $250,000.

 

Cash Equivalents

 

Cash equivalents are highly liquid debt instruments with original maturities of three months or less when purchased.

 

Certificate of Deposits

 

Certificates of deposit have maturities greater than three months when purchased, in amounts not greater than $250,000. All certificates of deposit are held until maturity and recorded at cost which approximates fair value. Certificates of deposit mature through 2020.

 

Equity Investment

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities,” (ASU 2016-01), which makes targeted amendments to the guidance for recognition, measurement, presentation and disclosure of financial instruments.  The guidance under ASU 2016-01 requires equity investments, other than equity method investments, to be measured at fair value with changes in fair value recognized in net income.  As of March 31, 2019and December 31, 2018, the Company classified $246,528 and $244,825, respectively, of mutual funds as equity securities.  The Company invests in ultra-short, high quality U.S. dollar money market, foreign funds, and obligations issued by the US Government. The Company did not hold any equity investments until the fourth quarter of 2018, accordingly, there are no effects on the Company’s investments under the adoption of ASU 2016-01.”

 

Accounts Receivable

 

The Company’s accounts receivable consist of incomes received after quarter end for royalties produced prior to quarter-end.  When there are royalties that have not been received at the time of the preparation of the financial statements for months in the prior quarter, the Company estimates the amount to be received based on the last month’s royalties that were received from that particular company.  The Company does not maintain an allowance for doubtful accounts because other than the accrual for earned but not received royalties, it has no accounts receivable.

 

5

 

 

Property, Building and Equipment

 

Property, building, and equipment is stated at cost. Major additions are capitalized. Maintenance and repairs are charged to income as incurred. Depreciation is computed on the straight-line and accelerated methods over the following estimated useful lives of the assets:

 

Furniture and equipment (years)

    5       -       7  

Land improvements (years)

            15          

 

Impairment of Long-lived Assets

 

Long-lived assets, such as land, timber and property, buildings, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If events or circumstances arise that require a long-lived asset to be tested for potential impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to its carrying value. If the carrying amount of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying value exceeds the fair value. Fair value may be determined through various valuation techniques including quoted market prices, third-party independent appraisals and discounted cash flow models. The Company recorded no impairment charges during the three months ended March 31, 2019 and 2018.

 

Revenue Recognition

 

Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under the new standard, we recognize revenues when the following criteria are met: (i) persuasive evidence of a contract with a customer exists, (ii) identifiable performance obligations under the contract exist, (iii) the transaction price is determinable for each performance obligation, (iv) the transaction price is allocated to each performance obligation, and (v) the performance obligations are satisfied. We derive a majority of our revenues from oil and gas royalties, timber sales, and surface leases. Surface leases are not within the scope of ASC 606. See Note 6 for more detailed information about the Company’s reportable segments.

 

Oil and Gas

 

Oil and gas revenue is generated through customer contracts, where we provide the customer access to a designated tract of land upon which the customer performs exploration, extraction, production and ultimate sale of the oil and gas. The Company receives royalties on all oil and gas produced by the customer. The performance obligation identified in oil and gas related contracts is the production of oil and gas on the designated tract of land. The performance obligation is satisfied at a point in time, which is when the customer produces oil and gas. The transaction price is comprised of fixed fees (royalties) on all oil and gas produced. The Company accrues monthly royalty revenues based upon estimates and adjusts to actual as the Company receives payments. Accrued royalty income was $58,626 and $93,594 as of March 31, 2019 and December 31, 2018, respectively. There are no capitalized contract costs associated with oil and gas contracts. The accounting of royalty income remains largely unchanged upon implementation of ASC 606.

 

Timber

 

Timber revenue is generated through customer contracts executed as a pay-as-cut arrangement, where the customer acquires the right to harvest specified timber on a designated tract for a set period of time at agreed-upon unit prices. The performance obligation identified in timber related contracts is the severing of a single tree.

 

We satisfy our performance obligation when timber is severed, at which time revenue is recognized. The transaction price for timber sales is determined using contractual rates applied to harvest volumes. The Company may receive a deposit at the time of entering into a stumpage agreement and this deposit is recorded in trade payables and accrued expenses until earned. The Company held stumpage agreement deposits of $54,300 at March 31, 2019 and December 31, 2018, respectively. There are no capitalized contract costs associated with timber contracts. The accounting of timber revenue remains largely unchanged upon implementation of ASC 606.

 

Surface

 

Surface revenue is earned through annual leases for agricultural and hunting activities and the Company records revenues evenly over the term of these leases.  Surface revenues from these sources are recurring on an annual basis.  Unearned surface revenues are recorded in trade payables and accrued expenses and were $70,780 and $58,893 at March 31, 2019 and December 31, 2018, respectively.

 

Surface revenue is also earned through right of way and related temporary work space leases, both of which are not unusual in occurrence and are not recurring sources of revenue. Generally, a right of way lease relates to either a utility or pipeline right of way that is a permanent servitude or exists for fixed periods of time greater than thirty years. The Company retains ownership of the land and the servitude is limited to the use of the surface. Revenue is recorded at the time of the agreement’s execution date. For income tax purposes, these types of agreements are treated as sales of business assets.

 

6

 

 

Other sources of surface revenue can be commercial activities leases and sales of surface minerals, such as dirt.

 

Basic and Diluted Earnings per share

 

Net earnings per share is provided in accordance with FASB ASC 260-10, "Earnings per Share". Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive income per share excludes all potential common shares if their effect is anti-dilutive. As of March 31,2019, and 2018 there were no dilutive shares outstanding.

 

Dividends

 

The Company has changed the manner in which it determines whether a dividend will be declared.  The Company will no longer have a “regular” or “extra” dividend as has been described in prior reports.  In determining whether a dividend will be declared, the Board of Directors will take into account the Company’s prior fiscal year’s cash flows from operations and the current economic conditions among other information deemed relevant. Dividends paid per common stock are based on the weighted average number of common stock shares outstanding during the period.

 

Pursuant to a dividend reversion clause in the Company’s Articles of Incorporation, dividends not claimed within one year after the dividend becomes payable will expire and revert in full ownership to the Company and the Company’s obligation to pay such dividend will cease. Any dividend reversions are recorded in equity upon receipt.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, which amended the accounting treatment for leases. Lessees (for capital and operating leases) and lessors (for sales-type leases, direct financing leases and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11. ASU 2018-10 provides certain areas for improvement in ASU 2016-02 and ASU 2018-11 provides an additional optional transition method by allowing entities to initially apply the new leasing standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The new leasing standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this standard as of January 1, 2019. The Company reviewed its service agreements and other arrangements and evaluated whether they met the definition of a lease under ASU 2016-02. The Company determined that the adoption of this standard would have no impact on its financial statements.

 

There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

 

Note 2:      Restricted Cash

 

During the three months ended March 31, 2019, the company closed on the sale of a parcel of land which was structured as a “deferred exchange using a qualified intermediary” pursuant to Section 1031 of the Internal Revenue Code (1031 Exchange) for income tax purposes. The net proceeds from this transaction of $103,975 are included in restricted cash as of March 31, 2019.  The related income tax expense on the gain from this sale has been accrued at March 31, 2019.

 

The following table provides a reconciliation of cash and restricted cash reported on the balance sheet that sum to the total of the same such amounts shown in the statement of cash flows.

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
                 

Cash

  $ 2,022,558     $ 1,860,736  

Restricted cash

    103,975       -  

Total

  $ 2,126,533     $ 1,860,736  

 

7

 

 

 

Note 3:      Certificates of Deposit


The Company has certificates of deposit for investment purposes. Certificates of deposit have maturities greater than three months when purchased, in amounts not greater than $250,000. All certificates of deposit are held until maturity and recorded at cost which approximates fair value. Certificates of deposit mature through August of 2020. Certificates of deposit were $3,874,000 and $4,095,000 as of March 31, 2019 and December 31, 2018, respectively. Purchases of certificates of deposit were $489,000 and $965,000 for the three months ended March 31, 2019 and 2018, respectively. Proceeds from the maturity of certificates of deposit were $710,000 and $980,000 for the three months ended March 31, 2019 and 2018, respectively.

 

 

Note 4:      Fair Value of Financial Instruments

 

ASC 820 Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. It defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.

 

Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it was practical to estimate that value:

 

Class

Methods and/or Assumptions

 

Cash and cash equivalents:

 

Carrying value approximates fair value due to its readily convertible characteristic.

 

Certificate of Deposit:

 

Held until maturity and recorded at amortized cost which approximates fair value.

 

The estimated fair value of the Company's financial instruments are as follows:

 

           

March 31, 2019

   

December 31, 2018

 

Financial Assets:

 

Level

   

Carrying Value

   

Fair Value

   

Carrying Value

   

Fair Value

 
                                         

Cash and cash equivalents

    1     $ 2,022,558     $ 2,022,558     $ 1,860,736     $ 1,860,736  

Certificate of deposit - short term

    1       3,394,000       3,394,000       3,370,000       3,370,000  

Certificate of deposit - long term

    1       480,000       480,000       725,000       725,000  

Equity investment in mutual funds

    1       246,289       246,528       244,832       244,825  

Total

          $ 6,142,847     $ 6,143,086     $ 6,200,568     $ 6,200,561  

 

 

Note 5:      Property and Equipment

 

Property and equipment consisted of the following:

   

March 31,

   

December 31,

 
   

2019

   

2018

 
                 

Land

  $ 7,023,103     $ 7,051,412  

Timber

    2,180,251       2,162,390  

Building and equipment

    108,602       108,602  
      9,311,956       9,322,404  

Accumulated depreciation

    (76,923 )     (76,416 )

Total

  $ 9,235,033     $ 9,245,988  

 

8

 

 

During the three months ended March 31, 2019 and 2018, the Company had a gain on sale of land of $75,926 and $878,320, respectively. For the three months ended March 31, 2018, $767,147 of the gain represented gain on the sale of an undivided 1/6th ownership interest in land.

 

Depreciation, depletion and amortization expense was $616 and $8,735 for the three months ended March 31, 2019 and 2018, respectively.

  

 

Note 6:      Segment Reporting

 

The Company’s operations are classified into three principal operating segments that are all located in the United States: oil and gas, timber and surface. The Company’s reportable business segments are strategic business units that offer income from different products. They are managed separately due to the unique aspects of each area.

 

The tables below present financial information for the Company’s three operating business segments:

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 

Revenues:

               

Oil and gas

  $ 94,228     $ 124,577  

Timber sales

    14,481       178,449  

Surface revenue

    44,766       43,669  

Total segment revenues

    153,475       346,695  
                 

Cost and expenses:

               

Oil and gas costs

    14,524       16,656  

Timber costs

    4,397       20,594  

Surface costs

    578       6,990  

Total segment costs and expenses

    19,499       44,240  
                 

Income from operations:

               

Oil and gas

    79,704       107,921  

Timber

    10,084       157,855  

Surface

    44,188       36,679  

Total segment income from operations

    133,976       302,455  

Other income (expense) before income taxes

    (18,092 )     758,448  

Income before income taxes

  $ 115,884     $ 1,060,903  

 

   

Three Months Ended

   

Year Ended

 
   

March 31,

   

December 31,

 
   

2019

   

2018

 

Identifiable Assets, net of accumulated depreciation

               

Timber

  $ 2,180,251     $ 2,162,390  

General corporate assets

    13,504,904       13,439,611  

Total

    15,685,155       15,602,001  
                 

Capital expenditures:

               

Timber

    17,970       45,067  

Surface

    -       4,900  

General corporate assets

    -       5,471  

Total segment costs and expenses

    17,970       55,438  
                 

Depreciation and depletion

               

Oil and gas

    -       1,858  

Timber

    109       -  

General corporate assets

    507       2,027  

Total

  $ 616     $ 3,885  

 

9

 

 

There are no intersegment sales reported in the accompanying income statements. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Form 10-K for the year ended December 31, 2018. The Company evaluates performance based on income or loss from operations before income taxes excluding any nonrecurring gains and losses on securities held available-for-sale. Income before income tax represents net revenues less costs and expenses less other income and expenses of a general corporate nature. Identifiable assets by segment are those assets used solely in the Company's operations within that segment.

  

 

Note 7:      Income Taxes

 

In accordance with generally accepted accounting principles, the Company has analyzed its filing positions in federal and state income tax returns that remain subject to examination, generally those filed in the last three years. The Company believes that all filing positions are highly certain and that all income tax filing positions and deductions would be sustained upon a taxing jurisdiction’s audit. Therefore, no reserve for uncertain tax positions is required. No interest or penalties have been levied against the Company and none are anticipated.

 

 

Note 8:      Related Party Transactions

 

The Company and Stream Wetlands Services, LLC (“Stream Wetlands”) are parties to an option to lease agreement dated April 17, 2017 (the “OTL”). The OTL provides Stream Wetlands an option, exercisable through February 28, 2020, to lease certain lands from the Company, subject to the negotiation and execution of a mutually acceptable lease form. Stream Wetlands paid the Registrant $38,333 upon execution of the OTL, and an additional $38,333 during the quarters ended March 31, 2018 and 2019. Stream Wetlands may extend the term of the OTL for one more year by paying $38,333 in the first quarter of 2020. Mr. Stream, a director of the Company, is the president of Stream Wetlands.

 

The Company’s President is a partner in Stockwell, Sievert, Viccellio, Clements, LLP (“Stockwell”). Beginning in August 2018, the Company began renting office space from Stockwell. The Company pays Stockwell $750 per month as rent for office space and associated services, $2,000 per month to reimburse the firm for an administrative assistant and reimburses Stockwell for miscellaneous office supplies and legal expenses. For the three months ended March 31, 2019, the Company recorded $8,495 in total of such expense, of which $2,250 was rent expense.

 

 

Note 9:      Concentrations

  

Revenue from customers representing 5% or more of total revenue for the three months ended March 31, 2019 and 2018, respectively were:

 

     

Three Months Ended March 31,

 

Count

   

2019

   

2018

 
1     $ 30,322     $ 138,519  
2       19,674       39,899  
3       16,644       34,723  
4       16,458       24,193  
5       10,562       19,764  

 

 

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2018 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on March 21, 2019.

 

Cautionary Statement

 

This Management’s Discussion and Analysis includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like “believe,” “expect,” “plan,” “estimate,” “anticipate,” “intend,” “project,” “will,” “predicts,” “seeks,” “may,” “would,” “could,” “potential,” “continue,” “ongoing,” “should” and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this Form 10-Q. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or from our predictions, including those risks described in our Annual Report on Form 10-K and in our other public filings. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

 

10

 

 

Overview

 

CKX Lands, Inc., a Louisiana corporation, began operations in 1930 under the name Calcasieu Real Estate & Oil Co., Inc. It was originally organized as a spin-off by a bank operating in southwest Louisiana. The purpose of the spin-off was to form an entity to hold non-producing mineral interests which regulatory authorities required the bank to charge off. Over the years, as some of the mineral interests began producing, the Company used part of the proceeds to acquire land. In 1990, the Company made its largest acquisition when it was one of four purchasers who bought a fifty percent undivided interest in approximately 35,575 acres in southwest Louisiana.

 

Today the Company’s income is derived from mineral royalties, timber sales and surface payments from its lands. CKX receives income from royalty interests and mineral leases related to oil and gas production, timber sales, and surface rents. Although CKX is active in the management of its land and planting and harvesting its timber, CKX is passive in the production of income from oil and gas production in that CKX does not explore for oil and gas or operate wells. These oil and gas activities are performed by unrelated third parties.

 

CKX leases its property to oil and gas operators and collects income through its land ownership in the form of oil and gas royalties and lease rentals and geophysical revenues. The Company’s oil and gas income fluctuates as new oil and gas production is discovered on Company land and then ultimately depletes or becomes commercially uneconomical to produce. The volatility in the daily commodity pricing of a barrel of oil or a thousand cubic feet, or “MCF,” of gas will also cause fluctuations in the Company’s oil and gas income.

 

CKX has small royalty interests in 29 different producing oil and gas fields. The size of each royalty interest is determined by the Company’s net ownership in the acreage unit for the well. CKX’s royalty interests range from 0.0045% for the smallest to 7.62% for the largest. As the Company does not own or operate the wells, it does not have access to any reserve information. Eventually, the oil and gas reserves under the Company’s current land holdings will be depleted.

 

Timber income is derived from sales of timber on Company lands. The timber income will fluctuate depending on our ability to secure stumpage agreements in the regional markets, timber stand age, and/or stumpage commodity prices. Timber is a renewable resource that the Company actively manages.

 

Surface income is earned from various recurring and non-recurring sources. Recurring surface income is earned from lease arrangements for farming, recreational and commercial uses. Non-recurring surface income can include such activities as pipeline right of ways, and temporary worksite rentals.

 

In managing its lands, the Company relies on and has established relationships with real estate, forestry, environmental and agriculture consultants as well as attorneys with legal expertise in general corporate matters, real estate, and minerals.

 

The Company actively searches for additional real estate for purchase in Louisiana with a focus on southwest Louisiana. When evaluating unimproved real estate for purchase, the Company will consider numerous characteristics including but not limited to, timber fitness, agriculture fitness, future development opportunities and/or mineral potential. When evaluating improved real estate for purchase, the Company will consider characteristics including, but not limited to, geographic location, quality of existing revenue streams, and/or quality of the improvements.

 

11

 

 

Results of Operations – Three Months Ended March 31, 2019 and 2018

 

Revenue

 

Total revenues for the three months ended March 31, 2019 were $153,475, a decrease of approximately 56% when compared with the same period in 2018. Total revenue consists of oil and gas, timber, and surface revenues. Components of revenues for the three months ended March 31, 2019 as compared to 2018, are as follows:

 

 

   

Three Months Ended

                 
   

March 31,

                 
   

2019

   

2018

   

Change from
Prior Period

   

Percent Change
from Prior Period

 

Revenues:

                               

Oil and gas

  $ 94,228     $ 124,577     $ (30,349 )     (24.4 )%

Timber sales

    14,481       178,449       (163,968 )     (91.9 )%

Surface revenue

    44,766       43,669       1,097       2.5  %

Total revenues

  $ 153,475     $ 346,695     $ (193,220 )     (55.7 )%

 

Oil and Gas

 

Oil and gas revenues were 61% and 36% of total revenues for the three months ended March 31, 2019 and 2018, respectively. A breakdown of oil and gas revenues for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 is as follows:

 

 

   

Three Months Ended

                 
   

March 31,

                 
   

2019

   

2018

   

Change from
Prior Period

   

Percent Change
from Prior Period

 

Oil

  $ 37,999     $ 97,662     $ (59,663 )     (61.1 )%

Gas

    52,222       23,375       28,847       123.4 %

Lease and geophysical

    4,008       3,540       468       13.2 %

Total revenues

  $ 94,228     $ 124,577     $ (30,349 )     (24.4 )%

 

 

CKX received oil and/or gas revenues from 79 and 82 wells during the three months ended March 31, 2019 and 2018, respectively.

 

The following schedule summarizes barrels and MCF produced and average price per barrel and per MCF for the three months ended March 31, 2019 and 2018:

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 

Net oil produced (Bbl)(2)

    650       1,409  

Average oil sales price (per Bbl)(1,2)

  $ 58.45     $ 60.92  

Net gas produced (MCF)

    10,280       6,724  

Average gas sales price (per MCF)(1)

  $ 5.08     $ 3.48  

 

(1) Before deduction of production costs and severance taxes

(2) Excludes plant products

 

Oil revenues decreased for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, by $59,663. Gas revenues increased for the three months ended March 31, 2019, as compared to 2018, by $28,847. As indicated from the schedule above the decrease in oil revenues were due to a decrease in the net oil produced and a decrease in the average oil sales price per barrel. The increase in gas revenues were due to an increase in net gas produced and an increase in the average price per MCF.

 

Lease and geophysical revenues increased for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, by $468. These revenues are dependent on oil and gas producers’ activities, are not predictable and can vary significantly from year to year.

 

Timber

 

Timber revenue was $14,481 and $178,449 for the three months ended March 31, 2019 and 2018, respectively. The decrease in revenues is due to wet weather during the first quarter of fiscal 2019 that limited customers’ ability to harvest timber.

 

12

 

 

Surface

 

Surface revenues increased for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, by $1,097. This is primarily due to additional right of ways being granted. 

 

Costs and Expenses

 

Oil and gas costs decreased slightly for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 by $2,132. These changes were due to lower production taxes and charges.

 

Timber costs decreased for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 by $16,197. This is primarily due to the decreased timber revenue occurring during the three months ended March 31, 2019.

  

Surface costs decreased for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 by $6,412. This is primarily due to reduced maintenance expense.

 

General and administrative expenses decreased for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 by $12,526. This is primarily due to a decrease in officer salaries, offset by increased property management, accounting, and legal fees.

 

Gain on Sale of Land

 

Gain on sale of land and equipment was $75,926 and $878,320 for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2018, $767,147 of the gain represented gain on the sale of an undivided 1/6th ownership interest in land.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

Current assets totaled $5,970,122 and current liabilities equaled $194,248 at March 31, 2019.

 

The Company has an unsecured revolving line of credit with Hancock Whitney Bank. The line of credit permits the Company to draw a maximum aggregate amount of $1,000,000. The line of credit matures on June 25, 2019, and borrowings under the line of credit bear interest at a rate of 4.25%. As of March 31, 2019, there was no outstanding balance under the line of credit.

 

In the opinion of management, cash and cash equivalents, and certificates of deposit are adequate for projected operations and possible land acquisitions.

  

Analysis of Cash Flows

 

Net cash used in operating activities decreased by $3,701 to $40,010 for the three months ended March 31, 2019, compared to $43,711 for the three months ended March 31, 2018. The change in cash provided by operating activities was attributable primarily to the decrease in net income offset by the decrease on the gain on the sale of land.

 

Net cash provided by investing activities was $305,807 and $970,417 for the three months ended March 31, 2019, and 2018, respectively.  For the three months ended March 31, 2019, this primarily resulted from purchases of certificates of deposit of $489,000, purchases of mutual funds of $1,458, purchases of timber of $17,970, offset by proceeds from maturity of certificates of deposit of $710,000 and the proceeds from the sales of fixed assets of $104,235. For the three months ended March 31, 2018, this resulted from purchases of certificates of deposit of $965,000 and purchases of fixed assets of $37,743, offset by proceeds from maturity of certificates of deposit of $980,000 and from the proceeds of sales of fixed assets of $993,160.   

 

Significant Accounting Polices and Estimates

 

There were no changes in our significant accounting policies and estimates during the three months ended March 31, 2019 from those set forth in “Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Recent Accounting Pronouncements

 

See Note 1, Basis of Presentation and Recent Accounting Pronouncements, to our condensed consolidated financial statements included in this report for information regarding recently issued accounting pronouncements that may impact our financial statements.

  

13

 

 

Off-Balance Sheet Arrangements

 

During the three months ended March 31, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements.

 

ITEM 3. NOT APPLICABLE

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, the Company’s principal executive and financial officer carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report. Disclosure controls and procedures mean controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on its evaluation, management concluded that as of March 31, 2019, the Company’s disclosure controls and procedures were not effective due to the existence of material weaknesses in internal control over financial reporting, discussed more fully below.

 

Changes in Internal Control Over Financial Reporting

 

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, our management concluded that, as of December 31, 2018, the Company’s internal control over financial reporting was not effective due primarily to a lack of internal staffing resulting in a lack segregation of duties, and a lack of evidence of review and oversight of certain financial processes, including processes that have been outsourced to a third-party service organization. Management is currently evaluating the steps that would be necessary to eliminate these material weaknesses.

 

There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended March 31, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1 – 5. NOT APPLICABLE

 

14

 

 

ITEM 6. EXHIBITS

 

 

3.1

Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Form 10-K (File No. 001-31905) for the year ended December 31, 2018 filed on March 21, 2019).

     
 

3.2

Amendment to Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to Form 10-K (File No. 001-31905) for the year ended December 31, 2003 filed on March 19, 2004).

     
 

3.3

Articles of Amendment to the Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.3 to Form 10-K (File No. 001-31905) for the year ended December 31, 2018 filed on March 21, 2019).

     
 

3.4

By-Laws of the Registrant (incorporated by reference to Exhibit 3.3 to Form 10-Q (File No. 001-31905) for the quarterly period ended March 31, 2013 filed on May 10, 2013).

     
 

31*

Certification of Lee W. Boyer, President and Treasurer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     
 

32**

Certification of Lee W. Boyer, President and Treasurer, pursuant to 18 U.S.C. Section 1350 and Section 906 of the Sarbanes-Oxley Act of 2002.

     

 

101.INS

XBRL Instance

 

 

101.SCH

XBRL Taxonomy Extension Schema

 

 

101.CAL

XBRL Taxonomy Extension Calculation

 

 

101.DEF

XBRL Taxonomy Extension Definition

 

 

101.LAB

XBRL Taxonomy Extension Labels

 

 

101.PRE

XBRL Taxonomy Extension Presentation

 

 

*

Filed herewith

  

**

Furnished herewith

 

Signature

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 2, 2019

 

CKX LANDS, INC.

 

By:

 

/s/ Lee W. Boyer

 

Lee W, Boyer

 

President and Treasurer

 

(Principal executive and financial officer)

 

 

15