CKX Lands, Inc. — Q1 2019 Form 10-Q Summary
Reporting period: Three months ended March 31, 2019; comparative period ended March 31, 2018. Financial statements are unaudited. CKX generates revenue from oil and gas royalties, timber sales, and surface leases and does not operate oil and gas wells.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $153,475 | $346,695 | (55.7%) |
| Income from operations | $89,360 | $1,047,981 | (91.5%) |
| Net income | $105,721 | $837,361 | (87.4%) |
| Basic and diluted EPS | $0.05 | $0.43 | Down $0.38 |
| Operating margin | Approximately 58.2% | Approximately 302.3% | Not comparable due to land-sale gains |
| Net margin | Approximately 68.9% | Approximately 241.5% | Not comparable due to land-sale gains |
| Net cash used in operating activities | $(40,010) | $(43,711) | Use decreased $3,701 |
| Net cash provided by investing activities | $305,807 | $970,417 | Down $664,610 |
Revenue mix: Oil and gas revenue was $94,228, timber revenue was $14,481, and surface revenue was $44,766, including $9,583 from a related party.
Balance sheet and liquidity: Total assets were $15.69 million at March 31, 2019, including $2.02 million of cash, $103,975 of restricted cash, $3.394 million of short-term certificates of deposit, $480,000 of long-term certificates of deposit, and $246,528 of mutual funds. Total liabilities were $381,912 and stockholders’ equity was $15.30 million. The company reported no outstanding borrowings and no debt-related interest expense.
Cash and investments: Cash and restricted cash totaled $2.127 million at quarter-end, compared with $1.861 million at December 31, 2018. Certificates of deposit totaled $3.874 million. Management stated that cash, cash equivalents, and certificates of deposit were adequate for projected operations and possible land acquisitions.
Material Changes Versus the Prior Comparable Period
- Oil and gas revenue declined 24.4% to $94,228. Oil revenue fell 61.1% because of lower net oil production and a lower average oil price; gas revenue increased 123.4% due to higher production and pricing.
- Timber revenue declined 91.9% to $14,481. Management attributed the decrease primarily to wet weather that limited harvesting during the quarter.
- Surface revenue increased 2.5% to $44,766, primarily due to additional rights-of-way.
- The 2019 quarter included a $75,926 gain on sale of land, compared with an $878,320 gain in Q1 2018. The prior-year gain included $767,147 from selling an undivided one-sixth interest in land.
- General and administrative expense decreased 9.5% to $120,035, primarily due to lower officer salaries, partly offset by higher property management, accounting, and legal costs.
- Operating cash flow remained negative despite reported net income, reflecting the effects of the land-sale gain and working-capital changes.
- No dividends were declared in Q1 2019. The company changed its dividend policy and will consider prior-year operating cash flow, current economic conditions, and other relevant information rather than using a regular or special dividend framework.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no quantitative earnings or revenue guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Oil and gas revenue is volatile because production declines as reserves deplete, commodity prices fluctuate, and CKX lacks access to reserve information because it does not operate the wells. CKX holds small royalty interests in 29 producing fields and received oil and/or gas revenue from 79 wells during the quarter.
- Timber revenue depends on harvesting conditions, timber stand age, regional stumpage markets, and timber prices. Weather materially affected Q1 2019 results.
- The company closed on a land sale structured as a Section 1031 deferred exchange. Net proceeds of $103,975 were classified as restricted cash at March 31, 2019, and related tax expense was accrued.
- An unsecured revolving credit facility permits borrowings of up to $1.0 million at 4.25% and matures June 25, 2019. No amount was outstanding at March 31, 2019. The filing does not state whether the facility was subsequently renewed or amended.
- Management concluded that disclosure controls and procedures were not effective at March 31, 2019 because of material weaknesses in internal control over financial reporting. Cited issues included limited staffing, inadequate segregation of duties, and insufficient evidence of review and oversight of certain financial processes, including outsourced processes.
- The company adopted the new lease accounting standard effective January 1, 2019 and determined that it had no impact on the financial statements.
- Related-party arrangements include surface revenue from Stream Wetlands Services, LLC, whose president is a company director, and office and administrative services from a law firm in which the company’s president is a partner.
Investor Verification Points
- Verify the status and renewal terms of the $1.0 million revolving credit facility after its June 25, 2019 maturity date.
- Assess whether the decline in timber revenue was temporary weather-related disruption or indicates a broader change in harvesting activity.
- Review oil and gas production, pricing, and royalty trends given the company’s exposure to depletion and commodity-price volatility.
- Confirm the use and eventual release of the $103,975 of restricted 1031-exchange proceeds and the related tax treatment.
- Monitor remediation of the disclosed material weaknesses in internal control and disclosure controls.
- Review future dividend decisions under the revised policy and the company’s operating cash flow generation.