CKX Lands, Inc. — Form 10-Q Summary
Business Context and Reporting Period
CKX Lands, Inc. owns land and mineral interests in southwest Louisiana and generates revenue from oil and gas royalties, timber sales, and surface leases and related payments. The company does not operate oil and gas wells. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The company had 1,942,495 common shares outstanding as of August 2, 2019.
Financial Position and Key Metrics
| Metric | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | Comparable 2018 Period |
|---|---|---|---|
| Total revenue | $216,808 | $370,283 | $394,033; $740,728 |
| Income from operations | $(1,625) | $87,735 | $227,801; $1,275,782 |
| Net income | $23,271 | $128,992 | $151,704; $989,065 |
| Basic and diluted earnings per share | $0.01 | $0.07 | $0.08; $0.51 |
| Net cash from operating activities | Not separately reported | $(51,255) | $5,132 |
At June 30, 2019, total assets were $15.71 million, including $2.48 million of cash, $104,424 of restricted cash, $3.40 million of certificates of deposit, and $248,032 of mutual fund investments. Current assets were $6.23 million versus current liabilities of $191,511. Total liabilities were $379,175, and stockholders’ equity was $15.33 million.
The company had no borrowings outstanding at June 30, 2019. Its unsecured $1.0 million revolving credit line, which carried a 4.25% interest rate, expired on June 25, 2019 and was not extended. Management stated that cash, cash equivalents, and certificates of deposit were adequate for projected operations and possible land acquisitions.
Investing activities generated $779,304 of cash during the first six months, principally from certificate-of-deposit maturities and proceeds from asset sales, partly offset by new certificate-of-deposit purchases and timber reforestation costs. Financing activities used no cash in 2019; the company paid $233,099 of dividends in the comparable 2018 period. Cash and restricted cash increased by $728,049 to $2.59 million.
Material Changes Versus the Prior Comparable Period
- Three-month revenue declined 45.0% to $216,808, while six-month revenue declined 50.0% to $370,283.
- Oil and gas revenue decreased 11.0% for the quarter and 17.0% year to date. The quarterly decline reflected lower oil and gas prices and lower gas production; the year-to-date decline primarily reflected lower oil production and oil prices, partly offset by higher gas revenue.
- Timber revenue fell to zero for the quarter and declined 95.9% year to date, as wet weather limited harvesting activity.
- Surface revenue increased 30.0% for the quarter and 17.2% year to date, primarily from lease bonuses and delay rentals, which management characterized as non-recurring.
- General and administrative expense increased $74,686 for the quarter and $62,160 year to date, mainly due to higher contract services, accounting, SEC filing, and legal fees, partly offset by lower salaries.
- Six-month net income fell 86.9% to $128,992. The 2018 comparison benefited from an $881,654 land-sale gain, including a $767,147 gain on the sale of an undivided one-sixth land interest. The 2019 land-sale gain was $80,876.
- Operating cash flow turned negative, declining from $5,132 to $(51,255), despite the smaller land-sale gain reducing the non-cash adjustment that depressed operating cash flow.
- No dividend was declared or paid during the first six months of 2019, compared with $233,099 paid in the first six months of 2018.
Outlook, Commentary, Risks, and Unusual Items
- Oil and gas revenue is subject to commodity-price volatility, production changes, producer activity, and eventual depletion of reserves. CKX does not operate the wells and does not have access to reserve information.
- Timber revenue depends on regional stumpage markets, timber stand age, harvesting conditions, and weather. Wet weather materially reduced 2019 harvesting activity.
- Surface revenue includes recurring leases but also non-recurring right-of-way, workspace, lease-bonus, and delay-rental payments, making results variable between periods.
- The company is actively seeking additional Louisiana real estate, particularly in southwest Louisiana, and considers timber, agricultural, development, and mineral potential in acquisition decisions.
- The 1031 exchange restricted cash of $104,424 represented sale proceeds and interest held by a qualified intermediary, generally until the earlier of the applicable six-month period or completion of the exchange process.
- Management concluded that disclosure controls and procedures were not effective as of June 30, 2019 because of material weaknesses in internal control over financial reporting. The cited issues included inadequate staffing and segregation of duties and insufficient evidence of review and oversight, including for outsourced processes. Management was evaluating remediation steps, and no material changes to internal control occurred during the quarter.
- The company adopted the new lease accounting standard on January 1, 2019 and determined that adoption had no impact on its financial statements.
- Related-party arrangements included an option-to-lease agreement with an entity whose president is a company director and payments to a law firm in which the company’s president is a partner. Related-party expense to the law firm was $16,953 for the first six months of 2019.
Important Facts for Investors to Verify
- Whether the expired $1.0 million revolving credit facility has been replaced or remains unavailable.
- Management’s remediation plan and progress toward eliminating the disclosed material weaknesses in internal control.
- The sustainability and timing of recurring versus non-recurring surface revenue and future timber harvesting activity.
- Exposure to oil and gas prices, production declines, producer activity, and the absence of company-controlled reserve information.
- The basis for future dividend decisions, particularly given negative year-to-date operating cash flow and no 2019 dividend.
- The timing and tax treatment of the 1031 exchange and release of the restricted cash.
- The effect of higher general and administrative expenses on profitability if revenue remains volatile.