CKX 10-Q Quarter ended Sept. 30, 2018

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2018

Commission File Number 1-31905

CKX Lands, Inc.

(Exact name of registrant as specified in its charter)

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 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).     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.

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  ☒

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 November 9, 2018

TABLE OF CONTENTS

CKX LANDS, INC.

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

CKX LANDS, INC.

(Unaudited)

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

CKX LANDS, INC.

(Unaudited)

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

CKX LANDS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

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, 2017 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, 2017, filed on March 2 3 , 2018.

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 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.

Overview

CKX Lands, Inc. 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 dispose of. 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 that 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 activities in that CKX does not explore for oil and gas,or operate wells. These oil and gas activities are performed by unrelated third parties.

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 an MCF of gas will also cause fluctuations in the Company’s oil and gas income.

CKX has small royalty interests in 31 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.

Timber income is derived from 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.

Results of Operations

Revenue – Three Months Ended September 30, 2018

Components of revenues for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, are as follows:

Oil and Gas

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. A breakdown of oil and gas revenues for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 are as follows:

CKX received oil and/or gas revenues from 80 and 79 wells during the three months ended September 30, 2018 and 2017, respectively.

The following schedule summarizes barrels and MCF produced and average price per barrel and per MCF for the three months ended September 30, 2018:

Oil revenues increased for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, by $52,903. Gas revenues decreased for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, by $10,271. As indicated from the schedule above the changes were due to increases in the average price per barrel and the average price per MCF and decreases in barrels of oil produced and MCF of gas produced.

Lease and geophysical revenues increased for the three months ended September 30, 2018, as compared to the three months ended September 30, 2018, by $3,660. 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 $56,929 for the three months ended September 30, 2018. There was no timber revenue for the three months ended September 30, 2017. The increase in revenues is due to our continued marketing of our timber and securing stumpage agreements over the last two years and dryer weather.

Surface

Surface revenues decreased for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, by $42,848. This is primarily due to revenue related to pipeline right of way agreements that were received in 2017 and not in 2018.  As previously noted by management, pipeline, utility and other right of ways are not unusual to the Company; however, these types of revenue are not predictable and can vary significantly from year to year.

Revenue – Nine Months Ended September 30, 2018

Components of revenues for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, are as follows:

Oil and Gas

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. A breakdown of oil and gas revenues for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 are as follows:

CKX received oil and/or gas revenues from 79 and 93 wells during the nine months ended September 30, 2018 and 2017, respectively.

The following schedule summarizes barrels and MCF produced and average price per barrel and per MCF:

Oil revenues increased for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, by $48,389. Gas revenues decreased for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, by $36,712. As indicated from the schedule above the changes were due to increases in the average price per barrel and the average price per MCF and decreases in barrels of oil produced and MCF of gas produced.

Lease and geophysical revenues decreased for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2018, by $12,492. These revenues are dependent on oil and gas producers’ activities, are not predictable and can vary significantly from year to year.

Timber

Timber revenues increased for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, by $402,970. The increase in revenues is due to our continued marketing of our timber and securing stumpage agreements over the last two years and dryer weather.

Surface

Surface revenues decreased for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, by $196,831. This is primarily due to revenue related to pipeline right of way agreements that were received in 2017 and not in 2018.  As previously noted by management, pipeline, utility and other right of ways are not unusual to the Company however, these types of revenue are not predictable and can vary significantly from year to year.

Costs and Expenses – Three and Nine Months Ended September 30, 2018

Oil and gas costs increased for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 by $4,767. Oil and gas costs increased for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, by $1,661. These changes were due to an increase in production taxes on oil and gas revenue. Production taxes consist of federal, state, and local taxes.

Timber costs increased for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, by $12,436. Timber costs increased for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, by $41,708. This is primarily due to the increased timber revenue occurring during the three and nine months ended September 30, 2018.

Surface costs decreased for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, by $1,712. Surface costs decreased for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, by $12,057. This is primarily due to lower repair and maintenance cost and no legal contract review as the Company did not enter into any new contracts in 2018.

General and administrative expenses increased for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, by $20,132. General and administrative expenses increased for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, by $36,207. This is primarily due to officer bonuses for land disposition administration paid in the first quarter of 2018 and increased accounting and professional services fees, offset by decreases in legal fees related to SEC reporting and director fees.

Liquidity and Capital Resou r ces

Sources of Liquidity

Current assets totaled $4,359,005 and current liabilities equaled $177,753 at September 30, 2018.

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 September 30, 2018, 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.

The Company declared and paid a $0.12 per common share dividend during the quarter ended March 31, 2018. During the first quarter of each future calendar year, the Company anticipates determining whether a dividend will be declared. 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 current economic conditions among other information deemed relevant.

Analysis of Cash Flows

Net cash provided by operating activities decreased by $178,756 to $98,089 for the nine months ended September 30, 2018, compared to $276,845 for the nine months ended September 30, 2017. The decrease in cash provided by operating activities was attributable primarily to the gain on the sale of land.

Net cash provided by (used in) investing activities was $475,067 and ($61,317) for the nine months ended September 30, 2018, and 2017, respectively.  For the nine months ended September 30, 2018, this included purchases of certificates of deposit of $3,145,000 and purchases of fixed assets of $39,317, offset by proceeds from maturity of certificates of deposit of $2,662,890 and from the sales of fixed assets of $996,494.   For the nine months ended September 30, 2017, this includes purchases of certificates of deposits of $2,412,890, purchases of fixed assets of $93,901, offset by proceeds from maturity of certificates of deposits of $2,410,000 and proceeds from the sale of fixed assets of $35,474.

Net cash used in financing activities was $233,099 and $194,250 for the nine months ended September 30, 2018, and 2017, respectively. For the nine months ended September 30, 2018, and 2017 this included dividends paid.

Significant Accounting Polices and Estimates

There were no changes in our significant accounting policies and estimates during the nine months ended September 30, 2018 from those set forth in “Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2017.

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.

Off-Balance Sheet Arrangements

During the nine months ended September 30, 2018, 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.

Evaluation of Disclosure Controls and Procedures

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the period covered by this report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company 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 a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company'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 the evaluation, performed under the supervision and with the participation of the Company’s management, including the President, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2018.

Changes in Internal Control Over Financial Reporting

There were no significant changes with respect to the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended September 30, 2018.

ITEM 1 – 5. NOT APPLICABLE

All exhibits not designated as filed herewith (*) or furnished herewith (**) are incorporated herein by reference to a prior filing under File Number 001-31905 or 000-09669 as indicated.

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: November 9, 2018

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