CKX LANDS, INC. - Quarter Report: 2019 September (Form 10-Q)

 

 

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 September 30, 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.)
127 W. Broad Street
Lake Charles, LA		70601
(Address of principal executive offices)		(Zip Code)
	(337) 493-2399
	(Registrant’s telephone number)

 

 

 

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 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  ☒

 

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 1, 2019.

 

 

 

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		September 30, 2019				December 31, 2018
		(unaudited)
ASSETS
Current assets:
Cash		$	2,940,360			$	1,860,736
Certificates of deposit			3,173,000				3,370,000
Equity investment in mutual funds			249,436				244,825
Accounts receivable			111,388				118,463
Prepaid expense and other assets			86,362				36,989
Total current assets			6,560,546				5,631,013
Long-term certificate of deposit			-				725,000
Property and equipment, net			9,238,383				9,245,988
Total assets		$	15,798,929			$	15,602,001
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables and accrued expenses			132,041				146,268
Unearned revenue			94,740				58,893
Income tax payable			-				11,654
Total current liabilities			226,781				216,815
Deferred income tax payable			187,664				187,664
Total liabilities			414,445				404,479
Stockholders' equity:
Common stock, 3,000,000 authorized, no par value, 1,942,495 issued and outstanding as of September 30, 2019 and December 31, 2018			59,335				59,335
Retained earnings			15,325,149				15,138,187
Total stockholders' equity			15,384,484				15,197,522
Total liabilities and stockholders' equity		$	15,798,929			$	15,602,001

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Revenues:
Oil and gas		$	174,097			$	178,640			$	408,029			$	464,895
Timber sales			16,717				56,929				31,198				411,936
Surface revenue			27,940				22,127				130,644				109,133
Surface revenue - related party			9,583				-				28,749				12,459
Total revenue			228,337				257,696				598,620				998,423
Costs, expenses and (gains):
Oil and gas costs			20,196				18,435				48,364				48,378
Timber costs			9,292				15,212				14,376				50,591
Surface costs			581				10,717				1,274				25,220
General and administrative expense			143,198				136,366				471,668				402,674
Depreciation expense			507				1,050				1,517				1,517
Gain on sale of land			-				-				(80,876	)			(881,654	)
Total costs, expenses and (gains)			173,774				181,780				456,323				(353,274	)
Income from operations			54,563				75,916				142,297				1,351,697
Interest income			28,512				26,301				84,524				52,176
Income before income taxes			83,075				102,217				226,821				1,403,873
Federal and state income tax expense:
Current			25,105				16,817				39,859				329,409
Deferred			-				-				-				-
Total income taxes			25,105				16,817				39,859				329,409
Net income		$	57,970			$	85,400			$	186,962			$	1,074,464
Dividends paid			-				-				-				(233,099	)
Net income available to common shareholders		$	57,970			$	85,400			$	186,962			$	841,366

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		Common Stock								Retained				Total
		Shares				Amount				Earnings				Equity
Balances, June 30, 2019 (unaudited)			1,942,495			$	59,335			$	15,267,179			$	15,326,514
Net income			-				-				57,970				57,970
Balances, September 30, 2019 (unaudited)			1,942,495			$	59,335			$	15,325,149			$	15,384,484

		Common Stock								Retained				Total
		Shares				Amount				Earnings				Equity
Balances, June 30, 2018 (unaudited)			1,942,495			$	59,335			$	15,012,192			$	15,071,527
Net income			-				-				85,400				85,400
Balances, September 30, 2018 (unaudited)			1,942,495			$	59,335			$	15,097,592			$	15,156,927

		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			-				-				186,962				186,962
Balances, September 30, 2019 (unaudited)			1,942,495			$	59,335			$	15,325,149			$	15,384,484

		Common Stock								Retained				Total
		Shares				Amount				Earnings				Equity
Balances, December 31, 2017			1,942,495			$	59,335			$	14,256,226			$	14,315,561
Dividends paid			-				-				(233,099	)			(233,099	)
Net income			-				-				1,074,464				1,074,464
Balances, September 30, 2018 (unaudited)		$	1,942,495			$	59,335			$	15,097,592			$	15,156,926

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		Nine Months Ended
		September 30,
		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	186,962			$	1,074,464
Less non-cash expenses included in net income:
Depreciation expense			1,517				1,517
Depletion expense			288				13,896
Gain on sale of land			(80,876	)			(881,654	)
Unrealized gain on equity investment in mutual funds			(246	)			-
Changes in operating assets and liabilities:
Increase (decrease) in current assets			(42,297	)			(67,375	)
Increase (decrease) in current liabilities			9,966				(42,759	)
Net cash provided by operating activities			75,314				98,089
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of certificates of deposit			(1,468,000	)			(3,145,000	)
Proceeds from maturity of certificates of deposit			2,390,000				2,662,890
Purchases of mutual funds			(4,365	)			-
Costs of reforesting timber			(22,560	)			(39,317	)
Proceeds from the sale of fixed assets			109,235				996,494
Net cash provided by investing activities			1,004,310				475,067
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid			-				(233,099	)
Net cash used in financing activities			-				(233,099	)
NET INCREASE IN CASH AND RESTRICTED CASH			1,079,624				340,057
Cash and restricted cash, beginning of the period			1,860,736				1,652,404
Cash and restricted cash, end of the period		$	2,940,360			$	1,992,461
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest		$	-			$	-
Cash paid for income taxes		$	67,107			$	355,387

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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 and nine months ended September 30, 2019 are not necessarily indicative of results to be expected for the full fiscal year or any other periods.

 

The preparation of the 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.

 

Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

 

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. Certificates of deposit with a maturity of one year or less are classified as short-term. Certificates of deposit with a maturity of more than one year are classified as long-term.

 

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 September 30, 2019, and December 31, 2018, the Company classified $249,436 and $244,825, respectively, of mutual funds as equity securities.  The Company invests in ultra-short, high quality U.S. dollar money market funds, foreign funds, and obligations issued by the U.S. 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 from 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 average of the most recent 12 month’s royalties that were received from that particular well.  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.

 

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:

 

 

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 nine months ended September 30, 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. Net accrued royalty income was $111,915 and $93,594 as of September 30, 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 September 30, 2019 and December 31, 2018. 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 $94,741 and $58,893 at September 30, 2019, and December 31, 2018, respectively.

 

Surface revenue is also earned through right of way and related temporary workspace leases, both of which are not usual 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.

 

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 September 30, 2019, and 2018 there were no dilutive shares outstanding.

 

Dividends

 

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 share are based on the weighted average number of shares of common stock outstanding during the period. The Company declared and paid a dividend of $233,099 during the nine months ended September 30, 2018. No dividends were declared during the nine months ended September 30, 2019.

 

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:      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. Total certificates of deposit were $3,173,000 and $4,095,000 as of September 30, 2019 and December 31, 2018, respectively. Purchases of certificates of deposit were $1,468,000 and $3,145,000 for the nine months ended September 30, 2019 and 2018, respectively. Proceeds from the maturity of certificates of deposit were $2,390,000 and $2,662,890 for the nine months ended September 30, 2019 and 2018, respectively.

  

 

 

Note 3:      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.
Equity Investment in mutual funds:	Carrying value adjusted to and presented at fair market value.

 

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

 

 

 

 

Note 4:      Property and Equipment

 

Property and equipment consisted of the following:

 

 

 

During the nine months ended September 30, 2019 and 2018, the Company had a gain on sale of land of $80,876 and $881,654, respectively. For the nine months ended September 30, 2018, $767,147 of the gain represented gain on the sale of an undivided 1/6th ownership interest in land.

 

Depreciation expense was $1,517 for the nine months ended September 30, 2019 and 2018.

 

Depletion expense was $288 and $13,896 for the nine months ended September 30, 2019 and 2018, respectively.

 

Note 5:      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:

 

 

 

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 6:      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 7:      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 September 30, 2019, the Company recorded $8,468 in total of such expense, of which $2,250 was rent expense. For the nine months ended September 30, 2019, the Company recorded $25,512 in total, of which $6,750 was rent expense.

 

 

Note 8:      Concentrations

  

Revenue from customers representing 5% or more of total revenue for the nine months ended September 30, 2019 and 2018, respectively were:

 

 

 

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