CKX Lands, Inc.: Form 10-Q for the period ended Jun 30, 2022

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2021 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, 2021, filed on March 28, 2022.

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, this Form 10-Q 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., 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, land 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. These commodity prices are affected by numerous factors and uncertainties external to CKX’s business and over which it has no control, including the global supply and demand for oil and gas, the effect of the COVID-19 pandemic and government responses to the pandemic on supply and demand, geopolitical conditions and domestic and global economic conditions, among other factors.

CKX has small royalty interests in 20 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 Company’s 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 and on timberland and agricultural land. 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.

The Company’s Board of Directors regularly evaluates a range of strategic alternatives that could increase shareholder value, and the Board and management conduct due diligence activities in connection with such alternatives. These include opportunities for growth though the acquisitions of land or other assets, business combinations, dispositions of assets and reinvestment of the proceeds, and other alternatives. We cannot assure you that the Board’s evaluations or the Company’s due diligence activities will result in any transaction or other course of action.

Recent Developments

In the first quarter of 2019, the Company began developing several ranchette-style subdivisions on certain of its lands in Calcasieu and Beauregard Parishes using existing road rights of way. The Company has identified demand in those areas for ranchette-style lots, which consist of more than three acres each, and the Board of Directors and management believe this project will allow the Company to realize a return on its investment in the applicable lands after payment of expenses. The Company has completed and recorded plats for three subdivisions. The three subdivisions are located on approximately 415 acres in Calcasieu Parish and approximately 160 acres in Beauregard Parish, and contain an aggregate of 39 lots. As of June 30, 2022, the Company has closed on the sale of 21 of the 39 lots. As of the date of this report no sales were pending, and the Company is actively marketing the remaining lots.

The Company is working to identify additional undeveloped acres owned by the Company in Southwest Louisiana that would likewise be suitable for residential subdivisions.

Results of Operations

Summary of Results

The Company’s results of operations for the six months ended June 30, 2022 were driven primarily by an increase in oil and gas, timber and surface revenues offset by an increase in general and administrative expenses. The increase in general and administrative expenses is primarily due to an increase in officer compensation, payroll expenses, audit fees and legal fees.

Revenue – Three Months Ended June 30, 2022

Total revenues for the three months ended June 30, 2022 were $310,214, an increase of approximately 46.8% when compared with the same period in 2021. Total revenue consists of oil and gas, timber, and surface revenues. Components of revenues for the three months ended June 30, 2022 as compared to 2021, are as follows:

Oil and Gas

Oil and gas revenues were 46% and 47% of total revenues for the three months ended June 30, 2022 and 2021, respectively. A breakdown of oil and gas revenues for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 is as follows:

CKX received oil and/or gas revenues from 65 and 66 wells during the three months ended June 30, 2022 and 2021, respectively.

The following schedule summarizes barrels and MCF produced and average price per barrel and per MCF for the three months ended June 30, 2022 and 2021:

(1) Before deduction of production costs and severance taxes

(2) Excludes plant products

Oil revenues increased for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, by $40,930. Gas revenues increased for the three months ended June 30, 2022, as compared to the same period in 2021, by $1,903. As indicated from the schedule above, the increase in oil revenues was due to an increase in the average oil sales price per barrel partially offset by a decrease in the net oil produced. The increase in gas revenues was due to an increase in average gas sales price per MCF partially offset by a decrease in net gas produced.

Lease and geophysical revenues decreased for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, by $321. 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 $88,637 and $49,414 for the three months ended June 30, 2022 and 2021, respectively. The increase in timber revenues was due to normal business variations in timber customers’ harvesting.

Surface

Surface revenues increased for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, by $17,173. This increase is due to a one-time oil and gas delay rental from an operator to postpone commencement of drilling during the primary term of lease, multiple one-time right of way income, and new surface leases.

Revenue – Six Months Ended June 30, 2022

Total revenues for the six months ended June 30, 2022 were $492,130, an increase of approximately $125,948 when compared with the same period in 2021. Total revenue consists of oil and gas, timber, and surface revenues. Components of revenues for the six months ended June 30, 2022 as compared to 2021, are as follows:

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Oil and Gas

Oil and gas revenues were 46% and 41% of total revenues for the six months ended June 30, 2022 and 2021, respectively. A breakdown of oil and gas revenues for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 is as follows:

CKX received oil and/or gas revenues from 67 and 69 wells during the six months ended June 30, 2022 and 2021, respectively.

The following schedule summarizes barrels and MCF produced and average price per barrel and per MCF for the six months ended June 30, 2022 and 2021:

(1) Before deduction of production costs and severance taxes

(2) Excludes plant products

Oil revenues increased for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, by $71,386. Gas revenues increased for the six months ended June 30, 2022, as compared to the same period in 2021, by $2,764. As indicated from the schedule above, the increase in oil revenues was due to an increase in the average oil sales price per barrel partially offset by a decrease in net oil produced. The increase in gas revenues was due to an increase in the average price per MCF partially offset by net gas produced.

Lease and geophysical revenues increased for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, by $645. 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 $110,379 and $102,941 for the six months ended June 30, 2022 and 2021, respectively. The increase in timber revenues was due to normal business variation in timber customers’ harvesting.

Surface

Surface revenues increased for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, by $43,715. This increase is due to multiple one-time oil and gas delay rentals from operators to postpone commencement of drilling during the primary term of lease, income from multiple one-time right of way payments, and new surface leases.

Costs and Expenses – Three and Six Months Ended June 30, 2022

Oil and gas costs increased for the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021 by $5,170, and $2,684, respectively. These variances are due to the normal variations in year to year costs.

Timber costs decreased for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, by $1,305. Timber costs decreased for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, by $2,028. Timber costs are related to timber revenue.

General and administrative expenses increased for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, by $448,979. This is primarily due to an increase in officer compensation and payroll expenses. General and administrative expenses increased for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021 by $518,244. This is primarily due to an increase in officer compensation, payroll expenses, auditing fees and legal fees.

Gain on Sale of Land – Three and Six Months Ended June 30, 2022

Gain on sale of land was $0 and $184,045 for the three months ended June 30, 2022 and 2021, respectively. Gain on sale of land was $0 and $590,265 for the six months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2021, this consisted of a gain on sale of fourteen pieces of land including twelve lots in subdivisions and unimproved land.

Liquidity and Capital Resources

Sources of Liquidity

Current assets totaled $7,902,572 and current liabilities equaled $181,887 at June 30, 2022.

As of June 30, 2022 and December 31, 2021, the Company had no outstanding debt.

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

The Company’s Board of Directors regularly evaluates a range of strategic alternatives that could increase shareholder value, and the Board and management conduct due diligence activities in connection with such alternatives. These include opportunities for growth though the acquisitions of land or other assets or business combinations, dispositions of assets and reinvestment of the proceeds, and other alternatives. The cost and terms of any financing to be raised in conjunction with any growth opportunity, including the Company’s ability to raise debt or equity capital on terms and at costs satisfactory to the Company, and the effect of such opportunities on the Company’s balance sheet, are critical considerations in any such evaluation.

Analysis of Cash Flows

Net cash used in operating activities was $139,279 and $64,018 for the six months ended June 30, 2022 and June 30, 2021, respectively. The change was attributable primarily to a decrease in net income attributable to a decrease in gain on sale of land and increase in share-based compensation.

Net cash (used in) provided by investing activities was ($29,835) and $730,999 for the six months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022, this primarily resulted from purchases of mutual funds of $538, purchases of property, plant and equipment of $12,835 and costs of reforesting timber of $16,462. For the six months ended June 30, 2021, this primarily resulted from proceeds from the sale of fixed assets of $745,237 offset by purchases of mutual funds of $124 and costs of reforesting timber of $14,114.

Net cash used in financing activities was $131,335 and $0 for the six months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022, this resulted from repurchases of common stock of $131,335.

Significant Accounting Polices and Estimates

There were no changes in our significant accounting policies and estimates during the six months ended June 30, 2022 from those set forth in “Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021.

Recent Accounting Pronouncements

See Note 1, Basis of Presentation and Recent Accounting Pronouncements, to our condensed 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 six months ended June 30, 2022, we do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

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 officer and principal 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 officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on its evaluation, management concluded that as of June 30, 2022, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEMS 1 – 5. NOT APPLICABLE