I
TEM
7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Report.
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 minerals 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 interest 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 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 an MCF of gas will also cause fluctuations in the Company’s oil and gas income.
CKX has small royalty interests in 29 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 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
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f
or the years ended December 31, 2018 and 2017
Revenue
Total revenues for 2018 were $1,194,763, an increase of approximately 4% when compared with 2017 revenues of $1,144,585. Total revenue consists of oil and gas, timber, and surface revenues. Components of revenues for the year ended December 31, 2018 as compared to 2017, are as follows:
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Year Ended
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December 31,
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2018
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2017
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Change from
Prior Year
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Percent Change
from Prior Year
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Revenues:
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Oil and gas
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$
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581,463
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$
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609,122
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$
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(27,659
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)
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(4.5
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)%
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Timber sales
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454,177
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224,111
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230,066
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102.7
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%
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Surface revenue
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159,123
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311,352
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(152,229
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)
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(48.9
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)%
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Total revenues
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$
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1,194,763
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$
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1,144,585
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$
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50,178
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4.4
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%
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Oil and Gas
Oil and gas revenues were 49% and 53% of total revenues for 2018 and 2017, respectively. A breakdown of oil and gas revenues for the years ended December 31, 2018 as compared to 2017 are as follows:
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Year Ended
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December 31,
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2018
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2017
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Change from
Prior Year
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Percent Change
from Prior Year
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Oil
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$
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487,276
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$
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424,036
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$
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63,240
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14.9
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%
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Gas
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89,700
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164,085
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(74,385
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)
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(45.3
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)%
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Lease and geophysical
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4,487
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21,001
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(16,514
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)
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(78.6
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)%
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Total revenues
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$
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581,463
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$
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609,122
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$
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(27,659
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)
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(4.5
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)%
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CKX received oil and/or gas revenues from 95 and 103 wells during the years ended December 31, 2018 and 2017, respectively.
The following schedule summarizes barrels and MCF produced and average price per barrel and per MCF for the years ended December 31, 2018 and 2017:
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Year Ended
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December 31,
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2018
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2017
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Net oil produced (Bbl)(2)
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6,956
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8,169
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Average oil sales price (per Bbl)(1,2)
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$
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68.57
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$
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48.32
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Net gas produced (MCF)
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25,776
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42,927
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Average gas sales price (per MCF)(1)
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$
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3.48
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$
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3.42
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(1) Before deduction of production costs and severance taxes
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(2) Excludes plant products
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Oil revenues increased for the year ended December 31, 2018, as compared to 2017, by $63,240. Gas revenues decreased for the year ended December 31, 2018, as compared to 2017, by $74,385. 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.
The following 8 fields produced 91.29% of the Company’s oil and gas revenues in 2018. The following table shows the number of barrels of oil (Bbl Oil) and MCF of gas (MCF Gas) produced from these fields.
Field
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Bbl Oil (1)
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MCF Gas
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South Bear Head Creek
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2,172
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2,513
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South Gordon
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220
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4,290
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Cowards Gully
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720
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458
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South Jennings
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429
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8,102
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Gonzales County
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660
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500
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South Lake Charles
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548
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5,782
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Caster Creek
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705
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19
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South Elton
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136
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2,993
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The following 8 fields produced 91.72% of the Company’s oil and gas revenues in 2017. The following table shows the number of barrels of oil (Bbl Oil) and MCF of gas (MCF Gas) produced from these fields.
Field
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Bbl Oil (1)
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MCF Gas
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South Bear Head Creek
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2,836
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6,406
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South Gordon
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396
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11,017
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Cowards Gully
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894
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1,529
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South Jennings
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440
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11,313
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Gonzales County
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969
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433
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South Lake Charles
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513
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5,321
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Caster Creek
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672
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39
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Northwest Vinton
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168
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1,705
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The Company was a lessor in the following non-producing mineral leases:
Activity
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2018
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2017
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Bonus lease
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1
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3
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Delay lease
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2
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1
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Gross acres
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200
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400
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Net acres
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33
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100
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Lease and geophysical revenues decreased for the year ended December 31, 2018, as compared to 2017, by $16,514. These revenues are dependent on oil and gas producers’ activities, are not predictable and can vary significantly from year to year.
Timber
Timber revenues were 38% and 20% of total revenues for 2018 and 2017, respectively. Timber revenues increased for the year ended December 31, 2018, as compared to the year ended December 31, 2017, by $230,066. 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, which was favorable for harvesting activity.
Surface
Surface revenues were 13% and 27% of total revenues for 2018 and 2017, respectively. Surface revenues decreased for the year ended December 31, 2018, as compared to 2017, by $152,229. 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, 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
Oil and gas costs increased slightly for the year ended December 31, 2018 as compared to 2017 by $916. 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 year ended December 31, 2018 as compared to 2017 by $9,948. This is primarily due to the increased timber revenue occurring during the year ended December 31, 2018.
Surface costs decreased for the year ended December 31, 2018 as compared to 2017 by $20,293. 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 year ended December 31, 2018 as compared to 2017 by $78,492. This is primarily due to officer bonuses for land disposition administration paid in the first quarter of 2018 and increased accounting, legal and professional services fees, offset by decreases in director fees.
Gain on Sale of Land
and Equipment
Gain on sale of land and equipment was $881,654 and $34,711 for the years ended December 31, 2018 and 2017, respectively. For the year ended December 31, 2018, this represented a gain on sale of land of $111,174 wholly owned, $767,147 from a 1/6
th
interest, and of equipment of $3,333. For the year ended December 31, 2017, this represented a gain on sale of land of $6,150 wholly owned, and $28,561 from a 1/6
th
interest.
Outlook for Fiscal Year 201
9
The Company will continue to consider and evaluate commercial, agricultural and timber lands for acquisitions and evaluate its current holdings for divestiture. The Company will consider purchases outside of southwest Louisiana and will consider developing its properties for commercial or residential purposes.
The Company will continue to actively market its timber. The rain levels were lower in 2018 when compared with 2017, so the harvesting of timber was not as hampered as 2017. Stumpage prices have also been depressed when compared to recent historical prices. The Company will seek to enter into additional stumpage agreements.
The Company began directly managing its lands in 2017, except for approximately 5,030 acres of timber property in which the Company owns an undivided 1/6 interest, which is managed by Walker Louisiana Properties. The Company believes the direct land management and continuing economic activity in southwest Louisiana will be a catalyst for increased surface revenue.
Liquidity and Capital Resources
Sources of Liquidity
The Company’s current assets totaled $5,631,013 and current liabilities equaled $216,815 at December 31, 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 December 31, 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 $162,697 to $241,562 for the year ended December 31, 2018, compared to $404,253 for the year ended December 31, 2017. The decrease in cash provided by operating activities was attributable primarily to the gain on the sale of land partially offset by an increase in net income.
Net cash provided by investing activities was $199,869 and $361,213 for the year ended December 31, 2018, and 2017, respectively. For the year ended December 31, 2018, this included purchases of certificates of deposit of $3,145,000 and purchases of fixed assets of $55,438, offset by proceeds from maturity of certificates of deposit of $2,662,890 and from the sales of fixed assets of $982,242. For the year ended December 31, 2017, this includes purchases of certificates of deposits of $3,132,890, purchases of fixed assets of $155,285, offset by proceeds from maturity of certificates of deposits of $3,610,000 and proceeds from the sale of fixed assets of $39,388.
Net cash used in financing activities was $233,099 and $194,250 for the year ended December 31, 2018, and 2017, respectively. For the year ended December 31, 2018, and 2017 this included dividends paid.
Significant
Accounting Policies
For a discussion of significant accounting policies, see Note 1 in the notes to our audited financial statements included elsewhere in this Form 10-K.
Off Balance Sheet Arrangements
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).