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Reserve Petroleum Co (RSRV) SEC Filing 10-Q Quarterly Report for the period ending Thursday, March 31, 2022

Reserve Petroleum Co

CIK: 83350 Ticker: RSRV
Document And Entity Information - shares
3 Months Ended
Mar. 31, 2022
May 05, 2022
Document Information [Line Items]  
Entity Central Index Key0000083350 
Entity Registrant NameRESERVE PETROLEUM CO 
Amendment Flagfalse 
Current Fiscal Year End Date--12-31 
Document Fiscal Period FocusQ1 
Document Fiscal Year Focus2022 
Document Type10-Q 
Document Quarterly Reporttrue 
Document Period End DateMar. 31, 2022 
Document Transition Reportfalse 
Entity File Number000-08157 
Entity Incorporation, State or Country CodeDE 
Entity Tax Identification Number73-0237060 
Entity Address, Address Line One6801 BROADWAY EXT., SUITE 300 
Entity Address, City or TownOKLAHOMA CITY 
Entity Address, State or ProvinceOK 
Entity Address, Postal Zip Code73116-9037 
City Area Code405 
Local Phone Number848-7551 
Entity Current Reporting StatusYes 
Entity Interactive Data CurrentYes 
Entity Filer CategoryNon-accelerated Filer 
Entity Small Businesstrue 
Entity Emerging Growth Companyfalse 
Entity Shell Companyfalse 
Entity Common Stock, Shares Outstanding 156,161
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2022

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-08157

pic1.jpg

THE RESERVE PETROLEUM COMPANY

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

73-0237060

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

 

6801 BROADWAY EXT., SUITE 300

OKLAHOMA CITY, Oklahoma 73116-9037

(405) 848-7551

(Address and telephone number, including area code, of registrant’s principal executive offices)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

None

None

 

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

 

As of May 5, 2022, 156,161 shares of the registrant’s $0.50 par value common stock were outstanding.

 

 

 

 

TABLE OF CONTENTS

 

 

 

PART I FINANCIAL INFORMATION
    Page
Item 1.  Consolidated Financial Statements (Unaudited) 2
     
  Consolidated Balance Sheets 2
  Consolidated Statements of Income 4
  Consolidated Statements of Stockholders’ Equity 5
  Condensed Consolidated Statements of Cash Flows 6
  Notes to Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 11
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
     
Item 4. Controls and Procedures 14
     
     
PART II OTHER INFORMATION
     
Item 1. Legal Proceedings 14
     
Item 1A. Risk Factors 14
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
     
Item 3. Defaults Upon Senior Securities 15
     
Item 4. Mine Safety Disclosures 15
     
Item 5. Other Information 15
     
Item 6. Exhibits 15

 

1
 

 

 

PART I FINANCIAL INFORMATION

 

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

ASSETS

 

  

March 31,

  

December 31,

 
  

2022

  

2021

 

Current Assets:

        

Cash and Cash Equivalents

 $9,900,890  $10,129,157 

Equity Securities

  9,878,008   9,142,357 

Refundable Income Taxes

  301,601   350,927 

Accounts Receivable

  2,115,256   1,362,963 

Notes Receivable

  472,445   472,445 
         

Total Current Assets

  22,668,200   21,457,849 
         
         

Investments:

        

Equity Method Investments

  1,410,744   1,426,201 

Other Investments

  2,897,662   2,791,656 
         

Total Investments

  4,308,406   4,217,857 
         

Property, Plant and Equipment:

        

Oil and Gas Properties, at Cost,

        

Based on the Successful Efforts Method of Accounting –

        

Unproved Properties

  1,518,040   1,663,567 

Proved Properties

  58,234,715   58,046,754 
         

Oil and Gas Properties, Gross

  59,752,755   59,710,321 
         

Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance

  (52,216,857)  (52,686,001)
         

Oil and Gas Properties, Net

  7,535,898   7,024,320 
         

Other Property and Equipment, at Cost

  680,043   680,043 
         

Less – Accumulated Depreciation

  (175,246)  (146,425)
         

Other Property and Equipment, Net

  504,797   533,618 
         

Total Property, Plant and Equipment, Net

  8,040,695   7,557,938 
         

Other Assets

  106,067   112,400 
         

Total Assets

 $35,123,368  $33,346,044 

 

See accompanying notes to unaudited consolidated financial statements

 

2

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

March 31,

  

December 31,

 
  

2022

  

2021

 

Current Liabilities:

        

Accounts Payable

 $234,268  $261,114 

Other Current Liabilities

  66,560   262,554 
         

Total Current Liabilities

  300,828   523,668 
         

Long-Term Liabilities:

        

Asset Retirement Obligation

  2,363,426   2,359,826 

Dividends Payable

  106,067   112,400 

Deferred Tax Liability, Net

  868,738   551,320 
         

Total Long-Term Liabilities

  3,338,231   3,023,546 
         

Total Liabilities

  3,639,059   3,547,214 
         
         

Commitments and Contingencies

          
         

Stockholders’ Equity:

        

Common Stock

  92,368   92,368 

Additional Paid-in Capital

  65,000   65,000 

Retained Earnings

  33,074,719   31,389,240 
         

Stockholders’ Equity Before Treasury Stock

  33,232,087   31,546,608 
         

Less – Treasury Stock, at Cost

  (1,747,778)  (1,747,778)
         

Total Stockholders’ Equity

  31,484,309   29,798,830 
         

Total Liabilities and Stockholders’ Equity

 $35,123,368  $33,346,044 

 

See accompanying notes to unaudited consolidated financial statements

 

3

 

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Operating Revenues:

        

Oil and Gas Sales

 $3,433,824  $1,600,454 

Lease Bonuses and Other

  236,400   --- 

Water Well Drilling Services

  275,534   --- 
         

Total Operating Revenues

  3,945,758   1,600,454 
         

Operating Costs and Expenses:

        

Production

  778,175   526,559 

Exploration

  (53,781)  16,190 

Water Well Drilling Services

  149,521   --- 

Depreciation, Depletion, Amortization and Valuation Provisions

  335,046   245,125 

General, Administrative and Other

  534,167   573,671 
         

Total Operating Costs and Expenses

  1,743,128   1,361,545 
         

Income from Operations

  2,202,630   238,909 
         

Equity Income/(Loss) in Investees

  (83,457)  1,085 
         

Other Income/(Loss), Net

  (65,106)  86,944 
         

Income Before Income Taxes

  2,054,067   326,938 
         

Income Tax Provision/(Benefit):

        

Current

  51,170   (96,203)

Deferred

  317,418   163,675 
         

Total Income Tax Provision

  368,588   67,472 
         

Net Income

 $1,685,479  $259,466 
         

Per Share Data:

        

Net Income, Basic

 $10.79  $1.66 
         
         

Weighted Average Shares Outstanding, Basic

  156,173   156,583 

 

 See accompanying notes to unaudited consolidated financial statements

 

4

 

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

  

Common

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Treasury

Stock

  

Total

 
                     

Three Months Ended March 31, 2022

                    

Balance as of December 31, 2021

 $92,368  $65,000  $31,389,240  $(1,747,778) $29,798,830 

Net Income

  ---   ---   1,685,479   ---   1,685,479 

Balance as of March 31, 2022

 $92,368  $65,000  $33,074,719  $(1,747,778) $31,484,309 
                     

Three Months Ended March 31, 2021

                    

Balance as of December 31, 2020

 $92,368  $65,000  $30,920,837  $(1,692,893) $29,385,312 

Net Income

  ---   ---   259,466   ---   259,466 

Purchase of Treasury Stock

  ---   ---   ---   (1,585)  (1,585)

Balance as of March 31, 2021

 $92,368  $65,000  $31,180,303  $(1,694,478) $29,643,193 

 

 See accompanying notes to unaudited consolidated financial statements

 

5

 

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 
         

Net Cash Provided by Operating Activities

 $1,441,668  $408,694 
         

Cash Provided by/(Applied to) Investing Activities:

        

Maturity of Available-for-Sale Debt Securities

  ---   1,515,234 

Proceeds from Disposal of Property, Plant and Equipment

  457,898   --- 

Purchase of Property, Plant and Equipment

  (1,069,680)  (637,236)

Purchase of Equity Method and Other Investments

  (174,006)  (10,000)

Cash Distributions from Other Investments

  8,318   --- 

Sale of Equity Securities

  628,126   700,602 

Purchase of Equity Securities

  (1,520,591)  (1,036,150)
         

Net Cash Provided by/(Applied to) Investing Activities

  (1,669,935)  532,450 
         

Cash Applied to Financing Activities:

        

Purchase of Treasury Stock

  ---   (1,585)
         

Total Cash Applied to Financing Activities

  ---   (1,585)
         

Net Change in Cash and Cash Equivalents

  (228,267)  939,559 
         

Cash and Cash Equivalents, Beginning of Period

  10,129,157   16,187,085 
         

Cash and Cash Equivalents, End of Period

 $9,900,890  $17,126,644 

 

 See accompanying notes to unaudited consolidated financial statements

 

6

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

March 31, 2022

(Unaudited)

 

 

 

Note 1 – BASIS OF PRESENTATION

 

In these notes the term “Company” refers to The Reserve Petroleum Company and its consolidated wholly owned subsidiary, Trinity Water Services, LLC (“TWSOK”), an Oklahoma limited liability company formed in March 2021 to provide initial capital, including the purchase of water well drilling equipment and startup costs, for TWS South, LLC (“TWSTX”), a Texas limited liability company. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of The Reserve Petroleum Company and its subsidiary, after elimination of all material intercompany balances and transactions.

 

The accompanying unaudited interim consolidated financial statements and these notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission (hereinafter, the “2021 Form 10-K”).

 

In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals), which are necessary for a fair presentation of the results of the interim periods presented. The results of operations for the current interim periods are not necessarily indicative of the operating results for the full year.

 

 

Note 2 – REVENUE RECOGNITION

 

A portion of oil and gas sales recorded in the consolidated statements of income are the result of estimated volumes and pricing for oil and gas payments not yet received for the period. For the three months ended March 31, 2022 and 2021, that estimate represented approximately $1,064,818 and $426,160, respectively, of oil and gas sales included in the consolidated statements of income.

 

The Company’s disaggregated revenue has two primary revenue sources which are oil sales and natural gas sales. The following is an analysis of the components of oil and gas sales:

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Oil Sales

 $2,352,133  $989,228 

Natural Gas Sales

  936,808   550,836 

Miscellaneous Oil and Gas Product Sales

  144,883   60,390 
  $3,433,824  $1,600,454 

 

 

Note 3 – OTHER INCOME/(LOSS), NET

 

The following is an analysis of the components of Other Income/(Loss), Net:

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Net Realized and Unrealized Gain/(Loss) on Equity Securities

 $(146,076) $70,722 

Interest Income

  7,529   7,097 

Dividend Income

  96,302   19,653 

Income from Other Investments

  8,318   --- 

Interest and Other Expenses

  (31,179)  (10,528)

Other Income/(Loss), Net

 $(65,106) $86,944 

 

7

 
 

Note 4 – EQUITY METHOD AND OTHER INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING GUARANTEES

 

The Company’s Equity Method Investments include:

 

Broadway Sixty-Eight, LLC (“Broadway 68”), an Oklahoma limited liability company, with a 33% ownership. Broadway 68 owns and operates an office building in Oklahoma City, Oklahoma. The Company leases its corporate office from Broadway 68 on a month-to-month basis under the terms of the modified lease agreement. Rent expense for lease of the corporate office from Broadway 68 was approximately $8,700 during the three months ended March 31, 2022 and 2021. The Company’s investment in Broadway 68 totaled $150,784 and $141,457 at March 31, 2022 and December 31, 2021, respectively.

 

Broadway Seventy-Two, LLC (“Broadway 72”), an Oklahoma limited liability company, with a 40% ownership, was acquired March 29, 2021. Broadway 72 owns and operates a commercial building in Oklahoma City, Oklahoma. The Company’s investment in Broadway 72 totaled $947,234 and $948,693 at March 31, 2022 and December 31, 2021, respectively.

 

Grand Woods Development, LLC (“Grand Woods”), an Oklahoma limited liability company, with a 47% ownership, was acquired in 2015. Grand Woods owns approximately 26.56 acres of undeveloped real estate in northeast Oklahoma City. The Company has guaranteed $1,200,000 of a $1,579,500 development loan (“the Loan”) that matures on November 23, 2026. The intent of the Grand Woods investment manager and investors is that proceeds from the sale of all, or part of, the property can be used to reduce or eliminate the loan. The Company does not anticipate the need to perform on the guarantee of the loan prior to a sale of property. The Company also holds notes receivable of $472,445 from Grand Woods, which are subordinate to the loan and will be paid upon the sale of property and payment of the loan. The Company’s investment in Grand Woods totaled $38,481 and $56,288 at March 31, 2022 and December 31, 2021, respectively.

 

QSN Office Park (“QSN”), an Oklahoma limited liability company, with a 20% ownership, was acquired in 2016. QSN is constructing and selling office buildings in a new office park. The Company has guaranteed 20% of a $1,100,000 development loan that matures July 15, 2023 and 20% of a $550,000 construction loan that matures March 9, 2027. The Company’s investment in QSN totaled $274,245 and $279,763 at March 31, 2022 and December 31, 2021, respectively.

 

The Company’s Other Investments primarily include:

 

Bailey Hilltop Pipeline (“Bailey”), with a 10% ownership, was acquired in 2008. Bailey is a gas gathering system pipeline for the Bailey Hilltop Prospect oil and gas properties in Grady County, Oklahoma. The Company’s investment in Bailey totaled $77,377 at March 31, 2022 and December 31, 2021.

 

Cloudburst International, Inc. (“Cloudburst”), with a 12.99% ownership, was acquired in 2019. Cloudburst owns exclusive rights to a water purification process technology that is being developed and currently tested. The Company’s investment in Cloudburst totaled $1,596,007 at March 31, 2022 and December 31, 2021.

 

Genlith, Inc. (“Genlith”), with a 5.15% ownership, was acquired in July 2020. Genlith identifies and structures investments in the new energy economy through corporate ventures, advisory and fund management. The Company’s investment in Genlith totaled $500,000 at March 31, 2022 and December 31, 2021.

 

 

OKC Industrial Properties, LC (“OKC”), with a 10% ownership, was acquired in 1992. OKC originally owned approximately 260 acres of undeveloped land in north Oklahoma City and over time has sold all but approximately 23 acres. The Company’s investment in OKC totaled $82,482 at March 31, 2022 and December 31, 2021.

 

VCC Accern Investment, LLC (“VCC Accern”), with a 9.9% ownership, was acquired in September 2021. VCC Accern serves as a special purpose investment vehicle to hold an investment in Accern Corporation (“Accern”). Accern is a SaaS, no-code artificial intelligence (“AI”) platform that enables customers to build enterprise AI applications without having to write code or develop complex AI algorithms. The Company’s investment in VCC Accern totaled $50,458 at March 31, 2022 and December 31, 2021.

 

VCC Beachy Investment, LLC (“VCC Beachy”), with a 4.29% ownership, was acquired in November 2021. VCC Beachy serves as a special purpose investment vehicle to hold an investment in Beachy Co. (“Beachy”). Beachy is a provider of SaaS reservation and mobile point of sale software solutions to the hospitality and leisure industry in the United States. The Company’s investment in VCC Beachy totaled $30,198 at March 31, 2022 and December 31, 2021.

 

8

 

Victorum BHR2 Investment, LLC (“BHR2”), with a 16.3% ownership, was acquired in August 2021. BHR2 serves as a special purpose investment vehicle to hold an investment in Berry-Rock Capital, LP (“Berry-Rock”). Berry-Rock is a provider of a rent-to-own program for individuals unable to qualify for a mortgage. The Company’s investment in BHR2 totaled $300,754 at March 31, 2022 and December 31, 2021.

 

VCC Homebase Investment, LLC (“VCC Homebase”), with a 7.29% ownership, was acquired in June 2021. VCC Homebase serves as a special purpose investment vehicle to hold an investment in Homebase, LLC (“Homebase”). Homebase is a smart apartment solution connecting buildings with future ready access control, internet, and property management. The Company’s investment in VCC Homebase totaled $100,337 at March 31, 2022 and December 31, 2021.

 

VCC Mamenta Investment, LLC (“VCC Mamenta”), with a 4.17% ownership, was acquired in July 2021. VCC Mamenta serves as a special purpose investment vehicle to hold an investment in Mamenta, Inc. (“Mamenta”). Mamenta is a SaaS global commerce platform enabling brands and retailers from any country to expand internationally through a software, data management, and pre-connected multi-channel commerce network. The Company’s investment in VCC Mamenta totaled $45,193 at March 31, 2022 and December 31, 2021.

 

VCC MooveGuru Investment, LLC (“VCC MooveGuru”), with a 3.53% ownership, was acquired in February 2022. VCC MooveGuru serves as a special purpose investment vehicle to hold an investment in MooveGuru, Inc. (“MooveGuru”). MooveGuru is a residential real estate technology platform that provides data aggregation and marketing services to all residential real estate verticals. The Company’s investment in VCC MooveGuru totaled $30,163 at March 31, 2022.

 

VCC Squarefoot Investment, LLC (“VCC SquareFoot”), with a 14.85% ownership, was acquired in March 2022. VCC SquareFoot serves as a special purpose investment vehicle to hold an investment in TheSquareFoot, Inc. (“SquareFoot”). SquareFoot is a tech-enabled commercial real estate brokerage and marketplace focused on tenants looking to lease space in the U.S. The Company’s investment in VCC Squarefoot totaled $75,843 at March 31, 2022.

 

 

Note 5 – PROVISION FOR INCOME TAXES

 

In 2022 and 2021, the effective tax rate differed from the statutory rate, primarily as a result of allowable depletion for tax purposes in excess of the cost basis in oil and gas properties.

 

Excess federal percentage depletion, which is limited to certain production volumes and by certain income levels, reduces estimated taxable income projected for any year. The federal excess percentage depletion estimates will be updated throughout the year until finalized with the detail well-by-well calculations at year-end. When a provision for income taxes is recorded, federal excess percentage depletion benefits decrease the effective tax rate. When a benefit for income taxes is recorded, federal excess percentage depletion benefits increase the effective tax rate. The benefit of federal excess percentage depletion is not directly related to the amount of pre-tax income recorded in a period. Accordingly, in periods where a recorded pre-tax income is relatively small, the proportional effect of these items on the effective tax rate may be significant.

 

 

Note 6 – ASSET RETIREMENT OBLIGATION

 

The Company records the fair value of its estimated liability to retire its oil and natural gas producing properties in the period in which it is incurred (typically the date of first sale). The estimated liability is calculated by obtaining current estimated plugging costs from the well operators and inflating it over the life of the property. Current year inflation rate used is 4.08%. When the liability is first recorded, a corresponding increase in the carrying amount of the related long-lived asset is also recorded. Subsequently, the asset is amortized to expense over the life of the property and the liability is increased annually for the change in its present value which is currently 3.25%.

 

A reconciliation of the Company’s asset retirement obligation liability is as follows:

 

Balance at December 31, 2021

 $2,359,826 

Liabilities settled (wells sold or plugged)

  (13,028)

Accretion expense

  15,059 

Revision to estimate

  1,569 

Balance at March 31, 2022

 $2,363,426 

 

9

 
 

 

 

Note 7 – FAIR VALUE MEASUREMENTS

 

The Company uses a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets.

 

Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

 

Level 3 – Unobservable inputs that reflect the Company’s own assumptions.

 

Recurring Fair Value Measurements

 

Certain of the Company’s assets are reported at fair value in the accompanying consolidated balance sheets on a recurring basis. The Company determined the fair value of equity securities using quoted market prices, and where applicable, securities with similar maturity dates and interest rates. At March 31, 2022 and December 31, 2021, the Company’s assets reported at fair value on a recurring basis are summarized as follows:

 

  

March 31, 2022

 
  

Level 1 Inputs

  

Level 2 Inputs

  

Level 3 Inputs

 

Financial Assets:

            

Equity Securities:

            

Domestic Equities

 $7,375,684  $---  $--- 

International Equities

  2,037,550   ---   --- 

Others

  464,774   ---   --- 
  $9,878,008  $---  $--- 

 

 

  

December 31, 2021

 
  

Level 1 Inputs

  

Level 2 Inputs

  

Level 3 Inputs

 

Financial Assets:

            

Equity Securities:

            

Domestic Equities

 $6,822,808  $---  $--- 

International Equities

  1,856,904   ---   --- 

Others

  462,645   ---   --- 
  $9,142,357  $---  $--- 

 

Non-Recurring Fair Value Measurements

 

The Company’s asset retirement obligation annually represents a non-recurring fair value liability, for which there were no liabilities incurred in the period ending March 31, 2022 or 2021. See Note 6 above for more information about this liability and the inputs used for calculating fair value.

 

There was no impairment loss in the quarter ended March 31, 2022 or 2021. This also represents non-recurring fair value measurements calculated using Level 3 inputs. See Note 8 below for a description of the impairment loss calculation.

 

Fair Value of Other Financial Instruments

 

The Company’s other financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables and dividends payable. At March 31, 2022 and December 31, 2021, the historical cost of cash and cash equivalents, trade receivables, trade payables and dividends payable are considered to be representative of their respective fair values due to the short-term maturities of these items.

 

10

 
 
 

Note 8 – LONG-LIVED ASSETS IMPAIRMENT LOSS

 

Certain oil and gas producing properties have been deemed to be impaired because the assets, evaluated on a property-by-property basis, are not expected to recover their entire carrying value through future cash flows. There were no impairment losses recorded for the period ending March 31, 2022 or 2021. Impairment losses are included in the consolidated statements of income in the line-item Depreciation, Depletion, Amortization and Valuation Provisions. Impairments are calculated by reducing the carrying value of the individual properties to an estimated fair value equal to the discounted present value of the future cash flow from these properties. Forward pricing is used for calculating future revenue and cash flow.

 

 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion and analysis should be read with reference to a similar discussion in the 2021 Form 10-K, as well as the consolidated financial statements included in this Form 10-Q.

 

Forward-Looking Statements

 

This discussion and analysis includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give the Company’s current expectations of future events. They include statements regarding the drilling of oil and gas wells, the production that may be obtained from oil and gas wells, cash flow and anticipated liquidity and expected future expenses.

 

Although management believes the expectations in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that would cause actual results to differ materially from expected results are described under “Forward-Looking Statements” on page 3 of the 2021 Form 10-K.

 

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q, and we undertake no obligation to update this information because of new information, future developments, or otherwise. You are urged to carefully review and consider the disclosures made in this and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.

 

FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

Executive Overview

 

The global spread of COVID-19 created significant volatility, uncertainty, and economic disruption during 2020 and 2021, and threatens to do the same in 2022. Oil and natural gas prices are expected to continue to be volatile because of the ongoing COVID-19 pandemic and its effect on oil and natural gas demand, the availability of personnel, equipment and materials, and national and world economic performance. We cannot predict the full impact that COVID-19 or the related significant disruption and volatility in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations.

 

The military conflict between Russia and Ukraine and related economic sanctions imposed on Russia has impacted existing supply shortages, causing oil and natural gas prices to increase even more during the first quarter of 2022.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Please refer to the Consolidated Balance Sheets and the Condensed Consolidated Statements of Cash Flows in this Form 10-Q to supplement the following discussion. In the first quarter of 2022, the Company continued to fund its business activity using internal sources of cash. The Company had net cash provided by operations of $1,441,668 in the three months ending March 31, 2022. The Company had sales of equity securities of $628,126, proceeds from disposal of property, plant and equipment of $457,898, and cash distributions from other investments of $8,318, for total cash provided by investing activities of $1,094,342 in the three months ending March 31, 2022. The Company utilized cash for the purchase of property of $1,069,680, purchase of equity method investments of $174,006 and purchase of equity securities of $1,520,591 for total cash applied of $2,764,277 in the three months ending March 31, 2022. Cash and cash equivalents decreased $228,267 (<3%) to $9,900,890 at March 31, 2022 from $10,129,157 at December 31, 2021.

 

11

 

Discussion of Significant Changes in Working Capital. In addition to the changes in cash and cash equivalents discussed above, there were other changes in working capital line items from December 31, 2021. A discussion of these items follows.

 

Equity securities increased $735,651 (8%) to $9,878,008 as of March 31, 2022 from $9,142,357 at December 31, 2021. The increase was the result of $751,915 in net purchases and a $16,264 decrease in market value.

 

Refundable income taxes decreased $49,326 (14%) to $301,601 as of March 31, 2022 from $350,927 at December 31, 2021.

 

Accounts receivable increased $752,293 (55%) to $2,115,256 as of March 31, 2022 from $1,362,963 at December 31, 2021. The increase was primarily related to increased production and increased oil and gas prices during the period ending March 31, 2022.

 

Discussion of Significant Changes in the Condensed Statements of Cash Flows. As noted in the first paragraph above, net cash provided by operating activities was $1,441,668 in the three months ended March 31, 2022, an increase of $1,032,974 (253%) from the comparable period in 2021 of $408,694. For more information see “Operating Revenues” and “Other Income, Net” below.

 

Cash applied to the purchase of property additions in the three months ended March 31, 2022 was $1,069,680, an increase of $432,444 (68%) from cash applied in the comparable period in 2021 of $637,236. For 2022, cash applied to property additions was all related to oil and gas exploration and development activity. See the subheading “Exploration Costs” in the “Results of Operations” section below for additional information.

 

Cash applied to the purchase of equity securities in the three months ended March 31, 2022 was $1,520,591, compared to $1,036,150 in the comparable period in 2021. Cash provided by the sale of equity securities in the three months ended March 31, 2022 was $628,126, compared to $700,602 in the comparable period in 2021.

 

Conclusion. Management is unaware of any additional material trends, demands, commitments, events or uncertainties, which would impact liquidity and capital resources to the extent that the discussion presented in the 2021 Form 10-K would not be representative of the Company’s current position.

 

RESULTS OF OPERATIONS

 

Net income increased $1,426,013 (550%) to $1,685,479 in the three months ended March 31, 2022 from $259,466 in the comparable period in 2021. Net income per share, basic, increased $9.13 to a net income per share of $10.79 in the three months ended March 31, 2022 from a net income per share of $1.66 in the comparable period in 2021.

 

A discussion of revenue from oil and gas sales and other significant line items in the consolidated statements of income follows.

 

Operating Revenues. Revenues from oil and gas sales increased $1,833,370 (115%) to $3,433,824 in the three months ended March 31, 2022 from $1,600,454 in 2021. Of the $1,833,370 increase, crude oil sales increased $1,362,905; natural gas sales increased $385,972; and miscellaneous oil and gas product sales increased $84,493.

 

The $1,362,905 (138%) increase in oil sales to $2,352,133 in the three months ended March 31, 2022 from $989,228 in the comparable period in 2021 was the result of an increase in the volume sold and an increase in the average price per barrel (Bbl). The volume of oil sold increased 6,198 Bbls to 25,039 Bbls in the three months ended March 31, 2022, resulting in a positive volume variance of $325,415 compared to the comparable period in 2021. The average price per Bbl increased $41.43 to $93.94 per Bbl in the three months ended March 31, 2022, resulting in a positive price variance of $1,037,490 compared to the comparable period in 2021.

 

The $385,972 (71%) increase in gas sales to $936,808 in the three months ended March 31, 2022 from $550,836 in the comparable period in 2021 was the result of an increase in the average price per thousand cubic feet (MCF), partially offset by a decrease in the volume sold. The volume of gas sold decreased 11,662 MCF to 170,158 MCF in the three months ended March 31, 2022 from 181,820 MCF in the comparable period in 2021, for a negative volume variance of $(35,332). The average price per MCF increased $2.48 to $5.51 per MCF in the three months ended March 31, 2022 from $3.03 per MCF in the comparable period in 2021, resulting in a positive price variance of $421,303.

 

For both oil and gas sales, the price change was mostly the result of a change in the spot market prices upon which most of the Company’s oil and gas sales are based. These spot market prices have had significant fluctuations in the past and these fluctuations are expected to continue.

 

Sales of miscellaneous oil and gas products increased $84,493 (140%) to $144,883 in the three months ended March 31, 2022 from $60,390 in the comparable period in 2021.

 

Lease bonuses and other increased $236,400 to $236,400 in the three months ended March 31, 2022 from none in the comparable period in 2021. The Company had $37,654 in lease bonuses and $198,746 in gain on the sale of unproved properties.

 

12

 

The Company had water well drilling revenues of $275,534 in the three months ended March 31, 2022 related to water well drilling through TWSTX, with none in the comparable period in 2021.

 

Operating Costs and Expenses. Operating costs and expenses increased $381,583 (28%) to $1,743,128 in the three months ended March 31, 2022 from $1,361,545 in the comparable period in 2021. The increase was primarily due to increased production, revenue, and drilling activity in the 2022 period.

 

Production Costs. Production costs increased $251,616 (48%) to $778,175 in the three months ended March 31, 2022 from $526,559 in the comparable period in 2021. This increase was primarily the result of an increase of $136,720 in lease operating expense and an increase of $60,500 in production tax and an increase of $54,396 in hauling, compression and other expenses.

 

Exploration Costs. Total exploration expense decreased $69,971 to $(53,781) in the three months ended March 31, 2022 from $16,190 in the comparable period in 2021. This change was the result of an increase in geological and geophysical costs of $13,210, an increase in dry hole costs, P&A and other costs of $75,612, offset by an adjustment to leaseholds of $158,793.

 

The following is a summary as of May 6, 2022, updating both exploration and development activity from December 31, 2021, for the period ended March 31, 2022.

 

The Company participated with its 14.85% working interest in the drilling of an exploratory well on a San Patricio County, Texas prospect. It is currently awaiting completion. An exploratory well will be drilled on another nearby prospect starting in July 2022. Leasehold costs for the period were $2,325. Additional capitalized costs were $205,673.

 

The Company participated with its 18% working interest in the drilling of an exploratory horizontal well on a Nolan County, Texas prospect. The well was successfully drilled with casing set, and it is currently awaiting completion. An old well has been re-entered and converted to a saltwater disposal well. Geological costs for the period were $11,250. Leasehold costs were $12,903 and additional capitalized costs were $238,105.

 

The Company participated with its 3% working interest in the drilling of a development well on a Hitchcock County, Nebraska prospect. It is currently awaiting completion. Capitalized costs for the period were $4,259.

 

The Company participated with its 20% working interest in the drilling of a step-out well on a Finney County, Kansas prospect. The well was completed as a commercial oil producer. Capitalized costs for the period were $125,000.

 

In January 2022, the Company purchased a 20% interest in 1,536 net acres of leasehold on another Finney County, Kansas prospect for $41,150. An exploratory well was drilled on the prospect and completed as a dry hole. Dry hole costs for the period were $78,294.

 

The Company participated with its 10% working interest in the drilling of a development horizontal well on a Logan County, Oklahoma prospect. The well was completed as a commercial oil and gas producer. The Company will participate in the drilling of three additional development horizontal wells on the prospect starting in May 2022. Capitalized costs for the period were $329,793, including $5,855 of prospect leasehold costs.

 

The Company participated with a 1% working interest in the drilling of a development horizontal well on fee minerals located in Ellis County, Oklahoma. A completion is in progress. Capitalized costs for the period were $67,953.

 

The Company participated with its 19% working interest in the drilling of a development well on a Woods County, Oklahoma prospect. It is currently awaiting completion.

 

At this time, the oil and gas industry is experiencing severe shortages of personnel, equipment and materials. The pending activity discussed above may or may not proceed as scheduled or in a timely manner, depending on the ability of our operators to secure the needed services and materials.

 

Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A increased $89,921 (37%) to $335,046 in the three months ended March 31, 2022 from $245,125 in the comparable period in 2021, primarily due to an increase in drilling costs in the current period.

 

General, Administrative and Other (G&A). G&A decreased $39,504 (7%) to $534,167 in the three months ended March 31, 2022 from $573,671 in the comparable period in 2021. The decrease was primarily due to a decrease in accounting services and consulting costs related to implementation of new accounting software.

 

13

 

Other Income/(Loss), Net. Other Income/(Loss), Net decreased $152,050 to loss of $(65,106) in the three months ended March 31, 2022 from income of $86,944 in the comparable period in 2021. See Note 3 to the accompanying consolidated financial statements for the various components of Other Income, Net.

 

Income Tax Provision. In the three months ended March 31, 2022, the Company had an estimated income tax provision of $368,588 as the result of a deferred tax provision of $317,418 and a current tax provision of $51,170. In the comparable period in 2021, the Company had an estimated income tax provision of $67,472 as the result of a deferred tax provision of $163,675 and a current tax benefit of $96,203. See Note 5 to the accompanying consolidated financial statements for additional information on income taxes.

 

Off-Balance Sheet Arrangement

 

The Company’s off-balance sheet arrangements relate to Broadway Sixty-Eight, LLC, an Oklahoma limited liability company, Broadway Seventy-Two, LLC, an Oklahoma limited liability company, Grand Woods Development, LLC, an Oklahoma limited liability company, and QSN Office Park, LLC, an Oklahoma limited liability company. The Company does not have actual or effective control of these entities. Management of these entities could at any time make decisions in their own best interest, which could materially affect the Company’s net income or the value of the Company’s investment. For more information about these entities and the related off-balance sheet arrangements, see Note 4 to the accompanying consolidated financial statements.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

As defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), the term “disclosure controls and procedures” means 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 and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

The Company’s Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, they concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2022.

 

Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

 

PART II OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

During the quarter ended March 31, 2022, the Company did not have any material legal proceedings brought against it or its properties.

 

 

ITEM 1A.

RISK FACTORS

 

Not applicable.

 

14

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

ITEM 5.

OTHER INFORMATION

 

None.

 

 

ITEM 6.

EXHIBITS

 

The following documents are exhibits to this Form 10-Q. Each document marked by an asterisk is filed electronically herewith.

 

Exhibit

Number

 

Description

     

31.1*

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.

31.2*

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.

32*

 

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

101.INS*

 

Inline XBRL Instance Document

101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document

101.CAL*

 

Inline XBRL Taxonomy Calculation Linkbase Document

101.DEF*

 

Inline XBRL Taxonomy Definition Linkbase Document

101.LAB*

 

Inline XBRL Taxonomy Label Linkbase Document

101.PRE*

 

Inline XBRL Taxonomy Presentation Linkbase Document

104   Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101)

 

 

* Filed electronically herewith.

 

 

15

 

 

SIGNATURES

 

 

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 thereto duly authorized.

 

 

      THE RESERVE PETROLEUM COMPANY  
      (Registrant)  
         
         
         
         
Date: May 16, 2022   /s/ Cameron R. McLain  
      Cameron R. McLain,  
      Principal Executive Officer  
         
         
         
         
Date: May 16, 2022   /s/ Lawrence R. Francis   
     

Lawrence R. Francis

 
      Principal Financial Officer  

 

16

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Ticker: RSRV
CIK: 83350
Form Type: 10-Q Quarterly Report
Accession Number: 0001437749-22-012455
Submitted to the SEC: Mon May 16 2022 6:55:49 AM EST
Accepted by the SEC: Mon May 16 2022
Period: Thursday, March 31, 2022
Industry: Crude Petroleum And Natural Gas

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