Business Context and Reporting Period
New Concept Energy, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2023. The company owns approximately 190 acres and four structures totaling approximately 53,000 square feet in Parkersburg, West Virginia; approximately 16,000 square feet is leased. The company also provides management, supervisory and administrative services for previously sold oil and gas operations under a consulting agreement that generates fees equal to 10% of gross revenue. Management stated that it is evaluating additional business opportunities to increase income and cash flow.
As of May 10, 2023, the company had 5,131,934 common shares outstanding. The company is a smaller reporting company and is not identified as a shell company.
Financial Results and Key Metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $45,000 | $45,000 |
| Rental income | $25,000 | $25,000 |
| Management fees | $20,000 | $20,000 |
| Operating expenses | $80,000 | $92,000 |
| Operating loss | $(35,000) | $(47,000) |
| Net income | $17,000 | $5,000 |
| Basic and diluted earnings per share | $0.01 | $0.01 |
| Cash flow from operations | $1,000 | $2,000 |
Revenue was unchanged year over year. The operating margin was approximately negative 78% in both periods, while the net margin was approximately 38% in Q1 2023 versus 11% in Q1 2022. Net income included $52,000 of interest income from related parties in each period. Depreciation, depletion and amortization was $3,000 in each quarter.
At March 31, 2023, cash and cash equivalents were $437,000, compared with $436,000 at December 31, 2022 and $254,000 at March 31, 2022. Current assets were $4.041 million and current liabilities were $76,000, representing current assets approximately 53 times current liabilities. The balance sheet included a $3.542 million note receivable and accrued interest from a related party. Total assets were $4.669 million, and shareholders’ equity was $4.593 million.
The company reported that all outstanding debt had been extinguished. No borrowings or interest-bearing debt were shown on the March 31, 2023 balance sheet. Cash provided by operations was only $1,000, so liquidity depends on cash from current operations and collection of notes receivable. Cash balances exceeded applicable FDIC insurance limits at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue remained $45,000, with rental income and management fees unchanged.
- Corporate general and administrative expense declined to $68,000 from $80,000, reducing total operating expenses by $12,000.
- The operating loss improved to $35,000 from $47,000.
- Net income increased to $17,000 from $5,000, primarily because of lower corporate expenses while related-party interest income remained $52,000.
- Operating cash flow decreased to $1,000 from $2,000 despite the increase in net income.
- Cash at quarter-end increased to $437,000 from $254,000 at March 31, 2022, but was essentially unchanged from year-end 2022.
- Accumulated deficit improved to $(59.038) million from $(59.231) million at March 31, 2022.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing provides no quantitative financial guidance. Management said it is evaluating opportunities intended to provide additional income and cash flow and cautioned that first-quarter results are not necessarily indicative of full-year results.
Key risks include dependence on current operating cash flow and collection of notes receivable, concentration of assets in a related-party receivable, limited recurring revenue relative to corporate expenses, and the possibility that deferred tax assets will not be realized. A 100% valuation allowance was recorded against the deferred tax asset because management could not conclude that realization was more likely than not.
The company maintains cash at financial institutions, and balances exceeded the $250,000 FDIC insurance limit at March 31, 2023. Management reported no material environmental liabilities or known material noncompliance relating to hazardous or toxic substances. The filing identifies general risks involving interest rates, financing availability, demand, pricing, competition, construction, licensing, permitting, delays, occupancy, and cost and cash-flow management, although the company has no outstanding debt and therefore minimal interest-rate exposure.
The company reported no subsequent events through May 10, 2023. Disclosure controls and procedures were concluded to be effective, and no material change in internal control over financial reporting was reported during the quarter.
Facts Investors Should Verify
- Collectability, maturity, and terms of the $3.542 million related-party note receivable and accrued interest.
- Sustainability of the $52,000 quarterly related-party interest income and the company’s reliance on it to report net income.
- Occupancy, lease terms, and renewal prospects for the company’s West Virginia property.
- Ability to generate sufficient operating cash flow given $45,000 of quarterly revenue and $80,000 of operating expenses.
- Potential uses of cash and the risk associated with uninsured cash balances above FDIC limits.
- Whether proposed business opportunities will produce material income or cash flow and whether additional financing will be required.
- Realizability of deferred tax assets and the basis for maintaining the 100% valuation allowance.