Business Context and Reporting Period
New Concept Energy, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company operates oil and gas wells and mineral leases in Ohio and West Virginia through wholly owned subsidiaries. Its common stock trades on the NYSE American under the symbol GBR. The filing states that the company is a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Oil and gas revenue | $93,000 | $164,000 | $218,000 | $344,000 |
| Operating expenses | $290,000 | $365,000 | $572,000 | $632,000 |
| Operating loss | $(197,000) | $(201,000) | $(354,000) | $(288,000) |
| Net loss applicable to common shares | $(137,000) | $(141,000) | $(234,000) | $(15,000) |
| Loss per common share | $(0.03) | $(0.03) | $(0.05) | $(0.00) |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $40,000 | $(100,000) |
Derived operating margins were approximately negative 212% for the second quarter and negative 162% for the first six months. Derived net margins were approximately negative 147% and negative 107%, respectively.
- Cash and cash equivalents were $39,000 at June 30, 2020, compared with $22,000 at December 31, 2019.
- Current assets were $3.793 million and current liabilities were $272,000, producing a current ratio of approximately 13.9. Current assets included $3.660 million of current notes receivable, including $3.620 million from related parties.
- Total assets were $5.353 million, compared with $5.790 million at year-end 2019.
- Debt consisted of $40,000 of current notes payable and $161,000 of long-term notes payable. The company also reported a $2.745 million asset retirement obligation.
- Stockholders’ equity was $2.175 million, down from $2.409 million at December 31, 2019, primarily reflecting the six-month net loss.
- Cash flow included $23,000 of financing outflows for payments on notes payable and no investing cash outflows during the six-month period.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined approximately 43% year over year, principally because of lower prices received for natural gas.
- Six-month revenue declined approximately 37% year over year for the same principal reason.
- Oil and gas operating expenses decreased to $163,000 in the quarter from $231,000 and to $341,000 for the six months from $410,000, primarily due to reductions in payroll, consulting fees, and general expenses.
- Corporate general and administrative expense decreased modestly in the quarter, to $127,000 from $134,000, but increased for the six months, to $231,000 from $222,000.
- The six-month net loss increased substantially to $234,000 from $15,000. The prior-year period included $153,000 of other income, including a $136,000 recovery of a receivable previously written off; no other income was reported in 2020.
- Reported common shares outstanding at June 30, 2020 were 5,131,934 versus 2,036,935 at December 31, 2019, while additional paid-in capital was unchanged. The filing text does not explain this share-count change.
Guidance, Outlook, Risks, and Unusual Items
- No formal revenue, earnings, production, or capital-spending guidance was provided.
- Management states that meeting current cash obligations depends on cash generated from operations and collection of notes receivable. The company is evaluating additional business opportunities to generate income and cash flow.
- The COVID-19 pandemic reduced economic activity and oil and natural gas demand. Management states that the ultimate impact on the company remains uncertain.
- Oil and gas properties are accounted for under the full-cost method, including a quarterly ceiling test based on discounted future net revenues from proved reserves. Lower oil and gas prices could increase impairment risk, although the filing does not report a ceiling-test impairment for the period.
- The company has substantial asset retirement obligations relative to its cash balance and operating scale.
- Nearly all debt is at fixed interest rates, so management describes interest-rate risk as minimal.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- The filing states that no subsequent events requiring disclosure were identified through August 12, 2020.
- The MD&A contains apparent period-reference errors, including references to June 30, 2019 when discussing 2020 results. The filing also includes generic risk language referring to retirement-community operations that is not consistent with the described oil and gas business.
Investor Verification Items
- Verify the unexplained increase in common shares outstanding from approximately 2.037 million at December 31, 2019 to approximately 5.132 million at June 30, 2020.
- Assess the collectability, timing, and related-party nature of the $3.620 million of current notes receivable, which represents most of current assets.
- Review liquidity sustainability given only $39,000 of cash, recurring operating losses, and reliance on operations and receivable collections.
- Evaluate the impact of natural gas pricing and COVID-19-related demand weakness on future revenue and the full-cost ceiling test.
- Review the $2.745 million asset retirement obligation, its expected settlement timing, and available funding sources.
- Reconcile the filing’s apparent typographical errors and confirm the comparable-period figures against the filed financial statements and 2019 Form 10-K.