New Concept Energy, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the quarter and nine months ended September 30, 2017, filed November 14, 2017. The company operates oil and gas wells and mineral leases in Ohio and West Virginia. Its retirement-center operation was sold by the facility owner on March 30, 2017 and is reported as a discontinued operation.
Key Financial Metrics
| Metric | Three Months Ended Sept. 30, 2017 | Nine Months Ended Sept. 30, 2017 |
|---|---|---|
| Oil and gas revenue, net of royalties | $194,000 | $632,000 |
| Operating expenses | $349,000 | $1.083 million |
| Operating loss | $(155,000) | $(451,000) |
| Operating margin | (79.9%) | (71.4%) |
| Loss from continuing operations | $(90,000) | $(399,000) |
| Net loss attributable to common shares | $(101,000) | $(397,000) |
| Net margin | (52.1%) | (62.8%) |
| Loss per common share | $(0.05) | $(0.20) |
- Cash and cash equivalents were $427,000 at September 30, 2017, versus $113,000 at December 31, 2016.
- Current assets were $617,000 and current liabilities were $677,000, producing a current ratio of approximately 0.91.
- Notes payable totaled $344,000, including $85,000 classified as current. The asset retirement obligation was $2.770 million.
- Total assets were $7.028 million and total liabilities were $3.706 million at September 30, 2017.
- Net cash provided by operating activities was $378,000 for the first nine months, compared with $141,000 in the prior-year period.
- Investing activities used $12,000 and financing activities used $52,000, primarily for repayment of notes payable.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased to $194,000 from $190,000, while nine-month revenue increased to $632,000 from $579,000, principally due to increased production.
- Third-quarter oil and gas operating expenses declined to $254,000 from $295,000, primarily because of lower depletion expense. Nine-month operating expenses declined to $766,000 from $924,000 as the company reduced costs.
- Third-quarter general and administrative expense increased to $95,000 from $52,000. Nine-month general and administrative expense was substantially unchanged at $317,000 versus $319,000.
- Third-quarter net loss improved to $101,000 from $164,000; nine-month net loss improved to $397,000 from $593,000.
- Other income was $66,000 in the third quarter and $51,000 for the nine months, compared with an $11,000 expense and $21,000 expense, respectively, in the prior-year periods. The principal item was a $64,000 collection in August 2017 of a previously written-off receivable.
- Cash increased by $314,000 during the first nine months of 2017, compared with a $57,000 increase in the prior-year period.
Outlook, Commentary, Risks, and Unusual Items
- The company states that natural-gas oversupply and depressed pricing may persist and does not anticipate a meaningful market-price increase.
- Under its gas-pricing arrangement, the company received $3.77 per MCF during June through August 2017 and was receiving $3.40 per MCF from September 1 through December 31, 2017. No formal earnings or production guidance was provided.
- The company uses full-cost accounting for oil and gas properties, including a quarterly ceiling test. Changes in commodity prices, reserves, production, or assumptions could result in impairment charges.
- Management maintains a 100% valuation allowance against its deferred tax asset because realization was not considered more likely than not.
- In August 2017, the parties to long-running Carlton litigation reached an arrangement subject to another appeal. Management states that the company should have no financial responsibility and that the matter should not materially adversely affect it, although final terms were not yet determined.
- Nearly all debt bears fixed interest rates, so management considers interest-rate exposure minimal.
- In the fourth quarter, the company privately sold 90,000 newly issued shares at $1.80 per share for general working-capital purposes.
- Management reported that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the company’s ability to fund operations given current liabilities exceeding current assets and continuing operating losses.
- Review gas production volumes, realized prices, the December 31, 2017 pricing expiration, and exposure to continued natural-gas oversupply.
- Assess the asset retirement obligation and the company’s future plugging and abandonment obligations.
- Confirm the final resolution and potential consequences of the Carlton litigation after the pending appeal.
- Evaluate the sustainability of operating cash flow, particularly the effect of working-capital changes and the nonrecurring $64,000 receivable recovery.
- Review the subsequent equity issuance, dilution, and use of proceeds.