New Concept Energy, Inc. — Q3 2015 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. The company operates oil and gas properties in Ohio and West Virginia and a 114-resident retirement community in King City, Oregon. The filing was signed November 12, 2015. The company reported 1,946,934 common shares outstanding as of that date.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $1.004 million | $2.896 million |
| Operating income (loss) | $(367,000) | $(1.009 million) |
| Net income (loss) applicable to common shares | $(75,000) | $349,000 |
| Basic and diluted earnings (loss) per share | $(0.04) | $0.18 |
| Operating cash flow | Not separately provided | $613,000 |
Quarterly operating margin was approximately negative 36.6%; the nine-month operating margin was approximately negative 34.8%. Net margin was approximately negative 7.5% for the quarter and positive 12.1% for the nine-month period, primarily because of a $1.430 million recovery of a previously reserved note receivable.
- Oil and gas revenue was $232,000 for the quarter and $663,000 for the nine months.
- Retirement-community revenue was $772,000 for the quarter and $2.233 million for the nine months according to the financial statements. The MD&A cites $771,000 for the comparable 2014 quarter and $2.223 million for 2015 nine-month revenue; these narrative figures do not fully agree with the statements.
- Cash and cash equivalents were $581,000 at September 30, 2015, compared with $300,000 at December 31, 2014.
- Current assets were $1.122 million versus current liabilities of $1.285 million, implying a current ratio of approximately 0.87.
- Total debt, including current and long-term notes payable, was $2.057 million, compared with $2.309 million at year-end 2014. The asset retirement obligation was $2.770 million.
- Net cash used in investing activities was $69,000, including $204,000 of oil and gas investment, partially offset by $116,000 of cash proceeds from a land sale and $126,000 collected on an affiliate note.
- Net cash used in financing activities was $263,000, consisting of note repayments. Cash increased by $281,000 during the nine months.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue declined approximately 11% from $1.131 million to $1.004 million, while nine-month revenue declined approximately 15% from $3.413 million to $2.896 million.
- Oil and gas revenue decreased approximately 43% for both the quarter and nine-month period, attributed primarily to lower oil prices; first-quarter weather also disrupted operations.
- Retirement-community revenue increased modestly for the nine-month period, primarily because of rate increases.
- Third-quarter operating loss widened to $367,000 from $164,000. Nine-month operating loss widened to $1.009 million from $451,000.
- Oil and gas operating expenses increased to $527,000 for the quarter and $1.437 million for the nine months, principally because of higher depreciation and depletion.
- Corporate general and administrative expense declined to $176,000 for the quarter and $485,000 for the nine months, primarily because of lower legal costs.
- Net results improved from a $343,000 nine-month loss in 2014 to $349,000 of income in 2015, but the improvement was substantially driven by the $1.430 million bad-debt recovery rather than operating performance.
Outlook, Risks, Contingencies, and Unusual Items
- The company does not provide specific earnings or revenue guidance.
- Management expects natural-gas oversupply and depressed market prices to persist. A gas-price agreement provides $4.53 per MCF through April 2017.
- Liquidity is constrained: current liabilities exceeded current assets by $163,000 at September 30, 2015, although cash increased year to date.
- The company’s deferred tax asset is fully offset by a valuation allowance because management could not conclude that realization was more likely than not.
- In litigation brought by Carlton Energy Group, the Texas Supreme Court determined that the company was an alter ego of another defendant and rejected reinstatement of a $66.5 million damages award as speculative. The matter was remanded for further proceedings. Management believes an unfavorable outcome is reasonably possible, but expects any adverse amount to be significantly below the more than $56 million security deposited with the court and believes the exposure is fully secured.
- Management identifies risks involving oil and gas prices, demand, competition, financing, property occupancy, operating costs, licensing, permitting, construction and delays in property dispositions or restructuring.
- Nearly all debt carries fixed interest rates, so management characterizes interest-rate exposure as minimal.
- Management reported that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the litigation ultimately produces a monetary obligation and the extent to which the deposited security remains available.
- The sustainability of operating cash flow excluding the unusual $1.430 million receivable recovery.
- Oil and gas production volumes, realized prices, reserve values and the potential for full-cost ceiling impairment.
- The company’s ability to meet current obligations given the approximately 0.87 current ratio and ongoing operating losses.
- The accuracy of retirement-community revenue figures, which differ between the financial statements and MD&A narrative.
- Occupancy, pricing, operating costs and licensing status of the retirement community.