New Concept Energy, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2015; filed March 30, 2016. New Concept Energy operates oil and gas properties in Ohio and West Virginia and leases and operates Pacific Pointe Retirement Inn, a 114-resident independent-living facility in Oregon. At year-end, the Company had 153 producing wells, 31 non-producing wells, approximately 20,000 acres and 46 employees.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $3.817 million | $4.363 million | Down $546,000 |
| Operating expenses | $7.787 million | $5.253 million | Up $2.534 million |
| Operating loss | $3.970 million | $890,000 | Worsened $3.080 million |
| Net loss | $2.622 million | $779,000 | Worsened $1.843 million |
| Net loss per share | $1.35 | $0.40 | Worsened $0.95 |
| Cash from operating activities | $579,000 | $(282,000) | Improved $861,000 |
| Capital and other investing cash use | $125,000 | $954,000 | Lower use |
| Cash from financing activities | $(281,000) | $(85,000) | Higher debt repayment |
| Cash and equivalents | $473,000 | $300,000 | Up $173,000 |
| Total assets | $8.875 million | $12.274 million | Down $3.399 million |
| Total liabilities | $5.204 million | $5.981 million | Down $777,000 |
| Stockholders’ equity | $3.671 million | $6.293 million | Down $2.622 million |
The operating margin was approximately negative 104% in 2015 versus negative 20% in 2014; the 2015 result included a $2.717 million non-cash oil and gas impairment. The net margin was approximately negative 69% versus negative 18% in 2014.
- Oil and gas revenue fell to $820,000 from $1.489 million, primarily because of lower oil prices. Production was 161,000 Mcf of natural gas and 7,600 barrels of oil, compared with 159,000 Mcf and 10,459 barrels in 2014.
- Retirement-community revenue increased to $2.997 million from $2.874 million. December 2015 average occupancy was 88.91% and the average monthly rate was $2,507, compared with 85.5% and $2,235 in December 2014.
- Oil and gas properties were reduced to $5.914 million from $8.809 million after the full-cost ceiling-test impairment.
- Current assets were $651,000 versus current liabilities of $1.223 million, indicating a working-capital deficit of approximately $572,000. Total debt was $2.042 million, including $831,000 due in 2016. The asset retirement obligation was $2.770 million.
- The Company recorded $1.430 million of bad-debt recovery related to a previously fully reserved affiliate note receivable. This non-operating recovery materially reduced the reported net loss.
Material changes versus the prior comparable period
- Revenue declined approximately 13%, driven by the oil and gas segment; retirement-community revenue increased approximately 4%.
- The oil and gas segment shifted from a $474,000 operating loss in 2014 to a $3.760 million loss in 2015, primarily due to the impairment charge.
- The retirement facility remained profitable, generating segment operating income of $333,000 in both 2015 and 2014.
- Corporate expenses decreased to $605,000 from $823,000, primarily due to lower legal costs.
- Interest expense declined to $62,000 from $91,000 as debt owed to prior oil and gas owners decreased.
- Fourth-quarter revenue was $824,000 and the quarterly net loss was $2.622 million, compared with fourth-quarter revenue of $950,000 and a $436,000 loss in 2014. The fourth-quarter 2015 loss included the full $2.717 million oil and gas impairment.
- Proved reserves decreased to 2.604 million Mcf of gas and 58,000 barrels of oil from 2.866 million Mcf and 139,000 barrels. The standardized measure of discounted future net cash flows declined to $5.914 million from $10.778 million.
Guidance, outlook, risks and unusual items
Management stated that expansion and development activity on existing acreage was suspended until oil and gas prices improve. The Company continues to evaluate distressed or undervalued oil and gas acquisitions, but this strategy depends on financing availability and commodity prices. Management expects to retain the Oregon retirement facility and does not currently intend to acquire or operate additional retirement facilities.
- Commodity-price risk is significant; the 2015 oil-price decline caused the full-cost ceiling-test impairment and reduced oil and gas revenue.
- The Company sells most natural gas to one purchaser and all oil to one purchaser, creating customer-concentration risk.
- The Carlton Energy litigation remains unresolved. The Texas Supreme Court found the Company to be an alter ego as a matter of law but rejected the $66.5 million damages figure and remanded the matter for further proceedings. Management considers an unfavorable outcome reasonably possible, has not recorded a liability, and believes any exposure is secured by a deposit made by an individual defendant. The independent auditor highlighted the uncertainty.
- Liquidity is constrained by the working-capital deficit, scheduled 2016 debt maturities of $831,000 and required retirement-community lease payments of approximately $1.0 million in 2016. The filing text does not provide a specific going-concern conclusion.
- The Company has approximately $9.3 million of net operating-loss carryforwards, but maintains a full valuation allowance because realization of the related deferred tax asset is not considered more likely than not.
- The Company paid no common-stock dividends in 2015 or 2014 and has not paid cash dividends for at least ten years.
- Approximately 46% of outstanding common stock was controlled by a group of entities as of March 30, 2016, creating substantial voting concentration.
Most important facts for investors to verify
- Whether oil and gas prices recover sufficiently to support reserve values, future development and reversal or avoidance of additional ceiling-test impairments.
- The status, potential damages and enforceability of the Carlton litigation security arrangement.
- Sources of cash for the $831,000 of 2016 debt maturities, approximately $1.0 million of 2016 lease payments and ongoing operating needs.
- The collectability and terms of related-party receivables and the effect of the $1.4 million 2015 related-party obligation forgiveness.
- Occupancy, pricing and profitability trends at Pacific Pointe as its primary lease approaches expiration on January 31, 2017, with a renewal option.
- The accuracy and comparability of the filing’s reserve disclosures, including the reported decline in proved oil reserves and the $5.914 million standardized measure.