New Concept Energy, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2021. New Concept Energy primarily owns and leases real estate in Parkersburg, West Virginia, including approximately 190 acres and four structures totaling about 53,000 square feet. Approximately 16,000 square feet is leased at an annual rate of approximately $101,000. The Company sold its oil and gas operations on August 31, 2020; those results are presented as discontinued operations.
The filing reports 5,131,934 common shares outstanding as of November 9, 2021. The financial statements are unaudited.
Financial Highlights
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Rental revenue | $25,000 in 2021 and 2020 | $76,000 in 2021 and 2020 |
| Operating expenses | $87,000 in 2021; $80,000 in 2020 | $309,000 in 2021; $342,000 in 2020 |
| Operating earnings (loss) | $(62,000) in 2021; $(55,000) in 2020 | $(233,000) in 2021; $(266,000) in 2020 |
| Income (loss) from continuing operations | $(8,000) in 2021; $82,000 in 2020 | $120,000 in 2021; $(8,000) in 2020 |
| Income (loss) applicable to common shares | $(8,000) in 2021; $2.182 million in 2020 | $120,000 in 2021; $1.948 million in 2020 |
| Net cash provided by operating activities | Not provided for the quarter | $261,000 in 2021; $(491,000) in 2020 |
Calculated operating margins were approximately negative 248% for the 2021 third quarter and negative 307% for the first nine months, reflecting operating expenses substantially above rental revenue. Continuing-operations net margins were approximately negative 32% for the quarter and positive 158% for the nine-month period; the nine-month percentage is elevated because income was supported by other income, primarily related-party interest income.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $249,000 at September 30, 2021, compared with $27,000 at December 31, 2020.
- Current assets were $3.883 million and current liabilities were $85,000, implying a current ratio of approximately 45.7 times.
- Current assets included $3.596 million of current notes receivable, including $3.637 million from related parties according to the balance-sheet disclosure; the filing text contains an apparent inconsistency between the total current note receivable and related-party amount that should be verified.
- Total assets were $4.530 million and total stockholders’ equity was $4.445 million at September 30, 2021.
- No current or long-term debt was reported at September 30, 2021, compared with $174,000 of total debt at December 31, 2020.
- Nine-month cash flow consisted of $261,000 from operations, $153,000 from investing activities, and $(192,000) from financing activities, resulting in a $222,000 increase in cash.
- The $192,000 financing cash outflow primarily reflected repayment of the mortgage on the Company’s properties. The Company states that all debt was financed at fixed rates and therefore was not exposed to changes in interest rates.
Material Changes Versus Prior Comparable Period
- Third-quarter continuing-operations results declined from $82,000 of income in 2020 to an $8,000 loss in 2021. The 2020 period included $83,000 of other income from a tax refund; no comparable amount was recorded in 2021.
- Nine-month continuing-operations results improved from an $8,000 loss in 2020 to $120,000 of income in 2021, primarily reflecting lower corporate general and administrative expenses and the absence of the prior-year loss from discontinued operations.
- Corporate general and administrative expense declined to $53,000 from $65,000 for the quarter and to $238,000 from $296,000 for the nine-month period.
- 2020 results included a $2.138 million gain from the sale of the oil and gas operations and discontinued-operation results of $2.100 million for the quarter and $1.956 million for the nine-month period. No comparable discontinued-operation gain was recorded in 2021.
- Accumulated deficit improved from $59.306 million at December 31, 2020 to $59.186 million at September 30, 2021, reflecting nine-month net income of $120,000.
Outlook, Risks, Contingencies, and Unusual Items
- The Company provided no specific revenue, earnings, or cash-flow guidance. It stated that it is evaluating business opportunities intended to provide additional income and cash flow.
- Meeting current cash obligations depends on cash generated from current operations and collection of notes receivable, creating potential concentration and collectability risk.
- The Company maintained a 100% valuation allowance against its deferred tax asset because management could not conclude that realization was more likely than not.
- The COVID-19 pandemic and related containment measures may adversely affect economic activity and the Company’s business, although the full impact remained uncertain.
- Management identified risks involving interest rates, financing availability, demand, pricing, competition, construction, licensing and permitting, delays, property dispositions or restructuring, cost control, cash flow, and occupancy.
- The Company stated that it was not aware of material environmental liabilities or noncompliance relating to hazardous or petroleum substances.
- No subsequent events requiring disclosure were identified through November 9, 2021.
- Management concluded that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify the balance-sheet disclosure for current notes receivable and the stated related-party component, which appears internally inconsistent in the filing text.
- Assess the credit quality, maturity, repayment terms, and related-party exposure of the notes receivable that represent most of current assets.
- Confirm the sustainability of liquidity after the repayment of the property mortgage and in light of recurring operating losses relative to rental revenue.
- Separate recurring operating performance from nonrecurring items, including the 2020 tax refund and oil and gas disposal gain.
- Review the Company’s plans and funding requirements for new business opportunities and the basis for maintaining the full deferred-tax-asset valuation allowance.