New Concept Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited and amounts are in thousands, except per-share and share data. The company operates oil and gas properties in Ohio and West Virginia and a 114-resident retirement community in King City, Oregon.
Financial performance and position
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|
| Revenue | $835 | $1,003 | $1,731 | $1,892 |
| Operating earnings (loss) | $(126) | $(252) | $(412) | $(642) |
| Net income (loss) | $(133) | $110 | $(429) | $424 |
| Net income (loss) per share | $(0.07) | $0.06 | $(0.22) | $0.22 |
| Net cash from operating activities | Not provided | Not provided | $59 | $340 |
- Second-quarter revenue declined 16.8%, while six-month revenue declined 8.5%, versus the prior comparable periods.
- Oil and gas revenue was $170 for the quarter and $389 for the six months, down from $259 and $431, respectively. Management attributed the decline principally to lower oil prices received.
- Retirement-community revenue was $665 for the quarter and $1,342 for the six months, down from $744 and $1,461. Management attributed the decline primarily to lower occupancy following the opening of a competing facility.
- Operating loss margins were approximately 15.1% for the quarter and 23.8% for the six months, compared with approximately 25.1% and 33.9% in the prior-year periods.
- Net losses in 2016 compare with prior-year profits that included bad-debt recoveries of $386 in the second quarter and $1,124 for the six months. No comparable recovery was recorded in 2016.
- Cash provided by operations was $59 for the six months, compared with $340 in 2015. Investing cash use was $23, primarily for retirement-center fixed assets, and financing cash use was $35 for note repayments.
Liquidity, debt, and balance sheet
| Balance-sheet item | June 30, 2016 | December 31, 2015 |
|---|
| Cash and cash equivalents | $474 | $473 |
| Current assets | $617 | $651 |
| Current liabilities | $1,429 | $1,223 |
| Total liabilities | $5,338 | $5,159 |
| Notes payable, including current portion | $1,969 | $1,997 |
| Asset retirement obligation | $2,770 | $2,770 |
| Accumulated deficit | $(55,617) | $(55,188) |
| Total assets | $8,580 | $8,830 |
- The company had a working-capital deficit of approximately $812 and a current ratio of approximately 0.43 at June 30, 2016.
- Cash was essentially unchanged from year-end despite the six-month net loss, supported by $59 of operating cash flow and limited capital spending.
- Accounts payable increased to $460 from $241, including $422 due to related parties at June 30, 2016.
- Management states that nearly all debt carries fixed interest rates, limiting exposure to interest-rate changes.
Material changes and management commentary
- Management reduced oil and gas, retirement-community, and corporate expenses to offset lower revenue. Six-month oil and gas operating expenses declined to $382 from $628; retirement-community operating expenses declined to $724 from $794; and corporate general and administrative expense declined to $267 from $309.
- The company has a gas-price agreement under which it expects to receive $4.53 per MCF for five years ending in April 2017. Management expects natural-gas oversupply and depressed market prices to continue for some time.
- No formal financial guidance was provided. Management cautioned that six-month results are not necessarily indicative of full-year results.
- The company evaluated subsequent events through August 12, 2016 and reported no subsequent events requiring disclosure.
- Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Risks, contingencies, and unusual items
- Carlton litigation: The Texas Supreme Court determined that the company was an alter ego of Eurenergy and remanded the case for further proceedings concerning damages. Management believes an unfavorable outcome is reasonably possible, but states that the exposure is fully secured by alternative security deposited with the court, valued at more than $56 million, and that maximum exposure should be significantly less than that amount.
- The filing does not provide a clear estimate of any potential litigation liability or a recorded accrual for the Carlton matter.
- Key operating risks include lower oil and gas prices, natural-gas oversupply, retirement-community occupancy and competition, ability to manage costs and cash flow, access to financing, licensing and permitting, and potential construction or disposition delays.
- Deferred tax assets were fully offset by a valuation allowance because management could not conclude that realization was more likely than not.
- Oil and gas properties are accounted for under the full-cost method and are subject to quarterly ceiling tests, which could produce impairment charges if reserve values or commodity prices decline.
Investor verification points
- Verify near-term liquidity and sources of cash for the $1,429 current-liability balance against only $617 of current assets.
- Review maturity dates, terms, and covenants for the $1,969 of notes payable and the $2,770 asset retirement obligation.
- Monitor retirement-community occupancy, competitive effects, and pricing after the opening of the competing facility.
- Assess oil and gas production, realized prices, reserve values, and the April 2017 expiration of the $4.53-per-MCF gas-price agreement.
- Track the Carlton litigation, including any determination of damages and whether the court-held security remains sufficient.
- Reconcile the share count: the balance sheet reports 1,946,935 shares outstanding at June 30, while the filing cover page reports 1,946,934 shares outstanding at August 12, 2016.
