New Concept Energy, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2014; filed May 14, 2014. The unaudited consolidated statements cover the Company and its majority-owned subsidiaries. NCE operates oil and gas properties in Ohio and West Virginia and a 114-resident retirement community in King City, Oregon. The Company had 1,946,935 common shares outstanding as of May 14, 2014.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Oil and gas revenue | $344 thousand | $340 thousand |
| Retirement community revenue | $725 thousand | $680 thousand |
| Total revenue | $1.069 million | $1.020 million |
| Operating expenses | $1.311 million | $1.251 million |
| Operating loss | $(242) thousand | $(231) thousand |
| Net income (loss) | $(40) thousand | $31 thousand |
| Basic and diluted earnings per share | $(0.02) | $0.02 |
| Net cash provided by (used in) operating activities | $(484) thousand | $380 thousand |
- Total revenue increased approximately 4.8% year over year. The implied operating margin was approximately negative 22.6% in both periods; the net margin was approximately negative 3.7% in Q1 2014 versus positive 3.0% in Q1 2013.
- At March 31, 2014, cash and cash equivalents were $443 thousand, down from $1.621 million at December 31, 2013. Current assets were $812 thousand versus current liabilities of $663 thousand, producing a current ratio of approximately 1.2x.
- Total liabilities were $5.560 million, including $2.312 million of notes payable and $2.770 million of asset retirement obligations. The Company paid $72 thousand on notes payable during the quarter.
- Total assets were $12.592 million, compared with $13.308 million at year-end 2013. Oil and gas properties were $9.025 million, net.
- Investing cash outflows were $622 thousand, primarily the $624 thousand purchase of 7.4 acres of undeveloped land in DeSoto, Texas, intended for potential multifamily development. Financing cash outflows were $72 thousand.
Material Changes Versus the Prior Comparable Period
- Retirement community revenue increased $45 thousand, principally from rate increases.
- Oil and gas revenue increased $4 thousand, while oil and gas operating expenses increased $27 thousand. The filing attributes higher operating expenses to general operating costs, partially offset by a $41 thousand reduction in depreciation, depletion and amortization.
- Retirement community operating expenses, including lease expense, increased $14 thousand to $636 thousand.
- Corporate general and administrative expense increased $19 thousand to $192 thousand, primarily because of $18 thousand of consulting fees related to reviewing oil and gas operations and identifying new oil and gas opportunities.
- Q1 2013 benefited from a $339 thousand recovery of previously reserved bad debt. Q1 2014 instead included $232 thousand of other income from a cash payment received from the bankruptcy estate of the prior owners of the oil and gas operations.
- Operating cash flow declined from $380 thousand provided in Q1 2013 to $484 thousand used in Q1 2014, primarily reflecting changes in accounts payable and other liabilities.
Outlook, Risks, Contingencies, and Unusual Items
- The Company provided no specific revenue, earnings, production, or capital-spending guidance.
- Management expects natural gas oversupply and depressed market prices to persist. A price-fixing agreement provides $4.53 per MCF for gas sales through April 2017.
- Chesapeake litigation resulted in the Company paying $791,960 to a bonding company in February 2014, which paid Chesapeake. The Company continues to pursue compensation for approximately 70,000 MCF of gas it estimates was withheld and remains owed to it.
- In the Carlton Energy Group litigation, the Texas Court of Appeals had imposed potential liability on the Company under an alter-ego theory. The Company petitioned the Texas Supreme Court, which granted review in March 2013; the filing states that the parties were awaiting a decision. The potential exposure described in the filing includes substantial damages, although management denies liability and believes the appellate ruling is erroneous.
- Nearly all debt bears fixed interest rates, so management characterizes interest-rate risk as minimal.
- Management maintains a full valuation allowance against deferred tax assets because realization of the tax benefits was not considered more likely than not.
- Key operating risks include gas prices and production, retirement-community occupancy and rental rates, labor and maintenance costs, financing availability, legal proceedings, permitting and construction delays, competition, and the ability to maintain cash flow.
- Management reported that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the Company’s near-term liquidity, given $443 thousand of cash, negative operating cash flow, and planned debt repayments.
- Review the terms and remaining obligations of the fixed-price gas contract and the Company’s production volumes and reserves.
- Assess the financial impact and collectability of the estimated 70,000 MCF gas claim against Chesapeake.
- Monitor the Carlton Energy Group litigation and the potential damages exposure described in the filing.
- Evaluate whether the $624 thousand Texas land investment can generate expected development value without materially further reducing liquidity.
- Reconcile the filing’s subsequent-event disclosure date, which appears to state May 14, 2013 despite the 2014 reporting period and filing date.