Business Context and Reporting Period
New Concept Energy, Inc. (NCE) filed a Form 10-Q for the quarterly period ended June 30, 2010. The Company operates in two primary segments: oil and gas exploration and production in Ohio and West Virginia, and a retirement community in King City, Oregon. NCE is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenue | $2,055,000 | $2,117,000 |
| Net Loss | $(315,000) | $(61,000) |
| Operating Loss | $(166,000) | $(337,000) |
| Cash and Equivalents | $102,000 | $190,000 (Beginning of Year) |
| Net Cash Used in Operating Activities | $(1,315,000) | $56,000 |
| Total Assets | $23,655,000 | $25,121,000 (Dec 31, 2009) |
| Total Liabilities | $5,688,000 | $6,839,000 (Dec 31, 2009) |
| Long-Term Debt | $1,253,000 | $1,198,000 (Dec 31, 2009) |
Revenue Breakdown (Six Months 2010): Oil and Gas Operations: $601,000; Real Estate Operations: $1,454,000.
Liquidity: Current assets totaled $10.6 million against current liabilities of $1.6 million. A significant portion of current assets ($10.0 million) consists of a note receivable from a related party.
Material Changes vs. Prior Period
- Net Loss Increase: The net loss widened to $315,000 for the six months ended June 30, 2010, compared to $61,000 in the prior year period. This was primarily driven by a $350,000 write-off of an investment in a South Texas oil and gas company that entered Chapter 7 liquidation.
- Operating Performance: Despite the net loss, operating earnings improved from a loss of $337,000 in 2009 to a loss of $166,000 in 2010. This improvement was due to reduced corporate general and administrative expenses (down $174,000) and lower oil and gas operating expenses.
- Revenue Trends: Total revenue declined slightly by 3% year-over-year. Oil and gas revenue decreased by 12% due to market price fluctuations, while real estate revenue increased by 1%.
- Cash Flow: Operating cash flow turned negative, using $1.3 million, compared to a positive $56,000 in the prior year. This was largely due to a $1.5 million reduction in income tax obligations and changes in working capital.
Outlook, Risks, and Contingencies
- Related Party Receivables: The Company holds a $10.0 million note receivable from Prime Income Asset Management, Inc. (PIAMI), a related party. This note bears interest at the prime rate plus 2% and is due on demand or by January 31, 2013.
- Legal Contingencies: NCE is involved in a lawsuit with Chesapeake Exploration Limited Partnership regarding disputed drilling costs for a 5% interest in two gas wells. Chesapeake filed suit in 2007 seeking $556,217. Management disputes the costs as unreasonable.
- Investment Write-off: The Company recorded a $350,000 expense related to the liquidation of a South Texas oil and gas company in which it had invested in 2009. Recovery of this investment is deemed unlikely.
- Deferred Tax Assets: A 100% valuation allowance was established against deferred tax assets as management could not determine it was more likely than not that the benefit would be realized.
- Forward-Looking Risks: Risks include interest rate fluctuations, ability to obtain financing, commodity pricing, and maintaining occupancy rates in the retirement community.
Investor Verification Checklist
- Related Party Loan: Verify the collectability and terms of the $10.0 million note receivable from Prime Income Asset Management, Inc.
- Chesapeake Litigation: Review the status of the pending lawsuit regarding the $556,217 disputed drilling costs.
- Investment Write-off: Confirm the details of the $350,000 loss related to the South Texas Chapter 7 liquidation.
- Cash Burn Rate: Assess the sustainability of operations given the $1.3 million cash outflow from operating activities and the decline in cash reserves.
- Revenue Concentration: Note that approximately 71% of revenue is derived from the real estate segment, making the company sensitive to occupancy rates and rental market conditions.