New Concept Energy, Inc. — Q3 2018 Form 10-Q Summary
Business Context and Reporting Period
New Concept Energy, Inc. operates oil and gas wells and mineral leases in Ohio and West Virginia through its subsidiaries. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the same periods in 2017. The company reported 2,131,935 common shares outstanding as of November 14, 2018.
Key Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Oil and gas revenue | $167,000 in 2018 vs. $194,000 in 2017 | $544,000 vs. $632,000 |
| Operating expenses | $285,000 vs. $349,000 | $982,000 vs. $1,083,000 |
| Operating loss | $118,000 vs. $155,000 | $438,000 vs. $451,000 |
| Net loss | $121,000, or $0.06 per share, vs. $101,000, or $0.05 per share | $429,000, or $0.20 per share, vs. $397,000, or $0.20 per share |
| Operating margin | Approximately negative 70.7% | Approximately negative 80.5% |
For the nine months, net cash used in operating activities was $264,000, compared with $378,000 of operating cash flow provided in 2017. Investing activities used no cash in 2018, compared with $12,000 used in 2017. Financing activities provided $117,000, including $171,000 from common stock sales, partly offset by $54,000 of note repayments.
Cash and cash equivalents declined to $272,000 at September 30, 2018, from $419,000 at December 31, 2017. Current assets were $374,000 versus current liabilities of $448,000, implying a current ratio of approximately 0.83. Accounts payable included $331,000 owed to related parties. Total debt consisted of $273,000 of notes payable, including $51,000 due within one year, plus a $2.77 million asset retirement obligation.
Material Changes Versus Prior Comparable Period
- Revenue declined 14% in the third quarter and 14% for the first nine months, primarily because a long-term gas pricing agreement expired in April 2018 and realized gas prices reverted to lower market prices.
- Oil and gas operating expenses declined 27% in the quarter and 9% year to date, reflecting lower general operating expenses.
- Corporate general and administrative expense increased 4% in the quarter but declined 11% year to date, principally because of lower payroll and administrative costs.
- The quarterly net loss increased from $101,000 to $121,000, while the nine-month net loss increased from $397,000 to $429,000.
- Cash flow deteriorated materially, shifting from $378,000 provided by operations in the first nine months of 2017 to $264,000 used in 2018, despite lower operating expenses.
Outlook, Risks, Contingencies, and Unusual Items
- No formal financial guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- The company expects to consummate a private issuance of up to 3,000,000 common shares at $1.50 per share, with approximately $4.5 million of expected net proceeds. Stockholder approval was obtained October 10, 2018, and NYSE American approved the additional listing October 29, 2018; closing was anticipated around November 20, 2018.
- Expected offering proceeds are intended to repay existing trade payables and current liabilities, fund an initial development well estimated at $370,000, and support future development and drilling activities.
- The company uses the full-cost method for oil and gas properties and is exposed to potential ceiling-test impairment if capitalized costs exceed the prescribed ceiling based on reserve values and future net revenues.
- Management stated that a 100% valuation allowance was recorded against the deferred tax asset because realization was not considered more likely than not.
- In Carlton litigation, management stated that an August 2017 arrangement should leave the company with no financial responsibility and that the matter should not materially adversely affect the company, subject to the outcome of another appeal.
- Nearly all debt bears fixed interest rates, limiting exposure to interest-rate changes. Management reported no material environmental liabilities and assessed disclosure controls as effective.
- The filing contains apparently stale or inconsistent narrative references to retirement-community revenue and related risks, while the current financial statements and Nature of Operations note describe the company primarily as an oil and gas operator. Investors should reconcile these disclosures against the company’s other filings.
Important Facts for Investors to Verify
- Whether the proposed 3,000,000-share issuance closed as planned, the actual proceeds received, and the resulting dilution.
- The company’s ability to fund ongoing operations given negative operating cash flow, $448,000 of current liabilities, and related-party payables.
- The sustainability of gas pricing and the impact of the expired long-term rate agreement on future revenue and margins.
- The reserve values and any potential full-cost ceiling-test impairment of the $2.56 million carrying value of oil and gas properties.
- The status and ultimate outcome of the Carlton litigation and any possible financial obligation despite management’s assessment.
- The timing, economics, funding, and expected production from the planned development wells.