New Concept Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 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 Oregon.
Financial performance and position
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Total revenue | $843 in 2016 vs. $1,004 in 2015 | $2,574 vs. $2,896 |
| Operating earnings (loss) | $(151) vs. $(367) | $(563) vs. $(1,009) |
| Net income (loss) | $(164) vs. $(75) | $(593) vs. $349 |
| Net income (loss) per common share | $(0.08) vs. $(0.04) | $(0.30) vs. $0.18 |
| Operating cash flow | Not separately provided | $141 vs. $613 |
- Third-quarter revenue declined 16.0% year over year; nine-month revenue declined 11.1%.
- Third-quarter operating loss improved by $216, primarily from lower oil and gas, retirement-community and corporate expenses. However, the net loss increased because the prior-year quarter included a $306 recovery of bad debt expense.
- Nine-month net income shifted to a $593 loss from $349 of income in 2015. The 2015 period included a $1,430 bad-debt recovery that did not recur in 2016.
- Approximate consolidated operating margins were negative 17.9% for the third quarter and negative 21.9% for the nine-month period.
- Oil and gas revenue was $190 for the quarter and $579 year to date, down from $232 and $663, respectively. Management attributed the decline principally to lower oil prices received.
- Retirement-community revenue was $653 for the quarter and $1,995 year to date, down from $772 and $2,233. Management attributed the decline primarily to lower occupancy following the opening of a competing facility.
- Cash and cash equivalents were $530 at September 30, 2016, compared with $473 at December 31, 2015. Current assets were $682 versus current liabilities of $1,581, producing a current ratio of approximately 0.43.
- Total debt consisted of $828 of current notes payable and $1,119 of long-term notes payable. The asset retirement obligation was $2,770.
- Total assets were $8,548 and stockholders’ equity was $3,078 at September 30, 2016. Accumulated deficit increased to $55,781 from $55,188 at year-end 2015.
Cash flow and liquidity
- Operating activities generated $141 during the first nine months, compared with $613 in the prior-year period.
- Investing activities used $45, consisting primarily of fixed-asset additions. Financing activities used $39 for note repayments.
- Management stated that current liabilities exceed current assets and that the company is actively discussing the sale of land held for investment and a settlement or more favorable modification of certain non-bank long-term debt.
- Management believes successful execution of these plans could significantly improve liquidity and working capital, but the filing does not provide a committed transaction, financing arrangement or specific completion date.
Material changes and unusual items
- Operating expenses declined to $994 for the quarter from $1,371 and to $3,137 year to date from $3,905, reflecting cost reductions across oil and gas, the retirement facility and corporate operations.
- The company received no bad-debt recovery in 2016, compared with $306 in the third quarter and $1,430 in the first nine months of 2015.
- Oil and gas properties are accounted for under the full-cost method. The company receives a fixed gas price of $4.53 per MCF through April 2017 under a 2012 agreement.
- No material subsequent events were reported through November 14, 2016.
Outlook, risks and contingencies
- The company does not provide quantitative earnings or revenue guidance. It cautions that nine-month results are not necessarily indicative of full-year results.
- Management expects natural-gas oversupply and related pricing pressure to persist for some time and does not anticipate a near-term increase in realized market prices.
- Liquidity risk is significant because current liabilities substantially exceed current assets, the company is loss-making, and liquidity improvement depends partly on prospective asset-sale and debt discussions.
- A competing retirement facility has reduced occupancy. Future performance depends on maintaining occupancy, controlling costs and sustaining market-rate charges.
- In the Carlton Energy litigation, the Texas Court of Appeals reinstated the trial court’s $31.16 million actual-damages award in August 2016. The company’s motion for rehearing was pending at the filing date. Management believes an unfavorable outcome is reasonably possible but that the exposure is fully secured by a deposit made by an individual defendant; the maximum exposure is expected to be significantly below the security’s stated value.
- The company faces ordinary-course lawsuits that management does not expect to materially affect financial condition, results or cash flows. Nearly all debt carries fixed interest rates, limiting interest-rate exposure.
Investor verification checklist
- Verify the status, enforceability and potential amount of the Carlton litigation exposure and the adequacy of the pledged security.
- Confirm whether the planned land sale and non-bank debt restructuring were completed and on what terms.
- Review debt maturities, covenant requirements and near-term cash obligations relative to the $530 cash balance.
- Track retirement-community occupancy and the competitive facility’s effect on revenue and margins.
- Assess oil and gas production volumes, realized prices, reserve values and the effect of the fixed-price gas contract after April 2017.
- Distinguish recurring operating performance from the nonrecurring $1,430 bad-debt recovery recorded in the 2015 comparison period.