New Concept Energy, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the quarter and nine months ended September 30, 2014, filed November 7, 2014. The company operates oil and gas properties in Ohio and West Virginia and a 114-resident retirement community in Oregon. It is a smaller reporting company with 1,946,934 common shares outstanding as of November 7, 2014.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $1.131 million, versus $1.018 million | $3.413 million, versus $3.088 million |
| Operating earnings (loss) | $(164) thousand, versus $(254) thousand | $(451) thousand, versus $(717) thousand |
| Net income (loss) | $(204) thousand, versus $133 thousand | $(343) thousand, versus $302 thousand |
| Net loss per common share | $(0.10), versus $0.07 | $(0.18), versus $0.16 |
| Operating margin | Approximately (14.5%), versus (24.9%) | Approximately (13.2%), versus (23.2%) |
| Net margin | Approximately (18.0%), versus 13.1% | Approximately (10.0%), versus 9.8% |
Oil and gas revenue was $410 thousand in the third quarter and $1.239 million for the nine months, while retirement-community revenue was $721 thousand and $2.174 million, respectively. Oil and gas revenue increased primarily from wells drilled in late 2013; retirement-community revenue increased primarily from rate increases.
Nine-month operating cash flow was negative $389 thousand, compared with positive $1.077 million in the prior-year period. Investing cash flow was negative $872 thousand, including $624 thousand for undeveloped land in DeSoto, Texas, and financing cash flow was negative $49 thousand. Cash declined to $311 thousand at September 30, 2014, from $1.621 million at December 31, 2013.
Current assets were $719 thousand versus current liabilities of $898 thousand, implying a current ratio of approximately 0.8. Debt consisted of $215 thousand of current maturities and $2.126 million of long-term notes payable. The company also reported a $2.770 million asset retirement obligation. Total liabilities were $5.794 million and stockholders’ equity was $6.729 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased approximately 11% in both the quarter and nine-month period.
- Oil and gas operating expenses declined, principally because of lower depletion expense.
- Retirement-community operating expenses increased due to higher non-payroll costs.
- Corporate general and administrative expense increased to $208 thousand for the quarter and $605 thousand for the nine months, primarily because of consulting fees; the nine-month increase was partly offset by lower legal fees.
- Net results shifted from income to loss because the prior-year periods included recovery of previously reserved receivables: $410 thousand in the quarter and $1.143 million for the nine months. Management’s discussion refers to $1.7 million of 2013 collections for the nine-month comparison, which does not reconcile clearly to the financial statements.
- The company paid $791,960 in February 2014 to settle the Chesapeake bonding obligation.
Outlook, Risks, Contingencies, and Unusual Items
- The company does not provide quantified earnings or revenue guidance. It states that nine-month results are not necessarily indicative of full-year results.
- Natural gas prices have been pressured by oversupply. Under a hedging arrangement, the company expects to receive $4.53 per MCF for gas sold during the five years ending April 2017.
- The company purchased 7.4 acres of undeveloped land in DeSoto, Texas, for approximately $624 thousand for potential multifamily-housing development.
- In the Carlton Energy litigation, a Texas appellate ruling imposed potentially substantial liability based on an alter-ego theory. The company petitioned the Texas Supreme Court, which had granted review and heard argument; the filing states that a decision was pending as of the reporting period.
- The company has an unresolved claim against Chesapeake for approximately 70,000 MCF of gas allegedly withheld from its interest. The company is pursuing payment or delivery of the gas.
- Management identifies risks involving commodity prices, occupancy and rental rates, operating costs, financing availability, competition, permitting, construction delays, licensing, and the ability to maintain cash flow.
- All debt bears fixed interest rates, limiting exposure to changes in market interest rates. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile the MD&A reference to a $374 thousand nine-month net loss with the consolidated statement showing a $343 thousand net loss.
- Assess liquidity, including only $311 thousand of cash, current liabilities exceeding current assets, and negative operating cash flow.
- Review the status and possible exposure from the Carlton Energy litigation and the company’s asserted Chesapeake gas claim.
- Evaluate the sustainability of results without the prior-year receivable recoveries and with continuing corporate and retirement-community cost pressures.
- Review the assumptions underlying the full-cost ceiling test, oil and gas reserves, the $4.53 per MCF gas-price arrangement, and the asset retirement obligation.