New Concept Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. The unaudited filing covers oil and gas operations in Ohio and West Virginia and a 114-resident retirement community in Oregon. The company is a smaller reporting company with 1,946,934 common shares outstanding as of August 9, 2014.
Financial Performance and Position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $1.213 million | $1.050 million | $2.282 million | $2.070 million |
| Operating earnings (loss) | $(45,000) | $(232,000) | $(287,000) | $(463,000) |
| Net income (loss) | $(99,000) | $138,000 | $(139,000) | $169,000 |
| Net income (loss) per share | $(0.05) | $0.07 | $(0.07) | $0.09 |
| Operating margin | (3.7%) | (22.1%) | (12.6%) | (22.4%) |
| Net margin | (8.2%) | 13.1% | (6.1%) | 8.2% |
- Oil and gas revenue increased to $485,000 in the second quarter and $829,000 for the six-month period, primarily from new wells drilled in late 2013.
- Retirement-community revenue increased to $728,000 in the quarter and $1.453 million year to date, primarily due to rate increases.
- Cash and cash equivalents were $301,000 at June 30, 2014, down from $1.621 million at December 31, 2013.
- Current assets were $732,000 versus current liabilities of $694,000, implying a current ratio of approximately 1.05. Total assets were $12.585 million.
- Total liabilities were $5.652 million, including $2.395 million of notes payable and a $2.770 million asset retirement obligation. Stockholders’ equity was $6.933 million.
- Six-month cash flow from operations was $(520,000), investing cash flow was $(808,000), and financing cash flow was $8,000. Ending cash declined by $1.320 million.
- Investing cash outflows included $624,000 for 7.4 acres of undeveloped land in DeSoto, Texas, acquired for potential multifamily housing development.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue rose 15.5%, while six-month revenue rose 10.2%.
- The second-quarter operating loss improved from $232,000 to $45,000, and the six-month operating loss improved from $463,000 to $287,000.
- Despite improved operating results, the company moved from net income to net loss in both comparable periods. The prior-year results included recovery of bad debt expense of $394,000 in the second quarter and $733,000 for the first six months; no such recovery was recorded in 2014.
- Oil and gas operating expenses declined, principally because of lower depletion expense. Retirement-community expenses increased modestly, while corporate general and administrative expense increased to $205,000 for the quarter and $397,000 year to date, partly due to consulting fees.
- The company paid $791,960 to a bonding company in February 2014 in connection with the Chesapeake litigation judgment. The company is pursuing approximately 70,000 MCF of gas that it believes Chesapeake owes for the company’s pro rata share of production.
Outlook, Risks, Contingencies, and Unusual Items
- No formal financial guidance was provided.
- The company has a fixed-price gas agreement under which it expects to receive $4.53 per MCF for five years ending April 2017. Management expects natural-gas oversupply and depressed market prices to persist.
- A material contingent litigation matter remains with Carlton Energy Group. A Texas appellate decision imposed substantial damages against the company on an alter-ego theory, but the company appealed to the Texas Supreme Court and was awaiting a decision at the filing date. Management denies liability and believes the favorable trial-court judgment could be reinstated.
- The Chesapeake judgment was paid, but the company continues to pursue compensation for withheld gas production. The filing does not clearly state whether any additional liability or recovery has been recognized for this matter.
- Management identifies risks related to commodity prices, occupancy and rental rates, operating costs, financing availability, interest rates, competition, construction, licensing, permitting, environmental matters, and the ability to maintain cash flow.
- Nearly all debt carries fixed interest rates, so management characterizes interest-rate exposure as minimal.
- The company uses full-cost accounting for oil and gas properties. A decline in reserve values or commodity prices could result in a ceiling-test impairment charge.
- The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
- The filing text contains an apparent inconsistency: the financial statements report six-month interest expense of $53,000, while the MD&A states $753,000. This value should be verified against the filed financial statements and underlying records.
Important Facts for Investors to Verify
- Reconcile the MD&A reference to $753,000 of six-month interest expense with the $53,000 amount shown in the consolidated statements.
- Confirm the status and potential exposure of the Carlton Energy litigation and any required disclosure after the anticipated Texas Supreme Court decision.
- Verify the recoverability, timing, and accounting treatment of the approximately 70,000 MCF gas claim against Chesapeake.
- Assess liquidity after the decline in cash to $301,000, including near-term debt maturities, capital requirements, and asset-retirement obligations.
- Evaluate the carrying value of oil and gas properties under the full-cost ceiling test, particularly given management’s expectation of prolonged natural-gas oversupply.
- Review the investment rationale, funding requirements, and development risks associated with the $624,000 Texas land acquisition.