New Concept Energy, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021; filed March 18, 2022. The filing is an annual report rather than a standalone fourth-quarter filing. The company is a smaller reporting company listed on NYSE American under ticker GBR.
Business Context
New Concept Energy primarily operates as a real estate rental company. It owns approximately 190 acres and four structures totaling approximately 53,000 square feet in Parkersburg, West Virginia. Approximately 16,000 square feet of industrial space was leased for approximately $101,000 annually at December 31, 2021.
The company sold its Ohio and West Virginia oil and gas wells and mineral leases in August 2020. Oil and gas results are therefore presented as discontinued operations. Effective January 1, 2022, the company entered into a consulting and management agreement with the purchaser of the wells, under which it will receive 10% of revenue from the wells for advisory, accounting and management services. Either party may terminate the agreement with 60 days’ notice.
Financial Highlights
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Rent revenue | $101,000 | $101,000 | Flat |
| Operating expenses | $437,000 | $468,000 | Down $31,000 |
| Operating loss | $(336,000) | $(367,000) | Improved $31,000 |
| Interest income | $220,000 | $242,000 | Down $22,000 |
| Other income, net | $191,000 | $85,000 | Up $106,000 |
| Income from continuing operations | $70,000 | $(52,000) | Improved $122,000 |
| Net income applicable to common shares | $70,000 | $1,916,000 | Down $1,846,000 |
| Basic and diluted earnings per share | $0.01 | $0.37 | Down $0.36 |
| Net cash provided by operating activities | $123,000 | $(535,000) | Improved $658,000 |
| Cash and cash equivalents | $252,000 | $27,000 | Up $225,000 |
Operating expenses exceeded rent revenue, producing an operating margin of approximately negative 333% based on reported continuing-operations revenue. Interest income and other income more than offset the operating loss, resulting in a continuing-operations profit of $70,000. Other income included a $91,000 prior-year tax refund and $100,000 from the sale of a previously fully reserved receivable.
Current assets were $3.812 million and current liabilities were $60,000 at year-end. Current assets included $3.560 million of notes receivable, substantially all from a related party. The company reported total assets of $4.455 million and stockholders’ equity of $4.395 million.
All outstanding long-term debt was repaid during 2021. Notes payable declined from $192,000 at December 31, 2020 to zero at December 31, 2021. The company paid $174,000 of principal and $5,000 of interest during 2021.
Material Changes Versus Prior Period
- Continuing operations moved from a $52,000 loss in 2020 to $70,000 of income in 2021.
- General and administrative expense declined from $396,000 to $360,000, while real estate operating expense increased from $72,000 to $77,000.
- Interest income declined because of repayments reducing outstanding note principal.
- Other income increased by $106,000, primarily because of the $100,000 receivable sale and a $91,000 tax refund.
- Cash increased by $225,000, supported by $123,000 of operating cash flow and $276,000 of note-receivable collections, partially offset by $174,000 of debt repayment.
- Unlike 2020, there was no oil and gas disposal gain in 2021. The 2020 net income included a $2.138 million gain on the sale of the oil and gas operations, partially offset by a $170,000 discontinued-operations loss.
- No dividends or share repurchases occurred in 2021. Common shares outstanding remained approximately 5.132 million.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative earnings or revenue guidance. The company intends to continue operating or selling its West Virginia property, provide advisory and management services to an independent oil and gas company, and evaluate new business operations and acquisition opportunities.
- Liquidity depends on operating cash receipts and collection of notes receivable, including a $3.6 million related-party receivable bearing 6% interest and scheduled to mature in September 2022.
- The company’s real estate rental base is limited, and rent revenue was only $101,000 in 2021 against $437,000 of operating expenses.
- Management established a 100% valuation allowance against deferred tax assets because future realization of approximately $8.3 million of net operating loss carryforwards could not be determined to be more likely than not.
- COVID-19 and other public health events could adversely affect economic activity and the company’s operations.
- The company has related-party transactions and receivables. The independent auditor identified the collectability assessment of related-party receivables as a critical audit matter and emphasized the significance of related-party transactions.
- The company has been named in lawsuits in the ordinary course of business, but management believes existing proceedings will not materially affect financial condition, results or cash flows.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor issued an unqualified opinion on the financial statements but did not provide an attestation opinion on internal control.
Important Facts for Investors to Verify
- Verify collection, maturity terms and credit support for the $3.6 million related-party note receivable.
- Assess whether the post-2021 consulting agreement produces material recurring revenue and whether the 10% fee is based on gross or collected well revenue.
- Evaluate the sustainability of profitability given the company’s low rental revenue, substantial corporate expenses and reliance on interest and nonrecurring other income.
- Review the terms and settlement status of the one preferred share, including its $100 liquidation value and 6% dividend right.
- Review related-party arrangements involving Realty Advisors, Pillar Income Asset Management and affiliated entities, including services provided without a direct fee but reimbursed at cost.
- Confirm the company’s ability to redeploy cash after debt repayment and fund future acquisitions or operating needs without new financing.