New Concept Energy, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the quarter and six months ended June 30, 2018, filed August 13, 2018. The Company operates oil and gas wells and mineral leases in Ohio and West Virginia through wholly owned subsidiaries. It is a smaller reporting company with 2,131,935 common shares outstanding as of August 13, 2018.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Oil and gas revenue | $173,000 in 2018 vs. $243,000 in 2017 | $377,000 in 2018 vs. $438,000 in 2017 |
| Operating expenses | $347,000 vs. $378,000 | $697,000 vs. $734,000 |
| Operating loss | $174,000 vs. $135,000 | $320,000 vs. $296,000 |
| Net loss | $174,000, or $0.08 per share, vs. $135,000, or $0.07 per share | $308,000, or $0.14 per share, vs. $294,000, or $0.15 per share |
| Operating margin | Negative 100.6% vs. negative 55.6% | Negative 84.9% vs. negative 67.6% |
| Net margin | Negative 100.6% vs. negative 55.6% | Negative 81.7% vs. negative 67.1% |
For the six months, depreciation, depletion and amortization was $128,000 versus $227,000 in the prior-year period. Net cash used in operating activities was $273,000, compared with $364,000 of cash provided in the prior-year period. Investing activities used no cash in 2018, compared with $12,000 used in 2017. Financing activities provided $132,000, including $171,000 from a common-stock issuance, partially offset by $39,000 of note repayments.
Cash and cash equivalents were $278,000 at June 30, 2018, down from $419,000 at December 31, 2017. Current assets were $370,000 and current liabilities were $396,000, producing a $26,000 working-capital deficit and a current ratio of approximately 0.94.
Total assets were $3.894 million, compared with $4.205 million at year-end 2017. Total liabilities were $3.395 million, including $287,000 of notes payable and a $2.770 million asset retirement obligation. Stockholders’ equity was $499,000, down from $636,000. Nearly all debt bears fixed interest rates, limiting exposure to interest-rate changes.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 29% and six-month revenue declined 14%, primarily because a long-term gas-rate agreement expired in April 2018 and realized gas prices reverted to a lower market price.
- Second-quarter net loss increased by $39,000, while the six-month net loss increased by $14,000.
- Oil and gas operating expenses declined modestly in the second quarter but were essentially flat for the six-month period.
- Corporate general and administrative expense declined 11% in the second quarter and 18% for the six months, primarily because of lower payroll and administrative costs.
- Cash declined by $141,000 during the first six months, as operating cash burn exceeded financing inflows.
- The Company issued 95,000 common shares at $1.80 per share in April 2018, raising $171,000 used to pay existing obligations.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing provides no numerical revenue, earnings, production, capital-spending, or liquidity guidance. Management states that interim results are not necessarily indicative of full-year results.
The Company’s principal operating risk is continued exposure to natural-gas pricing, including the loss of the expired favorable rate agreement. Other risks include ongoing operating losses, negative operating cash flow, limited liquidity, dependence on additional debt or equity financing, and the substantial asset retirement obligation.
The Company uses the full-cost method for oil and gas properties and must perform quarterly ceiling tests. Changes in reserves, commodity prices, or other assumptions could result in an impairment charge. A deferred tax asset is fully offset by a valuation allowance because management could not conclude that realization was more likely than not.
In the Carlton litigation, a 2017 arrangement is subject to the outcome of another appeal. Management states that the Company should have no financial responsibility and that no potential final outcome is expected to materially adversely affect the Company. The Company is also involved in other ordinary-course lawsuits that management does not expect to be material.
The filing reports no subsequent events through August 13, 2018. Management concluded that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether natural-gas prices and production volumes can support operations after expiration of the long-term rate agreement.
- The Company’s ability to fund operating cash deficits with only $278,000 of cash and a working-capital deficit.
- The timing and terms of remaining note repayments and the assumptions underlying the $2.770 million asset retirement obligation.
- Potential impairment exposure under the full-cost ceiling test if commodity prices or reserve estimates deteriorate.
- The final resolution and financial implications of the Carlton litigation arrangement and related appeal.
- Whether additional equity or debt financing will be required, including the potential dilution from future equity issuances.
- The filing’s forward-looking discussion contains references to retirement-community operations that do not align clearly with the described current oil and gas business; investors should verify the applicable business-risk disclosures in the complete filing and latest Form 10-K.