New Concept Energy, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2015; filed May 14, 2015. The unaudited consolidated statements cover 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 1,946,935 common shares outstanding as of May 14, 2015.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $889,000 | $1.069 million |
| Operating income (loss) | $(390,000) | $(242,000) |
| Net income (loss) | $314,000 | $(40,000) |
| Net income (loss) per common share | $0.16 | $0.02 as presented in the filing |
| Cash flow from operations | $170,000 | $(484,000) |
| Cash and equivalents | $412,000 | $443,000 at March 31, 2014 |
- Oil and gas revenue was $172,000, down from $344,000. Retirement-community revenue was $717,000, compared with $725,000.
- Operating expenses were $1.279 million versus $1.311 million. The implied operating margin was approximately negative 43.9%, compared with negative 22.6% in the prior-year quarter.
- The implied net margin was approximately 35.3%, compared with negative 3.7% in Q1 2014. The reported profit was principally affected by a $738,000 recovery of previously reserved bad debt.
- Current assets were $669,000 and current liabilities were $1.311 million, implying a current ratio of approximately 0.51.
- Total debt, including current and long-term notes payable, was $2.236 million. The balance sheet also included a $2.770 million asset retirement obligation.
- Total assets were $12.060 million versus $12.274 million at December 31, 2014. Accumulated deficit improved to $52.252 million from $52.566 million.
Cash Flow, Capital Spending, and Financing
- Operating cash flow was $170,000, compared with cash usage of $484,000 in Q1 2014.
- Investing cash flow was $(107,000), including $92,000 of oil and gas property investment and $15,000 of retirement-community equipment additions.
- Financing cash flow was $49,000, consisting of a $126,000 collection of a note receivable and $77,000 of debt repayments.
- Cash increased by $112,000 during the quarter, from $300,000 at December 31, 2014 to $412,000 at March 31, 2015.
Material Changes Versus Q1 2014
- Revenue declined 17%, driven by the 50% decrease in oil and gas revenue. Management attributed approximately $100,000 of the oil and gas decline to lower oil prices, with the remaining shortfall primarily attributed to unusually harsh weather that restricted maintenance and oil pickups.
- Management reported an average oil price of $46 per barrel versus $93 per barrel in Q1 2014.
- Retirement-community operating expenses increased to $410,000 from $396,000, while corporate general and administrative expense declined to $154,000 from $192,000 due primarily to lower legal fees.
- The company moved from a $40,000 net loss to $314,000 net income, but the improvement was not representative of recurring operating performance because of the $738,000 bad-debt recovery.
Outlook, Risks, Contingencies, and Unusual Items
- The company does not provide quantitative earnings or revenue guidance. It expects natural-gas oversupply and depressed market prices to persist and does not anticipate a near-term increase in realized gas prices.
- Under a price-fixing agreement, the company will receive $4.53 per Mcf for gas sales for the five years ending April 2017.
- The Carlton Energy Group litigation remains material. On May 8, 2015, the Texas Supreme Court determined that the company was an alter ego of Eurenergy, rejected reinstatement of the $66.5 million damages award as speculative, and remanded the matter for further proceedings concerning potential actual damages. Management stated that an unfavorable outcome is reasonably possible, but believes any adverse outcome is fully secured by alternative security exceeding $56 million deposited by an individual defendant. The ultimate exposure and outcome remain uncertain.
- Other ordinary-course lawsuits were not expected by management to materially affect financial condition, results, or cash flows.
- Key operating risks include oil and gas prices, natural-gas market conditions, weather-related production interruptions, retirement-community occupancy and pricing, labor and maintenance costs, financing availability, permitting and construction delays, and the ability to maintain cash flow.
- The company maintains a 100% valuation allowance against its deferred tax asset because realization was not considered more likely than not.
- Nearly all debt bears fixed interest rates, limiting exposure to interest-rate changes. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor Verification Checklist
- Verify the unusual $738,000 bad-debt recovery, its cash versus noncash nature, and whether it is expected to recur.
- Review the Carlton litigation remand, potential damages, security arrangements, and any subsequent developments after May 14, 2015.
- Assess liquidity given current liabilities materially exceed current assets and cash flow depends on continued operating performance and collections.
- Reconcile the filing’s reported Q1 2014 earnings-per-share figure of $0.02 with the reported $40,000 net loss and 1.947 million weighted-average shares.
- Evaluate sensitivity to oil prices, weather-related access and maintenance disruptions, gas-price terms through April 2017, and retirement-community occupancy and operating costs.