New Concept Energy, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three months ended March 31, 2012, filed May 15, 2012. New Concept Energy operates oil and gas wells and mineral leases in Ohio and West Virginia and leases and operates a 114-resident retirement community in Oregon. The company was a smaller reporting company with 1,946,935 common shares outstanding as of May 13, 2012.
Financial Results and Key Metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $964,000 | $1,009,000 |
| Oil and gas revenue | $290,000 | $280,000 |
| Retirement community revenue | $674,000 | $729,000 |
| Operating expenses | $2,173,000 | $1,072,000 |
| Operating loss | $(1,209,000) | $(63,000) |
| Net income (loss) | $(1,267,000) | $97,000 |
| Basic and diluted loss per share | $(0.65) | $0.05 |
| Net cash from operating activities | $(8,000) | $139,000 |
Revenue declined approximately 4.5% year over year. The operating margin was approximately negative 125.4% in Q1 2012, compared with approximately negative 6.2% in Q1 2011. The net margin was approximately negative 131.4%, compared with approximately 9.6% in the prior-year quarter.
At March 31, 2012, cash and cash equivalents were $123,000, compared with $109,000 at December 31, 2011. Current assets were $316,000 versus current liabilities of $779,000, producing negative working capital of approximately $463,000 and a current ratio of approximately 0.41.
Total assets were $12.419 million, compared with $13.450 million at year-end 2011. Oil and gas properties declined to $10.057 million from $11.141 million, primarily reflecting the $912,000 impairment charge. Total liabilities were $7.208 million, including notes payable of $2.309 million, related-party payables of $894,000, an asset retirement obligation of $2.735 million, and other long-term liabilities of $491,000.
Investing activities used $8,000 for fixed-asset additions. Financing activities provided $30,000, consisting primarily of loan proceeds net of note repayments. The filing states that nearly all debt bears fixed interest rates, resulting in minimal exposure to interest-rate changes.
Material Changes Versus the Prior Comparable Period
- Net results deteriorated from $97,000 of income to a $1.267 million loss, principally because of a $912,000 oil and gas property impairment and higher operating costs.
- Oil and gas revenue increased by $10,000. Management attributed approximately $70,000 of the increase to new wells drilled in late 2011, partly offset by approximately $60,000 from lower natural gas prices.
- Oil and gas operating expenses increased to $471,000 from $335,000, principally because lower gas prices reduced reserve valuations and accelerated depletion expense.
- Retirement community revenue decreased by $55,000, primarily due to fewer residents. Retirement-community operating and lease expenses increased to $597,000 from $581,000.
- Corporate general and administrative expense increased to $159,000 from $124,000, primarily because of legal fees.
- Interest income fell to zero from $119,000 after the company fully reserved a note receivable and related accrued interest in December 2011. Interest expense increased to $62,000 from $31,000 due to additional financing obtained in late 2011.
- Operating cash flow changed from $139,000 provided to $8,000 used, despite the impairment being a noncash charge.
Outlook, Commentary, Risks, and Unusual Items
Management reported continued natural gas oversupply and does not anticipate a near-term increase in market prices. In April 2012, the company entered into an agreement effective May 2012 through April 2017 to receive $4.53 per MCF for its gas. Applying the accounting formula to the new pricing arrangement resulted in the $912,000 reduction in the recorded value of oil and gas properties recognized at March 31, 2012.
The company has negative working capital, limited cash, recurring operating cash needs, debt obligations, asset retirement obligations, and a history of accumulated losses. The filing does not provide a formal earnings or revenue guidance target. Management identifies risks relating to commodity prices, financing availability, demand and occupancy at the retirement community, operating costs, competition, licensing and permitting, delays, and the ability to maintain cash flow.
In the Carlton Energy litigation, a Texas appellate court in February 2012 overturned a trial-court ruling favorable to the company and imposed alter-ego liability described in the filing as $66.5 million of actual damages plus exemplary damages. The company petitioned the Texas Supreme Court for review and denies liability. The ultimate obligation is unresolved and could be material.
In the Chesapeake litigation, the company has appealed a $686,874 summary judgment award plus legal fees. Chesapeake is withholding the company's share of gas proceeds, and the company has recorded a $491,000 liability. The company states that it has recorded its potential obligation if Chesapeake prevails.
Management concluded that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter. The financial statements were not audited.
Investor Verification Checklist
- Verify the status and potential financial exposure of the Carlton Energy appeal, including the asserted actual and exemplary damages.
- Verify the outcome and collectability implications of the Chesapeake litigation and the $491,000 recorded liability.
- Assess liquidity, negative working capital, available financing, debt maturities, related-party payables, and asset retirement obligations.
- Review the $912,000 full-cost ceiling impairment and the assumptions supporting reserve values, depletion, gas prices, and the $4.53 per MCF pricing agreement.
- Monitor natural gas production, realized prices, operating costs, and the impact of accelerated depletion on future results.
- Verify retirement community occupancy, rental rates, lease costs, and operating trends following the year-over-year revenue decline.
- Confirm the collectability and reserve treatment of the note receivable that generated no recognized interest income in the quarter.