New Concept Energy, Inc. quarterly report, Q3 FY2011

Business Context and Reporting Period

New Concept Energy, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company operates oil and gas wells and mineral leases in Ohio and West Virginia and leases and operates a 114-resident retirement community in King City, Oregon. The filing was signed November 11, 2011. The company is classified as a smaller reporting company and reported 1,946,935 common shares outstanding as of November 11, 2011.

Financial Results and Key Metrics

Metric	Three Months Ended September 30, 2011	Three Months Ended September 30, 2010	Nine Months Ended September 30, 2011	Nine Months Ended September 30, 2010
Oil and gas revenue	$313 thousand	$349 thousand	$873 thousand	$950 thousand
Retirement community revenue	$690 thousand	$763 thousand	$2.152 million	$2.217 million
Total revenue	$1.003 million	$1.112 million	$3.025 million	$3.167 million
Operating earnings (loss)	$(87) thousand	$97 thousand	$(174) thousand	$(69) thousand
Net income (loss)	$(57) thousand	$188 thousand	$106 thousand	$(127) thousand
Net income (loss) per diluted share	$(0.03)	$0.10	$0.05	$(0.07)

Calculated operating margins were approximately negative 8.7% for the 2011 third quarter and negative 5.8% for the first nine months, compared with positive 8.7% and negative 2.2%, respectively, in the comparable 2010 periods. Net margins were approximately negative 5.7% and positive 3.5% in 2011, compared with positive 16.9% and negative 4.0% in 2010.

Cash and cash equivalents were $2 thousand at September 30, 2011, compared with $59 thousand at December 31, 2010.
Current assets were $238 thousand versus current liabilities of $475 thousand, implying a current ratio of approximately 0.50.
Net cash provided by operating activities was $326 thousand for the nine months, compared with $1.235 million used in operating activities in the 2010 period.
Investing cash flow was $(374) thousand, principally for oil and gas property investment and retirement-facility equipment. Financing cash flow was $(9) thousand from notes-payable repayments.
Total assets were $24.202 million, including $10.007 million of related-party notes and accrued interest receivable from Prime Income Asset Management, Inc.
Total liabilities were $5.825 million, including $1.390 million of notes payable, $611 thousand payable to related parties, and a $2.669 million asset retirement obligation.
Stockholders’ equity was $18.377 million, with an accumulated deficit of $40.482 million.

Material Changes Versus the Prior Comparable Period

Third-quarter revenue declined 9.8%, while nine-month revenue declined 4.5%, primarily because of lower oil and gas prices and retirement-community occupancy fluctuations.
Third-quarter operating results moved from $97 thousand of income to an $87 thousand loss. Nine-month operating loss increased from $69 thousand to $174 thousand.
Oil and gas operating expenses increased to $325 thousand in the quarter and $1.025 million year to date, attributed primarily to increased drilling and related expenses.
Retirement-property operating and lease expenses increased to $632 thousand in the quarter and $1.727 million year to date, compared with $541 thousand and $1.707 million, respectively.
Corporate general and administrative expense decreased to $101 thousand in the quarter and $351 thousand year to date, primarily because of lower payroll costs.
Net income for the first nine months improved to $106 thousand from a $127 thousand loss, aided by improved operating cash flow and lower other expense. The third quarter nevertheless produced a $57 thousand loss.
Accounts payable increased to $340 thousand from $83 thousand at year-end 2010, while cash declined by $57 thousand.

Outlook, Risks, Contingencies, and Unusual Items

The filing does not provide formal financial guidance. Management cautions that results depend on oil and gas prices, retirement-community occupancy and rental rates, competition, financing availability, interest rates, permitting and construction matters, and the company’s ability to control costs and maintain cash flow.

The $10.007 million related-party note and accrued interest bears interest at prime plus 2%. It is callable on demand, but management does not expect to demand payment within the next 12 months; absent demand, it becomes due January 31, 2013. This is a significant concentration of assets and liquidity exposure.
Chesapeake Exploration and Chesapeake Operating obtained a March 2011 summary judgment for $686,874 plus legal fees relating to disputed well-development costs. The company appealed and has recorded the investment and obligation.
The company is also a defendant in litigation arising from the abandoned Sterling Exploration acquisition and related bankruptcy proceedings. Management believes the claim lacks merit as to the company.
Other ordinary-course lawsuits are not expected by management to materially affect financial condition, results, or cash flows.
The company uses full-cost accounting for oil and gas properties. Reserve estimates, commodity prices, depletion, and the quarterly ceiling test could materially affect carrying values and earnings.
A 100% valuation allowance was recorded against the deferred tax asset because management could not conclude that realization was more likely than not.
Nearly all debt carries fixed interest rates, so management characterizes interest-rate risk as minimal. Disclosure controls and procedures were deemed effective, with no material change in internal control over financial reporting during the quarter.

Investor Verification Priorities

Verify the collectability, maturity, related-party terms, and liquidity implications of the $10.007 million PIAMI receivable.
Assess whether cash of only $2 thousand and current liabilities of $475 thousand create near-term funding or working-capital pressure.
Review the Chesapeake appeal, recorded obligation, potential legal fees, and possible cash impact.
Analyze retirement-community occupancy, pricing, lease expense, and operating-cost trends.
Evaluate oil and gas production, reserve estimates, commodity-price sensitivity, drilling expenditures, and potential full-cost ceiling-test impairment.
Confirm the status and potential exposure from the Sterling bankruptcy litigation and other legal proceedings.