Business Context and Reporting Period
Company: New Concept Energy, Inc. (NCE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2018
Operations: The Company operates oil and gas wells and mineral leases in Ohio and West Virginia through wholly-owned subsidiaries. It utilizes the full cost method of accounting for oil and gas properties.
Key Financial Metrics
| Metric (in thousands) | Q1 2018 | Q1 2017 |
|---|---|---|
| Total Revenue | $204 | $195 |
| Net Loss | $(134) | $(159) |
| Operating Loss | $(146) | $(161) |
| Cash and Cash Equivalents | $397 | $520 |
| Net Cash from Operating Activities | $1 | $429 |
| Total Assets | $4,096 | $4,205 |
| Total Liabilities | $3,594 | $3,569 |
| Shareholders' Equity | $502 | $636 |
Debt and Liquidity: Current liabilities ($590,000) exceed current assets ($502,000). Long-term debt (excluding current portion) is $234,000. The Company has an Asset Retirement Obligation of $2,770,000.
Material Changes vs. Prior Period
- Revenue: Increased by $9,000 (4.6%) to $204,000, driven by oil and gas operations.
- Net Loss: Improved by $25,000 to a loss of $134,000 compared to $159,000 in Q1 2017.
- Operating Expenses: Oil and gas operating expenses increased by $19,000 to $275,000. However, corporate general and administrative expenses decreased by $25,000 to $75,000, primarily due to reduced payroll.
- Cash Flow: Net cash provided by operating activities dropped significantly from $429,000 in Q1 2017 to $1,000 in Q1 2018. This was due to lower adjustments for depreciation/depletion and changes in operating assets/liabilities.
- Financing: The Company used $23,000 in cash for financing activities to repay notes payable.
Outlook, Risks, and Contingencies
- Capital Raise: In March 2018, the Company issued 95,000 shares of Common Stock for $171,000. Proceeds are intended to fund the drilling of a new well to prove up additional reserves.
- Legal Contingency (Carlton Litigation): The Company is involved in long-standing litigation regarding a Bulgaria coal bed methane project. Management believes an arrangement reached in August 2017 will result in no financial responsibility for the Company, pending a final Supreme Court appeal outcome.
- Liquidity Risk: The Company has a working capital deficit. Future operations depend on the ability to obtain adequate debt and equity financing.
- Accounting Policy: A 100% valuation allowance was established against deferred tax assets as management could not determine it was more likely than not that the benefit would be realized.
Investor Verification Checklist
- Verify the status of the pending Supreme Court appeal in the Carlton litigation to confirm the absence of financial liability.
- Monitor the progress and cost of the new well drilling funded by the recent $171,000 capital raise.
- Assess the sustainability of operations given the working capital deficit (Current Liabilities > Current Assets).
- Review the impact of the new lease accounting standard (ASU 2016-02) upon its adoption in 2019.
- Confirm the Company's ability to service its debt and meet the $2.77 million Asset Retirement Obligation.