Business Context and Reporting Period
New Concept Energy, Inc. (NCE) filed its Form 10-Q for the quarter and nine-month period ended September 30, 2009. The Company operates in two primary segments: oil and gas exploration and production in Ohio and West Virginia, and a retirement community facility in King City, Oregon. NCE is classified as a smaller reporting company and a non-shell company.
Key Financial Metrics
Revenue and Profitability (Nine Months Ended Sept 30, 2009):
- Total Revenue: $3.087 million (Oil & Gas: $0.966 million; Real Estate: $2.121 million).
- Net Income (Loss): Net loss of $12,000 for the nine-month period; Net income of $49,000 for the three-month period.
- Operating Income (Loss): Operating loss of $400,000 for the nine-month period.
- Earnings Per Share: $(0.01) for the nine months ended September 30, 2009.
Cash Flow (Nine Months Ended Sept 30, 2009):
- Operating Cash Flow: Net cash provided by operating activities was $589,000.
- Investing Cash Flow: Net cash used in investing activities was $726,000, primarily due to loans to affiliates ($278,000) and investments in oil and gas operations ($327,000).
- Financing Cash Flow: Net cash provided by financing activities was $58,000.
- Cash Balance: Cash and cash equivalents decreased from $190,000 at year-end 2008 to $111,000 at September 30, 2009.
Balance Sheet Highlights (Sept 30, 2009):
- Total Assets: $24.728 million.
- Total Liabilities: $4.248 million (Current: $2.744 million; Long-term debt: $1.171 million).
- Stockholders' Equity: $20.480 million, with an accumulated deficit of $(38.379) million.
- Related Party Receivables: Significant portion of current assets ($11.170 million) consists of notes and interest receivable from related parties.
Material Changes Versus Prior Period
Revenue and Earnings: Total revenue increased to $3.087 million for the nine months of 2009 compared to $2.261 million in 2008. However, net income collapsed from $15.505 million in the prior year to a net loss of $12,000. The 2008 results were significantly inflated by a one-time gain of $16.440 million on the sale of leasehold interests, which did not recur in 2009.
Operating Expenses: Total operating expenses rose to $3.487 million in 2009 from $2.386 million in 2008. This increase is largely attributed to higher oil and gas operating expenses ($1.086 million vs. $0.070 million) due to the acquisition of oil and gas operations in late 2008, and increased corporate general and administrative expenses ($0.666 million vs. $0.633 million) driven by legal and professional fees.
Interest Income: Interest income decreased to $432,000 for the nine months of 2009 from $729,000 in 2008, primarily due to lower prime lending rates and a reduction in the principal balance of receivables on which interest is computed.
Guidance, Outlook, Risks, and Contingencies
Management Commentary: Management notes that the oil and gas operations were acquired in the third quarter of 2008, making period-to-period comparisons for that segment irrelevant. The Company relies on the full cost method of accounting for oil and gas properties. Liquidity is currently supported by operating cash flows, though cash reserves are low ($111,000).
Risks and Contingencies:
- Legal Dispute: The Company is involved in a lawsuit with Chesapeake Exploration Limited Partnership regarding a $556,217 invoice for drilling costs. The Company disputes the validity of these costs, claiming they exceed reasonable estimates and were incurred without notification.
- Related Party Concentration: A significant portion of the Company's assets ($11.170 million) is tied up in notes receivable from related parties (Eurenergy Resources Corporation and Prime Income Asset Management, Inc.). The collectability of these notes is a material risk.
- Deferred Tax Assets: The Company has established a 100% valuation allowance against its deferred tax assets due to uncertainty regarding future taxable income.
- Market Risk: The Company has minimal exposure to interest rate risk as nearly all debt is fixed-rate. However, the real estate segment is sensitive to market rental rates and occupancy levels.
Unusual Items: The 2008 financials included a $16.440 million gain on the sale of mineral interests, which is not present in the 2009 period.
Investor Verification Checklist
- Verify the collectability and status of the $11.170 million in related party notes receivable, which represent the majority of current assets.
- Review the status of the litigation with Chesapeake Exploration regarding the disputed $556,217 drilling cost invoice.
- Assess the sustainability of the retirement community's occupancy rates and rental income given the low cash balance of $111,000.
- Confirm the Company's ability to service its long-term debt of $1.171 million without additional equity financing.
- Monitor the impact of the new SEC oil and gas reporting rules (Release No. 33-8995) on future reserve estimates and financial disclosures.