New Concept Energy, Inc. — 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2020, filed May 13, 2020. The company operates oil and gas wells and mineral leases in Ohio and West Virginia through wholly owned subsidiaries. The filing identifies the company as a smaller reporting company. Financial statements are unaudited.
Financial Results and Key Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Oil and gas revenue | $125,000 | $180,000 |
| Total operating expenses | $282,000 | $267,000 |
| Operating loss | $(157,000) | $(87,000) |
| Net income (loss) | $(97,000) | $126,000 |
| Net income (loss) per share | $0.01 as presented | $0.02 |
| Net cash from operating activities | $17,000 | $114,000 |
| Capital expenditures | Not separately reported | Not separately reported |
Revenue declined approximately 31% year over year. The reported operating margin was approximately negative 126%, compared with approximately negative 48% in the prior-year quarter. The reported net margin was approximately negative 78%, compared with approximately positive 70% in Q1 2019. These margins reflect the company’s small revenue base and operating losses.
- Cash and cash equivalents were $27,000 at March 31, 2020, compared with $22,000 at December 31, 2019 and $460,000 at March 31, 2019.
- Current assets were $4.111 million and current liabilities were $462,000, implying a current ratio of approximately 8.9x. Most current assets consisted of a $3.990 million current note receivable, including $3.950 million from related parties.
- Total debt was approximately $211,000, consisting of $40,000 current debt and $171,000 of long-term notes payable. The company also reported a $2.770 million asset retirement obligation.
- Net cash provided by operations was $17,000. Financing activities used $12,000 for note repayments, resulting in a $5,000 increase in cash.
- Total assets were $5.715 million and total liabilities were $3.403 million at March 31, 2020.
- Nearly all debt carries fixed interest rates, so management reported minimal interest-rate risk.
Material Changes Versus the Prior Comparable Period
- Revenue decreased by $55,000, principally because of lower prices received per barrel of oil and per MCF of natural gas.
- Oil and gas operating expenses were broadly unchanged at $178,000 versus $179,000, despite the revenue decline.
- Corporate general and administrative expense increased to $104,000 from $88,000, principally because of consulting fees related to oil and gas matters.
- The company moved from $126,000 of net income to a $97,000 net loss. The filing’s statement of operations also reports $153,000 of other income in Q1 2019; the provided text does not clearly identify its nature.
- Operating cash flow declined to $17,000 from $114,000, and quarter-end cash was substantially below the prior-year level.
Guidance, Outlook, Risks and Unusual Items
- No quantitative revenue, earnings, production or cash-flow guidance was provided.
- Management stated that the company’s ability to meet current cash obligations depends on cash generated by current operations and collection of notes receivable. It is evaluating additional business opportunities intended to provide income and cash flow.
- COVID-19 was identified as a potential material adverse risk to the company and its results, although the filing stated that the extent of the impact was uncertain.
- The company uses full-cost accounting for oil and gas properties and must perform quarterly ceiling tests. A decline in estimated future oil and gas revenues could result in impairment charges, although no such charge is clearly reported in the provided text.
- A deferred tax asset was fully offset by a valuation allowance because management could not conclude that realization was more likely than not.
- The filing states that no reportable subsequent events occurred through May 13, 2020.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- The filing contains apparently boilerplate risk and inflation disclosures referring to retirement-community operations and rents, which do not align clearly with the described oil and gas business.
Important Facts for Investors to Verify
- Verify the company’s ability to collect the $3.950 million of current related-party notes receivable, which represents the principal source of reported current assets.
- Assess liquidity in light of only $27,000 of cash, recurring operating losses and reliance on operating receipts and note collections.
- Review oil and gas production volumes, realized prices, reserve estimates and any subsequent full-cost ceiling-test impairment.
- Reconcile the stockholders’ equity statement with the balance sheet. The provided filing text reports materially different March 31, 2020 accumulated deficit and total equity amounts in those statements.
- Reconcile reported common-share counts: the balance sheet shows 5,131,934 shares at March 31, 2020 versus 2,036,935 at December 31, 2019, while other portions of the filing present approximately 5.132 million shares for both periods.
- Clarify the source and nature of the $153,000 of other income reported for Q1 2019 and the apparently inconsistent per-share presentation.
- Monitor the $2.770 million asset retirement obligation and the company’s capacity to fund future plugging, abandonment and environmental obligations.