New Concept Energy, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the quarter and six months ended June 30, 2017, filed August 14, 2017. The company operates oil and gas wells and mineral leases in Ohio and West Virginia through wholly owned subsidiaries. Its retirement center operation in Oregon was sold by its owner on March 30, 2017, terminating the lease; that business is reported as a discontinued operation.
The company is a smaller reporting company and had 1,946,934 common shares outstanding as of August 14, 2017.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Oil and gas revenue, net of royalties | $243,000 in 2017 versus $170,000 in 2016 | $438,000 versus $389,000 |
| Operating expenses | $378,000 versus $334,000 | $734,000 versus $896,000 |
| Operating loss | $135,000 versus $164,000 | $296,000 versus $507,000 |
| Net income (loss) applicable to common shares | $(135,000) versus $(133,000) | $(294,000) versus $(429,000) |
| Basic and diluted loss per share | $(0.07) versus $(0.07) | $(0.15) versus $(0.22) |
| Net cash provided by operating activities | $364,000 for the six months ended June 30, 2017, versus $59,000 in 2016 |
Approximate operating and net margins were negative 56% for the second quarter and negative 68% for the six-month period. The company remained unprofitable despite improved revenue and lower year-to-date expenses.
At June 30, 2017, cash and cash equivalents were $433,000, compared with $113,000 at December 31, 2016. Current assets were $663,000 and current liabilities were $668,000, implying a current ratio of approximately 1.0. Accounts payable increased to $555,000 from $238,000, including $540,000 owed to related parties.
Total debt consisted of $87,000 of current notes payable and $276,000 of long-term notes payable. The company also reported a $2.77 million asset retirement obligation. Six-month investing cash outflows were $12,000 and financing cash outflows were $32,000, principally for debt repayment. Nearly all debt bears fixed interest rates, limiting exposure to interest-rate changes.
Material Changes Versus the Prior Comparable Period
- Second-quarter oil and gas revenue increased approximately 43% year over year, primarily due to increased production.
- Six-month oil and gas revenue increased approximately 13%, while oil and gas operating expenses decreased approximately 19% and corporate general and administrative expenses decreased approximately 17%.
- Six-month operating loss improved from $507,000 to $296,000, and operating cash flow improved from $59,000 to $364,000.
- Second-quarter net loss was slightly higher at $135,000 compared with $133,000, partly because discontinued operations produced an $11,000 loss in 2017 versus $38,000 of income in 2016.
- Cash increased by $320,000 during the first six months, although the balance sheet remained narrowly below current-liability coverage on a current-asset basis.
- Accumulated deficit increased to $55.434 million from $55.140 million at year-end 2016.
Outlook, Risks, Contingencies, and Unusual Items
Management provided no quantitative earnings or production guidance. Management stated that natural gas oversupply and depressed market prices are expected to persist. A gas-price agreement provided $4.53 per MCF through April 2017; the filing states that the company would receive $3.77 per MCF for June through August, although the text does not clearly specify the full applicable pricing period.
The company uses the full-cost method for oil and gas properties and is exposed to the risk of a ceiling impairment if capitalized costs exceed the prescribed value of proved reserves and related assets. The filing also identifies significant estimation risk relating to depletion, reserves, receivables, and deferred tax assets. A 100% valuation allowance was maintained against the deferred tax asset because realization was not considered more likely than not.
The Carlton Energy Group litigation remains material. The Texas Supreme Court previously determined that the company was an alter ego of another defendant and remanded the matter for further proceedings on damages. In August 2017, the parties reached an arrangement whose final terms remained subject to the appeal outcome and Bankruptcy Court approval. Management believed the company would have no financial responsibility or materially adverse outcome, but the filing does not provide final settlement terms or a quantified exposure.
Other ordinary-course lawsuits were not expected by management to materially affect financial condition, results, or cash flows. The company reported no material environmental liabilities and stated that disclosure controls were effective, with no material change in internal control over financial reporting.
Investor Verification Checklist
- Verify the final terms, court disposition, and any potential liability related to the Carlton litigation arrangement.
- Assess whether operating cash flow is sustainable, given the recurring net losses, increased accounts payable, and near-one current ratio.
- Review oil and gas production volumes, realized prices, reserve estimates, and the full-cost ceiling test for potential impairment.
- Confirm the duration and economics of the gas-price arrangement after August 2017.
- Evaluate the $2.77 million asset retirement obligation and the company’s ability to fund future plugging and abandonment costs.
- Review related-party payables of $540,000 and the terms and settlement expectations for those balances.
- Note that the filing’s MD&A contains an apparent wording error referring to six-month “net income” of $429,000; the financial statements report a six-month net loss of $429,000 for 2016.