Business Context and Reporting Period
New Concept Energy, Inc. (NCE) filed its Form 10-Q for the quarter and nine months ended September 30, 2010. The Company operates in two primary segments: oil and gas production in Ohio and West Virginia, and a retirement community in King City, Oregon. NCE is classified as a smaller reporting company.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2010 | 9 Months Ended Sep 30, 2009 | 3 Months Ended Sep 30, 2010 |
|---|---|---|---|
| Total Revenue | $3,167,000 | $3,087,000 | $1,112,000 |
| Net Income (Loss) | $(127,000) | $(12,000) | $188,000 |
| Operating Earnings (Loss) | $(69,000) | $(400,000) | $97,000 |
| Cash and Equivalents | $134,000 | $111,000 (End of Period) | $134,000 |
| Total Assets | $23,677,000 | $25,121,000 (Dec 31, 2009) | $23,677,000 |
| Total Liabilities | $5,523,000 | $6,839,000 (Dec 31, 2009) | $5,523,000 |
| Long-Term Debt | $1,281,000 | $1,198,000 (Dec 31, 2009) | $1,281,000 |
| Net Cash Used in Operating Activities | $(1,235,000) | $589,000 | N/A |
Segment Performance (9 Months 2010):
- Oil & Gas: Revenue of $950,000; Operating Loss of $(225,000).
- Retirement Facility: Revenue of $2,217,000; Operating Income of $510,000.
- Corporate: Operating Loss of $(412,000), driven by a $350,000 write-off of a South Texas investment.
Material Changes vs. Prior Period
- Profitability: The Company reported a net loss of $127,000 for the nine months ended September 30, 2010, compared to a net loss of $12,000 in the prior year period. However, the third quarter alone showed a net gain of $188,000, a significant improvement over the $49,000 gain in Q3 2009.
- Revenue: Total revenue increased slightly by 2.6% year-over-year. Real estate revenue grew due to higher occupancy rates, while oil and gas revenue remained relatively flat, impacted by commodity price fluctuations.
- Expenses: Corporate general and administrative expenses decreased significantly to $447,000 from $666,000 in the prior year, attributed to reduced payroll and overhead. Oil and gas operating expenses also declined.
- Cash Flow: Operating cash flow turned negative, using $1.235 million, compared to a positive $589,000 in the prior year. This was largely due to a $1.438 million reduction in accounts payable and other liabilities, and a $375,000 increase in interest receivable.
- Financing: The Company received $1.499 million from the repayment of loans from an affiliated entity, which was used to reduce income tax obligations.
Outlook, Risks, and Unusual Items
- Unusual Item: A $350,000 loss was recorded in the Corporate segment due to the liquidation of a South Texas oil and gas company (Chapter 7 bankruptcy) in which NCE had invested. Recovery of this investment is considered unlikely.
- Related Party Transactions: The Company holds a significant note receivable of $10.217 million from a related party, Prime Income Asset Management, Inc. Additionally, $225,000 is owed to the Company by Energy Advisors, LLC for services.
- Legal Contingency: NCE is involved in litigation with Chesapeake Exploration Limited Partnership regarding cost overruns on two gas wells. The trial is scheduled for November 2010. Management believes other pending lawsuits will not have a material effect.
- Liquidity: Current assets ($10.68 million) significantly exceed current liabilities ($1.46 million). However, cash on hand is low at $134,000.
- Deferred Taxes: 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
- Related Party Receivables: Verify the collectability of the $10.2 million note from Prime Income Asset Management, Inc., which constitutes a major portion of current assets.
- Chesapeake Litigation: Monitor the outcome of the November 2010 trial regarding the $556,217 dispute over drilling costs.
- Cash Burn Rate: Assess the sustainability of operations given the negative operating cash flow of $1.2 million and low cash balance of $134,000.
- Segment Viability: Confirm the continued profitability of the retirement facility, which is currently the primary source of operating income, versus the loss-making oil and gas and corporate segments.
- Tax Obligations: Review the details of the $1.55 million income tax obligation reduction mentioned in the liquidity section.