New Concept Energy, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited quarterly report covers the three and six months ended June 30, 2019. The company operates oil and gas wells and mineral leases in Ohio and West Virginia through wholly owned subsidiaries. The common stock trades on NYSE American under the symbol GBR. The filing reports 5,131,934 common shares outstanding as of August 13, 2019.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Oil and gas revenue | $164,000 | $344,000 |
| Oil and gas operating expense | $231,000 | $410,000 |
| Corporate general and administrative expense | $134,000 | $222,000 |
| Operating loss | $(201,000) | $(288,000) |
| Net income (loss) | $(141,000) | $(15,000) |
| Net loss per common share | $(0.03) | $(0.00) |
- Approximate operating margins were negative 123% for the quarter and negative 84% for the six-month period. Approximate net margins were negative 86% and negative 4%, respectively.
- Interest income was $64,000 in the quarter and $129,000 for the six months; interest expense was $4,000 and $9,000, respectively.
- Other income was $153,000 for the six months, including a $136,000 payment in the first quarter on a receivable previously written off.
- Six-month operating cash flow was negative $86,000, investing cash flow was negative $76,000, and financing cash flow was negative $24,000. Cash declined from $361,000 at December 31, 2018 to $175,000 at June 30, 2019.
- Current assets were $4.454 million versus current liabilities of $149,000, but current assets included $4.179 million of current note receivables, including $4.136 million from related parties.
- Total debt consisted of $51,000 of current notes payable and $187,000 of long-term notes payable. The asset retirement obligation was $2.770 million.
- Total assets were $7.852 million and stockholders’ equity was $4.746 million at June 30, 2019. Accumulated deficit was $58.885 million.
Material changes versus the prior comparable period
- Second-quarter revenue declined 5.2% from $173,000 to $164,000, principally because of lower natural gas prices.
- Six-month revenue declined 8.8% from $377,000 to $344,000, also principally because of lower natural gas prices.
- Oil and gas operating expense declined 8,000, or 3.3%, in the quarter and $104,000, or 20.2%, for the six months. The six-month reduction was attributed primarily to lower depletion, depreciation and general operating expenses.
- Corporate general and administrative expense increased 24.1% in the quarter and 21.3% for the six months because of higher general operating expenses.
- The quarterly net loss improved from $174,000 to $141,000. The six-month net loss improved from $308,000 to $15,000, largely because of higher interest income and the $136,000 recovery of a previously written-off receivable.
- Weighted-average common shares increased to 5.132 million from 2.132 million in both comparable periods, materially affecting per-share comparability.
Guidance, outlook, risks and unusual items
- The filing provides no specific revenue, earnings, production or capital-spending guidance. Management states that interim results are not necessarily indicative of full-year results.
- Results are exposed to natural gas pricing, production levels, operating costs, depletion and depreciation, and the ability to maintain adequate liquidity and financing.
- The company uses the full-cost method for oil and gas properties. A decline in estimated proved-reserve values could trigger a ceiling-test impairment charge; no such charge is identified in the provided filing text.
- The company has a $2.770 million asset retirement obligation, which is significant relative to cash and operating assets.
- Most debt carries fixed interest rates, so management characterizes interest-rate risk as minimal.
- In Carlton litigation, management states that the company should have no financial responsibility under a 2017 arrangement, although final terms depend on a pending Supreme Court appeal. Management does not expect a material adverse effect.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
- The filing contains generic risk and inflation language referring to retirement-community and real-estate operations that does not clearly correspond to the oil-and-gas business described elsewhere in the filing.
Important facts for investors to verify
- Confirm the collectability, maturity and related-party terms of the $4.136 million of related-party current note receivables, which represent most current assets.
- Assess whether $175,000 of cash and recurring negative operating cash flow are sufficient to fund operations, debt service and asset-retirement obligations.
- Review reserve estimates and future commodity-price assumptions supporting the full-cost ceiling test and the $2.492 million carrying value of oil and gas properties.
- Reconcile the substantial increase in shares outstanding and weighted-average shares from the 2018 comparable period.
- Review the status and final outcome of the Carlton litigation appeal and any potential effect on the company.
- Verify the source and sustainability of the six-month improvement in net loss, particularly the non-recurring recovery of a previously written-off receivable.