New Concept Energy, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2019; filed May 15, 2019. The company operates oil and gas wells and mineral leases in Ohio and West Virginia through wholly owned subsidiaries. The financial statements are unaudited and presented in thousands, except per-share data.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / Dec. 31, 2018 |
|---|---|---|
| Oil and gas revenue | $180,000 | $204,000 |
| Operating expenses | $267,000 | $350,000 |
| Operating loss | $(87,000) | $(146,000) |
| Net income (loss) | $126,000 | $(134,000) |
| Basic and diluted earnings (loss) per share | $0.02 | $(0.07) |
| Net cash provided by operating activities | $114,000 | $1,000 |
| Cash and cash equivalents | $460,000 | $361,000 at Dec. 31, 2018 |
| Total assets | $8.059 million | $7.882 million at Dec. 31, 2018 |
| Total liabilities | $3.172 million | $3.121 million at Dec. 31, 2018 |
| Debt, including current portion | $246,000 | $260,000 at Dec. 31, 2018 |
| Asset retirement obligation | $2.770 million | $2.770 million |
Revenue declined approximately 12% year over year, principally because of lower dollar amounts received per MCF of natural gas. Oil and gas operating expenses declined approximately 35%, primarily due to lower depletion and depreciation, consulting fees, and general operating expenses. Corporate general and administrative expense increased approximately 19% to $88,000, largely because of consulting fees related to oil and gas matters.
The operating margin improved to approximately negative 48% from negative 72%. Net income was substantially driven by net other income of approximately $213,000, including $65,000 of interest income, $5,000 of interest expense, and $153,000 of other income as presented in the filing. The filing’s statement-of-operations formatting is unclear, but the disclosed amounts reconcile to reported net income of $126,000.
At March 31, 2019, current assets were $4.702 million and current liabilities were $215,000. Current assets included $4.115 million of current notes receivable, of which $4.076 million was from related parties. Total stockholders’ equity was $4.887 million, compared with $4.761 million at year-end 2018. The accumulated deficit was $58.744 million.
Cash flow, debt, and liquidity
- Operating activities generated $114,000 of cash, compared with $1,000 in the prior-year quarter.
- Financing activities used $15,000 for repayments on notes payable, compared with $23,000 in the prior-year quarter.
- Cash increased $99,000 during the quarter, from $361,000 to $460,000.
- Debt consisted of $59,000 current and $187,000 long-term notes payable. Nearly all debt bears fixed interest rates, limiting reported exposure to interest-rate changes.
- The company reported no material capital expenditures in the cash-flow statement. A prior equity issuance of 95,000 shares for $171,000 was intended in part to fund drilling of a new well.
Material changes and unusual items
- Common shares outstanding increased from 2.037 million at December 31, 2018 to 5.132 million at March 31, 2019; the filing does not clearly explain the timing or transaction producing the increase in the balance-sheet share count.
- The company’s full-cost accounting for oil and gas properties requires quarterly ceiling tests. A decline in estimated future net revenues or reserves could result in an impairment charge; no such charge is disclosed for the quarter.
- A 100% valuation allowance was maintained against the deferred tax asset because management could not conclude that realization was more likely than not.
- The company disclosed a long-running Carlton litigation matter. Under an August 2017 arrangement, management expects the company to have no financial responsibility and does not expect a material adverse effect, although final terms depend on a Supreme Court appeal.
- The company reported no subsequent events requiring disclosure through May 15, 2019.
Outlook, risks, and controls
The filing does not provide quantitative revenue, earnings, production, reserve, or capital-spending guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results. Principal risks include natural gas pricing and demand, reserve estimates, oil and gas operating costs, access to debt or equity financing, environmental and asset-retirement obligations, litigation, and the company’s ability to manage cash flow.
Management stated that disclosure controls and procedures were effective as of March 31, 2019 and that no change in internal control over financial reporting materially affected, or was reasonably likely to materially affect, those controls. A portion of the forward-looking and inflation discussion refers to retirement-community and real-estate operations that are not consistent with the oil-and-gas business description in the financial statements; investors should verify the applicability of that language.
Important facts for investors to verify
- Support for the $213,000 of net other income and the nature, recurrence, and cash impact of the $153,000 other-income component.
- Collectability, maturity, and related-party status of the $4.115 million current notes receivable, including $4.076 million from related parties.
- The source and accounting treatment of the increase in common shares from 2.037 million to 5.132 million.
- Oil and gas production volumes, realized prices per MCF, proved reserves, and results of the quarterly full-cost ceiling test.
- Liquidity implications of the $2.770 million asset retirement obligation and the company’s ability to fund plugging, abandonment, maintenance, and potential drilling.
- Status and potential exposure from the Carlton litigation and the pending appeal.
- Whether the retirement-community and real-estate risk disclosures are boilerplate or reflect additional operations not clearly described elsewhere in the filing.