New Concept Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. The financial statements are unaudited. The company is a smaller reporting company and reported 5,131,934 common shares outstanding as of November 9, 2022.
Business Context
The company owns approximately 190 acres in Parkersburg, West Virginia, including four structures totaling approximately 53,000 square feet. Approximately 16,000 square feet of the main building is leased at an annual rate of approximately $101,000. The company sold its oil and gas operations in August 2020 but entered into a management consulting agreement effective January 1, 2022, under which it receives fees equal to 10% of the operations’ gross revenue.
Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $63,000 in 2022 vs. $25,000 in 2021 | $155,000 in 2022 vs. $76,000 in 2021 |
| Operating earnings (loss) | $(26,000) vs. $(62,000) | $(119,000) vs. $(233,000) |
| Net income (loss) | $27,000 vs. $(8,000) | $170,000 vs. $120,000 |
| Net income (loss) per share | $0.01 vs. $(0.01) | $0.03 vs. $0.02 |
- Revenue mix: Third-quarter revenue included $25,000 of rent and $38,000 of management fees. Nine-month revenue included $76,000 of rent and $79,000 of management fees.
- Margins: Operating margin was approximately negative 41% for the quarter and negative 77% for the nine-month period. Net margin was approximately 43% for the quarter and 110% for the nine-month period, primarily because other income exceeded operating losses.
- Other income: Nine-month other income was $130,000 in 2022 versus $191,000 in 2021. The 2022 amount included a $62,000 collection of an investment previously fully reserved and a $68,000 gain on the sale of equipment. The 2021 amount included a $100,000 collection of a previously reserved receivable and a $91,000 tax refund.
- Cash flow: Net cash provided by operating activities was $147,000 for the first nine months of 2022, compared with $261,000 in 2021. There was no financing or investing cash flow during the 2022 period.
- Liquidity: Cash and cash equivalents increased to $399,000 from $252,000 at December 31, 2021. Current assets were $3.988 million and current liabilities were $57,000, producing substantial reported current-asset coverage of current liabilities.
- Asset concentration: Current assets included a $3.542 million note receivable from related parties. Property and equipment, net, was $634,000.
- Debt: The balance sheet reports no note payable or other long-term debt at September 30, 2022. The company made no financing payments during the first nine months, compared with a $192,000 note repayment in 2021.
- Equity: Stockholders’ equity was $4.565 million, compared with $4.395 million at year-end 2021. Accumulated deficit was $59.066 million.
Material Changes Versus the Prior Comparable Period
- Revenue more than doubled in the quarter and increased by approximately 104% for the nine-month period, driven by the new management-fee arrangement.
- Quarterly results improved from an $8,000 net loss to $27,000 of net income, while nine-month net income increased from $120,000 to $170,000.
- Corporate general and administrative expense increased to $71,000 from $53,000 in the quarter but declined to $231,000 from $238,000 for the nine-month period.
- Operating losses narrowed despite the company remaining operationally unprofitable before other income.
- Other income declined by $61,000 year over year because the 2021 period included a larger benefit from a reserved receivable collection and a tax refund.
- Cash increased by $147,000 year to date, but operating cash generation declined from the prior year.
Outlook, Risks, Contingencies, and Unusual Items
- Management states that meeting current cash obligations depends on cash from current operations and collection of notes receivable. The company is evaluating additional business opportunities to generate income and cash flow.
- The management consulting agreement may be terminated by either party upon 60 days’ notice, creating a risk to the new management-fee revenue stream.
- A deferred tax asset exists, but management recorded a 100% valuation allowance because it could not conclude that realization was more likely than not.
- The company continues to identify COVID-19-related economic uncertainty, inflationary pressure on compensation and maintenance costs, rental-market conditions, competition, financing availability, permitting and construction delays, and the ability to maintain occupancy and control costs as risks.
- Management reported no material environmental liabilities or known material noncompliance relating to hazardous or toxic substances.
- The company reported no subsequent events through November 9, 2022.
- Disclosure controls and procedures were assessed as effective, and no material change in internal control over financial reporting was reported during the quarter.
Important Facts for Investors to Verify
- Collectability, maturity, terms, and related-party nature of the $3.542 million note receivable, which represents most of the company’s current assets.
- Sustainability of management-fee revenue and the underlying oil and gas operations after the consulting agreement’s termination provisions.
- Whether recurring rental and management revenue can cover corporate and property operating expenses without nonrecurring gains or collections.
- Composition and recoverability of the company’s accumulated deficit and deferred tax assets.
- Future cash needs, access to financing, and the company’s ability to fund obligations if note collections or operating cash flow decline.
- The unusual nature of the 2022 $62,000 reserved-investment collection and $68,000 equipment-sale gain when assessing normalized earnings.