New Concept Energy, Inc. — Q3 2020 Form 10-Q Summary
Business Context and Reporting Period
New Concept Energy, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company’s continuing operations primarily consist of real estate activities, including approximately 190 acres in Parkersburg, West Virginia, with four structures totaling approximately 53,000 square feet. Approximately 16,000 square feet is leased for $101,000 per year.
On August 31, 2020, the company sold its entire oil and gas operation for $85,000. The buyer assumed the company’s previously accrued $2.745 million plugging and abandonment obligation, and the oil and gas business is presented as discontinued operations.
Financial Results and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Rental revenue | $25 thousand in 2020 and 2019 | $76 thousand in 2020 and 2019 |
| Operating expenses | $80 thousand vs. $109 thousand | $342 thousand vs. $367 thousand |
| Operating loss | $55 thousand vs. $84 thousand | $266 thousand vs. $291 thousand |
| Income from continuing operations | $82 thousand vs. $22 thousand | $(8) thousand vs. $88 thousand |
| Discontinued operations and disposal gain | $2.100 million vs. $(2.342) million | $1.956 million vs. $(2.423) million |
| Net income applicable to common shares | $2.182 million vs. $(2.320) million | $1.948 million vs. $(2.335) million |
| Basic and diluted earnings per share | $0.43 vs. $(0.45) | $0.38 vs. $(0.45) |
Other income for the quarter included approximately $84 thousand from a tax refund for taxes paid in prior years. Interest income was primarily generated from related-party notes receivable.
Financial Position, Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $42 thousand at September 30, 2020, compared with $22 thousand at December 31, 2019.
- Current assets were $3.764 million, including $3.618 million of current notes receivable. Approximately $3.578 million of the notes receivable balance was due from related parties.
- Current liabilities were $97 thousand, and total debt was $190 thousand, consisting of $40 thousand current debt and $150 thousand long-term debt.
- Total assets declined to $4.604 million from $5.790 million, principally reflecting the removal of assets and liabilities associated with the sold oil and gas operations.
- Stockholders’ equity increased to $4.357 million from $2.409 million, primarily because of the discontinued-operations gain.
- Operating activities used $491 thousand of cash during the first nine months of 2020, compared with $395 thousand provided in the prior-year period.
- Investing activities provided $85 thousand from the sale of the oil and gas operations. No drilling or fixed-asset additions were reported in 2020.
- Financing activities provided $426 thousand, including $461 thousand collected on notes receivable and $35 thousand of debt repayments.
The company states that its ability to meet current cash obligations depends on cash from current operations and collection of notes receivable. It is evaluating additional business opportunities to generate income and cash flow.
Material Changes, Outlook and Risks
- The principal year-over-year improvement in reported earnings resulted from the sale of the oil and gas operations and the absence of the $2.285 million oil and gas impairment recorded in 2019. The disposal gain is nonrecurring and does not represent recurring operating performance.
- Rental revenue was unchanged, while corporate general and administrative expense declined to $65 thousand for the quarter from $92 thousand and to $296 thousand for the nine-month period from $314 thousand.
- The filing does not provide formal revenue, earnings or cash-flow guidance.
- COVID-19 and related containment measures adversely affected economic activity, but the company states that the full impact on its business remains uncertain.
- Liquidity risk is significant because cash is limited and current assets are heavily concentrated in notes receivable, including related-party balances. The filing does not provide a clear assessment of the collectability or repayment timing of those receivables beyond management’s stated reliance on their collection.
- All debt bears fixed interest rates; management therefore reports no material exposure to changes in interest rates.
- The company states that it is not aware of material environmental liabilities or noncompliance involving its properties.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the $3.618 million notes receivable, including $3.578 million due from related parties, will be collected on schedule and at stated carrying values.
- The sustainability of the company’s post-sale business model, given only $25 thousand of quarterly rental revenue and continuing operating losses.
- The nonrecurring nature and accounting treatment of the $2.138 million disposal gain and the buyer’s assumption of the $2.745 million plugging and abandonment obligation.
- Whether the company can maintain liquidity with $42 thousand of cash and $491 thousand of operating cash usage during the first nine months of 2020.
- Any subsequent effects of COVID-19 on occupancy, rental collections, property values and prospective business opportunities.
- The filing’s internal inconsistencies regarding certain descriptions of the disposal gain and discontinued-operations results; investors should reconcile the narrative to the audited annual filing and underlying financial statements.