New Concept Energy, Inc. — 2022 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 12, 2022. Financial statements are unaudited.
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 rent of approximately $101,000. The Company sold its oil and gas operations in August 2020 and began providing management, supervisory, and administrative services for those operations under a consulting agreement effective January 1, 2022. The agreement provides fees equal to 10% of gross oil and gas revenue and may be terminated by either party with 60 days’ notice.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $45,000 | $26,000 | +$19,000 |
| Rental revenue | $25,000 | $26,000 | -$1,000 |
| Management fees | $20,000 | — | +$20,000 |
| Operating expenses | $92,000 | $92,000 | Flat |
| Operating loss | $(47,000) | $(66,000) | Improved by $19,000 |
| Net income | $5,000 | $79,000 | -$74,000 |
| Net cash from operating activities | $2,000 | $25,000 | -$23,000 |
- Corporate general and administrative expense increased to $80,000 from $74,000. Operating expense excluding corporate general and administrative expense declined to $12,000 from $18,000.
- Other income was $52,000 in 2022, consisting primarily of $52,000 of related-party interest income. In 2021, other income was $145,000, including a $91,000 tax refund from prior years.
- Operating margin was approximately negative 104% in Q1 2022 versus negative 254% in Q1 2021. Net margin was approximately 11% versus 304%, reflecting the unusually large 2021 tax refund.
- Cash and cash equivalents were $254,000 at March 31, 2022, compared with $252,000 at December 31, 2021. The Company generated $2,000 of operating cash flow and had no financing cash flow during the quarter.
- Current assets were $3.856 million and current liabilities were $96,000, producing reported working capital of approximately $3.760 million. Current assets included a $3.542 million related-party note receivable.
- Total assets were $4.496 million and shareholders’ equity was $4.400 million at March 31, 2022. The balance sheet does not present a current notes-payable balance; the filing states that nearly all debt is fixed-rate and therefore interest-rate exposure is minimal.
- Shares outstanding and weighted-average basic shares were approximately 5.132 million. Basic and diluted earnings per share were $0.01.
Material changes versus the prior comparable period
- Revenue increased primarily because the new consulting management agreement generated $20,000 of management fees; rental revenue declined modestly.
- The operating loss narrowed by $19,000 because the revenue increase offset unchanged total operating expenses.
- Net income declined sharply because Q1 2021 included a $91,000 prior-year tax refund and higher other income.
- Operating cash flow declined from $25,000 to $2,000. The filing attributes working-capital movements primarily to changes in other current assets, the related-party note receivable, and accounts payable and other liabilities.
- Accumulated deficit improved from $59.236 million at December 31, 2021 to $59.231 million at March 31, 2022, reflecting the quarter’s net income.
Outlook, risks, contingencies, and unusual items
- Management states that meeting current cash obligations depends on cash from current operations and collection of notes receivable and related interest. The Company is evaluating additional business opportunities to increase income and cash flow.
- No specific financial guidance was provided. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- The consulting management agreement is a new source of revenue but is terminable on 60 days’ notice, creating potential revenue continuity risk.
- COVID-19-related economic effects remain uncertain. Other risks include interest-rate fluctuations, access to debt or equity financing, demand and pricing, competition, permitting and construction delays, property occupancy and rental rates, and the Company’s ability to control costs and cash flow.
- Inflation could increase compensation and maintenance costs, and the Company may not be able to offset those increases through higher rental rates.
- Management reported no material environmental liabilities or known material noncompliance relating to hazardous or toxic substances or petroleum products.
- The Company evaluated subsequent events through May 12, 2022 and reported no subsequent events requiring disclosure. Disclosure controls and procedures were deemed effective, with no material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Verify the collectability, terms, maturity, and related-party status of the $3.542 million note receivable and the sustainability of related-party interest income.
- Verify the 10% consulting-fee calculation, underlying oil and gas revenue, and termination provisions of the management agreement.
- Assess whether rental occupancy, annualized rent, and property operating costs support improved recurring cash flow.
- Reconcile the filing’s debt disclosures with the balance sheet and determine whether any noncurrent or related-party debt is outstanding.
- Evaluate liquidity dependence on note collections and operating cash flow, particularly given only $254,000 of cash and $2,000 of quarterly operating cash generation.
- Distinguish recurring operating performance from the nonrecurring $91,000 tax refund recognized in Q1 2021.