Item 1. Financial Statements
NEW CONCEPT ENERGY, INC. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
(unaudited)
|
(amounts in thousands)
|
|
|
June
30,
2017
|
|
December
31, 2016
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
433
|
|
|
$
|
113
|
|
Accounts receivable from oil and gas sales
|
|
|
143
|
|
|
|
119
|
|
Other current assets
|
|
|
87
|
|
|
|
206
|
|
Total current assets
|
|
|
663
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties (full cost accounting
method)
|
|
|
|
|
|
|
|
|
Proved developed and undeveloped oil and
gas properties, net of depletion
|
|
|
5,489
|
|
|
|
5,608
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of depreciation
|
|
|
|
|
|
|
|
|
Land, buildings and equipment - oil and
gas operations
|
|
|
689
|
|
|
|
706
|
|
Other
|
|
|
—
|
|
|
|
25
|
|
Total property and equipment
|
|
|
689
|
|
|
|
731
|
|
|
|
|
|
|
|
|
|
|
Other
assets
(including $124 due
from related parties in 2015)
|
|
|
298
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,139
|
|
|
$
|
7,178
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
NEW CONCEPT ENERGY, INC. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS - CONTINUED
|
(unaudited)
|
(amounts in thousands, except share amounts)
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31, 2016
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable (includes $540 and $160 due to related parties in 2017 & 2016)
|
|
$
|
555
|
|
|
$
|
238
|
|
Accrued expenses
|
|
|
26
|
|
|
|
59
|
|
Current portion of long term debt
|
|
|
87
|
|
|
|
96
|
|
Total current liabilities
|
|
|
668
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Notes payable less current portion
|
|
|
276
|
|
|
|
296
|
|
Asset retirement obligation
|
|
|
2,770
|
|
|
|
2,770
|
|
Total liabilities
|
|
|
3,714
|
|
|
|
3,459
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock, Series B
|
|
|
1
|
|
|
|
1
|
|
Common stock, $.01 par value; authorized, 100,000,000
|
|
|
|
|
|
|
|
|
shares; issued and outstanding, 1,946,935 shares
|
|
|
|
|
|
|
|
|
at June 30, 2017 and December 31, 2016
|
|
|
20
|
|
|
|
20
|
|
Additional paid-in capital
|
|
|
58,838
|
|
|
|
58,838
|
|
Accumulated deficit
|
|
|
(55,434
|
)
|
|
|
(55,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
3,425
|
|
|
|
3,719
|
|
|
|
|
|
|
|
|
|
|
Total liabilities & equity
|
|
$
|
7,139
|
|
|
$
|
7,178
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
NEW CONCEPT ENERGY, INC AND SUBSIDIARIES
|
CONSOLIDATED STATEMENT OF OPERATIONS
|
(unaudited)
|
(amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months ended June 30,
|
|
For the Six Months ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue
|
|
|
|
|
|
|
|
|
Oil and gas operations, net of royalties
|
|
$
|
243
|
|
|
$
|
170
|
|
|
$
|
438
|
|
|
$
|
389
|
|
Total Revenue
|
|
|
243
|
|
|
|
170
|
|
|
|
438
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas operations
|
|
|
256
|
|
|
|
233
|
|
|
|
512
|
|
|
|
629
|
|
Corporate general and administrative
|
|
|
122
|
|
|
|
101
|
|
|
|
222
|
|
|
|
267
|
|
Total Operating Expenses
|
|
|
378
|
|
|
|
334
|
|
|
|
734
|
|
|
|
896
|
|
Operating earnings (loss)
|
|
|
(135
|
)
|
|
|
(164
|
)
|
|
|
(296
|
)
|
|
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11
|
|
|
|
5
|
|
|
|
15
|
|
|
|
11
|
|
Interest expense
|
|
|
(6
|
)
|
|
|
(7
|
)
|
|
|
(13
|
)
|
|
|
(18
|
)
|
Other income (expense)
|
|
|
6
|
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
(10
|
)
|
|
|
|
11
|
|
|
|
(7
|
)
|
|
|
0
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(124
|
)
|
|
|
(171
|
)
|
|
|
(296
|
)
|
|
|
(524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations
|
|
|
(11
|
)
|
|
|
38
|
|
|
|
2
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares
|
|
$
|
(135
|
)
|
|
$
|
(133
|
)
|
|
$
|
(294
|
)
|
|
$
|
(429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share-basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and equivalent shares outstanding - basic
|
|
|
1,947
|
|
|
|
1,947
|
|
|
|
1,947
|
|
|
|
1,947
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
NEW CONCEPT ENERGY, INC AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(unaudited)
|
(amounts in thousands)
|
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(294
|
)
|
|
$
|
(429
|
)
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
227
|
|
|
|
294
|
|
Write-off of retirement center assets
|
|
|
24
|
|
|
|
—
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Other current and non-current assets
|
|
|
123
|
|
|
|
(13
|
)
|
Accounts payable and other liabilities
|
|
|
284
|
|
|
|
207
|
|
Net cash provided by (used) in operating activities
|
|
|
364
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Investment in undeveloped land
|
|
|
(10
|
)
|
|
|
—
|
|
Fixed asset additions
|
|
|
(2
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(12
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment on notes payable
|
|
|
(32
|
)
|
|
|
(35
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(32
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
320
|
|
|
|
1
|
|
Cash and cash equivalents at beginning of year
|
|
|
113
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
433
|
|
|
$
|
474
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest on notes payable
|
|
$
|
13
|
|
|
$
|
18
|
|
Cash paid for principal on notes payable
|
|
$
|
32
|
|
|
$
|
40
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
NEW CONCEPT ENERGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited
consolidated financial statements include the accounts of New Concept Energy, Inc. and its majority-owned subsidiaries (collectively,
“NCE” or the “Company”). All significant intercompany transactions and accounts have been eliminated.
The unaudited financial statements
included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly
present such information. All such adjustments are of a normal recurring nature. Although the Company believes
that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures,
including a description of significant accounting policies normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules
and regulations.
These financial statements
should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the fiscal year ending December 31, 2016. Operating results for the six month period ended
June 30, 2017 are not necessarily indicative of the results that may be expected for any subsequent quarter or for the fiscal
year ending December 31, 2017.
NOTE B: NATURE OF OPERATIONS
The Company operates oil and
gas wells and mineral leases in Athens and Meigs Counties in Ohio and in Calhoun, Jackson and Roane Counties in West Virginia
through its wholly owned subsidiaries Mountaineer State Energy, LLC and Mountaineer State Operations, LLC.
Until March 30, 2017 the Company
leased and operated a retirement center in King City, Oregon with a capacity of 114 residents. The terms of the lease agreement
provided that if the facility was sold to a third party the lease would be terminated. On March 30, 2017 the owners of the facility
sold the facility. The operations of the retirement center have been reflected as a discontinued operation.
NOTE C: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
We consider accounting policies
related to our estimates of depreciation amortization and depletion, segments, oil and gas properties, oil and gas reserves, gas
gathering assets, office and field equipment, revenue recognition and gas imbalances, leases, revenue recognition for real estate
operations, impairment, and sales of real estate as significant accounting policies. The policies include significant
estimates made by management using information available at the time the estimates are made. However, these estimates
could change materially if different information or assumptions were used. These policies are summarized in our Annual
Report on Form 10-K for the year ended December 31, 2016.
NOTE D: OIL AND GAS RESERVES
The Company
uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of
accounting, all costs of acquisition, exploration and development of oil and natural gas properties (including such costs as leasehold
acquisition costs, geological expenditures, dry hole costs, tangible and intangible development costs and direct internal costs)
are capitalized as the cost of oil and natural gas properties when incurred.
The full
cost method requires the Company to calculate quarterly, by cost center, a “ceiling,” or limitation on the amount
of properties that can be capitalized on the balance sheet. To the extent capitalized costs of oil and natural gas
properties, less accumulated depletion and related deferred taxes exceed the sum of the discounted future net revenues of proved
oil and natural gas reserves, the lower of cost or estimated fair value of unproved properties subject to amortization, the cost
of properties not being amortized, and the related tax amounts, such excess capitalized costs are charged to expense.
The standardized
measure of discounted future net cash flows and changes in such cash flows are prepared using assumptions required by the Financial
Accounting Standards Board and the Securities and Exchange Commission. Such assumptions include a standardized method
for determining pricing and require that future cash flow be discounted using a 10% rate. The valuation that results may not represent
management’s estimated current market value of proved reserves.
During
the past few years the exploration, development and production of natural gas has resulted in an oversupply of natural gas which
has resulted in a substantial reduction in the market price. Management of the Company believes that this oversupply will last
for some time and does not anticipate an increase in the price we can receive in the market place. In April 2012 the Company entered
into an agreement to fix the price it receives for the sale of its gas. For the five years ended April 2017 the Company received
$4.53 per MCF. For the month period June thru August the Company will receive $3.77 per MCF.
NOTE E: CONTINGENCIES
Carlton Energy Group, LLC
In December 2006, Carlton Energy
Group, LLC (“Carlton”) instituted litigation against an individual, Eurenergy Resources Corporation (“Eurenergy”)
and several other entities including New Concept Energy, Inc., which was then known as CabelTel International Corporation (the
“Company”) alleging tortuous conduct, breach of contract and other matters and as to the Company that it was the alter
ego of Eurenergy. The Carlton claims were based upon an alleged tortuous interference with a contract by the individual and Eurenergy
related to the right to explore a coal bed methane concession in Bulgaria which had never (and has not to this day) produced any
hydrocarbons. At no time during the pendency of this project or since did the company or any of its officers or directors have
any interest whatsoever in the success or failure of the so-called “Bulgaria Project”. However, in the litigation,
Carlton alleged that the Company was the alter-ego of certain of the other Defendants including Eurenergy.
Following a jury trial in 2009,
the Trial Court (295th District Court of Harris County, Texas) reduced the actual damages found by the jury of $66.5 million and
entered judgment against EurEnergy and The individual jointly and severally for $31.16 million in actual damages on its tortuous-interference
claim and the Court further assessed exemplary damages against The individual and EurEnergy in the amount of $8.5 million each.
The Court granted a judgment for the Company that it was not the alter ego of any of the other parties and thereby would not incur
any damages.
Cross appeals were filed by
Carlton, The individual and EurEnergy to the Court of Appeals for the First District of Texas (the “Court of Appeals”)
which rendered its opinion on February 14, 2012. The Court of Appeals opinion, among other things, reinstated the jury award of
actual damages jointly and severely against The individual and EurEnergy in the amount of $66.5 million and overturned the Trial
Court’s ruling favorable to the Company rendering a judgment for that amount plus exemplary damages against the Company
as the “alter ego” of Eurenergy.
The Company and the other defendants
filed a Petition for Review of the Court of Appeals Opinion with the Supreme Court of the State of Texas. On May 8, 2015, the
Supreme Court of Texas affirmed, in part, and reversed, in part, the Court of Appeals Judgment, remanding the case to that Court
for further proceedings. In its opinion, the Supreme Court concluded that the evidence supports the Jury’s verdict that
the individual used the Company and other entities, that it would be unjust to require Carlton to treat them separately and found
that the Company was an alter ego as a matter of law. The Supreme Court determined that the Court of Appeals erred in reinstating
the jury’s verdict on damages in the amount of $66.5 million as the amount was speculative and not supported by competent
evidence. The court declined to reinstate the trial court’s judgment of $31.16 million. The Supreme Court did rule that
there was some evidence to support an award of actual damages and therefore remanded the case to the Court of Appeals to make
a factual sufficiency determination, if possible, as to as to the amount. The defendants have filed a Motion for Rehearing requesting
clarification of the Supreme Court’s ruling and/or a remand to the trial court for a new trial.
During August 2017, the parties
to the litigation reached an arrangement, the final terms of which will not be determined until the outcome of the appeal of the
litigation and are also subject to Bankruptcy Court Approval. Under the terms of the arrangement, Management believes that the
Company will have no financial responsibility nor any potential unfavorable outcome, which could materially adversely affect the
Company.
Other
The Company has been named
as a defendant in other lawsuits in the ordinary course of business. Management is of the opinion that these lawsuits will not
have a material effect on the financial condition, results of operations or cash flows of the Company.
NOTE F: NEWLY
ISSUED ACCOUNTING STANDARDS
We have considered all other
newly issued accounting guidance that is applicable to our operations and the preparation of our consolidated statements, including
that which we have not yet adopted. We do not believe that any such guidance will have a material effect on our financial
position or results or operation.
NOTE G: SUBSEQUENT
EVENTS
The Company has evaluated subsequent
events through August 14, 2017, the date the financial statements were available to be issued, and has determined that there are
none to be reported.
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
and Estimates
The Company’s discussion
and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. Certain
of the Company’s accounting policies require the application of judgment in selecting the appropriate assumptions for calculating
financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These
judgments and estimates are based upon the Company’s historical experience, current trends and information available from
other sources that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
The Company’s significant
accounting policies are summarized in Note B to our consolidated financial statements in our annual report on Form 10-K. The
Company believes the following critical accounting policies are more significant to the judgments and estimates used in the preparation
of its consolidated financial statements. Revisions in such estimates are recorded in the period in which the facts
that give rise to the revisions become known.
Oil and Gas Property Accounting
The Company
uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of
accounting, all costs of acquisition, exploration and development of oil and natural gas properties (including such costs as leasehold
acquisition costs, geological expenditures, dry hole costs, tangible and intangible development costs and direct internal costs)
are capitalized as the cost of oil and natural gas properties when incurred.
The full
cost method requires the Company to calculate quarterly, by cost center, a “ceiling,” or limitation on the amount
of properties that can be capitalized on the balance sheet. To the extent capitalized costs of oil and natural gas
properties, less accumulated depletion and related deferred taxes exceed the sum of the discounted future net revenues of proved
oil and natural gas reserves, the lower of cost or estimated fair value of unproved properties subject to amortization, the cost
of properties not being amortized, and the related tax amounts, such excess capitalized costs are charged to expense.
The standardized
measure of discounted future net cash flows and changes in such cash flows are prepared using assumptions required by the Financial
Accounting Standards Board and the Securities and Exchange Commission. Such assumptions include a standardized method
for determining pricing and require that future cash flow be discounted using a 10% rate. The valuation that results may not represent
management’s estimated current market value of proved reserves.
Doubtful Accounts
The Company’s allowance
for doubtful accounts receivable and notes receivable is based on an analysis of the risk of loss on specific accounts. The
analysis places particular emphasis on past due accounts. Management considers such information as the nature and age
of the receivable, the payment history of the tenant, customer or other debtor and the financial condition of the tenant or other
debtor. Management’s estimate of the required allowance, which is reviewed on a quarterly basis, is subject to
revision as these factors change.
Deferred Tax Assets
Significant management judgment
is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded
against net deferred tax assets. The future recoverability of the Company’s net deferred tax assets is dependent
upon the generation of future taxable income prior to the expiration of the loss carry forwards. At June 30, 2017 the
Company had a deferred tax asset due to tax deductions available to it in future years. However, as management could
not determine that it was more likely than not that the benefit of the deferred tax asset would be realized, a 100% valuation
allowance was established.
Liquidity and Capital Resources
At June 30, 2017, the Company
had current assets of $663,000 and current liabilities of $668,000.
Cash and cash equivalents at
June 30, 2017 were $433,000 as compared to $113,000 at December 31, 2016.
Net cash provided from operating
activities was $364,000 for the six months ended June 30, 2017. During the six-month period, the Company had a net
loss of $294,000.
Net cash used in investing
activities was $12,000 for the six months ended June 30, 2017. This represents land and fixed assets acquired to support the Company’s
oil & gas operation
Net cash used in financing
activities was $32,000 for the six months ended June 30, 2017, consisting of the repayment of bank loans.
Results of Operations
The following discussion is
based on our Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016 as included in Part
1, Item 1: Financial statements of this report.
Comparison of the three
months ended June 30, 2017 to the same period ended 2016
The Company reported a net
loss of $135,000 for the three months ended June 2017, as compared to a net loss of $133,000 for the similar period in 2016.
For the three months ended
June 30, 2017, the Company recorded oil and gas revenues, net of royalty expenses of $243,000 as compared to $170,000 for the
comparable period of 2016. The increase in oil and gas revenue was principally due to an increase production in 2017
as compared to 2016.
For the three months ended
June 30, 2017, the Company recorded oil and gas operating expenses of $256,000 as compared to $233,000 for the comparable period
of 2016. The decrease was due to a decrease in overall operating expenses as the Company has actively been reducing costs to compensate
for the reduction in revenue.
For the three months ended
June 30, 2017, corporate general & administrative expenses were $122,000 as compared to $101,000 for the comparable periods
in 2016. The decrease is primarily due to a reduction in wages and overall operating expenses.
Comparison of the six
months ended June 30, 2017 to the same period ended 2016
The Company reported a net
loss of $294,000 for the three months ended June 2017, as compared to a net income of $429,000 for the similar period in 2016.
For the six months
ended June 30, 2017, the Company recorded oil and gas revenues, net of royalty expenses of $438,000 as compared to $389,000
for the comparable period of 2016. The increase in oil and gas revenue was principally due to an increase production in 2017
as compared to 2016.
For the six months ended June
30, 2017, the Company recorded oil and gas operating expenses of $512,000 as compared to $629,000 for the comparable period of
2016. The decrease was due to a decrease in overall operating expenses as the Company has actively been reducing costs to compensate
for the reduction in revenue.
For the six months ended June
30, 2017, corporate general & administrative expenses were $222,000 as compared to $267,000 for the comparable periods in
2016. The decrease is primarily due to a reduction in wages and overall operating expenses.
Forward Looking Statements
“Safe Harbor” Statement
under the Private Securities Litigation Reform Act of 1995: A number of the matters and subject areas discussed in
this filing that are not historical or current facts deal with potential future circumstances, operations and prospects. The
discussion of such matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations
generally, and also may materially differ from the Company’s actual future experience involving any one or more of such
matters and subject areas relating to interest rate fluctuations, the ability to obtain adequate debt and equity financing, demand,
pricing, competition, construction, licensing, permitting, construction delays on new developments, contractual and licensure,
and other delays on the disposition, transition, or restructuring of currently or previously owned, leased or managed properties
in the Company’s portfolio, and the ability of the Company to continue managing its costs and cash flow while maintaining
high occupancy rates and market rate charges in its retirement community. The Company has attempted to identify, in
context, certain of the factors that it currently believes may cause actual future experience and results to differ from the Company’s
current expectations regarding the relevant matter of subject area. These and other risks and uncertainties are detailed
in the Company’s reports filed with the Securities and Exchange Commission (“SEC”), including the Company’s
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
Inflation
The Company’s principal
source of revenue is rents from a retirement community and fees for services rendered. The real estate operation is
affected by rental rates that are highly dependent upon market conditions and the competitive environment in the areas where the
property is located. Compensation to employees and maintenance are the principal cost elements relative to the operation
of this property. Although the Company has not historically experienced any adverse effects of inflation on salaries
or other operating expenses, there can be no assurance that such trends will continue or that, should inflationary pressures arise,
the Company will be able to offset such costs by increasing rental rates in its real estate operation.
Environmental Matters
The Company has conducted environmental
assessments on most of its existing owned or leased properties. These assessments have not revealed any environmental
liability that the Company believes would have a material adverse effect on the Company’s business, assets or results of
operations. The Company is not aware of any such environmental liability. The Company believes that all
of its properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental
authority and is not otherwise aware of any material non-compliance, liability or claim relating to hazardous or toxic substances
or petroleum products in connection with any of its communities.