Item 1. Financial Statements
NEW CONCEPT ENERGY, INC. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
(amounts in thousands)
|
|
|
|
|
March
31, 2017
|
|
|
|
December
31, 2016
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
520
|
|
|
$
|
113
|
|
Accounts receivable from oil and gas sales
|
|
|
122
|
|
|
|
119
|
|
Other current assets
|
|
|
73
|
|
|
|
206
|
|
Total current assets
|
|
|
715
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties (full cost accounting method)
|
|
|
|
|
|
|
|
|
Proved developed and undeveloped oil and gas properties, net of depletion
|
|
|
5,551
|
|
|
|
5,608
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of depreciation
|
|
|
|
|
|
|
|
|
Land, buildings and equipment - oil and gas operations
|
|
|
703
|
|
|
|
706
|
|
Other
|
|
|
—
|
|
|
|
25
|
|
Total property and equipment
|
|
|
703
|
|
|
|
731
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
322
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,291
|
|
|
$
|
7,178
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
NEW CONCEPT ENERGY, INC. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS - CONTINUED
|
(amounts in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
March
31, 2017
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable - (including $463 and
$160 due to related parties in 2017 and 2016)
|
|
$
|
526
|
|
|
$
|
238
|
|
Accrued expenses
|
|
|
53
|
|
|
|
59
|
|
Current portion of long term
debt
|
|
|
89
|
|
|
|
96
|
|
Total current liabilities
|
|
|
668
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Notes payable less current portion
|
|
|
293
|
|
|
|
296
|
|
Asset retirement obligation
|
|
|
2,770
|
|
|
|
2,770
|
|
Total liabilities
|
|
|
3,731
|
|
|
|
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 March 31, 2017 and December 31, 2016
|
|
|
20
|
|
|
|
20
|
|
Additional paid-in capital
|
|
|
58,838
|
|
|
|
58,838
|
|
Accumulated deficit
|
|
|
(55,299
|
)
|
|
|
(55,140
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
3,560
|
|
|
|
3,719
|
|
|
|
|
|
|
|
|
|
|
Total liabilities & equity
|
|
$
|
7,291
|
|
|
$
|
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 March 31,
|
|
|
2017
|
|
2016
|
Revenue
|
|
|
|
|
Oil and gas operations, net of royalties
|
|
$
|
195
|
|
|
$
|
219
|
|
Total Revenues
|
|
|
195
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Oil and gas operations
|
|
|
256
|
|
|
|
396
|
|
Corporate general and administrative
|
|
|
100
|
|
|
|
167
|
|
Total Operating Expenses
|
|
|
356
|
|
|
|
563
|
|
Operating earnings (loss)
|
|
|
(161
|
)
|
|
|
(344
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4
|
|
|
|
6
|
|
Interest expense
|
|
|
(7
|
)
|
|
|
(11
|
)
|
Other income (expense), net
|
|
|
(8
|
)
|
|
|
(2
|
)
|
Expense
|
|
|
(11
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
Earns (loss) form continuing operations
|
|
|
(172
|
)
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations
|
|
|
13
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares
|
|
$
|
(159
|
)
|
|
$
|
(296
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) per common share from continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Net income per common share from discontinued operations
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share-basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common and equivalent shares outstanding - basic
|
|
|
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 Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(159
|
)
|
|
$
|
(296
|
)
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
148
|
|
|
|
186
|
|
Write-off of retirement center assets
|
|
|
24
|
|
|
|
—
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Other current and non-current assets
|
|
|
134
|
|
|
|
11
|
|
Accounts payable and other liabilities
|
|
|
282
|
|
|
|
208
|
|
Net cash provided by (used) in operating activities
|
|
|
429
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Investment in undeveloped land
|
|
|
(10
|
)
|
|
|
—
|
|
Fixed asset additions
|
|
|
(2
|
)
|
|
|
(8
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(12
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Payment on notes payable
|
|
|
(10
|
)
|
|
|
(27
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(10
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
407
|
|
|
|
74
|
|
Cash and cash equivalents at beginning of year
|
|
|
113
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
520
|
|
|
$
|
547
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest on notes payable
|
|
$
|
7
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
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. Certain
reclassifications have been made to the prior year revenue and operating expense amounts in the statement of operations to conform
to the current year presentation.
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 three month period ended
March 31, 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 facility have be reflected a discontinued operations.
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 palace. In April 2012 the Company
entering into an agreement to fix the price it receives for the sale of its gas. For the five years ended April 2017 the Company
will receive $4.53 per MCF.
NOTE F: 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 trial judge ruled that the Company was not the alter-ego of
Eurenergy however that decision was subsequently reversed by the Court of Appeals. The matter was then appealed to the Texas
Supreme Court who determined that the damages had been miscalculated and sent the matter back to the Court of Appeals to
determine what the acutual damages should be. At this point the damages according to the courts appear to be in the range of
$32 million dollars. We anticipate that the matter will be sent back to the Texas Supreme Court.
Management notes that in connection
with the original appeal, the individual defendant deposited alternative security with the Trial Court to supersede the judgment
which the court determined to have a value in excess of $56 million. Management believes that the maximum exposure would be in
an amount significantly less than the amount on deposit. Accordingly, management believes that any adverse outcome is fully secured
by that deposit.
For a discussion of this legal
matter see Item: 3 of the Company’s Form 10-K for December 31, 2016.
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 H: NEWLY
ISSUED ACCOUNTING STANDARDS
In February 2016,
Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases was issued. This new guidance establishes a new model
for accounting for leases and provides for enhanced disclosures. ASU 2016-02 is effective for reporting periods beginning after
December 15, 2018. The Company is currently evaluating the impact the adoption of this guidance, if any, on its financial position
and results of operations.
NOTE I: SUBSEQUENT
EVENTS
The Company has evaluated subsequent
events through May 12, 2017, the date the financial statements were available to be issued, and 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 March 31, 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 March 31, 2017, the Company
had current assets of $715,000 and current liabilities of $688,000.
Cash and cash equivalents at
March 31, 2017 were $520,000 as compared to $113,000 at December 31, 2016.
Net cash provided by operating
activities was $429,000 for the three months ended March 31, 2017. During the three-month period, the Company had net
loss of $159,000.
Net cash used in investing
activities was $12,000 for the three months ended March 31, 2017, consisting of the purchase of land and equipment at the Company’s
oil and gas operations.
Net cash used in financing
activities was $10,000 for the three months ended March 31, 2017, consisting of the repayments of loans to a bank.
Results of Operations
Comparison of the three
months ended March 31, 2017 to the same period in 2016
The Company reported a net
loss of $159,000 for three months ended March 31, 2017, as compared to net loss of $296,000 for the similar period in 2016.
For the three months ended
March 31, 2017, the Company recorded oil and gas revenues of $195,000 as compared to $219,000 for the comparable period of 2016. The
decrease in oil & gas revenue for the three months ended March 31, 2017 was principally due to the production and price the
Company received for oil.
For the three months ended
March 31, 2017, the Company recorded oil and gas operating expenses of $256,000 as compared to $396,000 for the comparable period
of 2016.The decrease was due to a specific effort by management to reduce operation costs. The decrease represents a $28,000 reduction
in payroll costs and a reduction in general operating expenses of $38,000.
For the three months ended
March 31, 2017, operating expenses at the retirement property were $348,000, as compared to $394,000 for the comparable period
in 2016. The decreases were due to a reduction in general operating expenses and depletion.
For the three months ended
March 31, 2017, corporate general & administrative expenses were $100,000 as compared to $169,000 for the comparable periods
in 2016. The decrease was due to a decrease in payroll expenses of $23,000 as well as other administrative costs.
Comparison of the three
months ended March 31, 2016 to the same period in 2015
The Company reported a net
loss of $296,000 for three months ended March 31, 2016, as compared to net income of $314,000 for the similar period in 2015.
For the three months ended
March 31, 2016, the Company recorded oil and gas revenues of $219,000 as compared to $172,000 for the comparable period of 2015. The
increase in oil & gas revenue for the three months ended March 31, 2016 was $47,000. The increase is due to the production
of more gas in 2016 than 2015. During the first quarter of 2015 there was unusual harsh weather in the areas where the Company
maintains its wells. The weather severely hampered the Company’s ability to repair and maintain well equipment as well as
limited the pickups of oil from wells that were located in areas that were impossible to reach.
The Company recorded revenues
of $677,000 for the three months ended March 31, 2016 from its retirement property compared to $717,000 for the comparable period
in 2015. The decrease is due to reduced occupancy at the facility.
For the three months ended
March 31, 2016, the Company recorded oil and gas operating expenses of $396,000 as compared to $470,000 for the comparable period
of 2015.The decrease was due to a specific effort by management to reduce operation costs. The decrease represents a $41,000 reduction
in payroll costs and a reduction in general operating expenses of $38,000.
For the three months ended
March 31, 2016, operating expenses at the retirement property were $348,000, as compared to $394,000 for the comparable period
in 2015. The decreases were due to a reduction in general operating expenses.
For the three months ended
March 31, 2016, corporate general & administrative expenses were $166,000 as compared to $154,000 for the comparable periods
in 2015.
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.