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EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED - New Western Energy Corpnwec03311410qex32_1.htm
EX-31.2 - CERTIFICATION - New Western Energy Corpnwec03311410qex31_2.htm
EX-31.1 - CERTIFICATION - New Western Energy Corpnwec03311410qex31_1.htm

SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C. 20549  

 

Form 10-Q  

 

(Mark One)  
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   
   
  For the Quarterly Period Ended March 31, 2014
 
OR  
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   

 

For the transition period from ______________ to ______________

 

Commission File No. 0-54343

 

NEW WESTERN ENERGY CORPORATION

(Exact name of small business issuer as specified in its charter)

 

NEVADA

(State or other jurisdiction of

incorporation or organization)

7929

(Primary Standard Industrial

Classification Code Number)

26-3640580

(I.R.S. Employer

Identification No.)

 

1140 Spectrum, Irvine, CA 92618

(Address of principal executive offices)

 

(949) 435-0977

(Registrant’s telephone number, including area code)  

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

  Yes [x] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

  Yes [x[ No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [x]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 

  Yes [ ] No [x]

 

The number of shares of Common Stock, $0.0001 par value, of the registrant outstanding at May 19, 2014 was 73,146,448.

   
 

TABLE OF CONTENTS

 

PART I.     3  
         
Item 1. Financial Statements.     3  
         
Condensed Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013     3  
         
Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2014 and 2013 (Unaudited)     5  
         
Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2014 and  2013 (Unaudited)     6  
         
Notes to Unaudited Condensed Consolidated Financial Statements     8  
         
Item 2. Management’s Discussion and Analysis or Plan of Operation     21  
         
Item 3. Quantitative and Qualitative Disclosures About Market Risks.     25  
         
Item 4. Controls and Procedures     25  
         
PART II.     26  
         
Item 1. Legal Proceedings.     26  
         
Item 1A. Risk Factors.     26  
         
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.     26  
         
Item 3. Defaults Upon Senior Securities.     26  
         
Item 4. Mine Safety Disclosures.     26  
         
Item 5. Other Information.     26  
         
Item 6. Exhibits.     26  
         
SIGNATURES     27  
         
EXHIBIT INDEX     28  
         

 

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties.

 

Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “desire,” “goal,” “should,” “objective,” “seek,” “plan,” “strive” or “anticipate,” as well as variations of such words or similar expressions, or the negatives of these words. These forward-looking statements present our estimates and assumptions only as of the date of this Form 10-Q. Except for our ongoing obligation to disclose material information as required by the federal securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement. We caution readers not to place undue reliance on any such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes will likely vary materially from those indicated.

 

 

 

 

 

 

 

 

 

PART I.

Item 1.  Financial Statements.

 

New Western Energy Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

 
   March 31, 2014 (Unaudited)  December 31, 2013
ASSETS          
Current assets          
  Cash and cash equivalents  $597,281   $1,523,181 
  Accounts receivable   47,647    43,365 
  Inventory   70,991    24,713 
  Prepaid expenses and other assets   60,500    75,417 
Total current assets   776,419    1,666,676 
           
Property and equipment, net   192,837    201,556 
Oil and gas properties, net   1,491,139    1,459,233 
Mineral properties, net   21,796    38,143 
Deferred debt issuance cost, net   192,266    241,911 
Other assets   1,930    1,930 
Total Assets  $2,676,387   $3,609,449 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
Current liabilities          
  Accounts payable  $79,826   $67,984 
  Accrued expenses   97,019    70,491 
  Convertible notes payable, current portion, net of discount of $19,703 and $72,534 at March 31, 2014 and December 31, 2013   12,903    21,792 
  Embedded conversion option liability   818,196    809,716 
  Warrant liability   853,342    912,215 
  Payable to related party   —      1,922 
Total current liabilities   1,861,286    1,884,120 
           
Notes payable, long term portion, net of discount of $715,446 at March 31, 2014 and $782,310 at December 31, 2013, respectively   858,304    791,440 
Convertible notes payable, net of discount of $851,855 at March 31, 2014 and $1,101,586 at December 31, 2013, respectively   380,144    130,414 
Total long term liabilities   1,238,448    921,854 
           
Total Liabilities   3,099,734    2,805,974 
           
Commitments and contingencies (Note 9)          
           
Stockholders' Equity (Deficit)          
New Western Energy Corporation and Subsidiaries Stockholders' Equity (Deficit)          

 

 

New Western Energy Corporation and Subsidiaries

Condensed Consolidated Balance Sheets 

 

    March 31, 2014 (Unaudited)   December 31, 2013

 

Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding at March 31, 2014 and December 31, 2013, respectively   —      —   
Common stock, $0.0001 par value, 250,000,000 shares authorized, 73,146,448 and 72,185,866 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively   7,315    7,219 
Additional paid in capital   5,920,702    5,752,443 
Accumulated deficit   (6,774,533)   (5,468,129)
Total New Western Energy Corporation and Subsidiaries Stockholders' Equity (Deficit)   (846,516)   291,533 
Noncontrolling interest in consolidated subsidiary   423,169    511,942 
Total Stockholders' Equity (Deficit)   (423,347)   803,475 
Total Liabilities and Stockholders' Equity (Deficit)  $2,676,387   $3,609,449 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

New Western Energy Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
       
   For the three months ended March 31,
   2014  2013
       
Revenues  $71,388   $19,197 
           
Expenses          
  Depreciation, depletion and amortization   28,159    21,500 
  General and administrative   679,896    165,991 
  Impairment expense   —      —   
  Gain on sale of oil leases   —      (79,271)
  Oil and gas production   277,487    16,428 
Total expenses   985,542    124,648 
           
Loss from operations   (914,154)   (105,451)
           
Other income (expenses)          
  Interest expense   (712,627)   (17,832)
  Change in fair value of embedded conversion option and warrant liability income (expense)   231,604    (57,815)
Total other income (expenses)   (481,023)   (75,647)
           
Loss from operations before income tax   (1,395,177)   (181,098)
           
Provision for income tax   —      800 
           
Net loss applicable to common stock before allocation to noncontrolling interest   (1,395,177)   (181,898)
           
Net loss applicable to noncontrolling interest in consolidated subsidiary   (88,773)   (1,245)
           
Net loss applicable to New Western Energy Corporation common stock  $(1,306,404)  $(180,653)
           
Basic and diluted net loss per share applicable to New Western Energy Corporation's common stock  $(0.02)  $(0.00)
           
Weighted average number of shares outstanding - Basic and Diluted   69,102,095    68,436,908 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

New Western Energy Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

       
   For the three months ended March 31,
   2014  2013
Cash Flows from Operating Activities:          
Reconciliation of net loss to net cash used in operating activities:          
Net loss applicable to New Western Energy Corporation common stock  $(1,306,404)  $(180,653)
Adjustment to reconcile net loss to net cash used in operating activities:          
     Depreciation and depletion   11,812    5,153 
     Amortization of debt discount   379,426    13,283 
     Amortization of mineral property   16,347    16,347 
     Amortization of deferred debt issuance cost   49,645    —   
     Loss applicable to noncontrolling interest   (88,773)   (1,245)
     Gain on sale of oil and gas property and related equipment   —      (79,271)
     Change in fair value of embedded conversion option liability   48,114    57,815 
     Change in fair value of warrant liability   (58,873)   —   
Changes in operating assets and liabilities:          
      Accounts receivable   (4,282)   2,042 
      Inventory   (46,278)   —   
      Prepaid expenses and other current assets   71,917    60,000 
      Accounts payable   11,842    (15,496)
      Accrued expenses   26,529    10,150 
Net cash used in operating activities   (888,978)   (111,875)
           
Cash Flows From Investing Activities:          
Cash proceeds from sale of oil and gas property and related equipment   —      280,000 
Cash paid for expenses relating to sale of oil and gas property and related equipment   —      (104,300)
Cash paid for purchase and capitalized cost of oils and gas properties   (35,000)   (24,750)
Net cash (used in) provided by investing activities   (35,000)   150,950 
           
Cash Flows From Financing Activities:          
Cash proceeds from sale of common stock and warrants   —      158,000 
Cash paid for offering costs   —      (17,700)
Cash received from noncontrolling interest   —      650,000 
Cash received from convertible promissory notes   —      125,000 
Cash repayments for notes payable   —      (125,000)
Proceeds from related party advances   —      6,000 
Repayments of related party advances   (1,922)   (47,500)
Net cash (used in) provided by financing activities   (1,922)   748,800 
           
Net increase (decrease) in cash and cash equivalents   (925,900)   787,875 
           
Cash and cash equivalents, beginning of the period   1,523,181    5,092 
           
Cash and cash equivalents, end of the period  $597,281   $792,967 

 

 

 

New Western Energy Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
  For the three months ended March 31,
     2014       2013
Supplemental disclosures of cash flow information:          
  Cash paid for income taxes  $—     $—   
  Cash paid for interest  $45,288   $7,500 
           
Supplemental disclosures of non-cash investing and financing activities:          
Liability incurred for oil and gas property  $—     $110,430 
Debt discount  $—     $13,889 
Reclassification of derivative Liability to equity  $181,211   $—   
Settlement of debt by issuance of common shares  $71,721   $—   
Common shares issued to consultant as prepaid for services  $57,000   $40,000 
Common shares issued to director as prepaid for services  $—     $60,000 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

 

NOTE 1: NATURE OF OPERATIONS, BASIS OF PRESENTATION AND GOING CONCERN

 

New Western Energy Corporation (the “Company”) was incorporated in the State of Nevada on September 25, 2008. The Company’s principal business is the acquisition, exploration and development of, and production from oil, gas and mineral properties located in the United States.

 

On December 1, 2010, the Company formed an entity named New Western Texas Oil and Gas Corporation incorporated in the State of Nevada, as its wholly-owned subsidiary. New Western Texas Oil and Gas Corporation started its operations on January 2011. On May 3, 2013, New Western Texas Oil and Gas Corporation amended its Articles of Incorporation and changed its name to New Western Gas Corporation.

 

On January 2, 2012, the Company completed the acquisition of 100% of the issued and outstanding capital stock of Royal Texan Energy Co. (“RTE”) and RTE became our wholly-owned subsidiary and conducts business as a separate operating company.

 

On March 18, 2013, the Company formed an entity named 2013 NWE Drilling Program 1 LP (the “Limited Partnership”). The Company became the General Partner and owns 51% of the Limited Partnership. The Limited Partnership was specifically formed to drill three oil wells on the Company’s B&W Ranch lease in the Chautauqua County, Kansas (See Note 3).

 

Basis of presentation

 

The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of management of the Company, contain all adjustments, which include normal recurring adjustments and business acquisition adjustments, necessary to present fairly the financial position at March 31, 2014, and the results of operations and cash flows for the three months ended March 31, 2014 and 2013. The balance sheet as of December 31, 2013 is derived from the Company’s audited consolidated financial statements.

 

Certain information and footnote disclosures normally included in consolidated financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these consolidated financial statements are adequate to make the information presented therein not misleading. For further information, refer to the financial statements and the notes thereto contained in the Company’s 2013 Annual Report filed with the Securities and Exchange Commission on Form 10-K on April 14, 2014.

 

Going Concern

 

These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has not generated significant revenues since inception and has never paid any dividends and is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations. At March 31, 2014, the Company had working capital deficit of $1,084,869, incurred a net loss applicable to New Western Energy Corporation common stockholders of $1,306,404 during the three months ended March 31, 2014 and used cash in operating activities of $888,978. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries New Western Gas Corporation and Royal Texan Energy Co. and the Company’s 51% majority owned subsidiary 2013 NWE Drilling Program 1 LP. All intercompany balances and transactions are eliminated in consolidation.  

 

Noncontrolling Interest

 

The Company accounts for its less than 100% interest in consolidated subsidiaries in accordance with Financial Accounting Standards Board - Accounting Standards Codification (“ASC”)   Topic 810, Consolidation , and accordingly, the Company presents noncontrolling interests as a component of equity on its unaudited condensed consolidated balance sheets and reports noncontrolling interest net income or loss under the heading “Net (income) loss applicable to noncontrolling interest in consolidated subsidiary” in the unaudited condensed consolidated statements of operations.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to the valuation of marketable securities, valuation of accounts, notes and other receivables, valuation and purchase price allocation of assets acquired and liabilities assumed in business combinations, valuation of beneficial conversion features in convertible debt, valuation of derivatives, valuation of long-lived assets, goodwill and oil, gas and mineral properties, stock-based compensation and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

Derivative Instruments

 

ASC Topic 815, Derivatives and Hedging (“ASC Topic 815”), establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income (loss) depending upon the purpose of the derivatives and whether they qualify and have been designated for hedge accounting treatment. The Company does not have any derivative instruments for which it has applied hedge accounting treatment.

 

 

Oil and Gas Properties

 

The Company uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire interest in oil and gas properties, to drill and equip exploratory wells that find proved reserves, to drill and equip development wells and related asset retirement costs are capitalized. Costs to drill exploratory wells, including equipment and facilities are capitalized as part of “Uncompleted Wells, Equipment and Facilities” pending determination of whether the well has found proved reserves. Costs to drill exploratory wells that find proved reserves are reclassified to proved oil and gas properties while costs that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining undeveloped properties are expensed.

 

Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an impairment allowance. Management may also determine to initiate straight line amortization of a property over the remaining useful life of the lease if management is uncertain as to its ability to recover the asset value but immediate impairment is not indicated. Capitalized costs of producing oil and gas properties (proved or unproved), after considering estimated residual salvage values, are depleted by the unit-of-production method. Support equipment and other property and equipment are depreciated over their estimated useful lives.

 

On the sale or retirement of a complete unit of a proved property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income.

 

On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.

 

Mineral Properties

 

Costs of acquiring mining properties are capitalized upon acquisition in accordance with ASC 930 “Extractive Industries - Mining” if the property is determined to have commercially minable deposits. Mine exploration costs are expensed as incurred. Mine developments costs are expensed as incurred and are capitalized once proven and probable reserves exist. Costs incurred to maintain current production or to maintain assets on a standby basis are charged to operations. Costs of abandoned projects are charged to operations upon abandonment.

 

Depletion of producing mineral properties is recorded using the unit-of-production method.

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

 

Fair value of Financial Instruments and Fair Value Measurements

 

ASC 820, Fair Value Measurements and Disclosures, requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

 

Level 1

 

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2

 

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

The Company’s financial instruments consist principally of cash, amounts receivable, accounts payable, notes payable, embedded conversion option liabilities, and amounts due to related parties. Pursuant to ASC 820, Fair Value Measurements and Disclosures and ASC 825, Financial Instruments, the fair value of our cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The Company believes that the recorded values of all of the other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.

 

Assets and liabilities measured at fair value on a recurring and non-recurring basis consist of the following at March 31, 2014:

 

      Fair Value Measurements at March 31, 2014
   Carrying Value at March 31, 2014 (Unaudited)  (Level 1) (Unaudited)  (Level 2) (Unaudited)  (Level 3) (Unaudited)
             
Mineral Properties  $21,796   $—     $—     $21,796 
                     
Warrant Liabilities  $853,342   $—     $—     $853,342 
                     
Embedded Conversion Option Liability  $818,196   $—     $—     $818,196 

 

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

 

The following is a summary of activity of Level 3 assets and liabilities for the period ended March 31, 2014:

  

Mineral Properties     
Balance - December 31, 2013  $38,143 
Additions   —   
Change in fair value   (16,347)
Balance – March 31, 2014  $21,796 
      
Warrant Liabilities     
Balance - December 31, 2013  $912,215 
Additions   —   
Change in fair value   (58,873)
Balance – March 31, 2014  $853,342 
      
Embedded Conversion Option Liability     
Balance - December 31, 2013  $809,716 
Additions   —   
Change in fair value   (172,731)
Reclassification to equity   181,211 
Balance – March 31, 2014  $818,196 

 

Changes in fair value of the embedded conversion liability are included in other income (expense) in the accompanying unaudited consolidated statements of operations.

 

Revenue Recognition

 

The Company sells crude oil and minerals under short-term agreements at prevailing market prices. Revenue, which is the Company's net revenue interest in the leased property, is recognized at the point of sale, when the crude oil and minerals are extracted from our storage units by the customer. This is at the point where the customer has taken title and has assumed the risks and rewards of ownership, the sales price is fixed or determinable and collectability is reasonably assured.

 

For sale of gas, the Company records revenue based on an estimate of the volumes delivered at the agreed-upon price and then adjusts revenue in subsequent periods based upon the data received from the purchaser that reflects actual volumes received. Generally, proceeds from gas production are received from one to three months after the actual delivery has occurred. Thus, it is usually necessary to estimate gas revenue based on prior months’ production volumes and current lease operating data, such as meter readings, in order to prepare financial statements on a timely basis.

 

 

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

 

Net Earnings (Loss) Per Share

 

The Company computes net earnings (loss) per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted net earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing earnings (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. At March 31, 2014, there were Class D, E and F Warrants outstanding for 14,278,420 common shares that if exercised, may dilute future earnings per share, 3,000,000 stock options outstanding awarded to employees and consultants, and there were convertible debt convertible into 6,651,782 common shares that may dilute future earnings per share.

 

Recent Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

NOTE 3: NONCONTROLLING INTEREST IN CONSOLIDATED SUBSIDIARY

 

On March 18, 2013, the Company formed a new entity 2013 NWE Drilling Program 1 LP (the “Limited Partnership”). The Limited Partnership was specifically formed to drill three oil wells on the Company’s B&W Ranch lease in the Chautauqua County, Kansas. The Company became the General Partner and owns 51% of the Limited Partnership. The Limited Partnership closed upon receiving a cash contribution of $650,000 from one non-affiliate shareholder of the Company as the Limited Partner, and the Company’s contribution as the General Partner was $6,500 in cash and giving the rights and commitment to the Limited Partnership to drill three oil wells on the Company’s B&W Ranch lease. Pursuant to the terms of the partnership agreement, the Limited Partner will be entitled to receive 70% of the net income and cash available for distributions until such time an amount equal to the Limited Partner’s initial investment plus a 50% return on such initial investment is received by the Limited Partner. Thereafter, net income and cash available for distributions shall be allocated 20% to the Limited Partner and 80% to the General Partner. The Limited Partnership will enter into turnkey drilling agreement with the managing General Partner, to drill and complete the partnership wells. The turnkey price includes all ordinary costs of drilling, testing and completing the wells. When the wells begin producing, the General Partner, as operator of the wells will be reimbursed at actual cost for all direct expenses incurred on behalf of the Limited Partnership, and will receive a fixed fee of $250 per well per month for supervising, operating and maintaining the wells during production operations. The Limited Partnership recorded a loss of $88,773 and $1,245 for the three months ended March 31, 2014 and 2013, respectively, and the Company allocated the Limited Partnership’s loss to its noncontrolling members in its consolidated financial statements as of March 31, 2014.

 

The following provides a summary of activity in the noncontrolling interest in consolidated subsidiary account for the three months ended March 31, 2014:

    
Balance at December 31, 2013  $511,942 
Contribution by noncontrolling interest member   —   
Net loss applicable to noncontrolling interest   (88,773)
Balance at March 31, 2014  $423,169 

 

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

NOTE 4: OIL AND GAS PROPERTIES

 

The Company's aggregate capitalized costs related to unproved oil and gas properties consist of the following:

Name of the Property  Type  March 31,
2014
(Unaudited)
  December 31,
2013
Rogers County, OK - Glass Lease   Oil   $221,000   $221,000 
Rogers County, OK - Phillips Lease   Oil    130,000    130,000 
Rogers County, OK (9) Leases   Oil    378,600    378,600 
Chautauqua County, KS - B&W Ranch Lease   Oil & Gas    75,000    75,000 
Chautauqua County, KS - Charles & Nancy Smith Lease   Oil & Gas    24,750    24,750 
Chautauqua County, KS - Lloyd & Patricia Fields Lease   Oil & Gas    14,400    14,400 
Chautauqua County, KS - Rinck Lease   Oil & Gas    24,750    24,750 
Wilson County, KS – Farwell, Puckett & Farwell/Eagle Lease   Gas    251,208    251,208 
Wilson County, KS – Volunteer & Landers Lease   Oil & Gas    470,000    470,000 
Nowata County, OK (4) Leases   Oil & Gas    35,000    —   
Shackelford County, TX - Terry Heirs   Oil    9,722    9,722 
         1,634,430    1,599,430 
Accumulated depletion        (9,791)   (6,697)
Impairment allowance        (133,500)   (133,500)
        $1,491,139   $1,459,233 
Impairment allowance is allocated as follows:               
 Glass Lease       $123,778   $123,778 
Terry Heirs Lease      $9,722   $9,722 

 

There were no exploration well costs capitalized for more than one year following the completion of drilling.

 

The following oil and gas leases were acquired and sold during the three months ended March 31, 2014.

 

Acquisition of Moab Oil and Gas Project, Nowata County, Oklahoma

On February 28, 2014, the Company entered into a Lease Purchase Agreement (“Agreement”) with Moab Oil and Gas, LLC and a third party, to purchase leasehold interest in four oil and gas leases named as Taylor Lease, Roberts Lease, Roebuck Lease and Walker Lease, consisting of 217 acres located in Nowata County, Oklahoma. The Company has paid the total consideration of $35,000 as of March 31, 2014. The Company has not started any oil and gas exploration on this lease as of March 31, 2014. 

 

 

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

NOTE 5: MINERAL PROPERTIES

 

The Company’s aggregate capitalized costs related to unproved mineral properties consist of the following:

 

Name of Property  Type  March 31, 2014
(Unaudited)
  December 31,
 2013
          
Wellsboro Lease   Gravel   $103,530   $103,530 
         103,530    103,530 
Less: Accumulated depletion        —      —   
         103,530    103,530 
Less: Amortization        (81,734)   (65,387)
        $21,796  $38,143 

 

The lease term of Wellsboro Lease expires on July 31, 2014. Since there was no production of minerals during the three months ended March 31, 2014 and 2013, no depletion expense relating to mineral properties has been recorded for the three months ended as of March 31, 2014 and 2013. The Company has taken a conservative position to amortize the lease acquisition cost over the remaining term of the lease. The Company recorded amortization expense of $16,347 for the three months ended March 31, 2014 and 2013, which is included in depreciation, depletion and amortization expenses in the consolidated financial statements. The Company has not started any gravel exploration on the Wellsboro Lease as of March 31, 2014.

 

NOTE 6: NOTES PAYABLE

 

Notes payable consist of:  March 31,  December 31,
   2014  2013
   (Unaudited)   
Note payable to a third party, unsecured, bearing interest at 5% per annum, due on September 30, 2015, is subordinated in right of payment to the prior payment in full of all bank rediscount line of credit or loan   73,750    73,750 
           
Stockholder note payable, secured, bearing interest at 10% per annum, due on October 31, 2015, is subordinated in right of payment to the prior payment in full of all future bank rediscount lines of credit or loans   1,500,000    1,500,000 
           
    1,573,750    1,573,750 
Notes payable - Current Portion   —      —   
Notes payable - Longterm Portion   1,573,750    1,573,750 
Less: Unamortized discount   (715,446)   (782,310)
   $858,304   $791,440 
           

The Company recorded interest expense on these notes of $38,409 and $4,549 for the three months ended March 31, 2014 and 2013, respectively.  

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

NOTE 7: CONVERTIBLE NOTES PAYABLE 

 

Convertible notes payable consist of:

   March 31,  December 31,
   2014  2013
   (Unaudited)   
Note payable to a third party, bearing one-time interest of 12%, one year term, due on June 5, 2014 (Convertible Note 2)  $—     $38,771 
           
Note payable to a third party, bearing one-time interest of 12%, one year term, due on September 26, 2014 (Convertible Note 3)   32,606    55,555 
           
Note payable to a third party, bearing interest of 8% per annum, due February 1, 2015 (Convertible Note 4)   1,232,000    1,232,000 
Convertible notes payable   1,264,606    1,326,326 
Less: unamortized debt discount   (871,559)   (1,174,120)
Convertible notes payable, net   393,046    152,206 
Less: current portion   (12,903)   (21,792)
Convertible notes payable, non-current  $380,144   $130,414 

 

Convertible Note 2

On June 5, 2013, the Company received $75,000 (the “Draw”) from a third party against a $500,000 Convertible Promissory Note (the “Note 2”) executed on June 4, 2013. The total consideration receivable against the Note 2 was $450,000, with the Note 2 bearing $50,000 original issue discount (OID) resulting in a principal amount due on this draw of $83,333. A one-time interest charge of 12% shall be applied to the principal sum. Any interest payable is in addition to the OID, and that OID (or prorated OID, if applicable) remains payable regardless of time and manner of payment by the Company. The maturity date is one year from the effective date of each payment and is the date upon which the principal sum of this promissory note, as well as any unpaid interest and other fees, shall be due and payable. The lender has the right at any time after the effective date, at its election, to convert all or part of the outstanding and unpaid principal sum and accrued interest into shares of fully paid and non-assessable shares of common stock of the Company as per the conversion formula: Number of shares receivable upon conversion equals the dollar conversion amount divided by the Conversion Price. The Conversion Price is the lessor of $0.22 or 67.5% of the lowest trade price in the 25 trading days previous to the conversion.

 

In connection with the issuance of the Note 2, the Company recorded a loan discount related to the OID in the amount of $8,333 which will be amortized to interest expense over the term of the Draw. In accordance with ASC 815, the Company recognized a debt discount related to the bifurcated embedded conversion option derivative liability in the amount of $75,000 which will be amortized to interest expense over the term of the Draw and an initial change in fair value of $42,591 for a total initial embedded conversion option liability of $117,591. For the year ended December 31, 2013, the Company has recognized interest expense of $4,691 related to the amortization of the OID and $43,773 related to the amortization of the embedded conversion option liability discount as it related to this Note 2. Furthermore, on December 5, 2013 and December 19, 2013, the Company converted $22,425 and $22,137 of the debt by issuance of 200,000 shares and 250,000 shares, respectively, of its common stock valued at $0.112125 per share and $0.08855 per share (See Note 11). On January 16, 2014 and February 11, 2014, the Company converted $24,948 and $23,823 of the debt by issuance of 240,000 shares and 220,582 shares, respectively, of its common stock valued at $0.10395 per share and $0.10800 per share (See Note 11). The Note 2 was converted in full $83,333 of the principal sum due and $19,802 of embedded conversion option liability was reclassified to equity. For the three months ended March 31, 2014, the Company has recognized interest expense of $13,643 related to the amortization of the OID and $31,168 related to the amortization of the embedded conversion option liability discount as it related to this Note 2.

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

Convertible Note 3

On September 26, 2013, the Company received $50,000 (the “Draw”) from a third party against a $500,000 Convertible Promissory Note (the “Note 3”) executed on September 25, 2013. The total consideration receivable against the Note 3 was $450,000, with the Note 3 bearing $50,000 original issue discount (OID) resulting in a principal amount due from this draw of $55,556. A one-time interest charge of 12% shall be applied to the principal sum. Any interest payable is in addition to the OID, and that OID (or prorated OID, if applicable) remains payable regardless of time and manner of payment by the Company. The maturity date is one year from the effective date of each payment and is the date upon which the principal sum of this promissory note, as well as any unpaid interest and other fees, shall be due and payable. The lender has the right at any time after the effective date, at its election, to convert all or part of the outstanding and unpaid principal sum and accrued interest into shares of fully paid and non-assessable shares of common stock of the Company as per the conversion formula: Number of shares receivable upon conversion equals the dollar conversion amount divided by the Conversion Price. The Conversion Price is the lessor of $0.22 or 67.5% of the lowest trade price in the 25 trading days previous to the conversion.

 

In connection with the issuance of the Note 3, the Company recorded a loan discount related to the OID in the amount of $5,555 which will be amortized to interest expense over the term of the Draw. In accordance with ASC 815, the Company recognized a debt discount related to the bifurcated embedded conversion option derivative liability in the amount of $50,000 which will be amortized to interest expense over the term of the Draw and an initial change in fair value of $17,511 for a total initial embedded conversion option liability of $67,511. For the year ended December 31, 2013, the Company has recognized interest expense of $1,461 related to the amortization of the OID and $13,151 related to the amortization of the embedded conversion option liability discount as it related to this Note 3. On March 27, 2014, the company converted $22,950 of the debt by issuance of 200,000 shares of its common stock valued at $0.12150 per share (See Note 11).

 

Based on the conversion amounts an aggregate $21,959 was reclassified from the embedded conversion option liability to additional paid in capital. For the three months ended March 31, 2014, the Company has recognized interest expense of $1,359 related to the amortization of the OID and $12,406 related to the amortization of the embedded conversion option liability discount as it related to this Note 3. The note balance was $32,606 at March 31, 2014.

 

Convertible Note 4

On November 6, 2013, the Company entered into a Definitive Agreement (the "Securities Agreement") for a private offering with an Investor for the sale of the Company’s securities (debt and warrants) for $1,232,000. The offering closed on November 15, 2013 (“funding date”).

 

Debt issue costs paid to or on behalf of the lender were $84,386. This amount plus an original issue discount (OID) of $132,000 and warrant discount discussed below of $1,219,332 were allocated by charging $1,232,000 to debt discount and $203,718 to change in fair value of warrant liability, and recorded in other expense in the accompanying statements of operations.

 

The Company engaged a placement agent with respect to the Offering. The Company paid the placement agent upon receipt of the gross proceeds at the Closing, a commission of $95,000 plus 250,000 shares of the Company’s restricted common stock valued at $77,500 based on the fair value of common stock on the date of Agreement. The Company also paid $35,000 in other issue costs to third parties. The total $207,500 is recorded as a deferred debt issue costs as an asset. All discounts and debt issue costs are being amortized to interest expense over the debt term of 1.22 years.

 

The Company closed the offering on November 15, 2013 and received net cash proceeds of $936,233.

 

The securities were sold pursuant to the Securities Purchase Agreement entered into by and among the Company and the Investor (the “Agreement”) and consists of (i) 8% original issue discount senior secured convertible promissory debentures in the issuance amount of $1,232,000 (the “Debentures”) and (ii) three year warrants to purchase 6,383,420 shares of the Company’s common stock, which are exercisable at $0.2316 per share. The net proceeds from the offering will be used by the Company for drilling and rework of oil and gas wells and general working capital. The Agreement contained certain customary representations, warranties and covenants 

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

 

The Debentures are convertible into shares of Common Stock at any time prior to maturity at $0.193 per share (the “Conversion Price”), subject to certain conversion limitations set forth in the Debentures and certain price protection described below. The Company shall pay interest on the aggregate unconverted and then outstanding principal amount of the Debenture at the rate of 8% per annum, payable quarterly on February 1, May 1, August 1 and November 1, beginning on May 1, 2014. Interest is payable in cash or at the Company’s option in shares of Common Stock, provided certain conditions are met, based on a share value equal to the lesser of (a) 90% of the average of the volume weighted average price (the “VWAP”) for the 20 consecutive trading days prior to the applicable interest payment date and (b) 100% of the average of the VWAP for the 20 consecutive trading days prior to the applicable interest payment date less $0.01. On each of May 1, 2014, August 1, 2014, November 1, 2014, and February 1, 2015, the Company is obligated to redeem an amount equal to $308,000 (plus accrued but unpaid interest, liquidated damages and any other amounts then owing in respect of the Debentures) (collectively, the “Periodic Redemption Amount”).

 

In lieu of a cash redemption and subject to the Company meeting certain equity conditions described in the Debentures, the Company may elect to pay the Periodic Redemption Amount in shares based on a conversion price equal to the lesser of (a) $0.193 per share, subject to adjustments upon certain events, and (b) 90% of the average of the VWAP for the 20 consecutive trading days prior to the applicable redemption date. Upon any Event of Default (as defined in the Debenture), the outstanding principal amount of the Debenture, plus liquidated damages and interest, shall become, at the Investors’ election, immediately due and payable in cash.  Commencing five days after the occurrence of any Event of Default, the interest rate on the Debentures shall accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. At any time after the 6 month anniversary of the Closing Date, the Company may prepay any portion of the outstanding principal amount of any Debentures, plus liquidated damages, interest, a premium of 20% and other amounts owing in respect thereof through the applicable date of optional redemption, subject to notice to the Investor. The Debentures contain customary affirmative and negative covenants of the Company. The Conversion Price is subject to “full ratchet” and other customary anti-dilution protections.

 

The Warrants are exercisable for a period of three years and are subject to “weighted average” and other customary anti-dilution protections including full ratchet protection.

 

As collateral security for all of the Company’s obligations under the Securities Agreement and related documents executed in connection with the Offering, the Company and its subsidiaries (the “Subsidiaries”), granted the Investor a first priority security interest in all of the Company’s and Subsidiaries assets pursuant to the terms of the Security Agreement. To further secure the Company's obligations, the Subsidiaries also executed a Guarantee, dated as of November 6, 2013 (the “Guaranty”), pursuant to which the Subsidiaries have agreed to guaranty the Company’s obligations owed to the Investor.

 

Due to the “full ratchet” price protection in warrant, the warrant is accounted for as a derivative liability in the balance sheet at fair value. The warrant liability was valued at the funding date at its fair value of $1,219,332 using the Black-Scholes option pricing model with the following assumptions; stock price $0.22, expected term of 3 years, expected volatility of 175% and discount rate of 0.58%. The warrant value was allocated $1,015,614 to debt discount and $203,718 to change in fair value of warrant liability, an other expense in the accompanying statements of operations.

 

Due to the “full ratchet” price protection in the convertible Debenture, the embedded conversion feature was bifurcated and accounted for as a derivative liability in the balance sheet at fair value. The initial valuation and recording of this derivative liability was $972,532 using the Black-Scholes option pricing model with the following assumptions; stock price $0.22, expected term of 1.22 years, expected volatility of 176% and discount rate of 0.75%, and charged to change in fair value of embedded conversion option liability, an other expense. The note balance was $1,232,000 at March 31, 2014.

 

For the three months ended March 31, 2014, the Company has recognized and recorded interest expense of $66,061 related to Note 2, Note 3 and Note 4, respectively, and $533,708 related to the amortization of other discounts of Note 2, Note 3 and Note 4, respectively.

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

 

NOTE 8: RELATED PARTY TRANSACTIONS AND BALANCES

 

Payable to Related party

 

At March 31, 2014 and December 31, 2013, advances, net of repayments, made to the Company by the Chief Executive Officer (“Officer”) for its working capital requirements amounted to $0 and $1,922, respectively. Amounts due to the Officer are unsecured, non-interest bearing and due on demand without specific repayment terms.

 

On June 1, 2013, the Company entered into a business consulting and marketing agreement with its non-executive director for a twelve months period at the rate of $2,500 per month. The Company recorded an expense of $7,500 as consulting fees for the three months ended March 31, 2014.

 

The Company engages an entity owned by a director of the Company to be the operator on its oil and gas lease properties in Wilson County, Kansas. The Company has paid the operator $218,787 for lease operating expenses and administration for these oil and gas leases for the three months ended March 31, 2014.

 

The Company paid $15,000 to a director for consulting and business advisory services for the three months ended March 31, 2014. No payments were made during the three months ended March 31, 2013.

 

NOTE 9: COMMITMENTS AND CONTINGENCIES

 

Legal Costs and Contingencies

 

In the normal course of business, the Company incurs costs to hire and retain external legal counsel to advise it on regulatory, litigation and other matters. The Company expenses these costs as the related services are received.

 

 

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

 

NOTE 10: STOCKHOLDERS' EQUITY

 

The Company’s capitalization at March 31, 2014 was 250,000,000 authorized common shares and 5,000,000 authorized preferred shares, both with a par value of $0.0001 per share.

 

Common Stock

 

On February 1, 2014, the Company entered into a non-exclusive agreement with a third party consultant to develop, coordinate, manage and execute a comprehensive corporate finance and investor relations campaign for the Company for a six month period. The Company issued 300,000 shares of its common stock valued at $57,000 for such services. The common shares issued are valued at the closing price of stock on the effective date of the consulting agreement and the value is recorded as a prepaid expense to be amortized over the service period.

 

On January 13, 2014 and February 10, 2014, the Company converted $24,948 and $23,823 of its convertible debt (Convertible Note 2 - See Note 7) by issuance of 240,000 shares and 220,582 shares of its common stock valued at $0.10395 per share and $0.10800 per share, respectively (See Note 7). On March 26, 2014, the Company converted $22,950 of its convertible debt (Convertible Note 3 – See Note 7) by issuance of 200,000 shares of its common stock valued at $0.11475 per share (See Note 7).

 

As a result of all stock, options and warrant issuances as of March 31, 2014, the Company had 73,146,448 shares of common stock issued and outstanding, 3,000,000 stock options for conversion into common stock, 395,000 Class D Warrants, 7,500,000 Class E Warrants, and 6,383,420 Class F Warrants for conversion into common stock.

 

NOTE 11: DERIVATIVE FINANCIAL INSTRUMENTS

 

Under the provisions of ASC 815-40, convertible instruments issued by the Company qualify for derivative treatment due to the variable conversion formula (Note 7). The embedded conversion features of the convertible note is bifurcated and recorded as a liability which is revalued at fair value each reporting date. If the fair value of the embedded conversion feature exceeds the face value of the related debt, net of other discounts, the excess is recorded as a change in fair value on the issuance date. Embedded conversion features are valued at their fair value, rather than by the intrinsic value method.

 

The Company calculated the estimated fair values of the liabilities for embedded conversion feature at March 31, 2014 with the Black-Scholes option pricing model using the closing price of the Company’s common stock at each respective date and the ranges for volatility, expected term and risk free interest indicated in the table below. As a result, the Company recorded a change in the fair value of the liabilities for embedded conversion option derivative instruments for the three months ended March 31, 2014 of $172,731 which was included in other expense (See Note 2 Fair Value Measurements).

 

Embedded Conversion Options

    Black-Scholes Model Assumptions
    During Three Months Ended March 31, 2014
     
Volatility   159.82
Expected term   0.50 – 0.84 years
Risk free interest rate   0.13%

 

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

March 31, 2014

(Unaudited)

 

NOTE 12: CONCENTRATIONS

 

Concentration of Operators

As of March 31, 2014, the Company uses two operators for the leased properties for which the Company has current activities. The Company also has one mineral lease with another lessor. There has been no activity on the mineral lease other than initial lease acquisition costs relating to the mineral lease as of March 31, 2014.

 

Concentration of Customer

The Company sells its oil product to one customer and gas product to a separate customer.

 

Concentration of Credit Risk

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through March 31, 2014. The Company’s bank balances exceeded FDIC insured amounts as of March 31, 2014.

 

NOTE 13: SUBSEQUENT EVENTS

 

On April 30, 2014, the Company announced that it had terminated the agreement to acquire Legend Oil & Gas, Ltd. that was announced on January 7, 2014. Under the proposed terms, the acquisition price would have been at a significant premium to the price of the stock prior to the termination and would not have been in the best interest of the stockholders of the Company. 

 

 

 

 

 

Item 2. Management’s Discussion and Analysis or Plan of Operation    

 

This 10-Q contains forward-looking statements. Our actual results could differ materially from those set forth as a result of general economic conditions and changes in the assumptions used in making such forward-looking statements. The following discussion and analysis of our financial condition and results of operations should be read together with the audited consolidated financial statements and accompanying notes and the other financial information appearing elsewhere in this report. The analysis set forth below is provided pursuant to applicable Securities and Exchange Commission regulations and is not intended to serve as a basis for projections of future events.

 

Overview

We are an oil and gas and mineral exploration and production company with current projects located in Kansas, Oklahoma and Texas. Our principal business is in the acquisition, exploration and development of, and production from oil, gas and mineral properties. We have a limited operating history with nominal revenues. On December 1, 2010, we formed an entity named New Western Texas Oil and Gas Corporation (“New Western Texas”) incorporated in the State of Nevada, as our wholly-owned subsidiary. New Western Texas started its operations in January 2011. On May 3, 2013, we changed the name of New Western Texas to New Western Gas Corporation (“New Western Gas”). On January 2, 2012, we acquired 100% of the issued and outstanding capital stock of Royal Texan Energy Co. (“RTE”), a Texas corporation. RTE’s principal business operations are acquisitions, exploration and development of, and production from oil and gas properties located in Texas. We acquired RTE primarily due to its lease ownership interests in oil and gas properties and the Company’s requirement to have an operator for exploration and production of oil and gas in Texas. On March 18, 2013, we formed 2013 NWE Drilling Program 1 LP, a California Limited Partnership (the “Limited Partnership”). We became the General Partner and own 51% of the Limited Partnership. A shareholder of the Company became the limited partner holding 49% of the Limited Partnership. The Limited Partnership was specifically formed to drill three oil wells on the Company’s B&W Ranch lease in the Chautauqua County, Kansas.

 

We incorporated in the State of Nevada on September 25, 2008. Our principal executive offices are located at 1140 Spectrum, Irvine, California 92618. Our telephone and fax numbers are (949) 435-0977 and (949) 861-3123, respectively.

 

Our Current Business

Our principal business strategy is to build our business through the acquisition of producing oil and natural gas wells, interests and leases. We plan to ultimately engage in the acquisition and exploration of oil and gas properties and to exploit oil and gas reserves we discover that demonstrate economic feasibility. We plan to explore new oil and natural gas wells and continue on recovery from stripper wells. A “stripper well” or “marginal well” is an oil well that is nearing the end of its economical life. Oil wells are generally classified as stripper wells when they produce ten barrels per day or less for any twelve month period. We plan to acquire working interests in oil and natural gas production companies in the United States that are located in oil and gas producing areas. We believe that there are opportunities in these areas for the development of additional oil and gas reserves. Such new reserves might come from the development of existing but as yet undeveloped reserves as well as from future success in exploration. We seek to add proved reserves and increase production through the use of advanced technologies, including detailed reservoir engineering analysis, drilling development wells utilizing sophisticated techniques and selectively recompleting existing wells. We also focus on reducing the operating costs associated with our properties. We believe that the properties we have acquired have significant potential and in certain cases have not been actively developed in the past.

 

From time to time management has been engaged in preliminary discussions with potential investors and merger candidates in this industry. However, no letter of intent or other document has been prepared in connection with these preliminary discussions. There are currently no agreements or arrangements with respect to any merger or similar transaction.

 

Results of Operations

Our consolidated results of operations for the three months ended March 31, 2014 and 2013 included the operation of the Company, our wholly-owned subsidiaries New Western Gas Corporation and Royal Texan Energy Co., and our 51% majority owned subsidiary 2013 NWE Drilling Program 1 LP.

 

 

We reported a net loss applicable to the Company’s common stockholders of $1,306,404 for the three months ended March 31, 2014 compared to a net loss of $180,653 for the same comparable period in 2013. The increase in loss was principally attributable to an increase in (i) general and administrative expenses relating to payroll costs, legal, professional and consulting fees, (ii) change in the fair value of embedded conversion option liability of convertible promissory note, (iii) oil and gas production costs, (iv) amortization, depreciation and depletion costs incurred by the Company, and (v) higher interest costs due to additional loans and amortization of debt discounts.

 

Revenues

Revenues for the three months ended March 31, 2014 were $71,388 compared to $19,197 for the same comparable period in 2013. Revenues for the three months ended March 31, 2014 consisted of oil sales of $32,599 from Volunteer and Lander leases in Kansas and Winchester II lease in Oklahoma, and $37,739 in gas sales from Farwell and Puckett leases in Kansas, and $1,050 from disposal of salt water. Revenues increased by $52,191 for the three months ended March 31, 2014 as compared to the comparable prior year period primarily due to the increased output of oil extraction from the Volunteer, Lander and Winchester II Lease and by production and sale of gas from Farwell and Puckett leases.

 

Operating Expenses

General and administrative expenses (G&A) for the three months ended March 31, 2014 were $679,896 compared to $165,991 for the same comparable period in 2013. G&A expenses increased by $513,905 primarily due to the increase in consulting fees, increase in investor relations and marketing expenses, legal and professional costs incurred associated with the proposed merger with Legend Oil and Gas Corporation, increase in compensation expense of officer, increase in legal and professional fees and increase in travel and other administrative expenses incurred to manage and expand operations.

 

Oil and gas production expenses for the three months ended March 31, 2014 were $277,487 compared to $16,428 for the same comparable period in 2013. Oil and gas production expenses increased by $261,059 during the three months ended March 31, 2014 as compared to the same comparable period in 2013, primarily due to the Company expending $184,777 on exploration, drilling and production costs associated with Farwell gas lease and Volunteer oil lease, and $76,282 incurred in lease operating costs to maintain the remaining oil and gas properties. The Company did not own Farwell and Volunteer leases in 2013.

 

Depreciation, depletion and amortization expense for the three months ended March 31, 2014 were $28,159 as compared to $21,500 for the same comparable period in 2013. Depreciation expense increased as a result of placing additional oil and gas equipment of $225,134 in service since April 1, 2013 which resulted in increase in depreciation for the three months ended March 31, 2014 by $8,634 as compared to prior year comparable period. Depletion expense remained relatively the same for the comparable periods. We recorded the same amortization expense of $16,347 for the three months ended March 31, 2014 and 2013 because we took a conservation position in January 2013 to amortize the lease acquisition costs of unproved mineral properties over the remaining term of the lease.

 

Gain on sale of oil leases for the three months ended March 31, 2014 was $0 as compared to $79,271 for the same comparable period in 2013. On February 28, 2013, we sold 100% of our working interest in 402 acres of oil and gas leases in the Swenson, McLellan and Reves leases located in Jones County, Texas to a third party and recorded a gain of $79,271 as a result of the sale of these leases.

 

Interest expense for the three months ended March 31, 2014 was $712,627 as compared to $17,832 for the same comparable period in 2013. Interest expense increased by $694,795 for the three months as compared to the same comparable periods in 2013 as a result of (i) interest expense of $62,712 for the three months ended March 31, 2014 on three promissory notes executed by us for our working capital needs and acquisitions, (ii) interest expense of $108,623 for the three months ended March 31, 2014 related to the amortization of the original issue discount, (iii) interest expense of $268,675 for the three months ended March 31, 2014 related to the amortization of the debt discount due to embedded conversion option liabilities on convertible notes, (iv) interest expense of $49,645 for the three months ended March 31, 2014 related to the amortization of debt issue costs, and (v) interest expense of $222,972 relating to the amortization of debt discount on warrants and lender fees on a convertible note. We did not borrow any working capital pursuant to executing convertible notes in 2013.

 

 

The convertible note issued by us on June 5, 2013 for $75,000, on September 26, 2013 for $50,000, and on November 6, 2013 for $1,232,000, and on November 5, 2013 promissory note to a stockholder of 1,500,000 with warrants attached qualifies for derivative accounting treatment due to the variable conversion formula. As a result, we recorded a change in the fair value of the liabilities for the embedded conversion option derivative instrument of $231,604 for the three months ended March 31, 2014, which was included in other expenses as of March 31, 2014.

 

Our 51% owned subsidiary 2013 NWE Drilling Program 1 LP recorded a loss of $181,169 for the three months ended March 31, 2014. We allocated $88,773 of the limited partnership’s loss to its noncontrolling member in our consolidated financial statements as of March 31, 2014. As a result, the noncontrolling interest of the limited partner was reduced to $423,169 at March 31, 2014.

 

Liquidity and Capital Resources

Cash and cash equivalents were $597,281 at March 31, 2014 compared to $1,523,181 at December 31, 2013. As shown in the accompanying consolidated financial statements, a loss of $1,306,404 was applicable to New Western Energy Corporation common stockholders for the three months ended March 31, 2014 compared to a loss of $180,653 for the same comparable period in 2013. Net cash used in operating activities for the three months ended March 31, 2014 was $888,978. These factors and our ability to meet our debt obligations from current operations, and the need to raise additional capital to accomplish our objectives, raises doubt about our ability to continue as a going concern.

 

We expect our expenses will continue to increase during the foreseeable future as a result of increased operational expenses and the development of additional oil and gas wells. We anticipate generating only minimal revenues over the next twelve months. Consequently, we are dependent on the proceeds from future debt or equity investments to sustain our operations and implement our business plan. If we are unable to raise sufficient capital, we will be required to delay or forego some portion of our business plan, which would have a material adverse affect on our anticipated results from operations and financial condition. There is no assurance that we will be able to obtain necessary amounts of capital or that our estimates of our capital requirements will prove to be accurate.

 

We presently do not have any significant credit available, bank financing or other external sources of liquidity. Due to our historical operating losses, our operations have not been a source of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding.

 

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders. If additional funds are raised through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. Regardless of whether our cash assets prove to be inadequate to meet our operational needs, we may seek to compensate providers of services by issuance of stock in lieu of cash, which may also result in dilution to existing shareholders. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing.

 

 

We have been successful in the past in raising capital, however, no assurance can be given that these sources of financing will continue to be available to us and/or that demand for our equity/debt instruments will be sufficient to meet our capital needs, or that financing will be available on terms favorable to us. If funding is insufficient at any time in the future, we may not be able to take advantage of business opportunities or respond to competitive pressures, or may be required to reduce the scope of our planned service development and marketing efforts, any of which could have a negative impact on our business and operating results. In addition, insufficient funding may have a material adverse effect on our financial condition, which could require us to: 

.Curtail our operations significantly
.Sell our oil, gas and mineral leases
.Seek arrangements with strategic partners or other parties that may require us to relinquish significant rights to oil, gas and mineral leases or markets, or
.Explore other strategic alternatives including a merger or sale of our Company.

 

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2014 was $888,978 which resulted primarily from our net loss of $1,306,404, depreciation, depletion and amortization of $28,159, amortization of debt discount of $379,426, amortization of deferred debt issuance cost of $49,645, loss applicable to non-controlling interest of $88,773, change in fair value of embedded conversion option liability of $48,114, change in fair value warrant liability of $58,873, increase in accounts receivable of $4,282, increase in inventory of $46,278, decrease in prepaid expenses and other current assets of $71,917, increase in accounts payable of $11,842, and increase in accrued expenses of $26,529.

 

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2014 was $35,000 primarily due to net cash paid for acquisition of oil and gas properties of $35,000.

 

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2014 was $1,922. due to cash repayment of advances received from a related party of $1,922.

 

As a result of the above activities, we experienced a net decrease in cash of $925,900 for the three months ended March 31, 2014. Our ability to continue as a going concern is still dependent on our success in obtaining additional financing from investors or from sale of our common shares.

 

Off-balance Sheet Arrangements

 

Since our inception through March 31, 2014, we have not engaged in any off-balance sheet arrangements as defined in Item 303(c) of the SEC's Regulation S-B.

 

Recent Accounting Pronouncements

 

We have implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risks.

 

Not Applicable.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are designed with an objective of ensuring that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Disclosure controls are also designed with an objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer, in order to allow timely consideration regarding required disclosures.

 

The evaluation of our disclosure controls by our principal executive officer included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report. Our management, including our Chief Executive Officer, does not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, our Principle Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures as of March 31, 2014 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

 

PART II.

 

Item 1. Legal Proceedings.

 

On November 12, 2013, a complaint was filed in the District Court of Taylor County, Texas, captioned Brent and Brook Hatchett v. New Western Energy Corporation, Case No. 25,863-B. The complaint asserts breach of contract on the part of the Company relating to a Plan and Agreement of Reorganization (the “Contract”) wherein the Company acquired all of the issued and outstanding capital stock of Royal Texan Energy Co. from the Hatchetts. The Hatchetts are seeking the remaining consideration of 600,000 common shares of New Western Energy Corporation payable to them for the acquisition by New Western Energy Corporation of Royal Texan Energy Co. in addition to general damages.

 

On January 22, 2014, the Company filed an answer denying any wrongdoing and a counterclaim against the Hatchetts, alleging fraudulent inducement and misrepresentations by the Hatchetts in addition to breach of contract and fiduciary duty. The Company is seeking among other things, damages from the Hatchetts, including exemplary damages and court costs and reasonable and necessary attorney’s fees.

 

The Company believes that the Hatchetts’ claims are baseless and is vigorously defending accordingly.

 

We are not a party to any other legal proceedings.

 

Item 1A. Risk Factors.

 

Not Applicable

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures.

 

None

 

Item 5. Other Information.

 

None

 

Item 6. Exhibits.

 

(a) Exhibits.

 

Exhibit   Item
31.1   Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
     
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  NEW WESTERN ENERGY CORPORATION
   
Date: May 19, 2014 /s/ Javan Khazali
 

Javan Khazali, President

(Principal Executive Officer)

   
Date: May 19, 2014 /s/ Haris Baha
 

Haris Baha, Chief Financial Officer

(Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 

EXHIBIT INDEX

 

Exhibit   Item
31.1   Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
     
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002