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 September 30, 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 November 17, 2014 was 75,292,086.

TABLE OF CONTENTS

  Page No.

PART I.
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013			2
Condensed Consolidated Statements of Operations for the Three Months and Nine Months ended September 30, 2014 and 2013 (Unaudited)			4
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2014 and  2013 (Unaudited)			5
Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis or Plan of Operation			24
Item 3. Quantitative and Qualitative Disclosures About Market Risks.			28
Item 4. Controls and Procedures			28
PART II.			30
Item 1. Legal Proceedings.			30
Item 1A. Risk Factors.			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			30
Item 3. Defaults Upon Senior Securities.			30
Item 4. Mine Safety Disclosures.			31
Item 5. Other Information.			31
Item 6. Exhibits.			31
SIGNATURES			31
EXHIBIT INDEX

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

(Unaudited)

		September 30, 2014				December 31, 2013
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	29,063			$	1,523,181
Accounts receivable			54,065				43,365
Inventory			34,546				24,713
Notes receivable, net			65,000				—
Prepaid expenses and other current assets			142,983				75,417
Total current assets			325,657				1,666,676
Property and equipment, net			216,448				201,556
Oil and gas properties, net			1,014,263				1,459,233
Mineral properties, net			—				38,143
Deferred debt issuance cost, net			33,455				241,911
Other assets			1,930				1,930
Total Assets		$	1,591,753			$	3,609,449
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable		$	69,057			$	67,984
Accrued expenses			79,936				22,582
Accrued interest payable			103,593				47,909
Note payable, current portion			183,750				—
Convertible notes payable, current portion, net of discount of $999 at September 30, 2014 and $72,534 at December 31, 2013			12,166				21,792
Embedded conversion option liability			19,365				809,716
Warrant liability			441,014				912,215
Payable to related party			—				1,922
Total current liabilities			908,881				1,884,120
Notes payable, long term portion, net of discount of $579,489 at September 30, 2014 and $782,310 at December 31, 2013			920,511				791,440
Convertible notes payable, net of discount of $0 at September 30, 2014 and $1,101,586 at December 31, 2013			—				130,414
Total long term liabilities			920,511				921,854
Total Liabilities			1,829,392				2,805,974
Commitments and contingencies (Note 10)

 

New Western Energy Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (continued)

(Unaudited)

  

		September 30, 2014				December 31, 2013
		(Unaudited)
Stockholders' (Deficit) Equity
New Western Energy Corporation and Subsidiaries Stockholders' Equity
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, 254,000 and 0 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively			25				—
Common stock, $0.0001 par value, 250,000,000 shares authorized, 74,806,448 and 72,185,866 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively			7,481				7,219
Additional paid in capital			6,872,976				5,752,443
Accumulated deficit			(7,418,893	)			(5,468,129	)
Total New Western Energy Corporation and Subsidiaries Stockholders' (Deficit) Equity			(538,411	)			291,533
Noncontrolling interest in consolidated subsidiary			300,772				511,942
Total Stockholders' (Deficit) Equity			(237,639	)			803,475
Total Liabilities and Stockholders' (Deficit) Equity		$	1,591,753			$	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 September 30,								For the nine months ended September 30,
		2014				2013				2014				2013
Revenues
Oil and gas sales		$	131,660			$	37,876			$	313,782			$	68,870
Operating expenses
Depreciation, depletion and amortization			18,904				29,694				76,785				77,961
General and administrative			505,932				508,079				1,587,743				962,759
Oil and gas production			144,631				(106,696	)			512,062				223,148
Total operating expenses			669,467				431,077				2,176,590				1,263,868
Loss from operations			(537,807	)			(393,201	)			(1,862,808	)			(1,194,998	)
Other income (expenses)
Interest expense			91,140				(32,949	)			(1,288,617	)			(175,246	)
Gain on sale of oil leases			—				—				—				77,594
Loss on settlement of debt			(128,168	)			—				(128,168	)			—
Change in fair value of embedded conversion option and warrant liability			304,802				(3,034	)			1,131,241				(127,359	)
Total other income (expenses)			267,774				(35,983	)			(285,544	)			(225,011	)
Income (loss) from operations before income tax			(270,033	)			(429,184	)			(2,148,352	)			(1,420,009	)
Provision for income tax			—				—				—				—
Net loss			(270,033	)			(429,184	)			(2,148,352	)			(1,420,009	)
Preferred stock dividend			(11,204	)			—				(13,582	)			—
Net income (loss) applicable to common stock before allocation to noncontrolling interest			(281,237	)			(429,184	)			(2,161,934	)			(1,420,009	)
Net income (loss) applicable to noncontrolling interest in consolidated subsidiary			(81,672	)			(10,354	)			(211,170	)			(106,701	)
Net income (loss) applicable to New Western Energy Corporation common stock		$	(199,565	)		$	(418,830	)		$	(1,950,764	)		$	(1,313,308	)
Basic and diluted net loss per share applicable to New Western Energy Corporation's common stock		$	(0.00	)		$	(0.01	)		$	(0.03	)		$	(0.02	)
Weighted average number of shares outstanding - Basic and Diluted			74,265,144				68,655,866				73,460,791				68,757,858
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 nine months ended September 30,
		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		$	(1,950,764	)		$	(1,313,308	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and depletion			38,642				28,919
Amortization of debt discount			966,951				151,641
Amortization of mineral property			38,143				49,041
Amortization of stock based compensation expense			—				139,667
Stock options compensation expense for services			—				243,730
Modification of stock options exercise price			—				42,412
Amortization of deferred debt issuance cost			137,887				—
Loss applicable to noncontrolling interest			(211,170	)			(106,701	)
Gain on sale of oil and gas property and related equipment			—				(77,594	)
Loss on settlement of convertible note payable			128,168				—
Change in fair value of embedded conversion option liability			(654,692	)			127,359
Change in fair value of warrant liability			(471,201	)			—
Changes in operating assets and liabilities:
Accounts receivable			(10,700	)			(26,248	)
Inventory			(9,833	)			(29,938	)
Prepaid expenses and other current assets			171,434				30,000
Other assets			—				(480	)
Accounts payable			1,073				(7,316	)
Accrued expenses			89,746				7,260
Accrued interest payable			55,684				16,106
Net cash used in operating activities			(1,680,632	)			(725,450	)
Cash Flows From Investing Activities:
Cash paid for purchase of property and equipment			(43,564	)			(152,868	)
Cash proceeds from sale of oil and gas property and related equipment			—				410,000
Cash advanced towards a note receivable			(75,000	)			—
Cash received towards a note receivable			10,000				—
Cash paid for expenses relating to sale of oil and gas property and related equipment			—				(99,680	)
Cash paid for purchase and capitalized cost of oil and gas properties, net			(50,000	)			(155,958	)
Net cash (used in) provided by investing activities			(158,564	)			1,494
Cash Flows From Financing Activities:
Cash received from sale of common stock and warrants			—				158,000
Cash received from sale of preferred stock			635,000				—
Cash paid for offering costs			—				(52,700	)
Cash received from noncontrolling interest			—				650,000
Cash received from convertible promissory notes			20,000				550,000
Cash repayments for notes payable			(308,000	)			(417,639	)
Proceeds from related party advances			—				6,000
Repayments of related party advances			(1,922	)			(48,500	)
Net cash provided by financing activities			345,078				845,161

 

New Western Energy Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
		For the nine months ended September 30,
		2014				2013
Net increase (decrease) in cash and cash equivalents			(1,494,118	)			121,205
Cash and cash equivalents, beginning of the period			1,523,181				5,092
Cash and cash equivalents, end of the period		$	29,063			$	126,297
Supplemental disclosures of cash flow information:
Cash paid for income taxes		$	—			$	—
Cash paid for interest		$	90,462			$	28,889
Supplemental disclosures of non-cash investing and financing activities:
Embedded conversion option liability		$	—			$	(235,430	)
Debt discount		$	73,591			$	27,778
Reclassification of derivative liability to equity		$	—			$	213,068
Promissory notes issued for lease purchases		$	110,000			$	120,000
Exchange of oil and gas properties for settlement of convertible notes payable		$	595,000			$	—
Settlement of convertible note payable in exchange for oil lease properties		$	924,000			$	—
Settlement of debt by issuance of common shares		$	91,161			$	—
Common shares issued to consultant as prepaid for services		$	259,000			$	97,000
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

September 30, 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 a 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).

 

On May 28, 2014, the Company formed New Western Operating LLC, a wholly-owned subsidiary that will take over all operational duties for its leases and oil and gas exploration, drilling and production in the state of Kansas.

 

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 necessary to present fairly the financial position at September 30, 2014, and the results of operations and cash flows for the nine months ended September 30, 2014. 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 interim consolidated financial statements are adequate to make the information presented therein not misleading. For further information, refer to the consolidated 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, and the attainment of profitable operations.

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

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

 

At September 30, 2014, the Company had working capital deficit of $583,224, incurred a net loss applicable to New Western Energy Corporation common stockholders of $1,950,764 during the nine months ended September 30, 2014 and used cash in operating activities of $1,680,632. 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.

 

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, Royal Texan Energy Co. and New Western Operating LLC, 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 accounts, notes and other receivables, valuation of beneficial conversion features in convertible debt, valuation of derivatives, valuation of long-lived assets 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.

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Accounting for Derivatives

 

The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability.  In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense).  Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.  Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date. The Company does not have any derivative instruments for which it has applied hedge accounting treatment.

 

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, warrant liabilities, 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.

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Assets and liabilities measured at fair value on a recurring and non-recurring basis consist of the following at September 30, 2014: 

		Carrying Value at September 30,				Fair Value Measurements at September 30, 2014
		2014 (Unaudited)				(Level 1) (Unaudited)				(Level 2) (Unaudited)				(Level 3) (Unaudited)
Warrant Liability		$	441,014			$	—			$	—			$	441,014
Embedded Conversion Option Liability		$	19,365			$	—			$	—			$	19,365

 

The following is a summary of activity of Level 3 assets and liabilities for the period ended September 30, 2014:

  

Warrant Liability
Balance - December 31, 2013		$	912,215
Additions			—
Change in fair value			(471,201	)
Balance – September 30, 2014		$	441,014
Embedded Conversion Option Liability
Balance - December 31, 2013		$	809,716
Additions			5,348
Change in fair value			(660,040	)
Reclassification to equity			(135,659	)
Balance - September 30, 2014		$	19,365

 

Changes in fair value of the warrant and embedded conversion liabilities 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

September 30, 2014

(Unaudited)

 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 notes and 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 September 30, 2014, there were Class D, E and F Warrants outstanding for 16,818,420 common shares that if exercised, may dilute future earnings per share, 3,000,000 stock options outstanding awarded to employees and consultants, and there was convertible debt convertible into 485,638 common shares that may dilute future earnings per share.

 

Reclassification of Prior Period Amounts

 

Certain amounts in comparative periods have been reclassified in the Company’s consolidated financial statements and related footnotes to conform to the current presentation. Accrued Interest payable for $47,909 has been broken out from Accrued Expenses in the December 31, 2013 consolidated balance sheet. Gain on Sale of Oil Leases for $77,594 has been reclassified from Operating Expenses to Other Income (Expense) and Provision for Income Tax for $800 (represents California Franchise Tax) has been reclassified to General and Administrative expenses on the consolidated statement of operations in the Nine Months ended September 30, 2013. The change in Accrued Interest payable for $16,106 has been broken out from Accrued Expenses in the consolidated Cash Flow for the nine months ended September 30, 2013.

 

Recent Accounting Pronouncements

 

In August 2014 the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires management of the Company to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company does not expect this standard to have an impact on the Company’s consolidated financial statements upon adoption.

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

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 51% owned subsidiary 2013 NWE Drilling Program 1 LP recorded a loss of $166,678 and $430,960 for the three and nine months ended September 30, 2014. We allocated $81,672 and $211,170 of the limited partnership’s loss for the three and nine months ended September 30, 2014 to its noncontrolling member in our consolidated financial statements as of September 30, 2014. As a result, the noncontrolling interest of the limited partner was reduced to $300,772 at September 30, 2014.

   

The following provides a summary of activity in the noncontrolling interest in consolidated subsidiary account for the nine months ended September 30, 2014:

 

Balance at December 31, 2013		$	511,942
Contribution by noncontrolling interest member			—
Net loss applicable to noncontrolling interest			(211,170	)
Balance at September 30, 2014		$	300,772

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 4: OIL AND GAS PROPERTIES

 

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

Name of the Property		Type		September,30, 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
Chautaugua 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		Oil & Gas			251,208				251,208
Wilson County, KS – Volunteer & Landers Lease		Oil			—				470,000
Nowata County, OK (4) Leases		Gas			35,000				—
Shackelford County, TX – Terry Heirs		Oil			9,722				9,722
					1,164,430				1,599,430
Accumulated depletion					(16,667	)			(6,697	)
Impairment allowance					(133,500	)			(133,500	)
				$	1,014,263			$	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 nine months ended September 30, 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 purchase consideration of $35,000 as of March 31, 2014. The Company has started gas exploration on this lease and sold 7,535 MCF of gas for $24,124 as of September 30, 2014. 

 

Sale of Volunteer & Landers Leases, Wilson County, Kansas

On December 11, 2013, the Company completed the acquisition of 87.5% working interest in Volunteer Lease which consists of approximately 440 acres with 14 existing oil wells and 3 water injection wells and Landers Lease, which consists of approximately 160 acres with 3 existing oil wells in Wilson County, Kansas.  The Company acquired the leases from a third party for an aggregate purchase price of $470,000 consisting of $100,000 cash and 1,480,000 shares of NWE’s restricted common stock.  On August 31, 2014, the Company acquired the remaining 12.5% working interest from an entity owned by a director for $125,000. The Company paid $15,000 in cash and executed a promissory note for $110,000 (See Note 7). On September 4, 2014, the Company executed a three party agreement where the Company sold Volunteer & Landers Leases to a third party Legend Oil & Gas Limited (“Legend”) and in exchange, the Company obtained a release of security interest against its assets and extinguishment of a Convertible Promissory Note 4 (See Note 8) in full settlement. As a result of the sale and extinguishment of debt, the Company recorded a loss of $128,168 as of September 30, 2014.

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 5: MINERAL PROPERTIES

 

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

 

Unproved Mineral Property

 

		Type				September 30, 2014				December 31,  2013
							(Unaudited)
Wellsboro Lease			Gravel			$	103,530			$	103,530
							103,530				103,530
Less: Accumulated depletion							—				—
							103,530				103,530
Less: Amortization							(103,530	)			(65,387	)
						$	—			$	38,143

 

The lease term of Wellsboro Lease expired on July 31, 2014. Since there was no production of minerals during the nine months ended September 30, 2014 and 2013, no depletion expense relating to mineral properties has been recorded for the three months and nine months ended as of September 30, 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 $5,449 and $38,143 for the three months and nine months ended September 30, 2014 as compared to $16,347 and $49,041 for the same comparable periods in 2013. The amortization of lease acquisition cost 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 September 30, 2014.

 

NOTE 6: NOTE RECEIVABLE

 

On April 1, 2014, the Company made a short-term advance of $75,000 to Legend, an entity with whom the Company had previously entered into a merger agreement on January 23, 2014. The advance is non-interest bearing, unsecured and is to be returned to the Company by Legend by February 28, 2015 or within 60 days, if the merger between the Company and Legend is terminated, whichever first occurs. On April 30, 2014, the Company terminated the merger agreement with Legend. The Company has received $10,000 in cash from Legend as of September 30, 2014. The Company expects to receive the remaining balance from Legend by March 31, 2015.

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 7: NOTES PAYABLE

 

Notes payable consist of:

		September 30,				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
Note payable to an entity owned by a director, secured, bearing interest at 5% per annum, due on August 31, 2015			110,000				—
			1,683,750				1,573,750
Notes payable - Current Portion			(183,750	)			—
Notes payable – Long term Portion			1,500,000				1,573,750
Less: Unamortized debt discount			(579,489	)			(782,310	)
Notes payable – Long term, net of debt discounts		$	920,511			$	791,440

 

The Company recorded interest expense on these notes of $38,888 and $115,716 for the three months and nine months ended September 30, 2014, and $11,335 and $23,606 for the three months and nine months ended September 30, 2013, respectively.  

  

NOTE 8: CONVERTIBLE NOTES PAYABLE 

 

Convertible notes payable consist of:

		September 30,				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)			13,165				55,555
Note payable to a third party, bearing interest of 8% per annum, due February 1, 2015 (Convertible Note 4)			—				1,232,000
Convertible notes payable			13,165				1,326,326
Less: unamortized debt discounts			(999	)			(1,174,120	)
Convertible notes payable, net of debt discounts			12,166				152,206
Less: current portion			(12,166	)			(21,792	)
Convertible notes payable, non-current		$	—			$	130,414

 

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 8: CONVERTIBLE NOTES PAYABLE (continued)

 

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 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 and $19,802 of embedded conversion option liability was reclassified to equity. For the three months and nine months ended September 30, 2014, the Company has recognized interest expense of $0 and $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.

 

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.

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 8: CONVERTIBLE NOTES PAYABLE (continued)

 

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 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 $0.1215 per share. On April 14, 2014, the Company converted $19,440 of the debt by issuance of 160,000 shares of its common stock valued at $0.1215 per share (See Note 12).

 

Based on the conversion amounts an aggregate $135,659 was reclassified from the embedded conversion option liability to additional paid in capital for Note 3 and Note 4. For the three months and nine months ended September 30, 2014, the Company has recorded interest expense of $1,400 and $3,977 related to the amortization of the OID and $12,603 and $35,967 related to the amortization of the embedded conversion option liability discount as it related to this Note 3. The note balance at September 30, 2014 was $13,165.

 

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.

 

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

September 30, 2014

(Unaudited)

 

NOTE 8: CONVERTIBLE NOTES PAYABLE (continued)

 

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 was 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”). The Company made the Periodic Redemption Amount of $308,000 on May 1, 2014 in the accordance with the redemption of debenture but failed to make a payment of $308,000 due on August 1, 2014. On August 11, 2014, the Company received a default notice from the debt holder requesting for the default amount due plus all accrued but unpaid interest.

 

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.

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 8: CONVERTIBLE NOTES PAYABLE (continued)

 

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 $924,000 at June 30, 2014.

 

On September 4, 2014, the Investor assigned all rights evidenced by the Securities Purchase Agreement, 8% Original Issue Discount Senior Secured Convertible Debenture issued by the Company to Legend Oil & Gas Ltd. pursuant to a Loan Release Agreement. In addition, the Investor waived all the obligations and restrictions on the Company as set forth the agreements and authorizing the Company to file termination of secured financing statements as required under the Security Purchase Agreement. On September 4, 2014, pursuant to the Loan Release Agreement, in exchange for the transfer and assignment of all of the Company’s right, title and interest in Volunteer and Lander Lease to Legend, Legend shall release and forgive the remaining balance owed on the debenture in the amount of $924,000 owed by the Company to the Investor. The investor was allowed to retain the 1,500,000 warrants as part of the settlement negotiations. As a result, the Company recorded $128,168 as a loss on sale of Volunteer and Lander Leases to Legend in settlement of its convertible promissory note to the investor as of September 30, 2014.

 

For the three months and nine months ended September 30, 2014, the Company has recorded interest expense of $18,952 and $66,691 related to Note 2, Note 3 and Note 4, respectively, and $125,804 and $427,484 related to the amortization of other discounts of Note 2, Note 3 and Note 4, respectively.

 

NOTE 9: RELATED PARTY TRANSACTIONS AND BALANCES

 

At September 30, 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 month period at the rate of $2,500 per month. On May 1, 2014, the agreement was extended for a twelve month period at the rate of $5,000 per month. The Company recorded an expense of $15,000 and $35,000 as consulting fees for the three months and nine months ended September 30, 2014.

 

On July 1, 2014, the Company entered into a business advisory and consulting agreement for a twelve months term, with a management company related to the Chief Executive Officer. The Company agreed to pay $5,000 monthly cash payment and issued 400,000 shares of its common stock valued at $56,000. 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. The Company recorded an expense of $29,000 as consulting expense for the three months and nine months ended September 30, 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 $493,582 and $737,156 for lease operating expenses and administration for these oil and gas leases for the three months and nine months ended September 30, 2014.

 

On August 31, 2014, the Company acquired the remaining 12.5% working interest in Volunteer and Lander Leases in Wilson County, Kansas, from an entity owned by a director for $125,000. The Company paid $15,000 in cash and executed a promissory note for $110,000 (See Note 7).

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 9: RELATED PARTY TRANSACTIONS AND BALANCES (continued)

 

The Company paid $0 and $40,000 to a director for consulting and business advisory services for the three months and nine months ended September 30, 2014. No payments were made during the three months and nine months ended September 30, 2013.

 

The Company recorded director fee expense of $12,000 and $104,000 for the three months and nine months ended September 30, 2014 of which $18,000 remains payable as of September 30, 2014. No payments were made during the three months and nine months ended September 30, 2013.

 

NOTE 10: COMMITMENTS AND CONTINGENCIES

 

Legal Costs and Contingencies

 

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 and the Hatchetts’ are currently in settlement negotiations.

 

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.

 

NOTE 11: STOCKHOLDERS' EQUITY

 

The Company’s authorized common shares and preferred shares at September 30, 2014 were 250,000,000 and 5,000,000 shares respectively, 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 8) 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 8). On March 26, 2014 and April 14, 2014, the Company converted $22,950 and $19,440 of its convertible debt (Convertible Note 3 – See Note 8) by issuance of 200,000 shares and 160,000 shares of its common stock valued at $0.11475 per share and $0.1215 per share (See Note 8).

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 11: STOCKHOLDERS’ EQUITY (continued)

 

On May 1, 2014, the Company entered into a business consulting agreement for a six month period with a third party to consult with the officers and employees concerning matters relating to the management and marketing of the Company. The Company issued 300,000 shares of its common stock valued at $54,000 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 June 1, 2014, the Company entered into a business consulting agreement for a three month period with a third party to consult with the officers and employees concerning matters relating to the management and marketing of the Company. The Company issued 200,000 shares of its common stock valued at $32,000 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 July 1, 2014, the Company entered into a business advisory and consulting agreement for a twelve months term, with a management company related to the Chief Executive Officer. The Company issued 400,000 shares of its common stock valued at $56,000. 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 September 1, 2014, the Company entered into an agreement with a consultant for a six months term, providing business services relating to energy and financial services. The Company issued 600,000 shares of its common stock valued at $60,000. 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.

 

Preferred stock

 

On April 1, 2014, the Company offered to sell pursuant to a private placement, under a Regulation S offering to non-US investors only, 1,500,000 Units to raise $7,500,000. The minimum investment in this offering is for 5,000 Units for $25,000. Each Unit consists of two (2) shares of Series A 7% Convertible Preferred Stock, par value $0.0001 per share and one (1) redeemable Class F Warrant of the Company to purchase ten (10) shares of common stock. Each share of Series A Preferred Stock pays a 7% annual dividend for the first year ending March 31, 2015 and thereafter, a 10% dividend payable, at the option of the Company, in cash or in the Company’s common stock. Each Class F Warrant entitles the holder thereof to purchase, at any time until the expiration date of March 31, 2017, ten (10) shares of Common Stock at an exercise price of $0.30 per share, subject to adjustment. The Class F Warrants are redeemable by the Company, at a redemption price of $0.05 per Warrant, upon at least 30 days’ prior written notice, commencing six months after the date of this private placement, if the average of the closing bid price of the Common Stock, as reported on the Over-The-Counter or other exchange, shall equal or exceed $1.00 per share (subject to adjustment) for ten (10) consecutive business days prior to the notice of redemption. The Units are being offered on a “best effort basis” by the Company through its officers and directors and selected finders and broker/dealers.

 

The Company has sold 127,000 Units and raised $635,000 as of September 30, 2014. The Company has issued 254,000 Series A 7% convertible Preferred Shares, par value $0.0001 per share, and warrants to purchase 2,540,000 shares of common shares at an exercise price of $0.30 per share as of September 30, 2014.

 

As a result of all stocks, options and warrant issuances as of September 30, 2014, the Company had 74,806,448 shares of common stock issued and outstanding, 254,000 of preferred 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 8,923,420 Class F Warrants for conversion into common stock.

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 12: 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 8). 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 September 30, 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 and warrant derivative instruments for the three months and nine months ended September 30, 2014 of $304,802 and $1,131,241 which was included in other expense (See Note 2 Fair Value Measurements).

 

Embedded Conversion Options

	Black-Scholes Model Assumptions
	For the Nine Months Ended September 30, 2014
Volatility		117.66 - 159.82
Expected term		0.01 – 1.09 years
Risk free interest rate		0.10% - .13%

 

NOTE 13: CONCENTRATIONS

 

Concentration of Operators

As of September 30, 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 September 30, 2014.

 

Concentration of Customer

The Company sells its oil product to two separate customers and gas products to two separate customers.

 

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 September 30, 2014. The Company’s bank balances exceeded FDIC insured amounts as of September 30, 2014.

New Western Energy Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

NOTE 14: SUBSEQUENT EVENTS

Pursuant to the September 25, 2014 private placement, under a Regulation S offering to non-US investors only to sell 400,000 Units to raise $2,000,000, on October 3, 2014, the Company received $140,500 from the sale of 28,100 Units to an accredited investor. Each Unit consists of two (1) share of Series A 7% Convertible Preferred Stock, par value $0.0001 per share and one (1) redeemable Class G Warrant of the Company to purchase five (5) shares of common stock.

 

On October 16, 2014, the Company converted $19,832 of the debt by issuance of 485,638 shares of its common stock valued at $0.040838 per share. The Conversion Price is the lesser of $0.11 or 67.5% of the lowest trade price of $0.06 in the 25 trading days previous to the conversion.

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. On May 28, 2014, we formed New Western Operating LLC, our wholly-owned subsidiary, to handle all operational duties for managing our leases and oil and gas exploration, drilling and production in the state of 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 and nine months ended September 30, 2014 included the operation of the Company, our wholly-owned subsidiaries New Western Gas Corporation, Royal Texan Energy Co. and New Western Operating, LLC, and our 51% majority owned subsidiary 2013 NWE Drilling Program 1 LP. Our consolidated results of operations for the three months and nine months ended September 30, 2013 included the operation of the Company, our wholly-owned subsidiaries New Western Gas Corporation, 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 $199,565 for the three months ended September 30, 2014 and a net loss of $1,950,764 for the nine months ended September 30, 2014 compared to a net loss of $418,830 and $1,313,308 for the same comparable periods in 2013. The decrease in loss for the three months ended September 30, 2014 as compared to 2013 was primarily due to the change in fair value of embedded conversion option and warrant liability of $304,802. The increase in loss for the nine months ended September 30, 2014 as compared to 2013 was principally attributable to an increase in (i) general and administrative expenses relating to payroll costs, legal, professional and consulting fees, (ii) oil and gas production costs, (iii) amortization, depreciation and depletion costs incurred by the Company, and (iv) higher interest costs due to additional loans and amortization of debt discounts. The increase in loss for the nine months ended September 30, 2014 was offset by change in the fair value of embedded conversion option and warrant liability of convertible promissory note.

 

Revenues

Revenues for the three months and nine months ended September 30, 2014 were $131,660 and $313,782 compared to $37,876 and $68,870 for the same comparable periods in 2013. Revenues for the three months ended September 30, 2014 consisted of oil sales of $78,611 from Volunteer, Lander and Puckett leases in Kansas, Winchester II and Anna lease in Oklahoma, and $51,649 in gas sales from Farwell and Puckett leases in Kansas, and Moab leases in Oklahoma, and $1,400 from disposal of salt water. Revenues for the three months ended September 30, 2013 consisted of gas sales from Farwell and Puckett leases acquired on June 1, 2013. Revenues increased by $93,784 and $244,912 for the three months and nine months ended September 30, 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 and nine months ended September 30, 2014 were $505,932 and $1,557,743 compared to $508,079 and $962,759 for the same comparable periods in 2013. Although G&A expenses decreased by $2,147 for the three months ended September 30, 2014 as compared to 2013, the Company recorded an increase in business advisory, consulting and professional fees for the three months ended September 30, 2014 as compared to 2013. The Company recorded stock compensation expense of $306,142 recorded for the three months ended September 30, 2013 and no such expense was recorded during the three months ended September 30, 2014. G&A expense increased by $624,984 for the nine months ended September 30, 2014 primarily due to the increase in business advisory and consulting fees of $366,615, increase in legal and professional costs incurred associated with the failed merger with Legend Oil & Gas Ltd. of $62,664, increase in compensation expense of officer of $135,828, and increase in travel and other administrative expenses incurred to manage and expand operations.

 

Oil and gas production expenses for the three months and nine months ended September 30, 2014 were $144,630 and $512,062 compared to $(106,696) and $223,148 for the same comparable periods in 2013. Oil and gas production expenses increased by $251,326 and $288,914 for the three months and nine months ended September 30, 2014 as compared to the same comparable period in 2013, primarily due to the Company expending $232,171 on exploration, drilling and production costs associated with Magnus #1 and Anna #1 wells on its B&W Ranch lease in Kansas and the Company expending funds in operating Volunteer, Landers, Winchester II, Anna and Puckett oil leases, and Farwell, Puckett and Moab gas leases and costs to maintain the remaining oil and gas properties. The Company did not own Farwell and Volunteer leases in 2013 and received a refund of $110,000 for the drilling operations at Magnus #1 and Anna #1 wells on its B&W Ranch Lease in Kansas.

Depreciation, depletion and amortization expense for the three months and nine months ended September 30, 2014 was $18,904 and $76,785 as compared to $29,694 and $77,961 for the same comparable periods in 2013. Depreciation expense increased by $1,527 and $3,542 for the three months and nine months ended September 30, 2014 as a result of placing additional oil and gas equipment of $38,669 in service since January 1, 2014. Depletion expense remained relatively the same for the three months ended September 30, 2014 and 2013, and increased by $6,177 during the nine months ended September 30, 2014 as compared to 2013 due to the expanded production of oil and gas in 2014 as compared to 2013. We recorded amortization expense of $5,449 and 38,143 for the three months and nine months ended September 30, 2014 as compared to $16,347 and $49,041 for the same comparable periods in 2013 since we took a conservation position in January 2013 to amortize the lease acquisition costs of unproved mineral properties over the remaining lease term.

 

Interest expense for the three months and nine months ended September 30, 2014 was $(91,140) and $1,288,617 as compared to $32,949 and $175,246 for the same comparable periods in 2013. Interest expense decreased by $124,089 for the three months ended September 30, 2014 and increased by $1,113,371 for the nine months ended September 30, 2014 as compared to the same comparable periods in 2013 as a result of (i) interest expense of $57,840 and $182,407 for the three months and nine months ended September 30, 2014 on the promissory notes and convertible notes payable executed by us for our working capital needs and acquisitions, (ii) interest expense of $87,674 and $289,599 for the three months and nine months ended September 30, 2014 related to the amortization of the original issue discount, (iii) interest expense of $(435,820) and $69,264 for the three months and nine months ended September 30, 2014 related to the amortization of the debt discount due to embedded conversion option liabilities on convertible notes, (iv) interest expense of $38,130 and $137,888 for the three months and nine months ended September 30, 2014 related to the amortization of debt issue costs, and (v) interest expense of $161,036 and $609,459 relating to the amortization of debt discount on warrants and lender fees on a convertible note. We borrowed $125,000 on February 15, 2013, $75,000 on June 5, 2013 and $50,000 on September 26, 2013 pursuant to executing convertible notes.

 

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 $65,424. On June 11, 2013, we sold 100% of our working interest in Mrs. W. G. Trice, Trice and Methodist Home and Trice Methodist “400” Lease, located in Shackelford County, Texas and recorded a gain of $12,170. As a result, we recorded a gain of $77,594 for the nine months ended September 30, 2013. We did not sell any oil and gas properties during three months and nine months ended September 30, 2014.

 

 Loss on settlement of debt by sale of oil leases for the three months and nine months ended September 30, 2014 was $128,168 and $128,168 as compared to $0 and $0 for the same comparable periods in 2013. On September 4, 2014, we sold our ownership interest in Volunteer and Landers Leases to Legend Oil & Gas Ltd. in exchange for extinguishment of our convertible promissory note debt, and recorded a loss of $128,168.

 

Dividend payable to preferred stockholders for the three months and nine months ended September 30, 2014 was $11,204 and $13,582 as compared to $0 for the same comparable periods in 2013. The dividend was calculated at an annual rate of 7% on the contributions received from the preferred stock holders. The Company received in cash $635,000 from the sale of preferred shares for the three months and nine months ended September 30, 2014.

 

The convertible promissory notes issued by us on (i) June 5, 2013 for $75,000, (ii) September 26, 2013 for $50,000, (iii) November 6, 2013 for $1,232,000, and (iv) November 5, 2013 promissory note to a stockholder for $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 and warrant liability of $304,802 and $1,131,241 for the three months and nine months ended September 30, 2014 as compared to $3,034 and $127,359, which was included in other expenses as of September 30, 2013.

 

Our 51% owned subsidiary 2013 NWE Drilling Program 1 LP recorded a loss of $166,678 and $430,960 for the three months and nine months ended September 30, 2014. We allocated $81,672 and $211,170 of the limited partnership’s loss for the three months and nine months ended September 30, 2014 to its noncontrolling member in our consolidated financial statements as of September 30, 2014. As a result, the noncontrolling interest of the limited partner was reduced to $300,772 at September 30, 2014.

Liquidity and Capital Resources

Cash and cash equivalents were $29,063 at September 30, 2014 compared to $1,523,181 at December 31, 2013. As shown in the accompanying consolidated financial statements, a loss of $1,950,764 was applicable to New Western Energy Corporation common stockholders for the nine months ended September 30, 2014 compared to a loss of $1,313,308 for the same comparable period in 2013. At September 30, 2014, our working capital deficit was $583,224. Net cash used in operating activities for the nine months ended September 30, 2014 was $1,680,632. 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 nine months ended September 30, 2014 was $1,680,632 which resulted primarily from our net loss of $1,950,764, depreciation and depletion of $38,642, amortization of debt discount of $966,951, amortization of mineral property of $38,143, amortization of deferred debt issuance cost of $137,887, loss applicable to non-controlling interest of $211,170, loss on settlement of convertible note payable of $128,168, change in fair value of embedded conversion option liability of $654,692, change in fair value of warrant liability of $471,201, increase in accounts receivable of $10,700, increase in inventory of $9,833, decrease in prepaid expenses and other current assets of $171,434, increase in accounts payable of $1,073, and increase in accrued expenses of $89,746 and increase in accrued interest payable of $55,684.

 

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2014 was $158,564 primarily due to the cash paid for purchase of property and equipment of $43,564, cash advanced towards a note receivable of $75,000, cash received from note receivable of $10,000, and net cash paid for acquisition of oil and gas properties of $50,000.

 

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2014 was $345,078 primarily due to cash received from sale of preferred stock of $635,000, cash received from convertible promissory note of $20,000, cash repayment of convertible promissory note payable of $308,000, and cash repayment of related party advance of $1,922.

 

As a result of the above activities, we experienced a net decrease in cash of $1,494,118 for the nine months ended September 30, 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 September 30, 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. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures as of September 30, 2014 were ineffective 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. There have been no material changes in our internal controls over financial reporting or in other factors that could materially affect, or are reasonably likely to affect, our internal controls over financial reporting during the quarterly period ended September 30, 2014.

 

Management identified a material weakness as follows: we lack the expertise in determining the classification of oil and gas reserves.

 

To address and remediate this material weakness set forth above, management intends to retain the services of an oil and gas expert to help identify and categorize the types of oil and gas reserves for proper disclosure in accordance with the SEC’s Rule 4-10(a) of Regulation S-X and its Compliance and Disclosure Interpretations of the Oil and Gas Rules.

 

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 September 30, 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 and the Hatchetts’ are currently in settlement negotiations.

 

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.

 

On July 3, 2014 and September 17, 2014, the Company issued 400,000 shares and 600,000 shares to two consultants for business advisory and consulting services rendered to the Company. The services were valued at $56,000 and $60,000, respectively.

 

On October 3, 2014, pursuant to a private placement under a Regulation S offering the Company sold to one non-US investor 28,500 Units at $5.00 per Unit for a total gross amount of $140,500. Each Unit consists of two (2) shares of Series A 7% Convertible Preferred Stock, par value $0.0001 per share and one (1) redeemable Class F Warrant of the Company to purchase ten (10) shares of common stock.

 

On October 16, 2014, the Company converted $19,832 of the debt by issuance of 485,638 shares of its common stock valued at $0.040838 per share. The Conversion Price, as set forth in the debt instrument, is the lessor of $0.11 or 67.5% of the lowest trade price of $0.06 in the 25 trading days previous to the conversion.

 

We relied upon Regulation S, Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended, for the issuances of the securities listed above. Each prospective investor was given a private placement memorandum, the Company’s Form 10-K, Form 10-Q and Form 8-K’s previously filed with the SEC. These materials and filings included all material aspects of an investment in us, including the business, management, offering details, risk factors, consolidated financial statements and use of proceeds. It is the belief of management that each of the individuals who invested has such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the investment and therefore did not need the protections offered by registering their shares under Securities and Act of 1933, as amended. Each investor completed a Stock Purchase Agreement, a Consulting Agreement and/or Subscription Agreement whereby the investors certified that they were purchasing the shares for their own accounts, with investment intent. These offerings were not accompanied by general advertisement or general solicitation and the share certificates were issued with a Rule 144 restrictive legend.

 

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: November 17, 2014	/s/ Javan Khazali
	Javan Khazali, President (Principal Executive Officer)
Date: November 17, 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