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NWTR > SEC Filings for NWTR > Form 10-Q on 19-Aug-2014All Recent SEC Filings

Show all filings for NEW WESTERN ENERGY CORP

Form 10-Q for NEW WESTERN ENERGY CORP


19-Aug-2014

Quarterly Report


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.

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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 six months ended June 30, 2014 and 2013 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.

We reported a net loss applicable to the Company's common stockholders of $444,795 and $1,751,199 for the three months and six months ended June 30, 2014 compared to a net loss of $713,826 and $894,479 for the same comparable periods in 2013. The decrease in loss for the three months ended June 30, 2014 as compared to 2013 was primarily due to the Company expending $246,583 for drilling operations on its wells on its B&W Ranch lease in Kansas in 2013 to test oil and gas bearing structures through the Mississippi Dolomite formation, whereas no such expenses were incurred in the three months ended June 30, 2014. The increase in loss for the six months ended June 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) change in the fair value of embedded conversion option liability of convertible promissory note, (iii) oil and gas production costs, (iv) amortization, depreciation and depletion costs incurred by the Company, and (v) higher interest costs due to additional loans and amortization of debt discounts.

Revenues

Revenues for the three months and six months ended June 30, 2014 were $110,734 and $182,122 compared to $11,797 and $30,994 for the same comparable periods in 2013. Revenues for the three months ended June 30, 2014 consisted of oil sales of $66,515 from Volunteer, Lander and Puckett leases in Kansas, Winchester II and Anna lease in Oklahoma, and $44,952 in gas sales from Farwell and Puckett leases in Kansas, and Moab leases in Oklahoma, and $700 from disposal of salt water. Revenues for the three months ended June 30, 2013 consisted of gas sales from Farwell and Puckett leases acquired on June 1, 2013. Revenues increased by $98,937 and $151,128 for the three months and six months ended June 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 six months ended June 30, 2014 were $401,915 and $1,081,811 compared to $287,891 and $453,882 for the same comparable periods in 2013. G&A expenses increased by $114,024 and $627,929 for the three months and six months ended June 30, 2014 primarily due to the increase in consulting fees, increase in investor relations and marketing expenses, legal and professional costs incurred associated with the failed merger with Legend Oil and Gas Corporation, increase in compensation expense of officer, increase in legal and professional fees and increase in travel and other administrative expenses incurred to manage and expand operations.

Oil and gas production expenses for the three months and six months ended June 30, 2014 were $89,944 and $367,431 compared to $313,416 and $329,844 for the same comparable periods in 2013. Oil and gas production expenses decreased by $223,472 for the three months ended June 30, 2014 as compared to the same comparable period in 2013, primarily due to the Company expending $245,583 on exploration, drilling and production costs associated with Magnus #1 and Anna #1 wells on its B&W Ranch lease in Kansas. Oil and gas production expenses increased by $37,587 for the six months ended June 30, 2014 as compared to the same comparable period in 2013 due to 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.

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Depreciation, depletion and amortization expense for the three months and six months ended June 30, 2014 were $29,722 and $57,881 as compared to $26,766 and $48,266 for the same comparable periods in 2013. Depreciation expense increased as a result of placing additional oil and gas equipment of $31,065 in service since January 1, 2014 which resulted in increase in depreciation for the three months and six months ended June 30, 2014 by $2,956 as compared to prior year comparable period. Depletion expense remained relatively the same for the comparable periods. We recorded the same amortization expense of $16,347 and $32,694 for the three months and six months ended June 30, 2014 and 2013 because we took a conservation position in January 2013 to amortize the lease acquisition costs of unproved mineral properties over the remaining term of the lease.

Gain on sale of oil leases for the three months and six months ended June 30, 2014 was $0 and $0 as compared to a loss of $1,677 for the three months ended June 30, 2013 and a gain of $77,594 for the six months ended June 30, 2013. On February 28, 2013, we sold 100% of our working interest in 402 acres of oil and gas leases in the Swenson, McLellan and Reves leases located in Jones County, Texas to a third party and recorded a gain of $79,271 as a result of the sale of these leases.

Interest expense for the three months and six months ended June 30, 2014 was $667,130 and $1,379,757 as compared to $124,465 and $142,297 for the same comparable periods in 2013. Interest expense increased by $542,665 and $1,237,460 for the three months and six months in 2014 as compared to the same comparable periods in 2013 as a result of (i) interest expense of $60,497 and $124,567 for the three months and six months ended June 30, 2014 on three promissory notes executed by us for our working capital needs and acquisitions,
(ii) interest expense of $94,661 and $201,925 for the three months and six months ended June 30, 2014 related to the amortization of the original issue discount, (iii) interest expense of $236,409 and $505,084 for the three months and six months ended June 30, 2014 related to the amortization of the debt discount due to embedded conversion option liabilities on convertible notes,
(iv) interest expense of $50,112 and $99,758 for the three months and six months ended June 30, 2014 related to the amortization of debt issue costs, and (v) interest expense of $225,450 and $448,423 relating to the amortization of debt discount on warrants and lender fees on a convertible note. We borrowed $125,000 on February 15, 2013 and $75,000 on June 5, 2013 pursuant to executing convertible notes.

Dividend payable to preferred stockholders for the three months and six months ended June 30, 2014 was $2,378 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 six months ended June 30, 2014.

The convertible promissory notes issued by us on June 5, 2013 for $75,000, on September 26, 2013 for $50,000, on November 6, 2013 for $1,232,000, and on 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 of $594,835 and $826,439 for the three months and six months ended June 30, 2014 as compared to $66,510 and $124,325, which was included in other expenses as of June 30, 2014.

Our 51% owned subsidiary 2013 NWE Drilling Program 1 LP recorded a loss of $83,113 and $264,282 for the three months and six months ended June 30, 2014. We allocated $40,725 and $129,498 of the limited partnership's loss for the three months and six months ended June 30, 2014 to its noncontrolling member in our consolidated financial statements as of June 30, 2014. As a result, the noncontrolling interest of the limited partner was reduced to $382,444 at June 30, 2014.

Liquidity and Capital Resources

Cash and cash equivalents were $438,576 at June 30, 2014 compared to $1,523,181 at December 31, 2013. As shown in the accompanying consolidated financial statements, a loss of $1,751,199 was applicable to New Western Energy Corporation common stockholders for the six months ended June 30, 2014 compared to a loss of $894,479 for the same comparable period in 2013. At June 30, 2014, our working capital deficit was $1,142,911. Net cash used in operating activities for the six months ended June 30, 2014 was $1,298,618. 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.

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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 six months ended June 30, 2014 was $1,298,618 which resulted primarily from our net loss of $1,751,199, depreciation, depletion and amortization of $25,188, amortization of debt discount of $711,714, amortization of mineral property of $32,694, amortization of deferred debt issuance cost of $99,758, loss applicable to non-controlling interest of $129,498, change in fair value of embedded conversion option liability of $76,973, change in fair value of warrant liability of $303,171, increase in accounts receivable of $27,895, increase in inventory of $49,240, decrease in prepaid expenses and other current assets of $104,059, increase in accounts payable of $11,932, and increase in accrued expenses of $54,014.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2014 was $131,065 primarily due to the cash paid for purchase of property and equipment of $31,064, 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 $35,000.

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Financing Activities

Net cash provided by financing activities for the six months ended June 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 $1,084,605 for the six months ended June 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 June 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.

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