CUSIP# 678046 10 3
NYSE Amex: BQI
CALGARY,
March 8, 2012 /PRNewswire/ - Oilsands
Quest Inc. (NYSE Amex:BQI) ("Oilsands Quest," "OQI" or "the
Company") has filed its Form 10-Q Quarterly Report for the quarter
ended January 31, 2012 with the
United States Securities and Exchange Commission. The full document
is available online at www.sec.gov and www.sedar.com; the
Management's Discussion and Analysis (MD&A) is presented
below.
Management's Discussion and Analysis
The following discussion addresses material changes in the
Company's results of operations and capital resources and uses for
the three and nine months ended January 31,
2012, compared to the three and nine months ended
January 31, 2011, and its financial
condition and liquidity since April 30,
2011. This document presumes that readers have read or
have access to OQI's 2011 Annual Report on Form 10-K/A, which
includes disclosure regarding critical accounting policies and
estimates as part of Management's Discussion and Analysis of
Financial Condition and Results of Operation. Unless
otherwise stated, all dollar amounts are expressed in U.S.
dollars. All future payments in Canadian dollars have been
converted to U.S. dollars using an exchange rate of $1.00 U.S. = $1.0052
CDN, which was the January 31,
2012 exchange rate.
Overview
Recent Events
The Company has secured Debtor in Possession ("DIP") financing
of CDN$3.75 million for the purpose
of funding operating costs and other expenses while the Company
proceeds with a Solicitation Process while under creditor
protection. The DIP financing is a twelve month term facility and
is expected to be available for draw down by mid-March 2012. The terms of DIP financing have
yet to be finalized.
On February 22, 2012, the Court
approved the sale of the Company's non-core Eagles Nest asset to
FAMA Capital Ltd. ("FAMA"), an unrelated third party, for
CDN$7.0 million. The approval
followed a short Court-directed limited bidding process, and the
Company signed a Purchase and Sale Agreement with FAMA. FAMA
paid deposits in the amount of CDN$50,000 and was required to pay an additional
deposit of CDN$350,000 on
February 24, 2012. However, FAMA did
not make the deposit and the agreement was terminated. On
March 7, 2012, the Court approved a
new bidding process for the Eagles Nest asset. Bids for the
asset are to be submitted to the Monitor by 4 PM MST, March 12,
2012. The bids must be accompanied by an unconditional
executed Purchase and Sale Agreement and a deposit representing 10%
of the purchase price with closing to occur on or before
March 30, 2012.
On November 29, 2011, the NYSE
Amex LLC ("NYSE") halted trading in the common shares of the
Company (symbol: BQI). The NYSE may proceed to delist the Company
for failure to meet the continued listing requirements of the NYSE
and as a result of the Company proceeding under the CCAA. The
Company's common shares will remain suspended from trading until a
delisting occurs, or until the NYSE permits the resumption of
trading. On February 24, 2012, the
NYSE granted the Company an extension until May 18, 2012 to regain compliance with the
continued listing standards. The Company's shares are currently not
traded on an active market.
Three Months Ended January 31,
2012
- On November 22, 2011, the Company
received approval to extend the termination date of its remaining
permits at Wallace Creek and Raven Ridge by two years from the
original expiration date.
- On November 29, 2011, the Company
requested and obtained an Order from the Alberta Court of Queen's Bench (the "Court")
providing creditor protection under the Companies' Creditors
Arrangement Act (Canada) ("CCAA").
While under CCAA protection, the Company will continue with its day
to day operations.
- Effective December 20, 2011,
Gordon Tallman and Pamela Wallin resigned from the Board of
Directors of Oilsands Quest.
- The Company will conduct a process to solicit offers to
acquire, restructure or recapitalize the Company (the "Solicitation
Process"). The Company has reengaged TD Securities Inc. ("TD
Securities") as its financial advisor to assist it with this
process.
Nine Months Ended January 31,
2012
- On May 17, 2011, the Company
provided new resource estimates for Wallace Creek following the
2011 winter drilling program.
- On June 27, 2011, the Company
received an extension of its permits at Wallace Creek until
March 31, 2013.
- On July 15, 2011, the Company
received approval from the Government of Saskatchewan to convert portions of the Axe
Lake permits to 15-year leases. The two leases, OSA00001 and
OSA00002 will be governed under the terms of the Petroleum and
Natural Gas Regulations, 1969 and will expire on March 31, 2027.
- On July 18, 2011, the Company
commenced a Rights Offering under which the existing shareholders
were given the right to purchase shares in the Company. This
Rights Offering process was terminated on September 12, 2011 as the negotiation of a
material transaction had reached an advanced stage and would have
significantly changed the use of proceeds described in the rights
offering prospectus.
- On September 25, 2011, the
Company entered into a non-binding Letter of Intent with a third
party to sell its Wallace Creek assets for total consideration of
$60 million, which included
$40 million cash at closing and a
$20 million contingent payment
subject to certain future events. On November 28, 2011, negotiations with the third
party for the sale of the Wallace Creek assets were
terminated.
- As previously announced, Oilsands Quest relinquished the
licenses in Saskatchewan and the
southernmost permits at Raven Ridge in Alberta as the Company did not view these
areas as being prospective for future development. All
activities in Saskatchewan will
now be focused on the development of the Axe Lake leases.
- Various exploration permits for the oil shale properties in
Pasquia Hills expired. The Company continues to hold one permit in
the Pasquia Hills area near Hudson Bay,
Saskatchewan.
- On October 17, 2011, the Company
entered into a securities purchase agreement to sell up to
$12 million of redeemable preferred
shares. This agreement automatically terminated when the
Company filed for CCAA protection.
Companies' Creditors Arrangement Act (Canada) ("CCAA") Proceedings and Going
Concern
On November 29, 2011, Oilsands
Quest Inc. and its subsidiaries (collectively, the "Company" or
"Oilsands Quest"), requested and obtained an order from the Court
providing creditor protection under the CCAA. While under CCAA
protection, the Company will continue with its day to day
operations. CCAA protection stays creditors and others from
enforcing rights against the Company and affords Oilsands Quest the
opportunity to restructure its financial affairs. The stay of
proceeding is currently in effect until May
18, 2012, and may be further extended as required and
approved by the Court.
Under the terms of the initial order, Ernst & Young Inc. was
named as the court-appointed monitor ("Monitor"). The Monitor will
monitor the Company's assets and liabilities, business and
financial affairs and report to the Court from time to time on the
Company's financial and operational position and any other matters
that may be relevant to the CCAA proceedings. In addition, the
Monitor may advise the Company on the development of a
comprehensive restructuring plan and, to the extent required,
assist the Company with a restructuring.
On February 7, 2012, the Monitor,
in its capacity as Oilsands Quest's Foreign Representative,
commenced proceedings in the United
States Bankruptcy Code for the Southern District of
New York ("US Bankruptcy Code")
pursuant to Chapter 15 of the United States Bankruptcy Code. This
order would allow the CCAA proceedings to be recognized as foreign
main proceedings along with the automatic stay and certain other
provisions of the US Bankruptcy Code to take effect within
the United States. Motions seeking
a joint administration of the Chapter 15 cases and approval of the
form and manner of notice of the Chapter 15 petitions and hearing
were granted by the US Bankruptcy Court on February 8, 2012. A final hearing on such
recognition is scheduled for March 15,
2012.
While under CCAA protection, the Board of Directors maintains
its usual role and management of the Company remains responsible
for the day to day operations. The Board of Directors and
management, with advice from the Monitor, will be responsible for
determining whether a given plan for restructuring the Company's
affairs is feasible. Certain stakeholders whose rights would be
compromised by the plan will have an opportunity to vote on the
plan. Before a plan is implemented it must be approved by the
requisite number and value of affected stakeholders contemplated by
law and approved by the Court.
CCAA protection enables the Company to continue with its day to
day operations until the CCAA status changes. The implications of
this process for Oilsands Quest shareholders will not be known
until the end of the restructuring process. If the affected
stakeholders do not approve a plan in the manner contemplated by
law, Oilsands Quest will likely be placed into receivership or
bankruptcy. If by May 17, 2012,
Oilsands Quest has not obtained a further extension of the initial
order or filed a plan, creditors and others will no longer be
stayed from enforcing their rights.
In connection with the CCAA proceedings, the Company has granted
a charge against its assets and any proceeds from and sales
thereof, as follows and in the following priority:
- First, a DIP Charge to Century Services Inc. in sums as may be
borrowed up to $3.75 million;
- Second, an administration charge, in an amount not to exceed
CAD$1 million, in favour of the
Monitor and its counsel and counsel to the Company, to secure
payment of professional fees and disbursements before and after the
commencement of the CCAA proceedings; and
- a financial advisor charge in a maximum amount of CAD$1 million in connection with the engagement
of TD Securities. This charge ranks equally with the administration
and represents a security for all amounts due to be paid to TD
Securities pursuant to their engagement; and
- Third, a directors' and officers' charge, in an amount not to
exceed CAD$1 million, in favour of
the directors and officers of the Company as security for the
Company's obligation to indemnify them against obligations and
liabilities that they may incur as directors and officers after the
commencement of the CCAA proceedings.
While the Company's assets on its balance sheet are in excess of
its liabilities, the majority of the asset value is in long term
bitumen resource properties that will require substantial further
investment to bring on to production.
Background to the CCAA Proceedings
On August 17, 2010 the Company
announced that it had initiated a process to explore strategic
alternatives for enhancing shareholder value. The strategic
alternative process was overseen by a special committee ("Special
Committee") with advice from TD Securities which was engaged as a
financial advisor to assist with this process. The Special
Committee considered all alternatives to increase shareholder
value, including strategic financing opportunities, asset
divestitures, joint ventures and/or a corporate sale, merger or
other business combination. The Company had many initial
expressions of interest and exploratory conversations and signed
confidentiality agreements with a number of entities who carried
out detailed due diligence.
The formal strategic alternative process did not result in any
proposals to the Company, and the process was concluded in June,
2011 upon the recommendation of the Special Committee.
The Company then proceeded to attempt to raise the funds
required to advance the development of the Company's assets and on
July 18, 2011, the Company commenced
a Rights Offering under which the existing shareholders were given
the right to purchase shares in the Company. This Rights
Offering process was terminated, on the basis of the factors
described below, on September 12,
2011, and the Company has, to date, been unable to raise the
funds required to advance the development of the Company's
assets. The decision to cancel the Rights Offering was based
on the fact that the negotiation of a material transaction had
reached an advanced stage - a transaction that would have, if
consummated, significantly changed the use of proceeds described in
the Rights Offering prospectus and that the Company would not
achieve a full $60 million
subscription through the Rights Offering, perhaps at least
partially due to weak market conditions.
On September 25, 2011, the Company
entered into a non-binding Letter of Intent with a third party to
sell its Wallace Creek assets for total consideration of
$60 million, which included
$40 million cash at closing and a
$20 million contingent payment
subject to certain future events. The sale of the Wallace
Creek property would have provided the Company with the financial
resources to focus on moving its largest and most advanced asset,
Axe Lake, toward commercial development. Completion of the
transaction was subject to a number of terms and conditions,
including negotiation of a definitive agreement, board approvals,
due diligence, financing and approval by the Company's
shareholders. On November 28, 2011,
negotiations for the sale of the Wallace Creek assets were
terminated as the potential purchaser could not complete the
conditions outlined above within the time frames agreed to in the
Letter of Intent.
Following the termination of the negotiations for the sale of
the Wallace Creek assets, the Company initiated the CCAA process in
order to preserve its liquidity and fund operations during the
restructuring process. The CCAA process will allow the Company to
reassess its business strategy with a view to developing a
comprehensive financial and business restructuring plan.
On January 11, 2012 the Company
received an approval from the Court to conduct a process to solicit
offers to acquire, restructure or recapitalize the Company (the
"Solicitation Process").
The Solicitation Process is being overseen by a Special
Committee chaired by Paul Ching, and
including Ronald Blakely and
Brian MacNeill, all of whom are
independent directors. The Special Committee will consider all
alternatives in developing a plan, including strategic financing
opportunities, asset divestitures, joint ventures and/or a
corporate sale, merger or other business combination, and will
ultimately recommend a course of action to the Company's full Board
and the Monitor. With the Court's approval, the Company has
reengaged TD Securities as financial advisor to assist it with this
process. TD Securities is familiar with Oilsands Quest's assets and
business as a result of previous engagements and has assisted
Oilsands Quest in prior discussions with potentially interested
parties. TD Securities has begun soliciting indications of interest
from prospective strategic or financial parties and several
confidentiality agreements have been signed with interested
parties. Given the time required for potential purchasers to
conduct their due diligence, the Company expects to shortlist
potential bidders and seek binding offers under the process by
April 27, 2012.
To date the Company has not received any revenue from any of its
natural resource properties, none of its estimated bitumen
resources have been classified as proved reserves, and the
Company's exploration and development work is capital intensive.
The Company expects that significant additional exploration and
development activities will be necessary to establish proved
bitumen reserves, and to develop the infrastructure necessary to
facilitate production, from those reserves. As at
January 31, 2012, the Company had
working capital of $1.1 million
(excluding restricted cash), including cash and cash equivalents of
$1.8 million, and a deficit
accumulated during the development phase of $726.0 million.
During the nine months ended January 31,
2012, the Company expended $11.4
million on operating activities, $2.0
million on property and equipment and $0.5 million on funding restricted cash.
Management anticipates that the Company will be able to fund its
activities at a reduced level through June
2012 with its working capital as at January 31, 2012 and the interim DIP facility of
$3.75 million to be available for
draw-down by mid-March 2012.
Accordingly, there is substantial doubt about Oilsands Quest's
ability to continue as a going concern and without additional
working capital, the Company may not be able to maintain operations
beyond June 2012.
The accompanying consolidated financial statements have been
prepared using U.S. GAAP and the rules and regulations of the SEC
as consistently applied by Oilsands Quest prior to the CCAA. While
the Company has filed for and been granted creditor protection, the
consolidated financial statements continue to be prepared on a
going concern basis, which assumes that the Company will be able to
realize its assets and discharge its liabilities in the normal
course of business for the foreseeable future. The CCAA provides
the Company with a period of time to stabilize its operations and
financial condition and develop a plan. However, it is not possible
to predict the outcome of these proceedings and, as such, the
realization of assets and discharge of liabilities are each subject
to significant uncertainty. Further, it is not possible to predict
whether the actions taken in any plan will result in sufficient
improvements to the Company's financial condition to allow it to
continue as a going concern. If the going concern basis is not
appropriate, adjustments will be necessary to the carrying amounts
and/or classification of the Company's assets and liabilities.
Further, a comprehensive restructuring plan could materially change
the carrying amounts and classifications reported in the
consolidated financial statements.
The accompanying consolidated financial statements do not
purport to reflect or provide for the consequences of the CCAA. In
particular, such consolidated financial statements do not purport
to show: (a) as to assets, their realizable value on a liquidation
basis or their availability to satisfy liabilities; (b) as to
pre-petition liabilities, the amounts that may be allowed for
claims or contingencies, or the status and priority thereof; (c) as
to shareholders accounts, the effect of any changes that may be
made in the Company's capitalization; or (d) as to operations, the
effect of any changes that may be made in the Company's
business.
Notice of Non-Compliance
On November 29, 2011, the NYSE
halted trading in the common shares of the Company.The NYSE may
proceed to delist the Company for failure to meet the continued
listing requirements of the NYSE and as a result of the Company
proceeding under the CCAA. The Company's common shares will remain
suspended from trading until a delisting occurs, or until the NYSE
permits the resumption of trading. The NYSE granted the Company an
extension until May 18, 2012 to
regain compliance with the continued listing standards. The
Company's shares are currently not traded on an active market.
Operations Summary
Axe Lake Camp
The Company has signed a series of agreements with Cenovus
Energy Inc. ("Cenovus") under which Oilsands Quest Sask Inc. is
providing camp and other services as Cenovus conducts operations in
the area. These agreements allow the Company to recover operating
and general administrative costs during the terms of the
agreements.
Axe Lake Area - Reservoir Development Activities
Oilsands Quest received approval from the Government of
Saskatchewan to convert portions
of the Axe Lake permits to 15-year leases. These leases, the first
oil sands leases in Saskatchewan,
are one of the key elements the Company needs in place to proceed
to development of a commercial oil sands production facility.
The two leases, OSA00001 and OSA00002, will give the certainty
of land tenure needed to underpin commercial development at Axe
Lake and are governed under the terms of the Petroleum and Natural
Gas Regulations, 1969 ("1969 Regulations"). The leases expire
on March 31, 2027 and may be
continued beyond this date if they meet certain requirements of the
1969 Regulations.
The Company continues to work with the regulators to assess an
issue relating to the re-abandonment of early exploration core
holes. As indicated by the Saskatchewan Ministry of Energy
and Resources("SMER"), it is possible that the outcome of such
assessment could result in cancellation of the Axe Lake leases
under the governing regulations. It is possible that the
Company, based on its current liquidity and future estimated cash
flows, may not be able to comply with the requirements of the
regulations and the leases may be cancelled. (See "Environmental
and Regulatory" below).
The planning for the steam-assisted-gravity drainage ("SAGD")
pilot has been put on hold as Oilsands Quest proceeds through the
CCAA process. The proposed pilot consists of one pair of 100 meter
long horizontal wells, with the upper well placed five meters below
the glacial till cap, or overburden, and is designed to make use of
the existing surface facilities. The SAGD pilot will demonstrate
the steam containment properties of the glacial till cap and
provide information essential for the front-end engineering design
for the commercial development. Further activity on the pilot
project will be dependent on securing additional financing.
Development of a commercial project remains subject to
financing, regulatory and other contingencies such as successful
reservoir tests, and other risks inherent in the oil sands industry
(See "Risk Factors" section of the Company's Form 10-K/A for the
year ended April 30, 2011 and see
Item 1A "Risk Factors" in its Form 10-Q for the nine months ended
January 31, 2012).
Exploration
After analysis of available drilling and seismic data, Oilsands
Quest concluded that the lands in the south part of Raven Ridge on
Permit # 7006080098 are not prospective and relinquished this
permit in August 2011. Relinquishing
this land has no impact on the Company's current resource estimates
or development plans.
During the nine month period ended January 31, 2012, Saskatchewan Oil Shale Permit
Nos. PS00222, PS00223, PS00224, PS00225, PS00226, PS00237 and
PS00238 expired and, as of January 31,
2012, the Company holds one exploration permit in Pasquia
Hills, SHP800001, totaling 83,769
acres around Hudson Bay,
Saskatchewan. This permit will expire on August 13, 2012.
In September 2011, the Government
of Alberta announced changes to
the "Oil Sands Tenure Resolution, 2010" that would allow permit
holders to apply to extend permits with an expiry date between
December 1, 2010 and December 1, 2013 by two years.
In addition, the Government of Alberta has temporarily relaxed the drilling
requirements for continuing permits to leases from 1 well per
section to 1 well per 3 sections.
On November 22, 2011, the Company
received approval to extend its remaining exploration permits in
raven Ridge and Wallace Creek by two
years from their original expiration date. The Raven Ridge
and Wallace Creek permits will now expire on March 22, 2014 and January
24, 2015 respectively.
Environmental and Regulatory
The Company is in discussion with the SMER to assess a
re-abandonment issue relating to the abandonment of early
exploration core holes. Oilsands Quest has drilled 359
exploration core holes in Saskatchewan. During a review of its
development plans and well records, the Company determined that 229
of the early-year wells were not abandoned to a standard that meets
thermal development requirements or were not abandoned in
accordance with the regulatory requirements.
Oilsands Quest has applied to the SMER for waivers of its
obligations to re-abandon 83 core holes, the majority of which are
located outside the current potential commercial development area
and the regulator has indicated that they are willing to consider
such waivers on a case by case basis. The waiver applications
are based on the fact that these core holes fall outside the
current commercial development area and are therefore located in
areas that are not expected to be economically recoverable.
The Company has included approximately 146 core holes in
management's best estimate of the re-abandonment costs as described
in the financial statements. The Company is currently working with
the SMER to assess the waiver applications. As indicated by
the Saskatchewan Ministry of Energy and Resources, it is possible
that if the Company does not meet its obligations to re-abandon
these core holes, it could result in the cancellation of the Axe
Lake permits under the governing regulations.
During the year ended April 30,
2011, Oilsands Quest completed an 18 core hole
re-abandonment program. The Company successfully re-abandoned
14 core holes and was only partially successful in its attempt to
re-abandon the other four core holes. Those four core holes may
still contain conduits which will require the Company to undertake
further monitoring should a SAGD project be implemented within the
vicinity of these core holes. The re-abandonment of these four core
holes occurred early in the program, and OQI anticipates high
success rates on the re-abandonments still to come.
The remaining 128 core holes are comprised of a combination of
locations that are in or adjacent to the commercial development
area plus a portion of the core holes for which OQI is seeking
waivers. The Company's best estimate of the undiscounted/gross
costs to complete this program over the next four years is
$25.5 million.
Management continues to work with the SMER to review the status
of the current year's re-abandonment program given the CCAA
protection granted to the Company.
Corporate
On January 17, 2011, the Company
entered into an equity distribution agreement ("Agreement") with
Knight Capital Americas, L.P. ("KCA"), a subsidiary of Knight
Capital Group, Inc. Under the terms of the Agreement, the Company
could offer and sell shares of common stock by way of
"at-the-market" (ATM) distributions on NYSE, up to a maximum of
US$20 million until January 17, 2012, through KCA as sales agent. The
shares were distributed at market prices prevailing at the time of
each sale and the timing, price and number of shares sold were at
our discretion. The number of shares sold on any given day
was expected to be relatively small compared to the total volume of
shares traded. Up to the termination of the ATM on January 17, 2012, 5,537,137 shares were
distributed for gross proceeds of $3.1
million. Funds raised from the ATM program have been
used to finance general corporate purposes.
On October 17, 2011 the Company
entered into a Securities Purchase Agreement ("SPA") with Socius CG
II, Ltd., a subsidiary of Socius Capital Group ("Socius").
The Company had the right, over a term of two years, to require
Socius, subject to the terms and conditions of the SPA, to purchase
up to $12 million of Series C
redeemable preferred shares (the "Preferred Shares"). The
Company did not sell any Preferred Shares under the terms of the
SPA. The SPA automatically terminated when the Company filed
for CCAA protection.
The Company has secured a commitment for DIP financing of
CDN$3.75 million, for the purposes of
funding operating costs and other expenses while the Company
proceeds with its previously-announced Solicitation Process while
under creditor protection. On February 16,
2012, the Court approved the secured DIP financing.
The DIP financing is a twelve month term demand facility and
will be repayable on the earlier of one year following closing or
the termination of the Order from the Court providing creditor
protection under the CCAA. The Company expects that the DIP
facility will be available for draw down by mid-March 2012. The terms of DIP financing have
yet to be finalized. There can be no assurance that this funding
will be sufficient to fund the Company's operations and ongoing
creditors' obligations during the period that the Company may spend
in creditor protection under the CCAA or until a plan is
approved.
On February 22, 2012, the Court
approved the sale of the Company's non-core Eagles Nest asset to
FAMA, an unrelated third party, for CDN$7.0
million. The approval followed a short Court-directed
limited bidding process, and the Company signed a Purchase and Sale
Agreement with FAMA. FAMA paid deposits in the amount of
CDN$50,000 and was required to pay an
additional deposit of CDN$350,000 on
February 24, 2012. However, FAMA did
not make the deposit and the agreement was terminated. On
March 7, 2012, the Court approved a
new bidding process for the Eagles Nest asset. Bids for the
asset are to be submitted to the Monitor by 4 PM MST, March 12,
2012. The bids must be accompanied by an unconditional
executed Purchase and Sale Agreement and a deposit representing 10%
of the purchase price with closing to occur on or before
March 30, 2012.
Effective December 20, 2011,
Gordon Tallman and Pamela Wallin resigned from the Board of
Directors. The Board is now composed of five members: independent
directors Ronald Blakely (Chairman),
Paul Ching and Brian MacNeill; OQI founder Christopher Hopkins; and T. Murray Wilson, who will not be standing for
re-election at the next Annual General Meeting.
Liquidity and Capital Resources
The following discussion of liquidity and capital resources
should be read in conjunction with the consolidated financial
statements included in Part I, Item 1. "Financial Statements" in
the 10-Q for the quarter ended January 31,
2012 filed on March 8, 2012.
The consolidated financial statements have been prepared assuming
that Oilsands Quest will continue as a going concern.
At January 31, 2012, the Company
held cash and cash equivalents totaling $1.8
million (April 30, 2011 -
$16.0 million).
In July 2011, the Company
commenced a $60 million rights
offering under which the existing shareholders were given the right
to purchase additional shares in the Company based on their
pro-rata share ownership. However, as described below, due to
a potential sale of the Wallace Creek assets that would have
impacted the Company's financial position and funding requirements,
the $60 million rights offering was
cancelled on September 12,
2011. Thereafter, the Company entered into a
non-binding letter of intent (the "Letter of Intent") for the sale
of the Wallace Creek assets with a third party on September 25, 2011. On November 28, 2011, the third party notified the
Company that they could not meet the terms of that Letter of Intent
and negotiations were terminated. This transaction would have
provided the Company with the capital required to complete the Axe
Lake pilot and prove its commercial recoverability. After
considering all available alternatives, on November 28, 2011 the Board of Directors of the
Company authorized the Company to file for creditor protection
under the CCAA. On November 29,
2011, the Company was granted an order from the Court
providing creditor protection under the CCAA.
The Company has secured a commitment for DIP financing of
CDN$3.75 million, for the purpose of
funding operating costs and other expenses while the Company
proceeds with its previously-announced Solicitation Process while
under creditor protection. The DIP financing is a twelve month term
demand facility and will be available for draw down by mid-March 2012. On February 16, 2012, the Court approved the secured
DIP financing. The terms of the DIP financing have yet to be
finalized.
On February 22, 2012, the Court
approved the sale of the Company's non-core Eagles Nest asset to
FAMA, an unrelated third party, for CDN$7.0
million. The approval followed a short Court-directed
limited bidding process, and the Company signed a Purchase and Sale
Agreement with FAMA. FAMA paid deposits in the amount of
CDN$50,000 and was required to pay an
additional deposit of CDN$350,000 on
February 24, 2012. However, FAMA did
not make the deposit and the agreement was terminated. On
March 7, 2012, the Court approved a
new bidding process for the Eagles Nest asset. Bids for the
asset are to be submitted to the Monitor by 4 PM MST, March 12,
2012. The bids must be accompanied by an unconditional
executed Purchase and Sale Agreement and a deposit representing 10%
of the purchase price with closing to occur on or before
March 30, 2012. There can be no
assurance that the sale will be concluded.
On November 29, 2011, the NYSE
Amex LLC ("NYSE") halted trading in the Company's common shares and
imposed an ongoing suspension in trading of the shares.
Accordingly, delay in the resumption of trading on the NYSE reduces
the liquidity of the Company's common shares and limits the
Company's availability to obtain equity financing. The NYSE
granted the Company an extension until May
18, 2012 to regain compliance with the continued listing
standards.
There can be no assurance that the DIP financing and the
proceeds received from the sale of the Eagles Nest property will be
sufficient to fund the Company's operations and ongoing creditors'
obligations during the period that the Company may spend in
creditor protection under the CCAA or until a plan is approved.
There can be no assurance that the period granted by the Court,
and any subsequent extensions thereof, will be sufficient to
present and finalize a plan. Should Oilsands Quest lose the
protection of the stay under the CCAA which is currently in effect
until May 18, 2012, creditors may
immediately enforce rights and remedies against Oilsands Quest and
its properties, which may lead to the liquidation of the Company's
assets.
There can be no assurance that the Company can raise sufficient
funds to carry out its exploration and development plans, meet its
future obligations and alleviate substantial doubt about its
ability to continue as a going concern. The Company cannot be
certain that additional funds, even if available, will be on
acceptable terms. To the extent additional funds are raised by
issuing equity securities, or the Company undergoes a restructuring
under the CCAA, significant dilution may be experienced by its
shareholders.
There can be no assurance that the Company will be able to
maintain its protection under the CCAA, implement a plan in the
manner contemplated by law, implement a transaction or
recapitalization or emerge as a solvent company. It is impossible
to predict with certainty the length of time that the Company may
spend in creditor protection under the CCAA or whether a plan will
be approved. The continuation of the CCAA could materially
adversely affect operations and relationships with creditors,
customers, vendors, service providers, employees, and
regulators.
Results of Operations
Net loss
Three months ended January 31,
2012 as compared to three months ended January 31, 2011. The Company experienced a
net loss of $4.2 million or
$0.01 per share for the three months
ended January 31, 2012 as compared to
a net loss of $10.7 million or
$0.03 per share for the three months
ended January 31, 2011. The
decline in the net loss in the current period as compared to the
prior period is primarily caused by the reduction of exploration
activity and by the recognition in the three month period ended
January 31, 2011 of a $5 million impairment loss recognized on the
Pasquia Hills property whereas none was recorded in the current
period. In addition, employees' salaries and other related costs
decreased by $1.6 million during the
period as compared to the same period last year following the
Company's cost reduction initiatives over the past year. These
employee-related costs were partially offset by increased
professional fees resulting from writing off fees associated with
the Socius financing that terminated automatically on November 29, 2011 upon filing of the CCAA
protection. Deferred income tax benefit was not recognized during
the current period as compared to $1.9
million recorded in the same period last year.
Nine months ended January 31, 2012
as compared to nine months ended January 31,
2011. The Company experienced a net loss of $14.5 million or $0.04 per share for the nine months ended
January 31, 2012 as compared to a net
loss of $35.8 million or $0.10 per share for the nine months ended
January 31, 2011. The decrease in the
net loss as compared to the same period last year is due to a
reduction in exploration activity, a reduction in cost revisions
related to asset retirement obligations, a reduction in impairment
loss on property and equipment as well as a reduction in employees
salaries and stock based compensation resulting from the Company's
cost reduction initiatives over the past year. During the same
period last year, the Company incurred $8.5
million of cost revisions related to asset retirement
obligations to re-abandon a certain number of core holes in the Axe
Lake area and reclaim the airstrip, camp site, access roads and
reservoir test site at the Company's properties. In addition, the
Company's impairment loss amounted to $7.3
million at January 31, 2011,
to recognize a write down on the value of the Pasquia Hills
property and the Saskatchewan Oil Sands Licenses. Deferred income
tax benefit was not recognized during the current period as
compared to $4.9 million recorded in
the same period last year.
The Company expects to continue to incur operating losses and
will continue to be dependent on additional sales of equity or debt
securities and/or property sales or joint ventures to fund its
activities in the future.
Exploration costs
Three months ended January 31,
2012 as compared to three months ended January 31, 2011. Exploration costs for the
three months ended January 31, 2012
were $0.2 million (2011 -
$2.8 million). Exploration
expenditures in the three months ended January 31, 2012 decreased due to the Company's
drilling and exploration programs that are currently put on hold
during the Solicitation Process under CCAA. Exploration costs
incurred in the current period relate primarily to maintaining the
Company's camp sites in Saskatchewan. The necessary capital resources
are required in order to pursue the Company's reservoir development
and exploration activities in accordance to plan and to re-abandon
the early exploration core holes to maintain the Axe Lake
leases.
Nine months ended January 31, 2012
as compared to nine months ended January 31,
2011. Exploration costs for the nine months ended
January 31, 2012 were $0.8 million (2011 - $16.2
million). Exploration expenditures in the nine months
ended January 31, 2012 include
$0.5 million of cost revisions
related to asset retirement obligations compared to $8.5 million incurred last year in relation to
the re-abandonment of a certain number of core holes at Axe Lake
and the reclamation of the airstrip, camp site, access roads and
reservoir test site at the Company's properties. In addition,
exploration expenditures decreased due to the Company's drilling
and exploration programs that are currently put on hold during the
Solicitation Process under CCAA.
For a summary of the exploration activities conducted in the
three and nine months ended January 31,
2012, please see "Operations Summary" above.
General and administrative
Corporate
Three months ended January 31,
2012 as compared to three months ended January 31, 2011. General and
administrative expenses for the three months ended January 31, 2012 were $2.7
million (2011 - $3.7 million).
Expenditures in the three month period ended January 31, 2012 consist of salaries
($0.3 million), legal and other
professional fees ($1.7 million) and
general office costs ($0.6
million). General and administrative expenses in
the three months ended January 31,
2011 consist of salaries ($2.0
million), legal and other professional fees ($0.9 million) and general office costs
($0.8 million). As a result of
cost reduction efforts initiated in September 2010 following the announcement of a
review of strategic alternatives, salaries and other employee
related costs decreased by $1.7
million compared to the same period last year, of which
approximately $0.5 million related to
severance payments incurred because of workforce terminations.
Compared to last year, salary levels decreased by $1.2 million over the three month period ended
January 31, 2012. The increase in
legal and professional fees for the three month period ended
January 31, 2012 compared to the same
period last year resulted primarily from writing off fees
associated with the Socius financing that terminated automatically
on November 29, 2011 upon filing of
the CCAA protection. The decrease in general office costs during
the three months ended January 31,
2012 is mainly caused by the recognition at April 30, 2011 and October
31, 2011 of an obligation under sublease contract to cover
for the net loss expected on the lease agreements for the
Calgary corporate offices.
Nine months ended January 31, 2012
as compared to nine months ended January 31,
2011. General and administrative expenses for the nine
months ended January 31, 2012 were
$9.9 million (2011 - $12.8 million). Expenditures in the nine
month period ended January 31, 2012
consist of salaries ($2.7 million),
legal and other professional fees ($4.7
million) and general office costs ($2.5 million). General and
administrative expenses in the nine months ended January 31, 2011 consist of salaries
($5.9 million), legal and other
professional fees ($3.8 million) and
general office costs ($3.1 million).
Cost reduction efforts and downsizing initiatives implemented by
the Company this past year explained primarily the reduction in
salaries and general office costs incurred during the nine month
ended January 31, 2012 compared to
the same period last year. The increase in legal and professional
fees for the nine month period ended January
31, 2012 compared to the same period last year resulted
primarily from writing off fees associated with the Socius
financing that terminated automatically on November 29, 2011 upon filing of the CCAA
protection. Downsizing activities in general office costs were
partially offset by the recognition of a $0.6 million obligation under sublease contract
incurred for the Calgary corporate
office.
At January 31, 2012, there were 11
corporate employees compared to 22 employees at January 31, 2011.
Stock-based compensation
Three and nine months ended January 31,
2012 as compared to three and nine months ended January 31, 2011. Stock-based compensation
expense for the three months ended January
31, 2012 was $0.06 million
(2011 -$0.05 million) and
$0.1 million (2011 - $1.0 million) for the nine months ended
January 31, 2012 and consists
of stock based compensation related to the issuance of
options to directors, officers and employees. The decrease
during the nine month period compared to the same period in the
prior year results from fewer options remaining to vest including
options that forfeited due to the reduction in employee
headcount. A total of 2.6 million options were forfeited and
3.4 million options expired during the nine months ended
January 31, 2012.
Foreign exchange (gain) loss
Three and nine months ended January 31,
2012 as compared to three and nine months ended January 31, 2011. A foreign exchange gain of
$0.1 million (2011 - $0.1 million) during the three months ended
January 31, 2012 and $0.4 million (2011 - loss of $0.1 million) during the nine months ended
January 31, 2012 resulted primarily
from holding U.S. funds in OQI Sask with a Canadian dollar
functional currency when the value of the U.S. dollar appreciated
against the Canadian dollar.
Depreciation and accretion
Three and nine months ended January 31,
2012 as compared to three and nine months ended January 31, 2011. Depreciation and
accretion expense for the three months ended January 31, 2012 was $1.2
million (2011 - $1.1 million)
and $3.8 million (2011 - $3.3 million) for the nine months ended
January 31, 2012. Depreciation
expense relates to camp facilities, equipment and corporate assets
which are being depreciated over their useful lives of three to
five years. Accretion expense relates to the asset retirement
obligation recognized on the re-abandonment of a certain number of
core holes in the Axe Lake area and on the airstrip, camp site,
access roads and reservoir test sites which are being brought into
income/loss over a period of one to 30 years. The increase
during the three and nine month period ended January 31, 2012 compared to the same periods
last year is due to the additional accretion on asset retirement
obligation resulting from the re-abandonment of a certain number of
core holes in the Axe Lake area that was identified in the year
ended April 30, 2010.
Impairment
Three and nine months ended January 31,
2012 as compared to three and nine months ended January 31, 2011. Impairment for the three
months ended January 31, 2012 was
$nil (2011 - $5.1 million).
Impairment for the nine months ended January
31, 2012 was $0.04 million
(2011 - $7.3 million).
Management recognized a full impairment on the Pasquia Hills
property and wrote down the remaining carrying value to zero during
the three months ended January 31,
2011. The Company's impairment loss of $7.3 million at January
31, 2011 includes a write down on the value of the Pasquia
Hills property and the Saskatchewan Oil Sands Licenses.
Interest and other income
Three and nine months ended January 31,
2012 as compared to three and nine months ended January 31, 2011. Interest income for the
three months ended January 31, 2012
was $0.01 million (2011 -
$0.07 million) and $0.04 million (2011 - $0.11 million) for the nine months ended
January 31, 2012. Interest
income is earned because the Company pre-funds its activities and
the resulting cash on hand is invested in short-term deposits.
Deferred income tax benefit
Three months ended January 31,
2012 as compared to three months ended January 31, 2011. The deferred income tax
benefit for the three months ended January
31, 2012 was $nil (2011 - $1.9
million) and $nil (2011 - $4.9
million) for the nine months ended January 31, 2012. During the three and nine
months ended January 31, 2012, no
deferred income tax benefit was recognized since a full valuation
allowance was taken on the taxable temporary differences associated
with property and equipment capitalized on the balance sheet. At
April 30, 2011, the deferred tax
benefit associated with the impairment on undeveloped properties
was recorded to the extent of the deferred tax liability amount on
the balance sheet derived from the excess appreciated asset value
over the tax basis of the Company's net assets. In addition to
recording a full valuation allowance on all non-capital losses
incurred in accordance with the Company's accounting policy, a
valuation allowance is now taken on taxable temporary differences
associated with property and equipment capitalized on the balance
sheet. The deferred income tax benefit recognized in the three and
nine months ended January 31, 2011
resulted from tax benefits on asset retirement obligations and
impairment recognized on properties.
Previously, the Company recognized a full valuation allowance on
all non-capital losses and generated deferred tax benefits by
expensing all exploration costs for accounting purposes while
capitalizing these costs for income tax purposes. This
resulted in a higher tax basis for the Company's property and
equipment when compared to their carrying value.
Reorganization expenses
Three and nine months ended January 31,
2012 as compared to three and nine months ended January 31, 2011. Reorganization expenses for the
three months ended January 31, 2012
were $0.3 million (2011 - $nil) and
$0.3 million (2011 - $nil) for the
nine months ended January 31, 2012.
Reorganization expenses represent the direct and incremental costs
related to CCAA proceedings and included $0.22 million of professional fees directly
related to the CCAA proceedings and $0.05
million of Court-approved obligations to certain key
eligible employees deemed essential to the business during the CCAA
proceedings.
Recently Issued Accounting Standards Not Yet Adopted
There have been no recent accounting pronouncements or changes
in accounting pronouncements during the three months ended
January 31, 2012, as compared to the
recent accounting pronouncements described in the Company's Annual
Report on Form 10-K/A, that are of significance, or potential
significance to the Company for the current reporting period.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or
are reasonably likely to have a current or further effect on its
financial condition, changes in financial condition, revenues or
expenses, results of operations liquidity, capital expenditures or
capital resources that are material to investors.
Legal Proceedings
On February 24, 2010, a derivative
action entitled Make a Difference Foundation Inc. v. Hopkins, et
al., Case # 10-CV-00408, was filed in United States District
Court for the District of Colorado
by plaintiff Make a Difference Foundation, Inc. The
derivative action names the following individual defendants:
Christopher H. Hopkins, T. Murray Wilson, Ronald
Blakely, Paul Ching,
Brian MacNeill, Ronald Phillips, John
Read, Gordon Tallman,
Pamela Wallin, Thomas Milne and W.
Scott Thompson. In addition, the Company is named as a
nominal defendant. Plaintiff asserts, among other things,
claims for waste and breaches of the fiduciary duty of loyalty and
good faith by the defendants stemming from the Company's approval
of the proposed sale of the Company's Pasquia Hills assets to
Canshale Corp. The plaintiff seeks unspecified damages on
behalf of the Company, restitution on behalf of the Company, and
reasonable costs and expenses including counsel fees and experts'
fees. The Company believes the claims are wholly
without merit and filed a motion to dismiss the Complaint on
May 18, 2010. Before the motion
to dismiss was ruled upon, Plaintiff filed an amended complaint and
a second amended complaint on July 15,
2010 and September 20, 2010,
respectively. Defendants moved to dismiss the second amended
complaint on September 29,
2010. On May 23, 2011,
Plaintiff and Defendants filed a stipulated motion requesting the
stay of all case deadlines pending further negotiation of a
settlement agreement that would resolve the litigation.
On August 11, 2011, the parties filed
a Notice of Settlement Stipulation and Agreement. On
September 2, 2011, the parties
entered into an Amended Stipulation and Agreement of Settlement and
Release, and plaintiff filed an Unopposed Motion for Order to
Preliminarily Approve Derivative Litigation Settlement. The Court
denied plaintiffs motion without prejudice on October 6, 2011, directing plaintiff to re-submit
an amended motion for preliminary approval of settlement to the
Court. On November 2,
2011, the Court granted plaintiff's amended motion for
preliminary approval of settlement, which in sum involves the
implementation of a corporate governance change by the Company and
an agreement by the Company's insurance carrier to pay Plaintiff's
counsel an award of fees in an amount determined by the court, but
not more than $250,000
("Settlement"). On February 24,
2012, the Court conducted a hearing to determine whether to
give final approval to the Settlement and to evaluate the request
for attorneys' fees sought by Plaintiff's counsel. At the
conclusion of the February 24, 2012
hearing, the court took these matters under advisement and
overruled three objections to the Settlement submitted by
shareholders of the Company. The Company has paid to date the
insurance deductible of $250,000 and
the remainder of the Company's counsel fees will be covered by the
Company's insurance carrier.
As previously disclosed, on February 24,
2011, a putative class action complaint (the "Original
Complaint") was filed against the Company and certain current and
former officers of the Company on behalf of investors who purchased
or sold the Company's securities between August 14, 2006 and July
14, 2009, alleging claims of securities fraud under Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, and control person liability for such fraud
under Section 20(a) of the same act, arising out of the Company's
accounting for its acquisition of an interest in OQI Sask in
August 2006. On May 27, 2011, the plaintiffs in that putative
class action filed an amended complaint (the "Amended Complaint")
alleging the same legal causes of action but making the following
changes from the Original Complaint: a) expanding the
putative class period so that it runs from March 20 2006 to January
13, 2011; b) naming as additional defendants eight
individuals who are current or former directors of the Company as
well as two additional corporate defendants, McDaniel &
Associates Consultants Ltd. and TD Securities, Inc.; and c) basing
the claimed fraud on a new theory that the Company overstated the
value of its mineral rights as a result of misstatements about,
among other things, the potential for extracting bitumen from oil
sands lands for which the Company had exploration and development
permits. The Amended Complaint seeks unspecified damages and
the Company believes the suit is without merit and intends to
defend itself vigorously. On June 6,
2011, the Company filed a motion to dismiss the Amended
Complaint. On June 20, 2011,
the plaintiffs filed their opposition to the motion to
dismiss. The Company filed its reply to the plaintiffs'
opposition on June 27, 2011 and on
July 29, 2011, the court heard oral
arguments and reserved decision. On August
5, 2011, the two remaining defendants moved to dismiss the
Amended Complaint. On September 16,
2011, the Court denied the Company's motion to dismiss the
Amended Complaint. On September 29,
2011, the defendants answered the Amended Complaint. As a
consequence of commencing US Chapter 15 proceedings, the case has
been stayed on an interim basis until the Court can hear and decide
the motion seeking a stay for the pendency of the US Chapter 15
proceedings.
On April 13, 2011, a derivative
action entitled Proctor v. Wilson, et al., Case No 2011CV2769 was
filed in District Court, Denver County,
Colorado. The derivative action names the following
individual defendants: T. Murray
Wilson, Ronald Blakely,
Paul Ching, Christopher H. Hopkins, Brian F. MacNeill, Ronald Philips, John
Read, Gordon Tallman and
Pamela Wallin. In addition,
the Company is named as a nominal defendant. Plaintiff
asserts, among other things, claims for breach of fiduciary duties,
unjust enrichment, abuse of control, gross mismanagement and waste
against the defendants relating to the alleged failure to properly
account for the Company's acquisition of a minority interest in
Oilsands Quest Sask Inc. and the Company's restatement of its
financial statements for certain periods. The plaintiff seeks
unspecified damages on behalf of the Company, restitution on behalf
of the Company, unspecified disgorgement of profits, unspecified
equitable relief and reasonable costs and expenses including
counsel fees and experts' fees. Plaintiff sought and
obtained approval from the court to file an amended complaint on
September 8, 2011.
On October 17, 2011, the defendants
filed a motion to dismiss the amended complaint. Plaintiffs'
response to the motion to dismiss is due on December 15, 2011. On December 1, 2011, the plaintiff requested and was
granted a stay of all proceedings. On January 3, 2012, the plaintiff sought to lift the
stay. By joint motion dated February
17, 2012, plaintiff agreed to hold the motion to lift stay
in abeyance pending the outcome of the Chapter 15 proceedings. The
Company believes the claims are without merit.
Cautionary statement about forward-looking statements
The following includes certain statements that may be deemed to
be "forward-looking statements." All statements, other than
statements of historical facts, included in this news release that
address activities, events or developments that management expects,
believes or anticipates will or may occur in the future are
forward-looking statements. Such forward-looking statements
include discussion of such matters as:
- the Company's ability to maintain protection under the
Companies' Creditors Arrangement Act (Canada) ("CCAA");
- risks and uncertainties associated with limitations on actions
against the Company and certain subsidiaries during creditor
protection proceedings;
- the Company's ability to successfully complete the Solicitation
Process while in CCAA proceedings;
- the Company's ability to submit a timely plan to its
stakeholders and the court under the CCAA and to resolve its
operational, legal and financial difficulties;
- risks and uncertainties associated with potential delisting of
the Company's common shares from the NYSE;
- the Company's ability to maintain sufficient cash to accomplish
its business objectives, including its ability to continue as a
going concern;
- the amount and nature of future capital, exploration and
development expenditures;
- the extent and timing of exploration and development
activities;
- business strategies and development of the Company's business
plan and exploration programs;
- potential relinquishment of certain of the Company's oil sands
permits and licenses;
- anticipated cost of the Company's asset retirement obligations,
including the extent and timing of its core hole re-abandonment
program; and
- the Company's ability to secure additional funds through the
sale of assets or the issuance of debt or equity.
Forward-looking statements are statements other than relating to
historical fact and are frequently characterized by words such as
"plan", "expect", "project", "intend", "believe", "anticipate",
"estimate", "potential", "prospective" and other similar words or
statements that certain events or conditions "may" "will" or
"could" occur. Forward-looking statements such as references to
Oilsands Quest's drilling program, geophysical programs, reservoir
field testing and analysis program, preliminary engineering and
economic assessment program for a first commercial project, and the
timing of such programs are based on the opinions and estimates of
management at the date the statements are made, and are subject to
a variety of risks and uncertainties and other factors that could
cause actual events or results to differ materially from those
anticipated in the forward-looking statements, which include but
are not limited to the ability to raise additional capital, risks
associated with the Company's ability to implement its business
plan, its ability to successfully submit a timely plan to its
creditors and the court under the CCAA proceeding and to resolve
its liquidity difficulties, the possibility of delisting of its
securities from the NYSE, risks inherent in the oil sands industry,
regulatory and economic risks, land tenure risks, lack of
infrastructure in the region in which the company's resources are
located and those factors listed under the caption "Risk Factors"
in the Company's 10-Q filed with the Securities and Exchange
Commission (the "SEC") on March 8,
2012.
The Company is under no duty to update any of these
forward-looking statements after the date of this report. You
should not place undue reliance on these forward-looking
statements.
About Oilsands Quest
Oilsands Quest Inc. (www.oilsandsquest.com) is exploring and
developing oil sands permits and licences, located in Saskatchewan and Alberta, and developing Saskatchewan's first commercial oil sands
discovery.
SOURCE Oilsands Quest Inc.