CUSIP# 678046 10 3 NYSE Amex: BQI CALGARY, March 8, 2012 /CNW/ -
Oilsands Quest Inc. ("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 . 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.
Oilsands Quest Inc. CONTACT: Investor RelationsEmail:
ir@oilsandsquest.comInvestor Line: 1-877-718-8941
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