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| WSCE.OB > SEC Filings for WSCE.OB > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-2008
Quarterly Report
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the "Cautionary Note Regarding Forward-Looking Statements" set forth above.
Wescorp Energy Inc. is referred to herein as "we", "us", "our", "Wescorp", "the Company" or "our Company".
Overview
We are an oil and gas operations solution and engineering company committed to acquiring, developing and commercializing technologies that are designed to improve the management, environmental and economic performance of field operations for oil and gas producers and to provide solutions to help them overcome the tough operational challenges they face. To this end, our primary business strategy is to acquire, fund and develop new systems and technologies in our field through investments in companies or products for which early stage product development has been completed, and to provide consulting services with respect to these systems and technologies. We prefer investments for which we can control the intellectual property of technologies that have emerged from research and initial development and are essentially market-ready. We also acquire companies with one or more technology products being developed that can benefit from the financial, technical and business development experience of our management to bring those products to market in a meaningful manner after they have been fully developed. Among other strategies, we may attempt to license or form third-party commercial partnerships based on these acquired technologies.
In short, our goal is to generate enhanced capital appreciation for our
shareholders by continuing to acquire, develop, and commercialize timely
effective product solutions or strategic investment opportunities for
energy-related applications that generate real returns with above-average cash
flow and margins. To this end, we currently have investments in five projects,
including: (i) our subsidiary, Flowstar; (ii) our joint venture with Ellycrack;
(iii) our Wescorp Navigator; (iv) our subsidiary Total Fluid Solutions Inc.
("Total Fluid"); and (v) our subsidiary Raider Chemical Corporation ("Raider").
Company Background
In 2004 and 2005, the Company recorded its first operating revenue from the acquired operating businesses of Flowstar Technologies Inc. ("Flowstar"), Flowray and their affiliated companies. Flowstar produces advanced natural gas and gas liquids measurement devices based on a proprietary Digital Chart Recorder (DCR) and advanced turbine measurement technology. Flowstar DCR-based devices are self-contained, energy-efficient flow computers with turndown ratios of 40:1 or more for more precise flow measurements and volume calculations that are installed directly to the well-head. Currently, these products carry a one-year warranty and have no right of return. There is no price protection plan in place.
On September 11, 2007, we effectively completed an Agreement and Plan of Merger (the "Merger Agreement") with Strategic Decisions Sciences USA Inc. ("SDS") and Scott Shemwell, who was the sole shareholder of SDS and who is our current Chief Operating Officer. The transaction was structured as a merger of SDS into Wescorp in accordance with the applicable provisions of the Delaware General Corporation Law (the "Merger"), with Wescorp remaining as the surviving entity following the Merger. The technology developed by SDS is operating as Wescorp Navigator, a division of Wescorp. It is a Houston-based engineering business focused on providing process-driven consulting services to help oil and gas operators improve the management, economics and environmental performance of field operations. As part of our acquisition of SDS, we acquired its NAVIGATOR Process Management Solution, a collaborative solution that manages the interactions of people, processes and equipment in complex oil and gas field operations. We believe that the Wescorp NAVIGATOR offers powerful, integrated, field operations capability that we intend to use to drive the development, commercialization and management of our client offerings. We also intend to make the Wescorp NAVIGATOR available to our clients to manage field complexities, especially in the areas of oil and gas flow measurement and metering, environmental remediation and compliance, enhanced oil recovery, unconventional oil and gas production, and field intelligence, including radio frequency identification ("RFID") tagging and implementation.
a. Total Fluid - Our wholly-owned subsidiary, Total Fluid Solutions, uses a proprietary, environmentally friendly, patented aeration process to remove hydrocarbons and solids from oilfield water,. This process reduces the hydrocarbon content from the conventional 5,000 to 30,000 parts per million range to less than 50 parts per million.
We intend to use this technology independently or in conjunction with other water remediation technologies in order to address the critical water issues facing the oil and gas industry today.
Currently our Total Fluid field testing unit is in full production at our industry sponsored production facilities, involving 120 oil and gas wells. So far this quarter, we have maintained over 90% uptime, with minimal interruptions. Our operational data has provided valuable data to our industry sponsors, allowing them to in turn to recommend technical improvements to our equipment, resulting in savings in operating costs. Since the beginning of Q2, we have demonstrated our unit to over 50 investors, clients, industry experts, and government officials. We believe that all indications are that our technology is sound and that the market opportunity is vast. We continue to work with the University of Calgary and the Canadian Environmental Technology Advancement Corporation on proving scalability and validating the technology's use in other areas of applications.
We have filed a provisional process patent application for additional technology which we have developed in this area. We also own all of the intellectual property rights for a solids-oil separation technology that is not patented, but is held as a trade secret. With these technologies, we hope to be able to remediate two of the main contaminates (solids, hydrocarbon) in oilfield water as the result of exploration for, and production of, oil and gas. The technology to remove solids from the oilfield water uses a proprietary, environmentally friendly, chemical process to separate drilling solids from the water and hydrocarbon mixtures, which are found in the water as a result of drilling the wells. The solids are cleaned to a standard that allows them to be used in construction. The third technology, to remove salt from the oilfield water, uses a low-energy process of flash distillation to separate the salts from the water.
b. Raider - Our wholly-owned subsidiary, Raider Chemical Corporation, designs and manufactures specialized chemicals used in the cementing and stimulation services area, within the oil and gas industry. Raider is currently making sales in Canada and is also evaluating expanding into the US.
Our sources of revenue now include (a) continued revenues from our subsidiary, Flowstar; and (b) revenues from our subsidiary, Raider (which also did not exist in the second quarter of 2007). We also have had an initial contract for a study by our Wescorp Navigator division, and we are working to develop additional revenue from this division.
Results for 2007 and the first six months of 2008 were not as strong as anticipated due to the downturn in Canadian gas drilling and exploration. Performance for Flowstar during the first half of 2008 was below average. Wescorp Navigator is a new business with strong potential for the future, but it may take some time for the sales to ramp up. The Raider division has shown encouraging sales considering the drilling market has been slow. Management hopes to complete the field testing of the Total Fluid unit in the third quarter. We have signed our first sales order for one unit to be installed prior to year-end with options for up to an additional two hundred and fifty-five units over the next five years. Until then, there will be no revenue from the Total Fluid operations. Overall, the Company as a whole has yet to reach profitability and during the second quarter ended June 30, 2008, we experienced negative cash flows. If we continue to experience negative cash flows, then we will have to continue to fund our operations by the issuance of new equity and/or the assumption of debt. There can be no assurances that we will be successful in these regards, which would significantly affect our ability to execute our business plan.
º The continued expansion of Flowstar operations within our current markets
and into the United States;
º The continuing development, pilot plant fabrication and field-testing of
the Ellycrack technology (see below);
º The business development and expansion of the newly acquired water
remediation technologies (Total Fluid and Raider), as well as Wescorp
Navigator;
º The potential acquisition of possible new technologies and businesses
related to our existing strategic business units, with the intent that they
would add value to our overall business almost immediately upon closing;
and
º Any negative cash flow resulting from operations.
Our current and future opportunities for success depend to a great extent on the continued employment of and performance by senior management and key personnel. As we continue to grow, the demands and skill sets of our senior management will change. As needed, new executives will be hired with the skill sets and experience required to enhance those areas which require specialized expertise.
Past Acquisitions
Flowstar and Flowray Terms of Acquisition of Flowstar and Flowray
On March 31, 2004, we, through our Alberta subsidiary 1049265 Alberta Ltd., acquired 100% of the outstanding shares of Flowstar and Flowray for cash payments to the selling shareholders totaling approximately $414,074 (CAD $550,000) pursuant to the share purchase and subscription agreement dated June 9, 2003, as amended effective January 14, 2004.
Related Agreements to Acquire 100% of Vasjar Trading Ltd.
We also entered into share purchase agreements dated effective January 14, 2004 pursuant to which we acquired 100% of the outstanding shares of Vasjar Trading Ltd. ("Vasjar"). Vasjar in turn owns 100% of the outstanding shares of Quadra, a Barbados corporation. Pursuant to an agreement dated effective as of August 30, 2003, Flowray had transferred to Quadra all of its intellectual property rights, including rights to the technology related to the DCR 900 system, in consideration of a promissory note in the principal amount of CAD $604,500 without interest. Flowstar and Flowray were legally amalgamated on December 31, 2004 into one company that continued under the name Flowstar Technologies Inc.
In consideration of the purchase of all the outstanding shares of Vasjar from its two shareholder entities (that each owned 50% of Vasjar's outstanding shares), Wescorp issued shares (and will issue additional shares), all of which are required to be registered for resale upon delivery, to each of the two shareholders of Vasjar in equal amounts as follows:
º Tranche 1: an aggregate of 2,400,000 shares of common stock of the Company (1,200,000 shares to each of the two shareholders) on April 28, 2004; and
Stage One. On or before April 1, 2005, the Company was required to issue 480,000 additional shares based on sales achieved in the 2004 calendar year (240,000 shares to each shareholder).
Stage Two. On or before April 1, 2006, the Company was required to issue 800,000 additional shares based on sales achieved in the 2005 calendar year (400,000 shares to each shareholder).
Stage Three. On or before April 1, 2007, Wescorp was required to issue 800,000 additional shares based on sales achieved in the 2006 calendar year (400,000 shares to each shareholder).
We were not able to deliver free-trading shares on April 1, 2005, and under the Vasjar purchase agreements we were required to pay an additional 48,000 Wescorp shares for each month that the shares were not delivered, covering the months April through September 2005. In September 2005, a third party acquired the interests of the former Vasjar shareholders in connection with the share delivery requirements of Tranche 2, Stage One. As a result, we owed shares under Tranche 2, Stage One to the third party.
On November 22, 2006, we entered into a letter agreement with the third party (the "Third Party Letter Agreement"), pursuant to which we agreed to pay the third party 1,000,000 shares of our common stock to fulfill the Tranche 2, Stage One debt requirements that the third party acquired from the former Vasjar shareholders. These shares were delivered to, and accepted by, the third party on November 22, 2006.
On April 1, 2006, we were not able to deliver free-trading shares called for under Tranche 2, Stage Two, and thus we were required to pay the former Vasjar shareholders an additional 80,000 Wescorp common shares for each month that the shares were not delivered. In February 2007, the third party acquired the interests of the former Vasjar shareholders in connection with the share delivery requirements of Tranche 2, Stage Two. As a result, the Company owed the shares under Tranche 2, Stage Two to a third party. By December 18, 2007, Wescorp issued 3,654,750 common shares to the third party.
If any of the Wescorp shares to be issued to the former Vasjar shareholders have not been delivered for a period of 182 days after the applicable due date, the former Vasjar shareholders may at their option terminate the share purchase agreements, without notice or prior opportunity to cure. The former Vasjar shareholders did not exercise these rights, and they sold to a third party their rights, including their rights to receive shares and/or penalty shares from the Company under both Stage One and Stage Two. We have also received a written waiver from the third party waiving and canceling any termination rights that the third party may have as a result of his purchase of certain rights under the Vasjar purchase agreements. In addition, we pledged to the former Vasjar shareholders all the Vasjar shares as security to guarantee Wescorp's performance under the share purchase agreements.
Although the Registration Statement covering the shares became effective in January 2008, as of May 7, 2008, we had not delivered the Vasjar shares because we were involved in discussions with the former Vasjar shareholders concerning the possibility of reaching a mutually acceptable agreement regarding the number of free-trading shares for the Company to deliver under Tranche 2, Stage Three. Under the terms of the agreement, without taking into account the Company's position that the number of shares owed should be reduced, the former Vasjar shareholders would be entitled to an additional 80,000 Wescorp common shares for each month that the shares are not delivered. Because we were unable to deliver these shares, plus the penalty shares, by October 1, 2007, the former Vasjar shareholders currently have the right to terminate their respective share purchase agreements with us. If they do so, we would no longer own Vasjar or its subsidiary, Quadra, including the intellectual property rights owned by Quadra.
With the completion of the acquisition of Vasjar, Wescorp owns, subject to Vasjar's right to terminate the acquisition agreement, all the proprietary technology originally owned by Flowray (which was subsequently amalgamated with Flowstar) related to the DCR 900 system and other products. As at December 31, 2007, management determined that future economic benefits of the Company's DCR technology were negligible. Therefore the balance of the value of the technology was fully impaired, resulting in an impairment loss on the Company's DCR technology in the amount of $2,177,970 as at December 31, 2007.
In the second quarter 2008, total sales were up approximately 15% from second quarter 2007. Flowstar was awarded a project and secured a letter of intent signed by an Alberta energy producer to provide metering, communications and a web hosting solution utilizing IFMWorks for an estimated value of $800,000 for 2008. Equipment for the first phase of this project was ordered at the end of Q2, 2008, with installation to commence at the start of Q3, 2008.
The Coal Bed Methane ("CBM") well completion was virtually unchanged from Q2, 2007 to Q2, 2008, with completions for all gas wells seeing a drop of 22%. This likely points to a long-term trend of decreasing conventional gas well production with more emphasis on unconventional sources like CBM, tight gas and shale gas. Commodity prices have remained firm in the first half of 2008 and are higher than the same period of 2007.
Investment in Ellycrack AS
Pursuant to a letter of intent dated February 10, 2004, Ellycrack AS ("Ellycrack"), of Florø, Norway, had granted Wescorp, or its subsidiary, options to acquire three separate exclusive territorial licenses in Canada, the United States and Mexico to make, use, copy, develop and exploit Ellycrack's technology and intellectual property and to design, manufacture, market and sell products or systems derived from or utilizing Ellycrack's technology or sublicense others to do the same in each territory.
However, on September 28, 2004, Ellycrack and the Company signed the MOU to form a 50% / 50% Joint Venture to make, use, copy, develop and exploit Ellycrack's technology and intellectual property and to design, manufacture, market and sell products or systems derived from or utilizing Ellycrack's technology or sublicense others to do the same on a world-wide basis.
The MOU also provides for cancellation of the options to purchase licenses in Canada, the United States and Mexico and the institution of an obligation to build and operate a pilot plant in Canada to determine the overall economics of the technology and, subject to the viability of these economics, to market the technology on a worldwide basis. For further details see our Current Report on Form 8-K filed with the SEC on September 28, 2004.
In addition to our interest in Ellycrack through the MOU described above, the Company owns an aggregate of 724,000 shares of Ellycrack representing approximately 13% of Ellycrack's outstanding shares.
Ellycrack has developed what is believed to be a cost effective technology in which heavy oil can be upgraded to "lighter" more commercially saleable oil via a low-energy "mechanical" cracking process which can be located directly in a field environment. By upgrading heavy oil in the field, oil companies can eliminate on-site storage tanks as well as the cost associated with transporting heavy oil great distances to centralized upgraders. As such, heavy oil can be transported directly to a refinery.
Since Wescorp's business relationship with Ellycrack A/S started, Ellycrack has reported improved results in experiments with its "test rig" These experiments have been conducted by the prestigious Norwegian research center SINTEF. Demonstration tests for several major oil companies were done at Wescorp's expense. This has resulted in current negotiations by Ellycrack with two major companies, to conduct further testing in Canada at their expense.
In accordance with the MOU with Ellycrack, Wescorp and Ellycrack undertook plans to develop a pilot plant. During the third quarter of 2005 we made various improvements to core technology within the Ellycrack process in order to optimize it for the pilot plant and subsequent commercial applications. As a result of those improvements, we scheduled tests for several major energy producers who requested a demonstration of the Ellycrack process for possible consideration within their field operations as a commercial application. Those improvements and tests were very successful, resulting in a significant increase in the process' upper limit of API upgrading. In the first quarter of 2006, a major engineering firm completed the design for a 50 to 200 barrel a day pilot plant utilizing the Ellycrack technology.
We have moved the VISCOSITOR "test rig" from a research center at Trondheim, Norway to Canada. This has been done in order to develop the technology under world class Canadian heavy oil expertise for the commercialization effort. The aim is to automate the test rig as an approximately 20-50 BOPD pilot plant, and "prove out" longer term operation before seeking markets for the technology.
Acquisition and Business of Strategic Decision Sciences USA Inc.
On September 11, 2007, we acquired SDS, a Houston-based engineering firm focused on providing process-driven consulting and services to help oil and gas operators improve the management, economics, and environmental performance of field operations. As part of our acquisition of SDS, we acquired its NAVIGATOR Process Management Solution, a collaborative solution that manages the interactions of people, processes, and equipment in complex oil and gas field operations. We believe that the Wescorp NAVIGATOR offers powerful, integrated, field operations capability that we intend to use to drive the development, commercialization, and management of our client offerings. We also intend to make the Wescorp NAVIGATOR available to our clients to manage field complexities, especially in the areas of oil and gas flow measurement and metering, environmental remediation and compliance, enhanced oil recovery, unconventional oil and gas production, and field intelligence, including radio frequency identification ("RFID") tagging and implementation.
SDS focuses on the operations level and is committed to assisting its clients to achieve operational excellence. SDS's capabilities include:
• Research
• White/Position Papers
• Market Studies (Multi-Client and Proprietary)
• Workshop Facilitation
• Assessment
• Risk Analysis
• Decisions Analysis
• Feasibility Studies
• Economic & Financial
• Management Science
• Stochastic Analysis
• Real-Options
• Project ROI
A number of applications for SDS's solutions exist, such as:
º Supply Chain & Asset Management
º Optimization of Field Operations
º Customer Acquisition Processes
º Corporate Governance & Planning
º Risk Assessment & Portfolio Management
º Information Technology ROI Assessment
º Merger & Acquisition "Gaming"
º Human Resource Planning
º Negotiation Management
NAVIGATOR Process Management Solution continues to be attractive to a variety of clients including petroleum operators and service providers. Working with a marine service partner, Wescorp has successfully tested an RFID tag attached to subsurface equipment at approximately 4,000 meters of water in the Gulf of Mexico. The purpose of this test was to assure that the tag was still attached and that it could be read when retrieved to the surface - the test was a critical success and Wescorp has several major players interested in deploying this technology to better manage remote maritime assets.
The Company continues to develop its NAVIGATOR sales strategy, primarily in the Houston, TX market including the marine service segment, energy service companies as well as petroleum operators. NAVIGATOR is still early in its life cycle, but a lot of interest has been generated by the industry. This is evidenced by the fact that several industry media outlets have published byline articles about NAVIGATOR by Wescorp executives and a presentation was made at the Society of Petroleum Engineers sponsored 2008 Digital Energy Conference on May 21, 2008 in Houston, Texas.
While the Company believes that NAVIGATOR provides customers a great deal of value, initial sales have been slower than expected. The Company believes that this is largely because its target purchasers, operations executives, are very busy and Wescorp sales representatives find it difficult to get on the calendar of senior management. However, the Company has several proposals outstanding that have been requested by its customers and expects additional sales to commence in the 3rd quarter.
Acquisition of Intellectual Property and Other Assets from FEP Services Inc.; Business of Total Fluid Solutions and Raider Chemical Corporation
On December 18, 2007, the Company effectively completed an agreement to purchase intellectual property and other assets from FEP. Different portions of this intellectual property and these other assets were transferred to our newly formed wholly-owned subsidiaries, Total Fluid Solutions and Raider Chemical Corporation, respectively, as described below. Under the terms of the purchase agreement, our wholly-owned subsidiary, Wescorp Technologies, assumed . . .
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