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| WSCE.OB > SEC Filings for WSCE.OB > Form 10-Q on 17-Nov-2008 | All Recent SEC Filings |
17-Nov-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. and its subsidiaries are collectively referred to herein as "we", "us", "our", "Wescorp", "the Company" or "our Company", unless the context warrants otherwise.
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 strategic 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 are intended to generate real returns with above-average cash flows 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") related to water remediation and purification.
Company Background
Flowstar
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.
In connection with our acquisition of Flowstar, we entered into share purchase agreements 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 effective as of August 30, 2003, Flowray had transferred to Quadra all of its
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
º Tranche 2: an aggregate of 2,080,000 additional shares of common stock of the Company (1,040,000 additional shares to each of the two shareholders) to be issued in stages as follows:
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 rights 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. As of December 18, 2007, Wescorp had issued 3,654,750 common shares to the third party that fulfilled its obligations to the third party under Tranche 2, State Two.
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 of Tranche 2. 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
Although the Registration Statement covering the shares became effective in January 2008, as of November 1, 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 is required 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 third quarter 2008, total sales were down approximately 9.2% from third 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. Total sales from this project alone approached $500,000 in the third quarter of 2008 and represent approximately 75 wells. Revenues include activation and set-up fees and the addition of the wireless radio communication panels on each well implemented. The first phase of this project should be completed by the end of the year with additional phases to continue in 2009.
Coal Bed Methane ("CBM") well completions were down by approximately 23% in the third quarter of 2008 versus the third quarter of 2007, with completions for all gas wells seeing a drop of approximately 24%. Commodity prices in Canada have remained firm in the first nine months of 2008 and are higher than the same period of 2007.
Flowstar is evolving into more of a total gas measurement solutions provider and is engaging customers for project based applications by integrating hardware sales with IFMWorks. Diversification of Flowstar's sales is also achieved by selling into the retrofit/upgrade market as well as the new metering market. Management believes that these two factors help provide Flowstar with some insulation from the market fluctuations experienced in today's energy environment.
Ellycrack
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.
The Company was interested in Ellycrack's technology because Ellycrack had 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
Rather than execute the licenses set forth in the letter of intent, Ellycrack and the Company signed an MOU on September 28, 2004 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 worldwide basis.
The MOU also provides for cancellation of the Company's options to purchase licenses in Canada, the United States and Mexico and creates a mutual 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.
In accordance with the MOU with Ellycrack, Wescorp and Ellycrack undertook plans to develop a pilot plant, including the VISCOSITOR "test rig". During the third quarter of 2005 we made various improvements to the 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 at our own expense 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. These tests also resulted in current negotiations by Ellycrack with two major companies to conduct further testing in Canada at their own expense. 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. 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.
Since arriving in Canada, the test rig was reassembled and modified at a fabrication shop in Manitoba to meet Canadian Electrical Code and other standards. Then the unit was moved to a Canadian research center where it is currently undergoing installation. Upon completion of installation, it will be subjected to a staged test program. The unit will be operated to duplicate conditions in Norway in order to validate proper operation.
Wescorp NAVIGATOR
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
We have completed the first phase of the NAVIGATOR project, originally announced March 5, 2008, with a Canadian heavy oil company. Now that the first phase has been completed, revenues may be generated as early as the fourth quarter of 2008. This project is ongoing and should continue well into fiscal year 2009.
Total Fluid and Raider
On December 18, 2007, Wescorp Technologies Ltd, our wholly-owned subsidiary ("Wescorp Technologies"), executed and closed an Asset Purchase Agreement with FEP Services, Inc. ("FEP"), pursuant to which Wescorp Technologies acquired certain rights to three different water remediation technologies and assets that we used to create two new business units - Total Fluid Solutions Inc. ("Total Fluid") and Raider Chemical Corporation ("Raider"). The three technologies address remediating three separate contaminates in oilfield water as the result of the exploration for, and production of, oil and gas, in particular, solids and hydrocarbon:
a. Total Fluid - Total Fluid 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 facility, involving 120 oil and gas wells. During the third quarter, we maintained over 90% uptime, with minimal interruptions. Our operational data has provided valuable data to our industry sponsors, allowing them to recommend technical improvements to our equipment, resulting in savings in operating costs.
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.
Since the beginning of the second quarter, we have demonstrated our unit to over 50 investors, clients, industry experts, and government officials. It is hoped that these demonstrations will lead to future sales opportunities of the unit. We have signed our first sales order for one unit with options for up to an additional two hundred and fifty-five units over the next five years.
In addition, we have filed a provisional process patent application for additional technology that 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 and 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 - Raider 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 evaluating expanding into the US.
Raider Chemical saw a stronger demand for products in the third quarter versus the second quarter of 2008. This is a result of stronger drilling and completion activities during the third quarter in western Canada, and Raider's major customer expanding their operations into the United States and Russia.
Operations Summary
Results for 2007 and the first nine months of 2008 were not as strong as anticipated due to the downturn in Canadian gas drilling and exploration. Sales by Flowstar during the first nine months of 2008 were below its prior year average. We believe that our Wescorp NAVIGATOR is a new business with strong potential for the future, but it will take some time for the sales to ramp up. At the same time, Management believes that the Radier division has shown encouraging sales considering the drilling market has been slow and hopes to complete the field testing of the Total Fluid unit in the fourth quarter of 2008. We have signed our first sales order for one Total Fluid unit to be installed prior to the year-end, with the customer having options for up to an additional 255 units over the next five years. Until a unit sale is finalized and the option to purchase additional units is exercised, there will be no revenue from Total Fluid.
Overall, the Company as a whole has yet to reach profitability and during the third quarter ended September 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.
Although we are optimistic regarding our future operations, cash will be required to fund the manufacture of sufficient inventory, to finance the build-up of trade accounts receivable, and to fund the startup of our water remediation technologies. Consequently, forecasting our total cash requirement is difficult at this time due to the contingent nature of the timing and volume of sales we expect over the next year. In the near future, we intend to raise additional capital by selling new equity, or incurring short-term debt, to finance the following, although there is no assurance that we will be able to do so:
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 that require specialized expertise.
Our sources of revenue now include (a) continued revenues from our subsidiary, Flowstar; and (b) revenues from our subsidiary, Raider (which did not exist in the third quarter of 2007). Although it has not yet
Results from Operations - 2008 Compared to 2007
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Revenues
Revenues during the quarter ended September 30, 2008 were $1,414,976, compared to $1,099,791 for the quarter ended September 30, 2007, an increase of $315,185, or 28.7% . The increase in revenue is the result of the operations of our wholly-owned subsidiary Raider, which was formed after we acquired assets from FEP on December 18, 2007. Revenues attributable to our wholly-owned subsidiary Flowstar were $1,006,344 while revenues of Raider contributed $408,632. Flowstar's revenue in the third quarter of 2008 decreased by $93,447 compared to the results for the third quarter of 2007. The decrease in revenue for Flowstar is directly attributable to problems caused by reductions in well licensing, drilling activities, and capital spending, which continue to affect the Canadian natural gas industry. Based on information published by the Canadian Association of Petroleum Producers, well licensing is down 14% and well completions are down 24% for gas wells in the third quarter of 2008 when compared to the same period for 2007. These current declines in revenue for Flowstar are directly attributable to the decrease in new natural gas wells being brought into production.
In order to offset these declines, we have focused on improving our sales coverage for the Flowstar DCR systems through increased exposure to the upstream measurement community, which we believe has resulted in, and will continue to result in, an increased market awareness of the Flowstar products. Flowstar also has brought to market new products that enhance the communications capabilities of the DCR product line, found new market niches for its existing products and has utilized existing client relationships to attract new customers.
Cost of Sales
As a percentage of revenues, cost of sales for the quarter ended September 30, 2008 increased to 63.0% versus 52.0% for the quarter ended September 30, 2007. Part of this increase is attributable to the costs of sales of the Raider products in 2008 that we did not have in 2007. In particular, the Raider products have significantly lower margins than the margins realized on the sale of Flowstar products. In addition, Flowstar gave slightly larger discounts to customers in the third quarter of 2008 in conjunction with high volume sales orders and in an attempt to stimulate sales due to the depressed market conditions.
Expenses
Operating expenses for the quarter ended September 30, 2008 were $2,144,115 versus $2,823,735 for the quarter ended September 30, 2007, a decrease of $679,620. This decrease was primarily the result of decreases in research and development expenses, consulting expenses, wages, and amortization of technology as explained below.
On September 11, 2007, the Company effectively completed the Merger Agreement with SDS and Scott Shemwell, who was the sole shareholder of SDS and who is the current Chief Operating Officer of the Company. Under the terms of the Merger Agreement, all shares of SDS common stock issued and outstanding immediately prior to the effective time of the Merger were converted into, and exchanged for, the right to receive 2,000,000 shares of the Company's common stock. At the date of this transaction the Company's shares had a closing trading price of . . .
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