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| WSCE.OB > SEC Filings for WSCE.OB > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
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".
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 (as defined below); (ii) our joint venture with Ellycrack (as defined below); (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 electronic flow meters and advanced turbine measurement technology. Flowstar 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 wellhead. 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 (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 various aspects of field operations. Specifically, the Wescorp NAVIGATOR can assist operators 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.
On December 18, 2007, Wescorp Technologies Ltd., our wholly-owned subsidiary, 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 rights owned by Total Fluid are for North America.) 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 - Our wholly-owned subsidiary, Total Fluid, owns a North American patent for certain oil- water separation technology. We are in the process of filing a provisional patent application for additional technology which we have developed in the same 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 technology to remove hydrocarbons from the oilfield water uses a patented
aeration process that is expected to reduce the hydrocarbon content from the conventional 5,000 to 30,000 parts per million range to less than 100 parts per million. 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, 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 possibly expanding operations into the US.
Our sources of revenue now include (a) continued revenues from our subsidiary, Flowstar; (b) revenues from our subsidiary Wescorp Services (Navigator) (c) revenues from our subsidiary, Raider and (d) revenues from our subsidiary, Total Fluid.
Results for 2008 and the first six months of 2009 were not as strong as anticipated due to the world wide financial situation, and specifically, the sharp downturn in gas drilling and exploration. Performance for Flowstar during the first six months of 2009 was below average. The Raider division has shown encouraging sales considering the drilling market has been slow. Wescorp Services (Navigator) is a new business with strong potential for the future, but it may take some time for the sales to ramp-up.
Overall, the Company as a whole has yet to reach profitability and during the first six months ended June 30, 2009, 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 somewhat optimistic regarding our future operations, based on
our sales for the last three quarters of 2008, additional cash will be required:
(i) to fund the purchase of sufficient inventory; (ii) to finance the build-up
of trade accounts receivable; and (iii) to fund the ramp-up 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 that same period.
In the near future, we intend to raise additional capital by selling new equity, or incurring debt, to finance the following:
º The continued expansion of Flowstar operations within our current markets
and possibly into the United States;
º The business development and expansion of water and soil remediation
technologies (Total Fluid and Raider), ;
º The potential acquisition of possible new technologies and businesses
related to one or more of 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 on, to a great extent, the continued employment of and performance by a highly qualified and committed group of senior management and key personnel. As we continue to grow and/or develop our business, the demands and skill sets of our senior management may change. We intend to hire, as needed, new executives 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.
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 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 August 12, 2009, 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 should be smaller, 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.
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.
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 has worked with Ellycrack on 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 have 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 2005, we hired a major engineering firm to prepare the design for a 50 to 200 barrel-per-day pilot plant utilizing the Ellycrack technology. This design was completed in the first quarter of 2006. We have also hired an engineer who at the appropriate time would serve as project manager for pilot plant fabrication and to oversee Ellycrack-related operations.
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.
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 to drive the development, commercialization and management of various aspects of field operators. Specifically, the Wescorp NAVIGATOR can assist operators 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.
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
Our wholly-owned subsidiary, Total Fluid Solutions Inc. ('Total Fluid"), owns the world-wide rights to certain oil-water separation technology in the oil and gas field. The Canadian patent rights expire in March 2011. We have filed a provisional patent application for the worldwide oil and gas rights for additional technology in the same 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. We intend to use these technologies independently or in conjunction with each other or other water remediation technologies in order to address the critical water issues facing the oil and gas industry today.
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 technology to remove hydrocarbons from the oilfield water uses a patented aeration process that is expected to reduce the hydrocarbon content from the conventional range of 5,000 to 30,000 parts per million to less than 10 parts per million. 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.
The Total Fluid field testing has been completed at our industry-sponsored production facility, involving 120 oil and gas wells. During the last phase of our test period, we maintained over 90% uptime, with minimal interruptions. Our operational results have provided valuable data to our industry sponsors, allowing them to recommend technical improvements to our equipment, resulting in savings in operating costs. These independent third-party verified results showed that the H2Omaxx unit reduced the hydrocarbon content in water down to below 10 parts per million.
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 of 2008, we have demonstrated our unit to over 100 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 255 units over the next five years.
Wescorp has had extensive discussions with interested parties regarding a worldwide strategic marketing and distribution alliance for the H2Omaxx technology in the oil and gas sector. A Letter of Intent for a Worldwide Exclusive Licensing Agreement to market and manufacture the H2Omaxx technology was signed with Weatherford International Inc. The parties currently are negotiating an agreement.
Wescorp has moved its initial H2Omaxx unit to Kansas where it is in operation with an independent oil and gas company that also has ordered a second unit. In addition, Wescorp has received an order for one H2Omaxx unit and one HCXT unit from Western Canadian Oil Sands, Inc. for use in Northern Alberta.
In addition, Wescorp and Cancen Oil Canada Corporation ("Cancen"), an oilfield waste management and processing company based in western Canada, have entered into a 50:50 joint venture agreement. Under the terms of the joint venture agreement a combination of a minimum of 12 H2O Maxx water units and HCXT Solids units will be strategically installed over the next 12 months at Cancen's facilities to significantly increase efficiency and reduce operating costs. As Cancen expands its operation it will be installing additional units. In addition, the joint venture intends to build additional portable units to provide remote onsite remediation for a number of Cancen's clients.
Wescorp and Cancen are completing an assessment of Cancen's facilities, and it is anticipated that by August 23, 2009 Cancen will post a $1,000,000 irrevocable line of credit for the immediate construction of three units to be deployed at Cancen's facilities.
The joint venture will share in the revenue generated by the use of Wescorp's H2O Maxx and HCXT units at Cancen's facilities.
Upon initial operation of the remediation units, the revenue will be split 25:75 (Wescorp: Cancen) until 110% of the construction costs are repaid to Cancen. Thereafter, the revenue will be shared on a 50:50 basis.
Raider Chemical Corporation
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