Oilsands Quest Files Form 10-Q Quarterly Report with Status Update

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 Relations

Email: ir@oilsandsquest.com

Investor Line: 1-877-718-8941