NXT Energy Solutions Inc 6-K, filed Apr 6, 2023
NXT Energy Solutions Inc. (NSFDF)
About this 6-K
NXT Energy Solutions Inc filed this 6-K on April 6, 2023.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934
For the month of April 2023
Commission File Number: 000-24027
| NXT Energy Solutions Inc. |
| (Translation of registrant's name into English) |
Suite 302, 3320-17th Avenue S.W.
Calgary, Alberta T3E 0B4
Canada
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ___
Yes ☐ No ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ___
Yes ☐ No ☒
Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing
the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ☐ No ☒
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):
The Issuer is filing material documents not previously filed.
Exhibit List:
| 2 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| NXT Energy Solutions Inc. |
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| (Registrant) |
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| Date: April __, 2023 |
| /s/ Eugene Woychyshyn |
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| Eugene Woychyshyn |
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| Chief Financial Officer |
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| 3 |
EXHIBIT 99.1
NXT ENERGY SOLUTIONS INC.
Consolidated Financial Statements
For the Years ended
December 31, 2022, 2021 and 2020
KPMG LLP
205 5th Avenue SW
Suite 3100
Calgary AB T2P 4B9
Tel 403-691-8000
Fax 403-691-8008
www.kpmg.ca
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
NXT Energy Solutions Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NXT Energy Solutions Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of loss and comprehensive loss, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s current and forecasted cash and cash equivalents and short-term investments position is not expected to be sufficient to meet its obligations which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. KPMG Canada provides services to KPMG LLP.
| [1] |
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Indicators of impairment of the intellectual property
As discussed in Note 9 to the consolidated financial statements, the Company had $13,168,509 of intellectual property as of December 31, 2022, of which $12,915,866 related to Stress Field Detection rights associated with hydrocarbon detection technology (“SFD”). As discussed in Note 2 to the consolidated financial statements, the Company assesses the recoverability of the intellectual property whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Since the inception of the Company’s operations, there has been inconsistency in the occurrence, amount and timing of SFD related revenue. The Company’s assessment of indicators of impairment of the intellectual property includes the consideration of the carrying amount of the Company’s net assets compared to a range of indicative fair values determined using the following inputs and significant assumptions:
| – | the Company’s market capitalization and publicly available control premiums for comparable entities |
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| – | the Company’s historical and forecasted SFD related revenue and publicly available trading revenue multiples for comparable entities. |
| [2] |
We identified the assessment of indicators of impairment of the intellectual property as a critical audit matter. The inconsistency in SFD related revenue indicated a higher risk that the intellectual property may not be recoverable, and therefore involved challenging auditor judgment. The control premiums, forecasted SFD related revenue and trading revenue multiples assumptions used to determine a range of indicative fair values of the Company net assets were challenging to test as they represented subjective determinations of conditions that were also sensitive to variations. Minor changes to those assumptions could have had a significant effect on the Company’s assessment of indicators of impairment. Additionally, the evaluation of the Company’s determination of control premiums and trading revenue multiples required specialized skills and knowledge.
The following are the primary procedures we performed to address the critical audit matter. We evaluated the Company’s forecasted SFD related revenue by comparing to contracted and noncontracted future SFD related revenue and related documentation, including Company press releases and board minutes. We involved a valuation professional with specialized skills and knowledge, who assisted in:
| – | evaluating the Company’s determination of the control premiums by comparing to a range that was independently developed using publicly available market data for comparable entities |
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| – | evaluating the Company’s determination of the trading revenue multiples applied to historical and forecasted SFD related revenue by comparing to a range that was independently developed using publicly available market data from comparable entities. |
We have served as the Company’s auditor since 2006.
Chartered Professional Accountants
Calgary, Canada
March 31, 2023
| [3] |
NXT ENERGY SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
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| December 31, |
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| December 31, |
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| 2022 |
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| 2021 |
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| Assets |
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| Current assets |
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| Cash and cash equivalents |
| $ | 263,437 |
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| $ | 2,257,855 |
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| Short-term investments (Note 3) |
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| - |
|
|
| 550,000 |
|
| Accounts receivable (Note 4) |
|
| 57,065 |
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|
| 841,567 |
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| Prepaid expenses and deposits (Note 5) |
|
| 36,157 |
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| 265,436 |
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| 356,659 |
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| 3,914,858 |
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| Long term assets |
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| Deposits (Note 6) |
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| 246,589 |
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| 234,475 |
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| Property and equipment (Note 7) |
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| 544,446 |
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| 624,763 |
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| Right of Use Assets (Note 8) |
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| 1,259,092 |
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| 1,943,252 |
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| Intellectual property (Note 9) |
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| 13,168,509 |
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| 14,867,023 |
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| $ | 15,575,295 |
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| $ | 21,584,371 |
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| Liabilities and Shareholders' Equity |
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| Current liabilities |
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| Accounts payable and accrued liabilities (Note 10, 24) |
| $ | 1,276,236 |
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| $ | 500,625 |
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| Current portion of long-term debt (Note 11) |
|
| 111,111 |
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| 64,815 |
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| Current portion of lease obligation (Note 12) |
|
| 650,315 |
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|
| 532,936 |
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| 2,037,662 |
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| 1,098,376 |
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| Long-term liabilities |
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| Long-term debt (Note 11) |
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| 824,074 |
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| 935,185 |
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| Long-term lease obligations (Note 12) |
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| 596,408 |
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| 1,369,668 |
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| Asset retirement obligation (Note 13) |
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| 24,574 |
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| 22,337 |
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| 1,445,056 |
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| 2,327,190 |
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| 3,482,718 |
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| 3,425,566 |
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| Shareholders' equity |
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| Common shares (Note 15): - authorized unlimited |
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| Issued: 68,949,109 (2021 - 65,250,710) common shares |
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| 96,423,648 |
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| 95,779,352 |
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| Contributed capital |
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| 9,404,518 |
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| 9,381,966 |
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| Deficit |
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| (93,735,589 | ) |
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| (87,002,513 | ) |
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| 12,092,577 |
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| 18,158,805 |
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| $ | 15,575,295 |
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| $ | 21,584,371 |
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Going Concern (Note 1)
Commitments (Note 14)
Subsequent event (Note 15,17)
| Signed "John Tilson" | Signed "Bruce G. Wilcox" | ||
| Director | Director |
The accompanying notes are an integral part of these consolidated financial statements.
| [4] |
NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Expressed in Canadian dollars)
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| For the Year ended December 31, |
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| 2022 |
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| 2021 |
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| 2020 |
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| Revenue |
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| SFD® related revenue (Note 21) |
| $ | - |
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| $ | 3,134,250 |
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| $ | 136,566 |
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| Expenses |
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| SFD® related costs, net (Note 22) |
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| 1,178,183 |
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| 1,224,168 |
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| 1,111,070 |
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| General and administrative expenses (Note 17, 23 & 24) |
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| 3,736,431 |
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| 3,189,857 |
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| 3,341,010 |
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| Amortization (Note 7, 9) |
|
| 1,768,727 |
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| 1,776,484 |
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|
| 1,780,806 |
|
|
|
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| 6,683,341 |
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| 6,190,509 |
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| 6,232,886 |
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| Other expenses (income) |
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|
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| Interest (income) expense, net |
|
| 36,220 |
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| 37,955 |
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| (14,062 | ) |
| Foreign exchange loss (gain) |
|
| (15,340 | ) |
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| 8,597 |
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| (64,432 | ) |
| Intellectual property and other |
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| 28,855 |
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| 20,988 |
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| 10,402 |
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| 49,735 |
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| 67,540 |
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| (68,092 | ) |
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| Loss before income taxes |
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| (6,733,076 | ) |
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| (3,123,799 | ) |
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| (6,028,228 | ) |
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| Income tax expense (Note 18) |
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| - |
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| - |
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| - |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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| Net loss and comprehensive loss |
|
| (6,733,076 | ) |
|
| (3,123,799 | ) |
|
| (6,028,228 | ) |
| Net loss per share (Note 16) |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
| (0.10 | ) |
|
| (0.05 | ) |
|
| (0.09 | ) |
| Diluted |
|
| (0.10 | ) |
|
| (0.05 | ) |
|
| (0.09 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
| [5] |
NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
| For the Year ended December 31, |
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| 2022 |
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| 2021 |
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| 2020 |
| |||
| Cash from (used in): |
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| |||
| Operating activities |
|
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| Net loss |
| $ | (6,733,076 | ) |
| $ | (3,123,799 | ) |
| $ | (6,028,228 | ) |
| Items not affecting cash: |
|
|
|
|
|
|
|
|
|
|
|
|
| Stock based compensation expense (Note 17) |
|
| 215,284 |
|
|
| 287,900 |
|
|
| 168,416 |
|
| Amortization |
|
| 1,768,727 |
|
|
| 1,776,484 |
|
|
| 1,780,806 |
|
| Accretion expense (recovery) (Note 13) |
|
| 2,237 |
|
|
| (404 | ) |
|
| 2,069 |
|
| Non-cash lease costs |
|
| (8,225 | ) |
|
| (11,736 | ) |
|
| (11,736 | ) |
| Change in carry amount of right of use assets & lease liabilities |
|
| 40,065 |
|
|
| 24,508 |
|
|
| 21,470 |
|
| Unrealized foreign exchange (gain) loss |
|
| 13,956 |
|
|
| 157 |
|
|
| 35,143 |
|
| Loss on disposal of assets and lease modifications |
|
| 11,921 |
|
|
| - |
|
|
| - |
|
| Change in non-cash working capital balances (Note 20) |
|
| 1,755,107 |
|
|
| 13,717 |
|
|
| 625,768 |
|
| ARO liabilities settled (Note 13) |
|
| - |
|
|
| - |
|
|
| (809 | ) |
|
|
|
| 3,799,072 |
|
|
| 2,090,626 |
|
|
| 2,621,127 |
|
| Net cash used in operating activities |
|
| (2,934,004 | ) |
|
| (1,033,173 | ) |
|
| (3,407,101 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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| Financing activities |
|
|
|
|
|
|
|
|
|
|
|
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| Proceeds from the Employee Share Purchase plan (Note 17) |
|
| 49,738 |
|
|
| 69,259 |
|
|
| 7,592 |
|
| Proceeds from (repayment of) long-term debt (Note 11) |
|
| (64,815 | ) |
|
| 1,000,000 |
|
|
| - |
|
| Net proceeds from Rights Offering (Note 15) |
|
| 216,062 |
|
|
| - |
|
|
| - |
|
| Net proceeds from Private Placement (Note 15) |
|
| 216,182 |
|
|
| - |
|
|
| - |
|
| Share issuance costs for Geothermal Right (Note 15) |
|
| - |
|
|
| (42,697 | ) |
|
| - |
|
| Repayment of financial liability and lease obligation (Note 12) |
|
| (27,950 | ) |
|
| (151,134 | ) |
|
| (181,208 | ) |
| Net cash from (used in) financing activities |
|
| 389,217 |
|
|
| 875,428 |
|
|
| (173,616 | ) |
|
|
|
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|
|
|
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| Investing activities |
|
|
|
|
|
|
|
|
|
|
|
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| Acquisition of intellectual property (Note 9) |
|
| - |
|
|
| (65,310 | ) |
|
| - |
|
| Proceeds from (used in) short-term investments |
|
| 550,000 |
|
|
| (208,739 | ) |
|
| 3,436,691 |
|
| Net cash from (used in) investing activities |
|
| 550,000 |
|
|
| (274,049 | ) |
|
| 3,436,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effect of foreign exchange rate changes on cash and cash equivalents |
|
| 369 |
|
|
| (497 | ) |
|
| (24,073 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net decrease in cash and cash equivalents |
|
| (1,994,418 | ) |
|
| (432,291 | ) |
|
| (168,099 | ) |
| Cash and cash equivalents, beginning of the year |
|
| 2,257,855 |
|
|
| 2,690,146 |
|
|
| 2,858,245 |
|
| Cash and cash equivalents, end of the year |
| $ | 263,437 |
|
| $ | 2,257,855 |
|
| $ | 2,690,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental information |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash interest paid (received) |
|
| 35,779 |
|
|
| 14,284 |
|
|
| (21,422 | ) |
| Cash taxes paid |
|
| - |
|
|
| - |
|
|
| - |
|
The accompanying notes are an integral part of these consolidated financial statements.
| [6] |
NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Shareholders' Equity
(Expressed in Canadian dollars)
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| For the Year ending December 31, |
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| 2022 |
|
| 2021 |
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| 2020 |
| |||
|
|
|
|
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| Common Shares |
|
|
|
|
|
|
|
|
| |||
| Balance at beginning of the year |
| $ | 95,779,352 |
|
| $ | 95,327,123 |
|
| $ | 95,313,064 |
|
| Issuance of common stock, net of share issuance costs for: |
|
|
|
|
|
|
|
|
|
|
|
|
| Rights Offering (Note 15) |
|
| 216,062 |
|
|
| - |
|
|
| - |
|
| Private placement (Note 15) |
|
| 216,182 |
|
|
| - |
|
|
| - |
|
| Employee Share Purchase Plan (Note 15) |
|
| 89,127 |
|
|
| 173,023 |
|
|
| 14,059 |
|
| Restricted Stock Unit Plan (Note 15) |
|
| 122,925 |
|
|
| 114,604 |
|
|
| - |
|
| Acquisition of SFD® Geothermal Right (Note 15) |
|
| - |
|
|
| 164,602 |
|
|
| - |
|
| Balance at end of the year |
|
| 96,423,648 |
|
|
| 95,779,352 |
|
|
| 95,327,123 |
|
| Contributed Capital |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at beginning of the year |
|
| 9,381,966 |
|
|
| 9,355,716 |
|
|
| 9,306,493 |
|
| Issuance of Equity for intellectual property (Note 15) |
|
| - |
|
|
| 207,300 |
|
|
| - |
|
| Transfer of equity to common shares (Note 15) |
|
| - |
|
|
| (207,300 | ) |
|
| - |
|
| Recognition of stock based compensation expense (Note 17) |
|
| 22,552 |
|
|
| 26,250 |
|
|
| 49,223 |
|
| Balance at end of the year |
|
| 9,404,518 |
|
|
| 9,381,966 |
|
|
| 9,355,716 |
|
| Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at beginning of the year |
|
| (87,002,513 | ) |
|
| (83,878,714 | ) |
|
| (77,850,486 | ) |
| Net loss income |
|
| (6,733,076 | ) |
|
| (3,123,799 | ) |
|
| (6,028,228 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at end of the year |
|
| (93,735,589 | ) |
|
| (87,002,513 | ) |
|
| (83,878,714 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Shareholders' Equity at end of the year |
|
| 12,092,577 |
|
|
| 18,158,805 |
|
|
| 20,804,125 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| [7] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
1. The Company and going concern
NXT Energy Solutions Inc. (the "Company" or "NXT") is a publicly traded company based in Calgary, Alberta Canada.
NXT's proprietary Stress Field Detection ("SFD®") technology is an airborne survey system that utilizes quantum-scale sensors to detect gravity field perturbations in an airborne survey method which can be used both onshore and offshore to remotely identify traps and reservoirs with exploration potential in both the hydrocarbon and geothermal industries.
These consolidated financial statements of NXT have been prepared by management in accordance with generally accepted accounting principles of the United States of America ("US GAAP”).
These consolidated financial statements reflect adjustments, all of which are normal recurring adjustments that are, in the opinion of management, necessary to reflect fairly the financial position and results of operations for the respective periods.
These consolidated financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that NXT will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The events described in the following paragraphs highlight that there is substantial doubt about NXT’s ability to continue as a going concern within one year after the date that these consolidated financial statements have been issued. The Company’s current cash position is not expected to be sufficient to meet the Company’s obligations and planned operations for a year beyond the date that these consolidated financial statements have been issued.
The Company has deferred payment of operating costs, including payroll and other general and administrative costs. Subsequent to December 31, 2022, the Company completed a private placement which resulted in raising an additional net proceeds of $1,658,280 (Note 15). Further financing options that may or may not be available to the Company include issuance of new equity, debentures or bank credit facilities. The need for any of these options will be dependent on the timing of securing new SFD® related revenues and obtaining financing on terms that are acceptable to both the Company and the financier.
NXT continues to develop its pipeline of opportunities to secure new revenue contracts. However, the Company’s longer-term success remains dependent upon its ability to convert these opportunities into successful contracts, to continue to attract new client projects, expand its revenue base to a level sufficient to exceed fixed operating costs, and generate consistent positive cash flow from operations. The occurrence and timing of these events cannot be predicted with sufficient certainty.
The consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for these consolidated financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. These adjustments could be material.
| [8] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
Use of Estimates and Judgements
In preparing these consolidated financial statements, NXT is required to make estimates and assumptions that affect both the amount and timing of recording assets, liabilities, revenues and expenses since the determination of these items may be dependent on future events. The Company uses the most current information available and exercises careful judgment in making these estimates and assumptions. In the opinion of management, these consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the Company’s significant accounting policies. The estimates and assumptions used are based upon management's best estimate as at the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period when determined. Actual results may differ from those estimates.
Certain estimates and judgments have a material impact where the assumptions underlying these accounting estimates relate to matters that are highly uncertain at the time the estimate or judgment is made or are subjective. In 2022 and 2021, the estimates and judgments included the assessment of impairment indicators of intellectual property.
The Company reviews intellectual property for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company considers both internal and external factors when assessing for potential indicators of impairment of its intellectual property, including the consideration of historical and forecasted SFD related revenues, market capitalization, control premiums, and the SFD related revenue multiples compared to industry peers. When indicators of impairment exist, the Company first compares the total of the estimated undiscounted future cash flows or the estimated sale price to the carrying value of an asset. If the carrying value exceeds these amounts, an impairment loss is recognized for the excess of the carrying value over the estimated fair value of the intellectual property.
Other accounting estimates and judgments that may have a material impact on the financial statements include: the forward looking assumptions related to the going concern assumption, the estimated useful lives of intellectual property and property, plant and equipment, and the assumptions used to measure stock based compensation expense.
2. Significant Accounting Policies
Basis of Presentation
These consolidated financial statements for the year ended December 31, 2022 have been prepared by management in accordance with generally accepted accounting principles of the United States of America (“US GAAP”).
| [9] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
New Standards Effective During the Period
Disclosures by Business Entities about Government Assistance
In June 2021 the Financial Accounting Standards Board issued new guidance that increases the transparency of government assistance including the disclosure of the types of assistance, and entity’s accounting for the assistance, and the effect of the assistance on an entity’s financial statements. The new guidance is effective for annual periods beginning after December 15, 2021. The Company adopted ASU 2021-10 on January 1, 2022. Adoption of ASU 2021-10 did not have a material impact on the Company’s financial statements.
Consolidation
These consolidated financial statements reflect the accounts of the Company and its wholly owned subsidiaries (all of which are inactive). All significant inter-company balances and transactions among NXT and its subsidiaries have been eliminated and are therefore not reflected in these consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and short term Guaranteed Investment Certificates (“GIC’s”) with an original maturity less than 90 days from the date of acquisition.
Short Term Investments
Short term investments consist of short term GICs, with original maturity dates greater than 90 days and up to one year.
Derivative Instruments
As at December 31, 2022 and 2021, NXT had no outstanding derivative instruments.
Fair Value Measures
For any balance sheet items recorded at fair value on a recurring basis or non-recurring basis, the Company is required to classify the fair value measure into one of three categories based on the fair value hierarchy noted below.
In Level I, the fair value of assets and liabilities is determined by reference to quoted prices in active markets for identical assets and liabilities that the Company has the ability to assess at the measurement date.
At December 31, 2022, the fair value of the restricted stock units (“RSU”) liability based on share price was determined using Level I inputs.
In Level II, determination of the fair value of assets and liabilities is based on the extrapolation of inputs, other than quoted prices included within Level I, for which all significant inputs are observable directly or indirectly. Such inputs include published exchange rates, interest rates, yield curves and stock quotes from external data service providers. Transfers between Level I and Level II would occur when there is a change in market circumstances. There are no Level II fair value measures.
| [10] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
In Level III, the fair value of assets and liabilities measured on a recurring basis is determined using a market approach based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities measured at fair value can fluctuate between Level II and Level III depending on the proportion of the value of the contract that extends beyond the time frame for which inputs are considered to be observable. As contracts near maturity and observable market data becomes available, the contracts are transferred out of Level III and into Level II.
The determination of the fair value of the acquisition of the Intellectual property (Note 9) was determined using Level III inputs in 2021.
Measurement of credit losses on financial instruments
The impairment model of financial instruments is based on expected losses rather than incurred losses. In making the assessment of expected losses, the Company considers the following factors: historically realized bad debts; a counterparty’s present financial condition and whether a counterparty has breached certain contracts; the probability that a counterparty will enter bankruptcy; changes in economic conditions that correlate to increased levels of default and term to maturity of the specific receivable. These expected credit losses are recognized as an allowance rather than as a direct write-down of the amortized cost basis.
Deposits
Deposits consist of security payments made to lessors for the Company’s office and aircraft lease. They are classified as long term if the lease end date is greater than one year.
Property and Equipment
Property and equipment is recorded at cost, less accumulated amortization, which is recorded over the estimated service lives of the assets using the following annual rates and methods:
| Computer hardware (including survey equipment) | 30% declining balance |
| Aircraft equipment | 10% declining balance |
| Furniture and other equipment | 20% declining balance |
| Leasehold improvements | 10% declining balance |
Intellectual Property
Intellectual property acquired is recorded at cost, less accumulated amortization, which is recorded over the estimated minimum useful life of the assets. The Company incurs periodic costs that are expensed when incurred to file patents and to maintain them.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, which includes property, equipment and intellectual property for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company considers both internal and external factors when assessing for potential indicators of impairment, and with respect to intellectual property, the Company’s assessment includes consideration of historical and forecasted SFD® related revenues, market capitalization, control premiums, and the SFD® related revenue multiples compared to industry peers.
| [11] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
When indicators of impairment exist, the Company first compares the total of the estimated undiscounted future cash flows or the estimated sale price to the carrying value of an asset. If the carrying value exceeds these amounts, an impairment loss is recognized for the excess of the carrying value over the estimated fair value of the asset.
Research and Development Expenditure
Research and development ("R&D") expenditures incurred to develop, improve and test the SFD® survey system and related components are expensed as incurred. Any intellectual property that is acquired for the purpose of enhancing research and development projects, if there is no alternative use for the intellectual property, is expensed in the period acquired. No significant external R&D was incurred in the years ended 2022, 2021 and 2020.
Foreign Currency Translation
The Company's functional currency is the Canadian dollar. Revenues and expenses denominated in foreign currencies are translated into Canadian dollars at the average exchange rate for the applicable period. Monetary assets and liabilities are translated into Canadian dollars at the exchange rate in effect at the end of the applicable period. Non-monetary assets and liabilities are recorded at the relevant exchange rates for the period in which the balances arose. Any related foreign exchange gains and losses resulting from these translations are included in the determination of net income (loss) for the period.
Income Taxes
NXT follows the asset and liability method of accounting for income taxes. This method recognizes deferred income tax assets and liabilities based on temporary differences in reported amounts for financial statement and income tax purposes, at the income tax rates expected to apply in the future periods when the temporary differences are expected to be reversed or realized. The effect of a change in income tax rates on deferred income tax assets and deferred income tax liabilities is recognized in income in the period when the tax rate change is enacted. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.
Stock Based Compensation
NXT follows the fair value method of accounting for stock options, restricted stock units, deferred stock units, and the employee share purchase plan (the “Share Compensation Plans”) that are granted to acquire common shares under NXT's Share Compensation Plans. For equity-settled stock-based compensation awards, fair values are determined at the grant date and the expense, net of estimated forfeitures, is recognized over the requisite service period with a corresponding increase recorded in contributed capital. An adjustment is made to compensation for any differences between the estimated forfeitures and the actual forfeitures. For cash-settled stock-based compensation awards, fair values, based on observable prices, are determined at each reporting date and periodic changes are recognized as compensation costs, with a corresponding change to liabilities. Stock-based awards with performance conditions are recognized as compensation costs only when the performance condition is probable of being met.
| [12] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
Upon exercise or realization of the equity-settled Share Compensation Plans, the consideration received by NXT, and the related amount which previously recorded in contributed capital, is recognized as an increase in the recorded value of the common shares of the Company.
Net Income (Loss) Per Share
Basic income (loss) per share amounts are calculated by dividing net income (loss) by the weighted average number of common shares that are outstanding for the fiscal period. Shares issued during the period are weighted for the portion of the period that the shares were outstanding. Diluted income per share, in periods when NXT has net income, is computed using the treasury stock method, whereby the weighted average number of shares outstanding is increased to include any additional shares that would be issued from the assumed exercise of stock options and restricted stock units. The incremental number of shares added under the treasury stock method assumes that outstanding stock options and restricted stock units that are exercisable at exercise prices below the Company's average market price (i.e. they were “in-the-money”) for the applicable fiscal period are exercised and then that number of incremental shares is reduced by the number of shares that could have been repurchased by the Company from the issuance proceeds, using the average market price of the Company’s shares for the applicable fiscal period.
No addition to the basic number of shares is made when calculating the diluted number of shares if the diluted per share amounts become anti-dilutive (such as occurs in the case where there is a net loss for the period).
Revenue
SFD® Surveys
The performance obligation for NXT in SFD® surveys is the acquisition, processing, interpretation and integration of Stress Field Detection (SFD®) data. Revenue from the sale of SFD® survey contracts (excluding any related foreign value added taxes) is recognized over time by measuring the progress toward satisfaction of its performance obligation to the customer. All funds received or invoiced in advance of recognition of revenue are reflected as contract obligations and classified as a current liability on our balance sheet.
The Company uses direct survey costs as the input measure to recognize revenue in any fiscal period. The percentage of direct survey costs incurred to date over the total expected survey costs to be incurred, provides an appropriate measure of the stage of the performance obligation being satisfied over time.
| [13] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
SFD® Data Sales
The performance obligation for NXT in SFD® data sales is the delivery of the promised specific services as itemized in the contract with the customer. Revenue from the sale of SFD® data (excluding any related foreign value added taxes) is recognized once the services are completed and the data is transferred to the customer.
Leases
The Company determines if an arrangement is an operating or finance lease, as defined under U.S. GAAP, at inception. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. These leases are included in right-of-use (“ROU”) assets and lease obligations in the Consolidated Balance Sheet.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the obligation to make lease payments arising from such leases. Lease obligations are recognized at the lease commencement date based on the present value of remaining lease payments over the lease term, taking into consideration conditions such as incentives and termination penalties, as appropriate. A corresponding ROU asset is recognized at the amount of the lease obligation, adjusted for payments made prior to lease commencement or initial direct costs, if any.
When calculating the present value, the Company uses the rate implicit in the lease, or uses its incremental borrowing rate for a similar term and risk profile based on the information available at the commencement date. The Company’s lease terms may have options to extend or terminate the lease which are included in the calculation of lease obligations when it is reasonably certain that it will exercise those options. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Office and equipment lease expenses are included within General and administrative expenses; the aircraft lease cost is included within SFD® related costs.
Lease agreements can contain both lease and non-lease components, which are accounted for separately.
Government grants
Government grants are recognized when there is reasonable assurance that the grant will be received, and all attached conditions will be complied with. When the grant relates to an expense item, it is recognized as an expense reduction in the period in which the costs are incurred. Where the grant relates to an asset, it is recognized as a reduction to the net book value of the related asset and then subsequently in net loss over the expected useful life of the related asset through lower charges to amortization and impairment.
| [14] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
3. Short-term investments
All GIC’s at December 31, 2021 matured during 2022 and were not reinvested. For December 31, 2021, interest rates ranged from 0.85% to 0.87%.
4. Accounts Receivable
|
|
| December 31, |
|
| December 31, |
| ||
|
|
| 2022 |
|
| 2021 |
| ||
| Trade receivables |
| $ | - |
|
| $ | 806,460 |
|
| Other receivables |
|
| 57,065 |
|
|
| 35,107 |
|
|
|
|
| 57,065 |
|
|
| 841,567 |
|
| Allowance for doubtful accounts |
|
| - |
|
|
| - |
|
| Net accounts receivable |
|
| 57,065 |
|
|
| 841,567 |
|
The entire trade receivable was with one client as at December 31, 2021.
5. Prepaid expenses and deposits
|
|
| December 31, |
|
| December 31, |
| ||
|
|
| 2022 |
|
| 2021 |
| ||
|
|
|
|
|
|
|
| ||
| Prepaid expenses |
| $ | 36,157 |
|
| $ | 74,270 |
|
| Aircraft deposit |
|
| - |
|
|
| 191,166 |
|
|
|
|
| 36,157 |
|
|
| 265,436 |
|
| [15] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
6. Deposits
Security deposits have been made to the lessors of the office building and the aircraft. The aircraft deposit is denominated in United States Dollars.
|
|
| December 31, |
|
| December 31, |
| ||
|
|
| 2022 |
|
| 2021 |
| ||
|
|
|
|
|
|
|
| ||
| Building |
| $ | 43,309 |
|
| $ | 43,309 |
|
| Aircraft |
|
| 203,280 |
|
|
| 191,166 |
|
|
|
|
| 246,589 |
|
|
| 234,475 |
|
7. Property and equipment
|
|
| December 31, 2022 |
| |||||||||
|
|
| Cost |
|
| Accumulated |
|
| Net book |
| |||
|
|
| Base |
|
| Amortization |
|
| value |
| |||
| Survey equipment |
| $ | 892,637 |
|
| $ | 724,002 |
|
| $ | 168,635 |
|
| Computers and software |
|
| 1,265,045 |
|
|
| 1,249,267 |
|
|
| 15,778 |
|
| Furniture and other equipment |
|
| 528,419 |
|
|
| 518,552 |
|
|
| 9,867 |
|
| Leasehold improvements |
|
| 1,064,225 |
|
|
| 714,059 |
|
|
| 350,166 |
|
|
|
|
| 3,750,326 |
|
|
| 3,205,880 |
|
|
| 544,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2021 |
| |||||||||
|
|
| Cost |
|
| Accumulated |
|
| Net book |
| |||
|
|
| Base |
|
| Amortization |
|
| value |
| |||
| Survey equipment |
| $ | 892,637 |
|
| $ | 701,911 |
|
| $ | 190,726 |
|
| Computers and software |
|
| 1,265,045 |
|
|
| 1,242,504 |
|
|
| 22,541 |
|
| Furniture and other equipment |
|
| 528,419 |
|
|
| 516,084 |
|
|
| 12,335 |
|
| Leasehold improvements |
|
| 1,084,573 |
|
|
| 685,412 |
|
|
| 399,161 |
|
|
|
|
| 3,770,674 |
|
|
| 3,145,911 |
|
|
| 624,763 |
|
| [16] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
8. Right of use assets
|
|
| December 31, 2022 |
| |||||||||
|
|
| Cost |
|
| Accumulated |
|
| Right of |
| |||
|
|
| Base |
|
| Amortization |
|
| Use |
| |||
| Aircraft |
| $ | 1,847,617 |
|
| $ | 1,407,743 |
|
| $ | 439,874 |
|
| Office Building |
|
| 1,725,414 |
|
|
| 915,773 |
|
|
| 809,641 |
|
| Printer |
|
| 9,716 |
|
|
| 139 |
|
|
| 9,577 |
|
|
|
|
| 3,582,747 |
|
|
| 2,323,655 |
|
|
| 1,259,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2021 |
| |||||||||
|
|
| Cost |
|
| Accumulated |
|
| Right of |
| |||
|
|
| Base |
|
| Amortization |
|
| Use |
| |||
| Aircraft |
| $ | 1,870,808 |
|
| $ | 1,073,365 |
|
| $ | 797,443 |
|
| Office Building |
|
| 1,805,447 |
|
|
| 664,372 |
|
|
| 1,141,075 |
|
| Printer |
|
| 17,794 |
|
|
| 13,060 |
|
|
| 4,734 |
|
|
|
|
| 3,694,049 |
|
|
| 1,750,797 |
|
|
| 1,943,252 |
|
In the fourth quarter of 2021, the Company determined it was reasonably certain it would extend the term of its Aircraft Leasing Agreement effective in the second quarter of 2022 for a period of 24 months with payments of approximately US$22,500 (CDN$28,675) per month, or US$270,000 (CDN$344,099) per year. The incremental borrowing rate is 11.2%. The Company recognized an additional $615,737 Aircraft ROU assets and US$493,166 ($630,266) additional Lease obligations at December 31, 2021. Should NXT want to repurchase the aircraft at the end of the extended term, the purchase price will be US$1.21 million.
On March 15, 2022, the Company surrendered 826 square feet of its office building lease to the landlord. The Company incurred a surrender fee of $14,000. The Company derecognized the following amounts on its balance sheet in the first quarter.
| Right of Use Assets |
| $ | 80,033 |
|
| Lease obligations |
|
| 83,095 |
|
| [17] |
9. Intellectual property
|
|
| December 31, 2022 |
| |||||||||
|
|
| Cost |
|
| Accumulated |
|
| Net book |
| |||
|
|
| Base |
|
| amortization |
|
| Value |
| |||
| SFD® Hydrocarbon Right acquired |
| $ | 25,271,000 |
|
| $ | 12,355,134 |
|
| $ | 12,915,866 |
|
| SFD® Geothermal Right acquired |
|
| 275,610 |
|
|
| 22,967 |
|
|
| 252,643 |
|
|
|
|
| 25,546,610 |
|
|
| 12,378,101 |
|
|
| 13,168,509 |
|
|
|
| December 31, 2021 |
| |||||||||
|
|
| Cost |
|
| Accumulated |
|
| Net book |
| |||
|
|
| Base |
|
| amortization |
|
| Value |
| |||
| SFD® Hydrocarbon Right acquired |
| $ | 25,271,000 |
|
| $ | 10,670,400 |
|
| $ | 14,600,600 |
|
| SFD® Geothermal Right acquired |
|
| 275,610 |
|
|
| 9,187 |
|
|
| 266,423 |
|
|
|
|
| 25,546,610 |
|
|
| 10,679,587 |
|
|
| 14,867,023 |
|
SFD® Hydrocarbon Right
During 2015, NXT acquired the rights to the SFD® technology for use in the exploration of hydrocarbons (“Hydrocarbon Right”) from the CEO, and recorded the acquisition as an intellectual property asset on the balance sheet. The asset was recorded at the fair value of the consideration transferred, including the related tax effect of approximately $25.3 million.
The Hydrocarbon Right is being amortized on a straight line basis over its estimated useful life of 15 years. The annual amortization expense expected to be recognized is approximately $1.7 million per year for a 5 year aggregate total of $8.5 million.
| [18] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
SFD® Geothermal Right
The Company acquired the SFD® technology rights for geothermal resources (“Geothermal Right”) from Mr. George Liszicasz, the former President and CEO of NXT (“CEO”) on April 18, 2021. The consideration deliverable by the Company in connection with the acquisition of the Geothermal Right is set forth below:
|
| 1. | US$40,000 (CAD$50,310) signature payment, which became due immediately and was paid on April 22, 2021; |
|
| 2. | 300,000 common shares, which were issued in December 2021; |
|
| 3. | CAD$15,000 signature milestone payment paid in August 2021; |
|
| 4. | US$200,000 milestone payment which will become due in the event that the Company's cash balance exceeds CAD$5,000,000 due to receipt of specifically defined funds from operations; and |
|
| 5. | US$250,000 milestone payment which will become due in the event that the Company executes and completes and receives full payment for an SFD® contract valued at US$10,000,000 or greater, provided such contract is entered into and completed and payment of at least US$5,000,000 is received by April 18, 2023. |
As of December 31, 2022, the Company has recognized $275,610 for the acquisition Geothermal Right which is the combination of the US$40,000 (CAD$50,310) and CAD$15,000 signature payments, the value of the 300,000 common shares of $207,300 and other costs of $3,000. Before the 300,000 common shares were issued by the Company, the value of the common shares was recorded as Contributed capital. Upon Toronto Stock Exchange (the “TSX”) approval, the amount recognized of $207,300 less issuance costs of $42,697 were reclassified to common shares. The cost of the remaining two milestones will be recognized when it is deemed probable that these two milestones will be achieved by a special committee of the Board of Directors, comprised entirely of independent directors. The Board of Directors delegated authority to the special committee to determine when the milestones have been achieved. As of December 31, 2022 the remaining two milestones are still deemed not probable of being achieved.
The current book value of the Geothermal Right is being amortized on a straight line basis over its estimated useful life of 20 years. The annual amortization expense expected to be recognized is approximately $13,781 per year for a 5 year aggregate total of approximately $68,902.
| [19] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
10. Accounts payable and accrued liabilities
|
|
| December 31, |
|
| December 31, |
| ||
|
|
| 2022 |
|
| 2021 |
| ||
| Accrued liabilities related to: |
|
|
|
|
|
| ||
| Consultants and professional fees |
| $ | 533,863 |
|
| $ | 203,732 |
|
| Payroll |
|
| 397,500 |
|
|
| 79,544 |
|
| Board of director’s fees |
|
| 162,500 |
|
|
| - |
|
| Expenses owed to an executive officer (Note 24) |
|
| - |
|
|
| 11,467 |
|
| Vacation accrued |
|
| 62,413 |
|
|
| 102,536 |
|
|
|
|
| 1,156,276 |
|
|
| 397,279 |
|
| Trade payables and other |
|
| 119,960 |
|
|
| 103,346 |
|
|
|
|
| 1,276,236 |
|
|
| 500,625 |
|
11. Long-term debt
On May 26, 2021, the Company received $1,000,000 from the Business Development Bank of Canada’s (“BDC”) Highly Affected Sectors Credit Availability Program (“HASCAP Loan”), funded by the Royal Bank of Canada. The HASCAP Loan is a $1,000,000 non-revolving ten year term credit facility with an interest rate of 4%. Repayment terms were interest only until May 26, 2022, and monthly principal plus interest payments for the remaining nine years. The HASCAP Loan is secured by a general security agreement and is guaranteed by BDC.
| Repayment of principal and interest: |
|
|
| |
| 2023 |
| $ | 146,481 |
|
| 2024 |
|
| 142,037 |
|
| 2025 |
|
| 137,593 |
|
| 2026 |
|
| 133,148 |
|
| 2027 |
|
| 128,704 |
|
| 2028 to 2031 |
|
| 406,204 |
|
| Total principal and interest payments |
|
| 1,094,167 |
|
| Less interest |
|
| (158,982 | ) |
| Total principal remaining |
|
| 935,185 |
|
| Current portion of long-term debt |
|
| 111,111 |
|
| Non-current portion of long-term debt |
|
| 824,074 |
|
| [20] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
12. Lease obligation
|
|
| December 31, |
|
| December 31, |
| ||
|
|
| 2022 |
|
| 2021 |
| ||
| Aircraft |
| $ | 378,769 |
|
| $ | 712,762 |
|
| Office Building |
|
| 858,378 |
|
|
| 1,185,356 |
|
| Printer |
|
| 9,576 |
|
|
| 4,486 |
|
|
|
|
| 1,246,723 |
|
|
| 1,902,604 |
|
| Current portion of lease obligations |
|
| 650,315 |
|
|
| 532,936 |
|
| Long-term lease obligations |
|
| 596,408 |
|
|
| 1,369,668 |
|
| Maturity of lease liabilities: |
| Weighted Average Remaining Lease Term | |||||
| 2023 |
| $ | 740,800 |
|
| 2.3 years | |
| 2024 |
|
| 382,842 |
|
| 1.7 years | |
| 2025 |
|
| 259,528 |
|
| 0.8 years | |
| 2026 |
|
| 3,140 |
|
| 0.9 years | |
| Total lease payments |
|
| 1,386,310 |
|
|
| |
| Less imputed interest |
|
| (139,587 | ) |
|
| |
| Total discounted lease payments |
|
| 1,246,723 |
|
|
| |
| Current portion of lease obligations |
|
| 650,315 |
|
|
| |
| Non-current portion of lease obligations |
|
| 596,408 |
|
|
| |
|
|
| Lease Term Till |
| Option to Extend |
| Incremental Borrowing Rate |
| |
| Aircraft |
| April 2024 |
| Executed |
|
| 11.2 | % |
| Office Building |
| September 2025 |
| No |
|
| 6.1 | % |
| Printer |
| November 2026 |
| No |
|
| 10.8 | % |
The Company’s total lease expenditures for the year ended December 31, 2022 was $771,968 (2021 - $966,762, 2020 – $1,262,109).
13. Asset Retirement Obligations
Asset retirement obligations ("ARO") relate to minor non-operated interests in oil and natural gas wells in which NXT has outstanding abandonment and reclamation obligations in accordance with government regulations. The estimated future abandonment liability is based on estimates of the future timing and costs to abandon, remediate and reclaim the well sites within the next five years. The net present value of the ARO is as noted below, and has been calculated using an inflation rate of 3.4% and discounted using a credit-adjusted risk-free interest rate of 10%.
| [21] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
|
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| ARO balance, beginning of the year |
| $ | 22,337 |
|
| $ | 22,741 |
|
| $ | 21,481 |
|
| Accretion expense |
|
| 2,069 |
|
|
| 2,069 |
|
|
| 2,069 |
|
| Change in ARO estimates |
|
| 168 |
|
|
| (2,473 | ) |
|
| - |
|
| Costs incurred |
|
| - |
|
|
| - |
|
|
| (809 | ) |
| ARO balance, end of the year |
|
| 24,574 |
|
|
| 22,337 |
|
|
| 22,741 |
|
14. Commitments
The table below is the non-lease operating cost components associated with the costs of the building lease.
| For the fiscal period ending December 31, |
| Office Premises |
| |
| 2023 |
| $ | 225,255 |
|
| 2024 |
|
| 225,255 |
|
| 2025 |
|
| 168,941 |
|
|
|
|
| 619,451 |
|
15. Common shares
The Company is authorized to issue an unlimited number of common shares, of which the following are issued and outstanding:
|
|
| For the years ended December 31, |
| |||||||||||||
|
|
| 2022 |
|
| 2021 |
| ||||||||||
|
|
| # of shares |
|
| $ amount |
|
| # of shares |
|
| $ amount |
| ||||
| As at the beginning of the year |
|
| 65,250,710 |
|
| $ | 95,779,352 |
|
|
| 64,437,790 |
|
| $ | 95,327,123 |
|
| Rights offering, net of issuance costs |
|
| 2,149,180 |
|
|
| 216,062 |
|
|
| - |
|
|
| - |
|
| Private placement, net of issuance costs |
|
| 1,148,282 |
|
|
| 216,182 |
|
|
| - |
|
|
| - |
|
| Employee Share Purchase Plan |
|
| 188,633 |
|
|
| 89,127 |
|
|
| 304,550 |
|
|
| 173,023 |
|
| Restricted Stock Units |
|
| 212,304 |
|
|
| 122,925 |
|
|
| 208,370 |
|
|
| 114,604 |
|
| SFD® Geothermal Right (Note 9) |
|
| - |
|
|
| - |
|
|
| 300,000 |
|
|
| 164,602 |
|
| As at the end of the year |
|
| 68,949,109 |
|
|
| 96,423,648 |
|
|
| 65,250,710 |
|
|
| 95,779,352 |
|
| [22] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
| For the year ended December 31, | |||||||||
|
|
| 2020 |
| ||||||
|
|
| # of shares |
|
| $ amount |
| |||
| As at the beginning of the year |
|
| 64,406,891 |
|
| $ | 95,313,064 |
| |
| Employee Share Purchase Plan |
|
| 30,899 |
|
|
| 14,059 |
| |
| As at the end of the year |
|
| 64,437,790 |
|
|
| 95,327,123 |
| |
On December 2, 2022, NXT closed the Rights Offering that had been announced on October 31, 2022. The Company issued 2,149,180 common shares a price of $0.18 per common share, for aggregate gross proceeds of a $386,852. Share issue costs of $170,790 were recorded as a reduction to share capital.
On December 22, 2022 the Company announced a multi-tranche private placement (the “Private Placement”) at $0.195 per share. At December 22, 2022 the Company issued 1,148,282 common shares for gross proceeds of $223,915 in the first tranche, less issuance costs of $7,732.
January 25, 2023, the Company closed the Private Placement by issuing an additional 8,510,000 common shares, at $0.195 per common shares, for additional aggregate gross proceeds of approximately $1,659,450, less issuance costs of $1,170.
In December 2021, the TSX approved the issuance of 300,000 common shares for the SFD® Geothermal Right for a value of $207,300 less issuance costs of $42,697 (Note 9). Before the approval of the TSX, the Company recorded the value of the common share consideration in Contributed capital.
16. Loss per share
|
|
| For the years ended December 31, |
| |||||||||
|
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| Net loss for the year |
| $ | (6,733,076 | ) |
| $ | (3,123,799 | ) |
| $ | (6,028,228 | ) |
| Weighted average number of shares outstanding for the year: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
| 65,602,875 |
|
|
| 64,658,380 |
|
|
| 64,409,170 |
|
| Diluted |
|
| 65,602,875 |
|
|
| 64,658,380 |
|
|
| 64,409,170 |
|
| Net loss per share – Basic |
| $ | (0.10 | ) |
| $ | (0.05 | ) |
| $ | (0.09 | ) |
| Net loss per share – Diluted |
| $ | (0.10 | ) |
| $ | (0.05 | ) |
| $ | (0.09 | ) |
In periods in which a loss results, all outstanding stock options are excluded from the diluted loss per share calculations as their effect is anti-dilutive.
| [23] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
17. Share based compensation
The Company has an equity compensation program in place for its executives, employees and directors. Executives and employees are given equity compensation grants that vest based on a recipient's continued employment. The Company’s stock-based compensation awards outstanding as at December 31, 2022, include stock options, restricted stock units (“RSUs”), deferred share units (“DSUs”) and the employee share purchase plan (“ESP Plan”). The following tables provide information about stock option, RSU, DSU, and ESP Plan activity.
| For the years ended December 31, | ||||||||||||
|
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| Stock Option Expense |
| $ | 22,552 |
|
| $ | 26,250 |
|
| $ | 34,223 |
|
| Deferred Share Units |
|
| - |
|
|
| - |
|
|
| 15,000 |
|
| Restricted Stock Units |
|
| 153,343 |
|
|
| 154,715 |
|
|
| 111,060 |
|
| Employee Share Purchase Plan |
|
| 39,389 |
|
|
| 106,935 |
|
|
| 8,133 |
|
| Total stock based compensation expense |
|
| 215,284 |
|
|
| 287,900 |
|
|
| 168,416 |
|
| [24] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
Stock Options:
The following is a summary of stock options which are outstanding as at December 31, 2022.
| Exercise price per share |
|
| # of options outstanding |
|
| # of options exercisable |
|
| Average remaining life (in years) |
| ||||
| $0.17 |
|
|
| 69,200 |
|
|
| 69,200 |
|
|
| 4.9 |
| |
| $0.44 |
|
|
| 21,360 |
|
|
| 21,360 |
|
|
| 3.5 |
| |
| $0.51 |
|
|
| 16,000 |
|
|
| 16,000 |
|
|
| 2.7 |
| |
| $0.52 |
|
|
| 100,000 |
|
|
| 100,000 |
|
|
| 1.5 |
| |
| $0.55 |
|
|
| 30,000 |
|
|
| 30,000 |
|
|
| 2.1 |
| |
| $0.59 |
|
|
| 150,000 |
|
|
| 150,000 |
|
|
| 0.8 |
| |
| $0.62 |
|
|
| 18,050 |
|
|
| 18,050 |
|
|
| 4.0 |
| |
| $0.68 |
|
|
| 14,750 |
|
|
| 14,750 |
|
|
| 3.7 |
| |
| $0.68 |
|
|
| 17,500 |
|
|
| 17,500 |
|
|
| 4.5 |
| |
| $0.72 |
|
|
| 24,460 |
|
|
| 24,460 |
|
|
| 4.4 |
| |
|
|
|
|
| 461,320 |
|
|
| 461,320 |
|
|
| 2.4 |
| |
| [25] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
A continuity of the number of stock options which are outstanding at the end of the current year and as at the prior fiscal years ended December 31, 2021 and 2020 are as follows:
| For the years ended December 31, | ||||||||||||||||
|
|
| 2022 |
|
| 2021 |
| ||||||||||
|
|
|
|
|
| weighted |
|
|
|
|
| Weighted |
| ||||
|
|
| # of stock |
|
| average |
|
| # of stock |
|
| Average |
| ||||
|
|
| Options |
|
| exercise price |
|
| Options |
|
| exercise price |
| ||||
| Options outstanding, start of the year |
|
| 358,660 |
|
| $ | 0.56 |
|
|
| 421,000 |
|
| $ | 0.83 |
|
| Granted |
|
| 134,060 |
|
| $ | 0.40 |
|
|
| 62,660 |
|
| $ | 0.56 |
|
| Expired |
|
| - |
|
|
| - |
|
|
| (125,000 | ) |
| $ | (1.48 | ) |
| Cancelled |
|
| (31,400 | ) |
| $ | (0.51 | ) |
|
|
|
|
|
| ||
| Options outstanding, end of the year |
|
| 461,320 |
|
| $ | 0.51 |
|
|
| 358,660 |
|
| $ | 0.56 |
|
| Options exercisable, end of the year |
|
| 461,320 |
|
| $ | 0.51 |
|
|
| 358,660 |
|
| $ | 0.56 |
|
| For the year ended December 31, |
| |||||||
|
|
| 2020 |
| |||||
|
|
|
|
| Weighted |
| |||
|
|
| # of stock |
|
| Average |
| ||
|
|
| Options |
|
| exercise price |
| ||
| Options outstanding, start of the year |
|
| 1,169,500 |
|
| $ | 1.48 |
|
| Granted |
|
| 46,000 |
|
| $ | 0.54 |
|
| Expired |
|
| (794,500 | ) |
| $ | (1.77 | ) |
| Options outstanding, end of the year |
|
| 421,000 |
|
| $ | 0.83 |
|
| Options exercisable, end of the year |
|
| 421,000 |
|
| $ | 0.83 |
|
Stock options granted generally expire, if unexercised, five years from the date granted and entitlement to exercise them generally vests at a rate as determined by the Board of Directors.
| [26] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
Stock based compensation expense (“SBCE”) is calculated based on the fair value attributed to grants of stock options using the Black-Scholes valuation model and utilizing the following weighted average assumptions:
| For the year ended |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| Expected dividends paid per common share |
| Nil |
|
| Nil |
|
| Nil |
| |||
| Expected life in years |
|
| 5.0 |
|
|
| 5.0 |
|
|
| 5.0 |
|
| Weighted average expected volatility in the price of common shares |
| 75% |
|
| 108% |
|
| 138% |
| |||
| Weighted average risk free interest rate |
| 3.05% |
|
| 0.38% |
|
| 1.12% |
| |||
| Weighted average fair market value per share at grant date |
| $ | 0.40 |
|
| $ | 0.56 |
|
| $ | 0.54 |
|
On January 6, 2023 the Company announced the grant of 2,050,000 incentive stock options at a price of $0.216 to employees, officers and directors. These incentive stock options will vest upon receipt of cash for SFD® services performed: 1/3 upon collection of US$6.5 million, 1/3 upon the collection of the next US$7.0 million and the final 1/3 upon collection of an additional US$7.5 million.
Deferred Stock Units:
A continuity of the number of DSUs which are outstanding at the end of the current year and as at the prior fiscal years ended December 31, 2021 and 2020 are as follows:
|
|
| For the years ended December 31, |
| |||||||||
| Opening balance |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| Opening balance |
|
| 37,354 |
|
|
| 37,354 |
|
|
| - |
|
| Granted |
|
| - |
|
|
| - |
|
|
| 37,354 |
|
| Closing balance |
|
| 37,354 |
|
|
| 37,354 |
|
|
| 37,354 |
|
The DSUs plan is a long-term incentive plan that permits the grant of DSUs to qualified directors. DSUs granted under the DSUs plan are to be settled at the retirement, resignation or death of the Board member holding the DSUs
Restricted Stock Units:
RSUs entitle the holder to receive, at the option of the Company, either the underlying number of shares of the Company's Common Stock upon vesting of such units or a cash payment equal to the value of the underlying shares. The RSUs vest at a rate of one-third at the end of each of the first three years following the date of grant. In the third quarter of 2022, the Company settled the RSUs that vested with shares and cash, and intends to continue to settle the RSUs in shares and cash.
| [27] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
A continuity of the number of RSUs, including fair value (“FV”) which are outstanding at the end of the current year and as the end of the prior fiscal years ended December 31, 2021 and 2020 are as follows:
| For the years ended December 31, | ||||||||||||||||||
|
|
| 2022 |
|
| 2021 |
| ||||||||||||
|
|
| # of RSUs |
|
| FV/Unit |
|
| # of RSUs |
|
| FV/Unit |
| ||||||
| RSUs outstanding, start of the year |
|
| 696,666 |
|
| $ | 0.61 |
|
|
| 1,200,000 |
|
| $ | 0.79 |
| ||
| Granted |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||
| Common shares issued |
|
| (212,304 | ) |
| $ | (0.58 | ) |
|
| (208,370 | ) |
| $ | (0.55 | ) | ||
| Payroll withholdings settled in cash |
|
| (136,028 | ) |
| $ | (0.58 | ) |
|
| (139,964 | ) |
| $ | (0.55 | ) | ||
| Forfeited |
|
| - |
|
|
| - |
|
|
| (155,000 | ) |
| $ | (0.79 | ) | ||
| RSUs outstanding, end of the year |
|
| 348,334 |
|
| $ | 0.21 |
|
|
| 696,666 |
|
| $ | 0.61 |
| ||
|
|
| For the year ended December 31, |
| |||||
|
|
| 2020 |
| |||||
|
|
| # of RSUs |
|
| FV/Unit |
| ||
| RSUs outstanding, start of the year |
|
| - |
|
|
| - |
|
| Granted |
|
| 1,200,000 |
|
| $ | 0.45 |
|
| RSUs outstanding, end of the year |
|
| 1,200,000 |
|
| $ | 0.79 |
|
Employee Share Purchase Plan:
The ESP Plan allows employees and other individuals determined by the Board to be eligible to contribute a minimum of 1% and a maximum of 10% of their earnings to the plan for the purchase of common shares in the capital of the Company, of which the Company will make an equal contribution. Common shares contributed by the Company may be issued from treasury or acquired through the facilities of the TSX. During 2022, 2021, and 2020 the Company has elected to issue common shares from treasury.
| [28] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
A continuity of the number of commons shares under the ESP Plan which are outstanding at the end of the current period and as at the prior fiscal years ended December 31, 2021 and 2020 are as follows:
|
|
| For the years ended December 31, |
| |||||||||||||
|
|
| 2022 |
|
| 2021 |
| ||||||||||
|
|
| # of shares |
|
| $ amount |
|
| # of shares |
|
| $ amount |
| ||||
| Purchased by employees |
|
| 105,221 |
|
| $ | 49,738 |
|
|
| 127,790 |
|
| $ | 69,260 |
|
| Matched by the Company |
|
| 83,412 |
|
|
| 39,389 |
|
|
| 102,641 |
|
|
| 55,733 |
|
| Bonus match by the Company |
|
| - |
|
|
| - |
|
|
| 74,119 |
|
|
| 48,030 |
|
| Total Common Shares issued |
|
| 188,633 |
|
|
| 89,127 |
|
|
| 304,550 |
|
|
| 173,023 |
|
| For the year ended December 31, | ||||||||
|
|
| 2020 |
| |||||
|
|
| # of shares |
|
| $ amount |
| ||
| Purchased by employees |
|
| 16,686 |
|
| $ | 7,592 |
|
| Matched by the Company |
|
| 14,213 |
|
|
| 6,467 |
|
| Total Common Shares issued |
|
| 30,899 |
|
|
| 14,059 |
|
If the employee does not withdraw common shares from the ESP Plan in the first year of their participation, the Company will match an additional 100% of the employee contributions, up to $15,000 per employee (the “Bonus Match”). The Company matched employee contributions for a total of $52,867, less any payroll withholdings in 2021. As at December 31, 2022 the Company has accrued $nil for the Bonus Match ($nil as at December 31, 2021).
18. Income Tax Expense
Payments made to NXT for services rendered to clients and branch offices in certain countries may be subject to foreign income and withholding taxes. Such taxes incurred are only recoverable in certain limited circumstances, including potential utilization in Canada as a foreign tax credit, or against future taxable earnings from the foreign jurisdictions.
| [29] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
Income tax expense is different from the expected amount that would be computed by applying the statutory Canadian federal and provincial income tax rates to NXT's income (loss) before income taxes as follows:
| For the years ended December 31, | ||||||||||||
|
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Net loss before income taxes |
| $ | (6,733,076 | ) |
| $ | (3,123,799 | ) |
| $ | (6,028,228 | ) |
| Canadian statutory income tax rate |
|
| 23.0 | % |
|
| 23.0 | % |
|
| 24.0 | % |
| Income tax (recovery) at statutory income tax rate |
|
| (1,548,607 | ) |
|
| (718,474 | ) |
|
| (1,446,775 | ) |
| Effect of non- deductible expenses and other items: |
|
|
|
|
|
|
|
|
|
|
|
|
| Stock-based compensation and other expenses |
|
| 53,379 |
|
|
| 67,948 |
|
|
| 44,225 |
|
| Change in statutory tax rates |
|
| (11,997 | ) |
|
| (92,850 | ) |
|
| (131,242 | ) |
| Foreign exchange adjustments |
|
| - |
|
|
| 662 |
|
|
| 29,910 |
|
| True-up |
|
| (3,280 | ) |
|
| - |
|
|
| - |
|
| Other |
|
| (33,113 | ) |
|
| 1,206,056 |
|
|
| 258,091 |
|
| Change in valuation allowance |
|
| 1,543,618 |
|
|
| (463,342 | ) |
|
| 1,245,791 |
|
| Income tax expense (recovery) |
|
| - |
|
|
| - |
|
|
| - |
|
Effective July 1, 2020, the Province of Alberta decreased its corporate tax rate from 10% to 8%.
A valuation allowance has been provided for the Company’s deferred income tax assets due to uncertainty regarding the amount and timing of their potential future utilization, as follows:
| For the years ended December 31, | ||||||||||||
|
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| Net operating losses carried forward: |
|
|
|
|
|
|
|
|
| |||
| Canada (expiration dates 2027 to 2041) |
| $ | 9,136,353 |
|
| $ | 8,051,504 |
|
| $ | 7,809,363 |
|
| USA (expiration dates 2023 to 2026) |
|
| 169,359 |
|
|
| 248,289 |
|
|
| 1,223,212 |
|
| Timing differences on property & equipment, Right |
|
|
|
|
|
|
|
|
|
|
|
|
| of Use of Assets, Lease obligations and financing costs |
|
| 1,726,603 |
|
|
| 1,674,085 |
|
|
| 1,945,086 |
|
| SRED Expenditures |
|
| 676,518 |
|
|
| 575,747 |
|
|
| 369,522 |
|
| Foreign Tax Credit |
|
| 285,772 |
|
|
| 285,772 |
|
|
| 285,772 |
|
|
|
|
| 11,994,605 |
|
|
| 10,835,397 |
|
|
| 11,632,955 |
|
| Intellectual property |
|
| (3,028,757 | ) |
|
| (3,411,411 | ) |
|
| (3,745,627 | ) |
| Less valuation allowance |
|
| (8,965,848 | ) |
|
| (7,423,986 | ) |
|
| (7,887,328 | ) |
19. Financial instruments
Non-derivative financial instruments:
The Company's non-derivative financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, deposits, accounts payables and accrued liabilities, long-term debt and lease obligations. The carrying value of these financial instruments, excluding lease obligations and long-term debt, approximates their fair values due to their short terms to maturity.
| [30] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
Credit Risk
Credit risk arises from the potential that the Company may incur a loss if counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms. The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The carrying value of cash and cash equivalents and accounts receivable reflects management’s assessment of maximum exposure to credit risk. At December 31, 2022, cash and cash equivalents included balances in bank accounts placed with financial institutions with investment grade credit ratings. The Company manages Accounts Receivable credit risk by requiring advance payments before entering into certain contract milestones and when possible, accounts receivable insurance.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk in relation to its holding of significant US$ balances in cash and cash equivalents, deposits, accounts payables, accrued liabilities, and lease obligations, and entering into United States dollar revenue contracts. The Company does not currently enter into hedging contracts, but to mitigate exposure to fluctuations in foreign exchange the Company uses strategies to reduce the volatility of United States Dollar assets including converting excess United States dollars to Canadian dollars. As at December 31, 2022, the Company held net U.S. dollar liabilities totaling US$231,161. Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2022 would have had an approximately $31,327 effect on the unrealized foreign exchange gain or loss for the year.
20. Change in non-cash operating working capital
The changes in non-cash operating working capital balances are comprised of:
|
|
| For the years ended December 31, |
| |||||||||
|
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| Accounts receivable |
| $ | 784,502 |
|
| $ | 123,587 |
|
| $ | 406,114 |
|
| Note receivable |
|
| - |
|
|
| - |
|
|
| 324,700 |
|
| Prepaid expenses and deposits |
|
| 229,279 |
|
|
| 3,262 |
|
|
| 19,600 |
|
| Accounts payable and accrued liabilities |
|
| 741,326 |
|
|
| 14,375 |
|
|
| (120,767 | ) |
| Contractual obligations |
|
| - |
|
|
| (127,507 | ) |
|
| (3,879 | ) |
|
|
|
| 1,755,107 |
|
|
| 13,717 |
|
|
| 625,768 |
|
| [31] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
21. Geographic information
The Company generates revenue from its SFD® survey system that enables the clients to focus their exploration decisions concerning land commitments, data acquisition expenditures and prospect prioritization on areas with the greatest potential. NXT conducts all of its survey operations from its head office in Canada, and occasionally maintains administrative offices in foreign locations if and when needed. Revenue fluctuations are a normal part of SFD® survey system sales and can vary significantly year-over-year.
Revenues for the year ended December 31, 2021 were generated solely from a single client and the Hydrocarbon Right. Revenues for the year ended December 31, 2020 were the result of the forfeiture of a non-refundable deposit. There were no revenues attributable to the Geothermal Right since its acquisition in 2021.
|
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| International |
| $ | - |
|
| $ | 3,134,250 |
|
| $ | - |
|
| Other |
|
| - |
|
|
| - |
|
|
| 136,566 |
|
|
|
|
| - |
|
|
| 3,134,250 |
|
|
| 136,566 |
|
22. SFD® related costs
SFD® related costs include the following:
| For the years ended December 31, | ||||||||||||
|
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| Aircraft Operations |
|
|
|
|
|
|
|
|
| |||
| Charter Hire Reimbursements |
| $ | - |
|
| $ | (389,513 | ) |
| $ | (662,383 | ) |
| Lease payments |
|
| 404,777 |
|
|
| 412,742 |
|
|
| 453,101 |
|
| Operating Expenses |
|
| 773,406 |
|
|
| 1,085,640 |
|
|
| 1,320,352 |
|
|
|
|
| 1,178,183 |
|
|
| 1,108,869 |
|
|
| 1,111,070 |
|
| Survey Projects |
|
| - |
|
|
| 115,299 |
|
|
| - |
|
|
|
|
| 1,178,183 |
|
|
| 1,224,168 |
|
|
| 1,111,070 |
|
| [32] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2022, 2021 and 2020
(Expressed in Canadian dollars unless otherwise stated)
23. Government Grants
During the years ended December 31, 2021 and 2020, the Company received government grants through the Canada Emergency Wage Subsidy (“CEWS”), the Canada Emergency Rent Subsidy (“CERS”) and the National Research Council of Canada Industrial Research Assistance Program (“NRC IRAP”). The CEWS, CERS and the NRC IRAP were recognized as a reduction to general and administrative expenses.
|
|
| For the years ended December 31, |
| |||||||||
|
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| CEWS |
| $ | - |
|
| $ | 226,607 |
|
| $ | 292,161 |
|
| CERS |
|
| - |
|
|
| 188,983 |
|
|
| 58,526 |
|
| NRC IRAP |
|
| - |
|
|
| 50,000 |
|
|
| - |
|
| Government grants recognized |
|
| - |
|
|
| 465,590 |
|
|
| 350,687 |
|
24. Other related party transactions
One of the members of NXT’s Board of Directors is a partner in a law firm which provides legal advice to NXT. Accounts payable and accrued liabilities includes a total of $76,843 ($16,000 as at December 31, 2021) payable to this law firm.
Accounts payable and accrued liabilities includes $nil ($11,467 as at December 31, 2021) related to reimbursement of expenses owing to an executive officer and $162,500 ($nil as at December 31, 2021) for Board of Director’s fees.
A company owned by a family member of a former executive officer was contracted to provide presentation design services to the Company during 2021.
As discussed in Note 9, the Company acquired the Geothermal Right from its former Chairman, President and Chief Executive Officer, Mr. Liszicasz on April 18, 2021.
|
| For the years ended December 31, |
| ||||||||||
|
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| Legal Fees |
| $ | 92,308 |
|
| $ | 85,815 |
|
| $ | 224,479 |
|
| Design Services1. |
|
| - |
|
|
| 4,013 |
|
|
| - |
|
| 1. US$3000 |
|
|
|
|
|
|
|
|
|
|
|
|
| [33] |
EXHIBIT 99.2
NXT ENERGY SOLUTIONS INC.
Management’s Discussion and Analysis
For the year ended
December 31, 2022
Management’s Discussion and Analysis
This management’s discussion and analysis (“MD&A”) was prepared by management of NXT Energy Solutions Inc. (“NXT”, “we”, “us”, “our” or the “Company”) based on information available as at March 31, 2023 and unless otherwise stated, has been approved by the Board of Directors of the Company (the “Board”), and should be reviewed in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2022 (the “audited consolidated financial statements”). This MD&A covers the unaudited three and audited twelve month periods ended December 31, 2022, with comparative amounts for the unaudited three and twelve month periods ended December 31, 2021.
Our functional and reporting currency is the Canadian dollar. All references to “dollars,” “$” and “CDN$” in this MD&A are to Canadian dollars unless specific reference is made to United States dollars (“US$”).
NXT® and SFD® are registered trademarks of NXT in Canada and the United States.
Advisories
Forward-looking Information
Certain statements contained in this MD&A constitute “forward-looking information” within the meaning of applicable securities laws. These statements typically contain words such as “anticipate,” “believe,” “would,” “could,” “should,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “continue” and similar words and phrases suggesting future outcomes or an outlook. Forward-looking statements in this document include, but are not limited to:
|
| · | payment of the Consideration (as defined below), and the satisfaction of the conditions thereto (including with respect to cash balances, receipt of funds, and the execution and completion of contracts); |
|
| · | the development, commercialization, and protection of the SFD® technology for geothermal resource exploration; |
|
| · | the extent to which expanding the Company’s scope of business to include exploring for both hydrocarbon and geothermal resources is anticipated to result in an expansion of its scope of revenue sources; |
|
| · | the Company’s pursuit of opportunities to secure new revenue contracts; |
|
| · | estimates related to our future financial position and liquidity including certain contractual obligations; and |
|
| · | general business strategies and objectives. |
Such forward-looking information is based on a number of assumptions which may prove to be incorrect. Assumptions have been made with respect to the following matters, in addition to any other assumptions identified in this document:
|
| · | our ability to develop and market our SFD® technology and services to current and new customers; |
|
| · | our ability to source personnel and equipment in a timely manner and at an acceptable cost; |
|
| · | our ability to obtain all permits and approvals required; |
| NXT Energy Solutions Inc. | page | 2 |
| MD&A for the year ended December 31, 2022 |
|
|
| · | our ability to obtain financing on acceptable terms; |
|
| · | our ability to obtain insurance to mitigate the risk of default on client billings; |
|
| · | foreign currency exchange and interest rates; |
|
| · | general business, economic, and market conditions (including global commodity prices); |
|
| · | the estimated costs of the Offering (defined below); |
|
| · | approval of phase 2 of the NRC IRAP project; and |
|
| · | the use of funds raised under the Offering. |
Although NXT believes that the expectations reflected in such forward-looking information are reasonable, undue reliance should not be placed on them as NXT can give no assurance that such expectations will prove to be correct. Forward-looking information is based on expectations, estimates, and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated by NXT and are described in the forward-looking information. Material risks and uncertainties include, but are not limited to:
|
| · | the ability of management to execute its business plan, including their ability to secure new revenue contracts; |
|
| · | health, safety, and the environment (including risks related to the COVID-19 pandemic); |
|
| · | our ability to develop and commercialize the geothermal technology; |
|
| · | our ability to service existing debt; |
|
| · | our ability to protect and maintain our intellectual property (“IP”) and rights to our SFD® technology; |
|
| · | our reliance on a limited number of key personnel; |
|
| · | our reliance on a limited number of aircraft; |
|
| · | our reliance on a limited number of clients; |
|
| · | counterparty credit risk; |
|
| · | foreign currency and interest rate fluctuations; |
|
| · | the likelihood that the Company’s ICFR (as defined below) will prevent or detect material misstatements in our audited consolidated financial statements; |
|
| · | changes in, or in the interpretation of, laws, regulations, or policies; and |
|
| · | general business, economic, and market conditions (including global commodity prices). |
For more information relating to risks, see the section titled “Discussion of Operations – Risk and Uncertainties” in this MD&A and the section titled “Risk Factors” in NXT’s most recently filed Annual Information Form. Except as required by applicable securities law, NXT undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise. Accordingly, the reader is cautioned not to place undue reliance on forward-looking statements.
Financial outlooks are provided for the purpose of understanding the Company’s accounting practices and liquidity position, and the information may not be appropriate for other purposes.
| NXT Energy Solutions Inc. | page | 3 |
| MD&A for the year ended December 31, 2022 |
|
Non-GAAP Measures
NXT’s accompanying audited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The Company has consistently used US GAAP for the eight most recently completed quarters. This MD&A includes references to net working capital, which does not have a standardized meaning prescribed by US GAAP and may not be comparable to similar measures being presented by other entities. Net working capital is the net result of the difference between current assets and current liabilities, and can be used by investors and management to assess liquidity at a particular point in time. See “Liquidity and Capital Resources – Net Working Capital” for further information.
Description of the Business
NXT Energy Solutions Inc. is a Calgary-based technology company whose proprietary and patented Stress Field Detection (“SFD®”) survey system utilizes quantum-scale sensors to detect gravity field perturbations in an airborne survey method, which can be used both onshore and offshore to remotely identify traps and reservoirs with hydrocarbon and geothermal exploration potential. The SFD® survey system enables NXT’s clients to focus their exploration decisions concerning land commitments, data acquisition expenditures, and prospect prioritization on areas with the greatest potential. SFD® is environmentally friendly and unaffected by ground security issues or difficult terrain and is the registered trademark of NXT. NXT provides its clients with an effective and reliable method to reduce time, costs, and risks related to exploration.
Financial and Operational Highlights
Key financial and operational highlights for Q4-22 are summarized below:
|
| · | cash at December 31, 2022 was $0.26 million; |
|
| · | net working capital was $(1.681) million at December 31, 2022; |
|
| · | the Company recorded SFD®-related revenues of $nil; |
|
| · | a net loss of $1.47 million was recorded for Q4-22, including stock-based compensation expense (“SBCE”) and amortization expense of $0.47 million; |
|
| · | a net loss of $6.73 million was recorded for YE-22, including SBCE and amortization expense of $1.98 million; |
|
| · | net loss per common share for Q4-22 was $0.02 basic and $0.02 diluted; |
|
| · | net loss per common share for YE-22 was $0.10 basic and $0.10 diluted; |
|
| · | cash flow used in operating activities was $0.70 million duringQ4-22 and $2.93 million during YE-22; |
|
| · | general and administrative (“G&A”) expenses decreased by $0.03 million (3%) in Q4-22 as compared to Q4-21; |
|
| · | G&A expenses increased by $0.55 million (17%) in YE-22 as compared to YE-21; and |
|
| · | the Rights Offering and Private Placement (together the “Offerings”) contributed $0.43 million of cash. |
| NXT Energy Solutions Inc. | page | 4 |
| MD&A for the year ended December 31, 2022 |
|
Key financial and operational highlights occurring subsequent to Q4-22 are summarized below:
|
| · | On January 6, 2023 the Company announced the grant of 2,050,000 incentive stock options at a price of $0.216 to employees, officers and directors. These incentive stock options will vest upon receipt of cash for SFD® services performed: 1/3 upon collection of US$6.5 million, 1/3 upon the collection of the next US$7.0 million and the final 1/3 upon collection of an additional US$7.5 million; and |
|
| · | January 25, 2023, the Company closed the Private Placement by issuing an additional 8,510,000 common shares, at $0.195 per common shares, for additional aggregate gross proceeds of approximately $1,659,450, less issuance costs of $1,170. |
Selected Annual Information
| ($M except per share) | YE-22 | YE-21 | YE-20 |
| Total assets | $15,575,295 | $ 21,584,371 | $ 23,484,748 |
| Lease liabilities | 1,246,723 | 1,902,604 | 2,089,838 |
| Long-term debt | 935,185 | 1,000,000 | - |
| Revenue | - | 3,134,250 | 136,566 |
| Net earnings (loss) | (6,733,076) | (3,123,799) | (6,028,228) |
| Net earnings (loss) per share |
|
|
|
| Basic | ($0.10) | $(0.05) | $(0.09) |
| Diluted | ($0.10) | $(0.05) | $(0.09) |
Total assets decreased between YE-20 through YE-22 as cash and short-term investments were used for operating activities offset by revenue recognized from the Pre-existing SFD® Data Sale (defined below). The Company extended its aircraft lease during YE-21 for two years and one small equipment lease was entered into during YE-22. This was more than offset by accretion of the lease liabilities and the surrender of 7.3% of the Company’s office space. During YE-21, the Company entered into the Business Development Bank of Canada’s (“BDC”) Highly Affected Sectors Credit Availability Program (the “HASCAP Loan”) for $1,000,000 thereby increasing Long-term debt. There were no SFD® surveys in YE-20 and YE-22. For YE-21 revenue was due to the Pre-existing SFD® Data Sale. YE-20 revenue was the result of the forfeiture of a deposit from a customer.
Discussion of Operations
Management Committee
Given the recent passing of Mr. George Liszicasz, former Chairman, President and Chief Executive Officer (“CEO”), in Q1-23 the Board of Directors has formally empowered a committee of the Board to assume the CEO’s duties. The Committee, which meets several times weekly with NXT management, consists of Lead Director Charles Selby and Directors Gerry Sheehan and Bruce G. Wilcox, who collectively possess senior operating and management experience in the Energy and Capital Markets Industries. The Committee will undertake its executive role, until further notice, in close cooperation with NXT’s qualified management team that will continue to manufacture SFD® systems, perform SFD® surveys, and provide vital interpretation as contracts are finalized.
| NXT Energy Solutions Inc. | page | 5 |
| MD&A for the year ended December 31, 2022 |
|
Acquisition of the Geothermal Right
The Company acquired the SFD® technology rights for geothermal resources (“Geothermal Right”) from Mr. George Liszicasz, the former President and CEO of NXT on April 18, 2021. The consideration deliverable by the Company in connection with the acquisition of the Geothermal Right is set forth below (the “Consideration”):
|
| 1. | US$40,000 (CDN$50,310) signature payment, which became due immediately and was paid on April 22, 2021; |
|
| 2. | CDN$15,000 signature milestone payment paid in August 2021; |
|
| 3. | 300,000 common shares, which were issued in December 2021; |
|
| 4. | US$200,000 milestone payment, which will become due in the event that the Company’s cash balance exceeds CDN$5,000,000 due to receipt of specifically defined funds from operations; and |
|
| 5. | US$250,000 milestone payment, which will become due in the event that the Company executes and completes and receives full payment for a SFD® contract valued at US$10,000,000 or greater, provided such contract is entered into and completed and payment of at least US$5,000,000 is received by April 18, 2023. |
As of December 31, 2022, the Company has recognized $275,610 for the acquisition of the Geothermal Right, which is the combination of the US$40,000 (CDN$50,310) signature payment, the CDN$15,000 signature milestone payment, the value of the 300,000 common shares of $207,300 and other costs of $3,000. The cost of the remaining two milestones will be recognized when it is deemed probable that these two milestones will be achieved by a special committee of the Board, comprised entirely of independent directors. The Board delegated authority to the special committee to determine when the milestones have been achieved.
Geothermal Right Development Update
Progress continues with respect to the development of the SFD-GT geothermal sensor family. The objective of this project was to test, identify, and analyze the desired elements of the SFD® geothermal sensor response over known geothermal areas with the ultimate goal of providing a green upstream geophysical service for advancing renewable power initiatives in Canada and abroad. The agreed project work was completed in November 2021 with total funding of $50,000 from the National Research Council of Canada Industrial Research Assistance Program (“NRC IRAP”). During Q1-23, the Company submitted a proposal for up to approximately $200,000 to NRC IRAP for a funding and research plan for the next phase to support the research and development of the SFD® technology for geothermal applications.
Patents
In Q1-22, NXT announced its patent application in Brazil has been allowed. As of the date of this MD&A, NXT has been granted SFD® patents in Brazil (February 2022), India (July 2021), Russia (January 2017), Japan (July 2017), Canada (August 2017), Mexico (September 2017), the United States (two patents were granted in November 2017 and September 2018, respectively), China (April 2018), and Europe (January 2020). In total, NXT has obtained SFD® patents or received patent allowances in 46 countries. These patents protect our proprietary SFD® technology and serve as independent third-party recognition of our technological invention in terms of practical applicability, conceptual novelty, and knowledge advancement.
| NXT Energy Solutions Inc. | page | 6 |
| MD&A for the year ended December 31, 2022 |
|
Summary of Operating Results
|
|
| Q4-22 |
|
| Q4-21 |
|
| YE-22 |
|
| YE-21 |
| ||||
| SFD®-related revenue |
| $ | - |
|
| $ | (10,123 | ) |
| $ | - |
|
| $ | 3,134,250 |
|
| Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| SFD®-related costs, net |
|
| 203,891 |
|
|
| 273,431 |
|
|
| 1,178,183 |
|
|
| 1,224,168 |
|
| General and administrative expenses |
|
| 813,771 |
|
|
| 841,577 |
|
|
| 3,736,431 |
|
|
| 3,189,857 |
|
| Amortization |
|
| 442,097 |
|
|
| 445,144 |
|
|
| 1,768,727 |
|
|
| 1,776,484 |
|
|
|
|
| 1,459,759 |
|
|
| 1,560,152 |
|
|
| 6,683,341 |
|
|
| 6,190,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other Expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest expense, net |
|
| 9,969 |
|
|
| 10,941 |
|
|
| 36,220 |
|
|
| 37,955 |
|
| Foreign exchange loss (gain) |
|
| (1,165 | ) |
|
| (1,732 | ) |
|
| (15,340 | ) |
|
| 8,597 |
|
| Intellectual property and other |
|
| 986 |
|
|
| (5,897 | ) |
|
| 28,855 |
|
|
| 20,988 |
|
|
|
|
| 9,790 |
|
|
| 3,312 |
|
|
| 49,735 |
|
|
| 67,540 |
|
| Loss before income taxes |
|
| (1,469,549 | ) |
|
| (1,573,587 | ) |
|
| (6,733,076 | ) |
|
| (3,123,799 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income tax expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss and comprehensive loss |
|
| (1,469,549 | ) |
|
| (1,573,587 | ) |
|
| (6,733,076 | ) |
|
| (3,123,799 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss per share – basic |
| $ | (0.02 | ) |
| $ | (0.02 | ) |
| $ | (0.10 | ) |
| $ | (0.05 | ) |
| Net loss per share – diluted |
| $ | (0.02 | ) |
| $ | (0.02 | ) |
| $ | (0.10 | ) |
| $ | (0.05 | ) |
Quarterly operating results. Net loss for Q4-22 compared to Q4-21 decreased by $104,038, or $0.00 per share-basic. There were no SFD®-related revenues in either quarter. SFD®-related costs, net, were $69,540 lower due to the timing of regular maintenance and lower lease costs. G&A expenses decreased by $27,806, compared to Q4-21, due primarily lower vacation expense, SBCE offset by higher professional fees. Interest expense, net, decreased by $972 in Q4-22 versus Q4-21 due to the cessation of the financial liability related to the aircraft lease in Q1-22. Foreign exchange gain was minimal as CDN$ to US$ exchange rate fluctuated less than 1% in each quarter. IP and other expenses related mostly to costs associated with finalizing certain SFD® patents.
| NXT Energy Solutions Inc. | page | 7 |
| MD&A for the year ended December 31, 2022 |
|
Year-to-date operating results. In Q2-21, the Company completed the delivery of certain pre-existing Hydrocarbon Right SFD® data (the “ Pre-existing SFD® Data”) to its customer (the “Pre-existing SFD® Data Sale”). The Company has been paid in full. Net loss for YE-22 compared to YE-21 increased by $3,609,277, or $0.05 per share-basic. SFD®-related costs, net, were $45,985 lower due to the timing of routine maintenance costs offset by survey interpretation costs to support the Pre-existing SFD® Data Sale in YE-21. G&A expenses increased by $546,574 compared to YE-21, to the termination of the Canada Emergency Wage Subsidy (“CEWS”) and the Canada Emergency Rent Subsidy (“CERS”) in Q4-21. Interest expense, net,decreased by $1,735 in YE-22 versus YE-21 due to the cessation of the financial liability related to the aircraft lease. With respect to foreign exchange, at December 31, 2021, the CDN$ to US$ exchange rate was slightly lower as compared to the CDN$ to US$ exchange rate at December 31, 2020, resulting in the corresponding foreign exchange loss for YE-21. With respect to foreign exchange during 2022, the CDN$ weakened to the US$ at YE-22 resulting in the related foreign exchange gain. IP and other expenses increased $7,867 in YE-22 mostly due to the disposal of leasehold improvement assets related to the Company surrendering 826 square feet of its office space, offset by lower IP costs related to increased patent maintenance and approval costs during YE-21.
SFD®-Related Costs, Net
| SFD®-Related Costs |
| Q4-22 |
|
| Q4-21 |
|
| Net change |
| |||
| Aircraft lease costs |
| $ | 89,798 |
|
| $ | 106,310 |
|
| $ | (16,512 | ) |
| Aircraft operations |
|
| 119,162 |
|
|
| 166,754 |
|
|
| (47,592 | ) |
| Survey projects |
|
| (5,069 | ) |
|
| 367 |
|
|
| (5,436 | ) |
| Total SFD®-related costs, net |
|
| 203,891 |
|
|
| 273,431 |
|
|
| (69,540 | ) |
| SFD®-Related Costs |
| YE-22 |
|
| YE-21 |
|
| Net change |
| |||
| Aircraft lease costs |
| $ | 404,777 |
|
| $ | 412,742 |
|
| $ | (7,965 | ) |
| Aircraft operations |
|
| 776,548 |
|
|
| 696,127 |
|
|
| 80,421 |
|
| Survey projects |
|
| (3,142 | ) |
|
| 115,299 |
|
|
| (118,441 | ) |
| Total SFD®-related costs, net |
|
| 1,178,183 |
|
|
| 1,224,168 |
|
|
| (45,985 | ) |
SFD®-related costs include aircraft charter costs (net of charter hire reimbursements), lease expenses, and aircraft operation and maintenance costs. In Q4-22, SFD®-related costs were lower compared to Q4-21 by $69,540 due to the timing of routine maintenance costs and lower monthly lease costs.
Aircraft operations were $80,421 higher due to the timing of routine major preventive maintenance costs in Q1-22 and preparing the aircraft for up to 300 hours of flight hours to conduct SFD® surveys. Finally, survey project costs were $118,441 lower due to the costs incurred for the pre-existing Data Sale in Q2-21.
The aircraft is available for charter to third parties through our aircraft manager when it is not being used by NXT. Any charter hire reimbursements received are used to offset aircraft costs.
The Company extended the term of its aircraft leasing agreement effective in Q2-22 for a period of 24 months with payments of approximately US$22,500 (CDN$28,675) per month, or US$270,000 (CDN$344,099) per year.
Should NXT want to repurchase the aircraft at the end of the extended term, the purchase price will be US$1.21 million.
| NXT Energy Solutions Inc. | page | 8 |
| MD&A for the year ended December 31, 2022 |
|
General and Administrative Expenses
| G&A Expenses |
| Q4-22 |
|
| Q4-21 |
|
| Net change |
|
| % |
| ||||
| Salaries, benefits and consulting charges |
| $ | 380,617 |
|
| $ | 398,283 |
|
| $ | (17,666 | ) |
|
| (4 | ) |
| Board and professional fees, public company costs |
|
| 169,548 |
|
|
| 123,600 |
|
|
| 45,948 |
|
|
| 37 |
|
| Premises and administrative overhead |
|
| 189,419 |
|
|
| 198,827 |
|
|
| (9,408 | ) |
|
| (5 | ) |
| Business development |
|
| 46,995 |
|
|
| 38,952 |
|
|
| 8,043 |
|
|
| 21 |
|
| Stock-based compensation |
|
| 27,192 |
|
|
| 81,915 |
|
|
| (54,723 | ) |
|
| (67 | ) |
| Total G&A Expenses |
|
| 813,771 |
|
|
| 841,577 |
|
|
| (27,806 | ) |
|
| (3 | ) |
| G&A Expenses |
| YE-22 |
|
| YE-21 |
|
| Net change |
|
| % |
| ||||
| Salaries, benefits and consulting charges |
| $ | 1,688,261 |
|
| $ | 1,485,952 |
|
| $ | 202,309 |
|
|
| 14 |
|
| Board and professional fees, public company costs |
|
| 818,087 |
|
|
| 720,269 |
|
|
| 97,818 |
|
|
| 14 |
|
| Premises and administrative overhead |
|
| 818,987 |
|
|
| 647,943 |
|
|
| 171,044 |
|
|
| 26 |
|
| Business development |
|
| 195,811 |
|
|
| 47,793 |
|
|
| 148,018 |
|
| >100 |
| |
| Stock-based compensation |
|
| 215,284 |
|
|
| 287,900 |
|
|
| (72,616 | ) |
|
| (25 | ) |
| Total G&A Expenses |
|
| 3,736,431 |
|
|
| 3,189,857 |
|
|
| 546,574 |
|
|
| 17 |
|
G&A expenses decreased $27,806, or 3%, in Q4-22 compared to Q4-21 for the following reasons:
|
| · | salaries, benefits, and consulting charges increased $17,666, or 4%, as Q4-21 costs were lower due to less vacation expense; |
|
| · | board and professional fees and public company costs increased $45,948, or 37%, due to increased professional and insurance fees; |
|
| · | premises and administrative overhead costs decreased $9,409, or 5%, by lower information technology costs; |
|
| · | business development costs for Q4-22 increased $8,043 from Q4-21 due to additional meetings with potential customers in Q4-22; and |
|
| · | SBCE’s were lower in Q4-22 vs Q4-21 by $54,723 or 67% due to a lower Restricted Share Unit Plan (“RSU Plan”) expense as the December 31, 2022 share price was lower than the December 31, 2021 share price. Please see the next section “Discussion of Operations – General and Administrative Expenses – Stock-based Compensation Expenses” for further information on the SBCE. |
G&A expenses increased $546,574 or 17%, in YE-22 compared to YE-21 for the following reasons:
|
| · | salaries, benefits, and consulting charges increased $202,309 or 14%, as YE-21 costs were reduced by the CEWS. This was partially offset in YE-22 due to lower vacation expense; |
|
| · | board and professional fees and public company costs increased $97,818, or 14%, due to increased professional and insurance fees; |
|
| · | premises and administrative overhead costs increased $171,044 or 26%, as YE-21 costs were reduced by the CERS; |
|
| · | business development costs for YE-22 increased $148,018 from YE-21 due to increased meetings with potential customers during YE-22; and |
|
| · | SBCE’s were lower in YE-22 vs YE-21 by $72,616 or 25% as the Employee Share Purchase Plan (the “ESP Plan”) expense is lower as there was no bonus accrual during YE-22. Please see the next section “Discussion of Operations – General and Administrative Expenses – Stock-based Compensation Expenses” for further information on the SBCE. |
| NXT Energy Solutions Inc. | page | 9 |
| MD&A for the year ended December 31, 2022 |
|
Stock-based Compensation Expenses
| Stock-based Compensation Expenses |
| Q4-22 |
|
| Q4-21 |
|
| Net change |
|
| % change |
| ||||
| Stock Option Expense |
| $ | 7,500 |
|
| $ | 7,500 |
|
| $ | - |
|
|
| - |
|
| Deferred Share Units |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| Restricted Stock Units |
|
| 12,280 |
|
|
| 52,204 |
|
|
| (39,924 | ) |
|
| (76 | ) |
| ESP Plan |
|
| 7,412 |
|
|
| 22,211 |
|
|
| (14,799 | ) |
|
| (67 | ) |
| Total SBCE |
|
| 27,192 |
|
|
| 81,915 |
|
|
| (54,723 | ) |
|
| (67 | ) |
| Stock-based Compensation Expenses |
| YE-22 |
|
| YE-21 |
|
| Net change |
|
| % change |
| ||||
| Stock Option Expense |
| $ | 22,551 |
|
| $ | 26,250 |
|
| $ | (3,699 | ) |
|
| (14 | ) |
| Deferred Share Units |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| Restricted Stock Units |
|
| 153,343 |
|
|
| 154,715 |
|
|
| (1,372 | ) |
|
| (1 | ) |
| ESP Plan |
|
| 39,390 |
|
|
| 106,935 |
|
|
| (67,545 | ) |
|
| (63 | ) |
| Total SBCE |
|
| 215,284 |
|
|
| 287,900 |
|
|
| (72,616 | ) |
|
| (25 | ) |
SBCE varies in any given quarter or year as it is a function of several factors, including the number of units of each type of stock-based compensation plan issued in the period and the amortization term based on the number of years for full vesting of the units.
SBCE is also a function of periodic changes in the inputs used in the Black-Scholes option valuation model, such as volatility in NXT’s trailing common share price. For cash-settled stock-based compensation awards variability will occur based on changes to observable prices.
Stock options granted generally expire, if unexercised, five years from the date granted and entitlement to exercise them generally vests at a rate as determined by the Board of Directors.
The deferred share unit (“DSUs”) plan (the “DSU Plan”) is a long-term incentive plan that permits the grant of DSUs to qualified directors. DSUs granted under the DSU Plan are to be settled at the retirement, resignation, or death of the Board member holding the DSUs.
Restricted Share Units (“RSUs”) entitle the holder to receive, at the option of the Company, either the underlying number of shares of the Company’s common shares upon vesting of such RSUs or a cash payment equal to the value of the underlying shares. The RSUs vest at a rate of one-third at the end of each of the first three years following the date of grant. In Q3-22, the Company settled the Q3-22 RSU vesting with common shares and cash, and intends to continue to settle the RSUs in common shares and cash.
| NXT Energy Solutions Inc. | page | 10 |
| MD&A for the year ended December 31, 2022 |
|
The ESP Plan allows employees and other individuals determined by the Board to be eligible to contribute a minimum of 1% and a maximum of 10% of their earnings to the plan for the purchase of common shares in the capital of the Company, of which the Company will make an equal contribution. Common shares contributed by the Company may be issued from treasury or acquired through the facilities of the Toronto Stock Exchange. During 2021 and 2022 the Company has elected to issue common shares from treasury.
SBCE in Q4-22 was lower compared to Q4-21 by $54,723 or 67%. The RSU expense was lower as the Company’s share price was lower at December 31, 2022 versus December 31, 2021. In addition there was lower ESP plan participation and there was no ESP Plan bonus accrual in Q4-22, as all participants in the ESP Plan have been members of the plan for more than one year.
SBCE in YE-22 is lower compared to YE-21 by $72,616 or 25%. RSU costs in YE-22 are higher than YE-21 as the 2022 vesting price was higher than in 2021 and in Q1-21 there was a forfeiture by one participant in the RSU plan. This was offset by the Company’s share price being lower at December 31, 2022 versus December 31, 2021. Option expense was lower as no options were issued for director fees in Q3-22. There was no ESP Plan bonus accrual YE-22, as all participants in the ESP Plan have been members of the plan for more than one year. No directors elected to participate in the DSU Plan in 2022 and 2021.
On January 6, 2023 the Company announced the grant of 2,050,000 incentive stock options at a price of $0.216 to employees, officers and directors. These incentive stock options will vest upon receipt of cash for SFD® services performed: 1/3 upon collection of US$6.5 million, 1/3 upon the collection of the next US$7.0 million and the final 1/3 upon collection of an additional US$7.5 million.
Amortization
| Amortization |
| Q4-22 |
|
| Q4-21 |
|
| Net change |
|
| % |
| ||||
| Property and equipment |
| $ | 17,468 |
|
| $ | 20,641 |
|
| $ | (3,173 | ) |
|
| (15 | ) |
| Intellectual property |
|
| 424,629 |
|
|
| 424,503 |
|
|
| 126 |
|
|
| 0 |
|
| Total Amortization Expenses |
|
| 442,097 |
|
|
| 445,144 |
|
|
| (3,047 | ) |
|
| (1 | ) |
| Amortization |
| YE-22 |
|
| YE-21 |
|
| Net change |
|
| % |
| ||||
| Property and equipment |
| $ | 70,213 |
|
| $ | 82,564 |
|
| $ | (12,351 | ) |
|
| (15 | ) |
| Intellectual property |
|
| 1,698,514 |
|
|
| 1,693,920 |
|
|
| 4,594 |
|
|
| 0 |
|
| Total Amortization Expenses |
|
| 1,768,727 |
|
|
| 1,776,484 |
|
|
| (7,757 | ) |
|
| (0 | ) |
Property and equipment and related amortization expense.Property and equipment amortization was lower in Q4-22 compared to Q4-21, and YE-22 compared to YE-21, the Company not acquiring new assets in the periods. Amortization also decreases each year as the Company uses the declining balance method of depreciation, thereby having the effect of lowering amortization each year on existing assets.
Intellectual property and related amortization expense. NXT acquired specific rights to utilize the proprietary SFD® technology in global hydrocarbon exploration applications from the inventor of the SFD® technology, NXT’s former Chairman, President and CEO, on August 31, 2015. The value attributed to the acquired IP assets was $25.3 million. The IP assets are being amortized on a straight-line basis over a 15-year period (future amortization expense of $1,685,000 per year) and are also being subject to ongoing assessment of potential indicators of impairment of the recorded net book value. No impairments were recognized in YE-22 or YE-21.
| NXT Energy Solutions Inc. | page | 11 |
| MD&A for the year ended December 31, 2022 |
|
As discussed in the section “Discussion of Operations – Acquisition of the Geothermal Right,” the Company acquired the SFD® technology for the Geothermal Right from NXT’s Chairman, President and CEO on April 18, 2021. The Geothermal Right is being amortized on a straight line basis over its estimated useful life of 20 years. The annual amortization expense expected to be recognized is approximately $13,781 per year for a five-year aggregate total of $68,902.
Other Expenses (Income)
| Other Expenses |
| Q4-22 |
|
| Q4-21 |
|
| Net change |
|
| % |
| ||||
| Interest expense, net |
| $ | 9,969 |
|
| $ | 10,941 |
|
| $ | (972 | ) |
|
| (9 | ) |
| Foreign exchange loss (gain) |
|
| (1,165 | ) |
|
| (1,732 | ) |
|
| 567 |
|
|
| (33 | ) |
| Intellectual property and other |
|
| 986 |
|
|
| (5,897 | ) |
|
| 6,883 |
|
| >(100 | ) | |
| Loss on disposal of assets & lease modifications |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| Total Other Expenses, net |
|
| 9,790 |
|
|
| 3,312 |
|
|
| 6,478 |
|
| >100 |
| |
| Other Expenses |
| YE-22 |
|
| YE-21 |
|
| Net change |
|
| % |
| ||||
| Interest expense, net |
| $ | 36,220 |
|
| $ | 37,955 |
|
| $ | (1,735 | ) |
|
| (5 | ) |
| Foreign exchange loss (gain) |
|
| (15,340 | ) |
|
| 8,597 |
|
|
| (23,937 | ) |
| >(100 | ) | |
| Intellectual property and other |
|
| 16,933 |
|
|
| 20,988 |
|
|
| (4,055 | ) |
|
| (19 | ) |
| Loss on disposal of assets & lease modifications |
|
| 11,922 |
|
|
| - |
|
|
| 11,922 |
|
|
| 100 |
|
| Total Other Expenses, net |
|
| 49,735 |
|
|
| 67,540 |
|
|
| (17,805 | ) |
|
| (26 | ) |
Interest expense, net. This category of other expenses includes interest income earned on short-term investments netted, by interest expense from the financial liability related to the aircraft lease (up to February 2022) and long-term debt. Interest expense decreased in Q4-22 versus Q4-21 and YE-22 versus YE-21 due to the cessation of the financial liability in Q1-22, amortization of the HASCAP Loan principle and no short-term investments during Q4-22.
Foreign exchange loss (gain). This category of other expenses includes losses and gains caused by changes in the relative currency exchange values of US$ and CDN$. The Company held net US$ liability at December 31, 2022 and significant net assets in US$ at December 31, 2021, which included accounts receivable, cash and cash equivalents, short-term investments, US$ lease obligations, and the security deposit for the aircraft, all of which have an effect on the unrealized foreign exchange gain and loss. For Q4-22 and Q4-21 the exchange gains were minimal as the CDN$ to US$ exchange rates changed less than 1% from the previous quarter. At December 31, 2022, the CDN$ to US$ exchange rate was 6.3% lower as compared to the CDN$ to US$ exchange rate at December 31, 2021, resulting in the corresponding foreign exchange gain for YE-22. At December 31, 2021, the CDN$ to US$ exchange rate was slightly lower as compared to the CDN$ to US$ exchange rate at December 31, 2020, resulting in the corresponding foreign exchange loss for YE-21.
The Company does not currently enter into hedging contracts, but does however use alternative strategies to reduce the volatility of US dollar assets including converting excess US dollars to CDN dollars.
| NXT Energy Solutions Inc. | page | 12 |
| MD&A for the year ended December 31, 2022 |
|
IP and other. This category of other expenses primarily includes costs related to IP filings and research & development activity related to the SFD® technology.
In Q4-22 and YE-22, the Company’s IP and other expenses were associated with periodic patent maintenance and renewal fees required during these time periods.
Loss on disposal of assets & lease modifications. In Q1-22, the Company surrendered 826 square feet of office space. As a result of the space surrender, the Company recorded a loss on disposal of leasehold improvement assets and lease modifications.
Income Tax Expense
There was no income tax expense in YE-22 or YE-21.
Competition
Our SFD® airborne survey service is based upon a proprietary technology, which is capable of remotely identifying, from a survey aircraft, subsurface anomalies associated with potential hydrocarbon traps with a resolution that we believe is technically superior to other airborne survey systems. To our knowledge, there is no other company employing technology comparable to our SFD® survey system for oil and natural gas and geothermal exploration.
Seismic is the standard technology used by the oil and gas industry to image subsurface structures. It is our view that the SFD® survey system is highly complementary to seismic analysis. Our system may reduce the need for seismic in wide‑area reconnaissance but will not replace the role of seismic in verifying structure, closure, and selecting drilling locations. The seismic industry is very competitive with many international and regional service providers.
The SFD® system can be used as a focusing tool for seismic. With a SFD® survey, a large tract (i.e. over 5,000 square kilometers) of land can be evaluated quickly to identify locations with indications of reservoir potential. Seismic surveys, although effective in identifying these locations, are much more expensive, require significantly more time, and impose a much greater negative impact on local communities and the environment. A SFD® survey deployed first can provide necessary information to target a seismic program over a limited area of locations selected by SFD®. This approach can result in a more effective seismic program and reduce the overall cost, time, community resistance, and environmental impact required to locate and qualify a prospect.
The energy industry uses other technologies for wide area oil and natural gas reconnaissance exploration, such as aeromagnetic and gravity surveys. These systems can provide regional geological information, such as basement depth, sedimentary thickness and major faulting, and structural development.
| NXT Energy Solutions Inc. | page | 13 |
| MD&A for the year ended December 31, 2022 |
|
Risk and Uncertainties
Hydrocarbon and geothermal exploration operations involve a number of risks and uncertainties that have affected our audited consolidated financial statements and are reasonably likely to affect them in the future. These risks and uncertainties are discussed further below.
Development, Commercialization, and Protection of the Geothermal Right
With the acquisition of the Geothermal Right, the Company will continue to refine and develop the SFD® survey system to commercialize the Geothermal Right. This development requires substantial time and resources, and continued government assistance is not guaranteed. Furthermore, even if resources are available, there can be no assurance that the Company will be commercially or technically successful in enhancing the technology. If we are unable to develop and commercialize the geothermal applications of SFD® technologies, or adapt to evolving industry standards and demands, these could have a material adverse effect on our business, financial condition, and results of operations.
Debt Service
NXT may finance a significant portion of its operations through debt. Amounts paid in respect of interest and principal on debt incurred by NXT may impair NXT’s ability to satisfy its other obligations. Variations in interest rates and scheduled principal repayments could result in significant changes in the amount required to be applied to debt service before payment by NXT of its debt obligations. Lenders may be provided with security over substantially all of the assets of NXT. If NXT becomes unable to pay its debt service charges or otherwise commits an event of default such as bankruptcy, a lender may be able to foreclose on or sell the assets of NXT.
Credit Risk
Credit risk arises from the potential that the Company may incur a loss if a counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms. The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable. The carrying value of cash and cash equivalents, short-term investments, and accounts receivable reflect management’s assessment of credit risk.
At December 31, 2022, cash and cash equivalents included balances in bank accounts placed with financial institutions with investment-grade credit ratings. The Company manages accounts receivable credit risk by requiring advance payments before entering into certain contract milestones and when possible, accounts receivable insurance.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk in relation to its holding of significant US$ balances in cash and cash equivalents, accounts receivable, deposits, accounts payables, accrued liabilities and lease obligations, and entering into United States dollar revenue contracts. The Company does not currently enter into hedging contracts, but to mitigate exposure to fluctuations in foreign exchange, the Company uses strategies to reduce the volatility of United States dollar assets including converting excess United States dollars to Canadian dollars. As at December 31, 2022, the Company held net U.S. dollar liabilities totaling US$231,161. Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2022 would have had an approximately $31,327 effect on the unrealized foreign exchange gain or loss for the period.
| NXT Energy Solutions Inc. | page | 14 |
| MD&A for the year ended December 31, 2022 |
|
Interest Rates
We periodically invest available cash in short-term investments that generate interest income that will be affected by any change in interest rates.
Tax Rates
Changes in tax rates in the jurisdictions that we operate in would impact the amount of current taxes that we pay. In addition, changes to substantively enacted tax rates would impact the carrying balance of deferred tax assets and liabilities, potentially resulting in a deferred tax recovery or incremental deferred tax expense.
In addition to the above, we are exposed to risk factors that may impact the Company and our business. For further information on these risk factors, please refer to our Annual Information Form, available on NXT’s website at www.nxtenergy.com and on SEDAR at www.sedar.com.
Summary of Quarterly Results
A summary of operating results for each of the trailing eight quarters (including a comparison of certain key categories to each respective prior quarter) follows:
|
|
| Q4-22 |
|
| Q3-22 |
|
| Q2-22 |
|
| Q1-22 |
| ||||
| SFD®-related revenue |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| Net loss |
|
| (1,469,549 | ) |
|
| (1,647,988 | ) |
|
| (1,774,671 | ) |
|
| (1,840,868 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss per share – basic |
| $ | (0.02 | ) |
| $ | (0.03 | ) |
| $ | (0.03 | ) |
| $ | (0.03 | ) |
| Loss per share – diluted |
| $ | (0.02 | ) |
| $ | (0.03 | ) |
| $ | (0.03 | ) |
| $ | (0.03 | ) |
|
|
| Q4-21 |
|
| Q3-21 |
|
| Q2-21 |
|
| Q1-21 |
| ||||
| SFD®-related revenue |
| $ | (10,123 | ) |
| $ | - |
|
| $ | 3,144,373 |
|
| $ | - |
|
| Net income (loss) |
|
| (1,573,587 | ) |
|
| (1,434,442 | ) |
|
| 1,531,522 |
|
|
| (1,647,292 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) per share – basic |
| $ | (0.02 | ) |
| $ | (0.02 | ) |
| $ | 0.02 |
|
| $ | (0.03 | ) |
| Income (loss) per share – diluted |
| $ | (0.02 | ) |
| $ | (0.02 | ) |
| $ | 0.02 |
|
| $ | (0.03 | ) |
| NXT Energy Solutions Inc. | page | 15 |
| MD&A for the year ended December 31, 2022 |
|
During Q4-22 costs were reduced primarily due to lower vacation and SBCE. In Q3-22 the Company incurred lower SFD®-related costs as the aircraft had early completed its required maintenance. In Q2-22 the Company recorded unrealized foreign exchange gains as the CDN$ weakened versus the US$. In Q1-22, the Company incurred maintenance fees on its aircraft to have it available for up to 300 flight hours. In Q4-21, the CEWS and the CERS programs were ended therefore increasing G&A costs. In Q3-21, the Company recorded favourable exchange gains due to the strengthening of the US$. In Q2-21, revenue was recognized for a Pre-existing SFD® Data Sale. In Q1-21, costs were lower due to lower aircraft costs, a reduction in RSU accruals, and less fluctuation of exchange rates. Excluding Q2-21, the Company incurred net losses primarily due to incurred SFD®-related costs related to aircraft lease and aircraft maintenance costs, G&A expenses, and non-cash items like SBCE, which can be a significant expense in any given quarter. More specific details are provided below:
|
| · | in Q4-22, costs were reduced primarily due to lower vacation and SBCE; |
|
| · | in Q3-22, costs were reduced primarily due to lower SFD®-related costs offset partially by higher business development costs; |
|
| · | in Q2-22, the Company recorded unrealized foreign exchange gains as the CDN$ weakened versus the US$; |
|
| · | in Q1-22, the Company incurred maintenance fees on the leased aircraft to have it available for up to 300 flight hours; |
|
| · | in Q4-21, the Company received grants from the CEWS and CERS for only one month due to the termination of these programs; |
|
| · | in Q3-21, the US$ strengthened vs the CDN$, which resulted in a $102,632 exchange gain; |
|
| · | in Q2-21, revenue was earned for the Pre-existing SFD® Data Sale and costs were lower due to receipt of the CEWS and the CERS. Additionally there was no business development travel due to restrictions from the COVID-19 pandemic; and |
|
| · | in Q1-21, costs were lower due to lower aircraft costs, a reduction in RSU accruals, and less fluctuation of exchange rates. |
Liquidity and Capital Resources
Going Concern
The audited consolidated financial statements for YE-22 have been prepared on a going concern basis. The going concern basis of presentation assumes that NXT will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The events described in the following paragraphs highlight that there is substantial doubt about NXT’s ability to continue as a going concern within one year after the date that these consolidated financial statements have been issued. The Company’s current cash position is not expected to be sufficient to meet the Company’s obligations and planned operations for a year beyond the date that these consolidated financial statements have been issued.
The Company continues to defer payment of operating costs, including payroll and other general and administrative costs. Subsequent to December 31, 2022, the Company completed a private placement which resulted in raising an additional net proceeds of $1,658,280. Further financing options that may or may not be available to the Company include issuance of new equity, debentures or bank credit facilities. The need for any of these options will be dependent on the timing of securing new SFD®-related revenues and obtaining financing on terms that are acceptable to both the Company and the financier.
| NXT Energy Solutions Inc. | page | 16 |
| MD&A for the year ended December 31, 2022 |
|
NXT continues to develop its pipeline of opportunities to secure new revenue contracts. However, the Company’s longer-term success remains dependent upon its ability to convert these opportunities into successful contracts, to continue to attract new client projects, expand its revenue base to a level sufficient to exceed fixed operating costs, and generate consistent positive cash flow from operations. The occurrence and timing of these events cannot be predicted with sufficient certainty.
The audited consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for the audited consolidated financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. These adjustments could be material.
NXT’s cash and cash equivalents at December 31, 2022 totaled $0.263 million. Net working capital totaled $(1.691) million. See the information in the section “Liquidity and Capital Resources – Net Working Capital” for further information.
Risks related to having sufficient ongoing net working capital to execute survey project contracts are mitigated through our normal practice of obtaining advance payments and progress payments from customers throughout the course of the projects, which often span three to four months. In addition, where possible, risk of default on client billings has been mitigated through the use of export insurance programs offered by Export Development Canada.
The Company does not have provisions in its leases, contracts, or other arrangements that would trigger additional funding requirements or early payments except that if the Company were to default on its office lease, the current month rent, plus the next three months, become immediately due. If the Company were to default on the aircraft lease, the Company would be required to deliver the aircraft back to the Lessor.
Net Working Capital (Non-GAAP Measure)
| Net Working Capital |
| December 31, 2022 |
|
| December 31, 2021 |
|
| Net Change |
|
| % |
| ||||
| Current assets (current liabilities) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Cash, cash equivalents and short-term investments |
| $ | 263,437 |
|
| $ | 2,807,855 |
|
| $ | (2,544,418 | ) |
|
| (91 | ) |
| Accounts receivable |
|
| 57,065 |
|
|
| 841,567 |
|
|
| (784,502 | ) |
|
| (93 | ) |
| Prepaid expenses and deposits |
|
| 36,157 |
|
|
| 265,436 |
|
|
| (229,279 | ) |
|
| (86 | ) |
| Accounts payable and accrued liabilities |
|
| (1,276,236 | ) |
|
| (500,625 | ) |
|
| (775,611 | ) |
|
| (155 | ) |
| Current portion of long-term debt |
|
| (111,111 | ) |
|
| (64,815 | ) |
|
| (46,296 | ) |
|
| (71 | ) |
| Current portion of lease obligation |
|
| (650,315 | ) |
|
| (532,936 | ) |
|
| (117,379 | ) |
|
| (22 | ) |
| Total Net Working Capital |
|
| (1,681,003 | ) |
|
| 2,816,482 |
|
|
| (4,497,485 | ) |
|
| (160 | ) |
NXT had net working capital of $(1,681,003) as at December 31, 2022.
| NXT Energy Solutions Inc. | page | 17 |
| MD&A for the year ended December 31, 2022 |
|
Net working capital at December 31, 2022 compared to December 31, 2021 decreased by $4,497,485, or 160%, due to cash used in operating activities, offset by cash received from payments on accounts receivable. Accounts payable increased due to annual timing of professional fees, payroll accruals, and the deferral of payments of various G&A costs.
Accounts Payable
| Accounts Payable |
| December 31, 2022 |
|
| December 31, 2021 |
|
| Net Change |
|
| % |
| ||||
| Trade accounts payable |
| $ | (270,956 | ) |
| $ | (122,935 | ) |
| $ | (148,021 | ) |
|
| (120 | ) |
| Deferred advisor board payable |
|
| (25,410 | ) |
|
| (23,896 | ) |
|
| (1,514 | ) |
|
| (6 | ) |
| Accrued liabilities |
|
| (357,457 | ) |
|
| (171,714 | ) |
|
| (185,743 | ) |
|
| (108 | ) |
| Accrued directors fees payable |
|
| (162,500 | ) |
|
| - |
|
|
| (162,500 | ) |
|
| (100 | ) |
| Salaries payable |
|
| (363,594 | ) |
|
| - |
|
|
| (363,594 | ) |
|
| (100 | ) |
| Vacation pay accrued |
|
| (62,413 | ) |
|
| (102,536 | ) |
|
| 40,123 |
|
|
| 39 |
|
| RSU and ESP Plan liability |
|
| (33,906 | ) |
|
| (79,544 | ) |
|
| 45,638 |
|
|
| 57 |
|
| Total accounts payable |
|
| (1,276,236 | ) |
|
| (500,625 | ) |
|
| (775,611 | ) |
|
| (155 | ) |
Accounts payable increased by $775,611 or 155%, as at December 31, 2022 compared to December 31, 2021 for the following reasons:
|
| · | trade accounts payable increased by $148,021, or 120%, due to timing of payables at the stated dates and deferring of payments; |
|
| · | accrued liabilities increased by $185,743, or 108%, due to timing of annual professional fees and deferring payments; |
|
| · | accrued directors fees payable increased by $162,500, or 100%, as payment of directors’ fees were deferred; |
|
| · | salaries payable increased by $363,594, or 100%, as the Company has implemented a salary deferral program; |
|
| · | vacation pay accrued decreased by $40,123, or 39%, due to improved management of vacations; and |
|
| · | RSU Plan and ESP Plan liabilities decreased by $45,638 or 57% due to the lower NXT share price at December 31, 2022 versus December 31, 2021. |
| NXT Energy Solutions Inc. | page | 18 |
| MD&A for the year ended December 31, 2022 |
|
Cash Flow
| Cash Flow - from / (used in) |
| Q4-22 |
|
| Q4-21 |
|
| YE-22 |
|
| YE-21 |
| ||||
| Operating activities |
| $ | (704,187 | ) |
| $ | 75,612 |
|
| $ | (2,934,003 | ) |
| $ | (1,033,173 | ) |
| Financing activities |
|
| 413,790 |
|
|
| (66,289 | ) |
|
| 389,217 |
|
|
| 875,428 |
|
| Investing activities |
|
| - |
|
|
| (186,245 | ) |
|
| 550,000 |
|
|
| (274,049 | ) |
| Effect of foreign exchange changes on cash |
|
| (20,008 | ) |
|
| (2,175 | ) |
|
| 368 |
|
|
| (497 | ) |
| Net use of cash |
|
| (310,405 | ) |
|
| (179,097 | ) |
|
| (1,994,418 | ) |
|
| (432,291 | ) |
| Cash and cash equivalents, start of period |
|
| 573,842 |
|
|
| 2,436,952 |
|
|
| 2,257,855 |
|
|
| 2,690,146 |
|
| Cash and cash equivalents, end of period |
|
| 263,437 |
|
|
| 2,257,855 |
|
|
| 263,437 |
|
|
| 2,257,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents, end of period |
|
| 263,437 |
|
|
| 2,257,855 |
|
|
| 263,437 |
|
|
| 2,257,855 |
|
| Short-term investments, end of period |
|
| - |
|
|
| 550,000 |
|
|
| - |
|
|
| 550,000 |
|
| Total cash and short-term investments, end of period |
|
| 263,437 |
|
|
| 2,807,855 |
|
|
| 263,437 |
|
|
| 2,807,855 |
|
The overall net changes in cash balances in each of the periods noted above is a function of several factors including any inflows (outflows) due to changes in net working capital balances and net of any cash transferred into/out of short-term investments. Further information on the net changes in cash, by each of the operating, financing, and investing activities, is as follows:
| Operating Activities |
| Q4-22 |
|
| Q4-21 |
|
| YE-22 |
|
| YE-21 |
| ||||
| Net loss for the period |
| $ | (1,469,549 | ) |
| $ | (1,573,587 | ) |
| $ | (6,733,076 | ) |
| $ | (3,123,799 | ) |
| Total non-cash expense and lease items |
|
| 510,165 |
|
|
| 562,568 |
|
|
| 2,043,966 |
|
|
| 2,076,909 |
|
| Operating activities before change in non-cash working capital balances |
|
| (959,384 | ) |
|
| (1,011,019 | ) |
|
| (4,689,110 | ) |
|
| (1,046,890 | ) |
| Change in non-cash working capital balances |
|
| 255,196 |
|
|
| 1,086,631 |
|
|
| 1,755,107 |
|
|
| 13,717 |
|
| Total cash from (used) in operating activities |
|
| (704,188 | ) |
|
| 75,612 |
|
|
| (2,934,003 | ) |
|
| (1,033,173 | ) |
Operating cash flow decreased by $779,799 in Q4-22 as compared to Q4-21 due to the receipt of payments for outstanding accounts receivable in Q4-21 of US$750,000 (CDN$950,168). There were no receipts in Q4-22.
Operating cash flow decreased by $1,900,830 in YE-22 as compared to YE-21 due larger payments for outstanding accounts receivable in YE-21 for the Pre-existing SFD® Data Sale versus YE-22 and increased G&A costs during YE-22.
| NXT Energy Solutions Inc. | page | 19 |
| MD&A for the year ended December 31, 2022 |
|
| Financing Activities |
| Q4-22 |
|
| Q4-21 |
|
| YE-22 |
|
| YE-21 |
| ||||
| Proceeds from (repayment of) long-term debt |
| $ | (27,778 | ) |
| $ | - |
|
| $ | (64,815 | ) |
| $ | 1,000,000 |
|
| Proceeds from the employee share purchase plan |
|
| 9,324 |
|
|
| 16,505 |
|
|
| 49,738 |
|
|
| 69,259 |
|
| Net proceeds from Rights Offering |
|
| 216,062 |
|
|
| - |
|
|
| 216,062 |
|
|
| - |
|
| Net proceeds from Private Placement |
|
| 216,182 |
|
|
| - |
|
|
| 216,182 |
|
|
| - |
|
| Repayment of financial liability |
|
| - |
|
|
| (40,097 | ) |
|
| (27,950 | ) |
|
| (151,134 | ) |
| Share issuance costs for Geothermal Right |
|
| - |
|
|
| (42,697 | ) |
|
| - |
|
|
| (42,697 | ) |
| Total cash from (used in) financing activities |
|
| 413,790 |
|
|
| (66,289 | ) |
|
| 389,217 |
|
|
| 875,428 |
|
The Company began to repay its HASCAP Loan (as defined below) at the beginning of Q3-22. Proceeds were received from employee contributions under the ESP Plan, but at a lower rate due to the salary deferral. The repayment of financial liability was for the sales and leaseback agreement on NXT’s aircraft which ended in Q1-22.
In Q4-22 net proceeds from the Offerings were $432,244. Please see the sections “Rights Offering” and “Private Placement” for a discussion on the Offering.
| Investing Activities |
| Q4-22 |
|
| Q4-21 |
|
| YE-22 |
|
| YE-21 |
| ||||
| Acquisition of intellectual property |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | (65,310 | ) |
| Proceeds from (used in) short-term investments |
|
| - |
|
|
| (186,245 | ) |
|
| 550,000 |
|
|
| (208,739 | ) |
| Total Cash from (used in) Investing Activities |
|
| - |
|
|
| (186,245 | ) |
|
| 550,000 |
|
|
| (274,049 | ) |
Changes in short-term investments were for investments in guaranteed investment certificates to fund operations and investing of excess short-term cash. Please see the section “Acquisition of the Geothermal Right” for a discussion on the Acquisition of intellectual property.
Contractual Obligations
Leases
The estimated minimum annual commitments for the Company’s lease components as at December 31, 2022 are listed in the following table:
| Lease payment obligations: |
| Total |
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| 2026 |
| |||||
| Office |
| $ | 969,048 |
|
| $ | 371,472 |
|
| $ | 341,472 |
|
| $ | 256,104 |
|
| $ | - |
|
| Office operating costs |
|
| 619,451 |
|
|
| 225,255 |
|
|
| 225,255 |
|
|
| 168,941 |
|
|
| - |
|
| Aircraft lease1 |
|
| 403,850 |
|
|
| 365,904 |
|
|
| 37,946 |
|
|
| - |
|
|
| - |
|
| Office equipment |
|
| 13,412 |
|
|
| 3,424 |
|
|
| 3,424 |
|
|
| 3,424 |
|
|
| 3,140 |
|
| Total |
|
| 2,005,761 |
|
|
| 966,055 |
|
|
| 608,097 |
|
|
| 428,469 |
|
|
| 3,140 |
|
1. US$ payments have been converted to CDN$ at a rate of 1.3552.
| NXT Energy Solutions Inc. | page | 20 |
| MD&A for the year ended December 31, 2022 |
|
Long-term Debt (HASCAP Loan)
On May 26, 2021, the Company received $1,000,000 from the BDC’s HASCAP Loan. The HASCAP Loan is a $1,000,000 non-revolving ten-year term credit facility with an interest rate of 4%. Repayment terms were interest only until May 26, 2022, and monthly principal plus interest payments for the remaining nine years. The HASCAP Loan is secured by a general security agreement and is guaranteed by BDC.
| Repayment of long-term debt principal and interest: |
|
|
| |
| 2023 |
|
| 146,481 |
|
| 2024 |
|
| 142,037 |
|
| 2025 |
|
| 137,593 |
|
| 2026 |
|
| 133,148 |
|
| 2027 |
|
| 128,704 |
|
| 2028 to 2031 |
|
| 406,204 |
|
| Total principal and interest payments |
|
| 1,094,167 |
|
| Less interest |
|
| (158,982 | ) |
| Total principal remaining |
|
| 935,185 |
|
| Current portion of long-term debt |
|
| 111,111 |
|
| Non-current portion of long-term debt |
|
| 824,074 |
|
Rights Offering
On December 2, 2022, NXT closed the Rights Offering that had been announced on October 31, 2022. The Company issued 2,149,180 common shares a price of $0.18 per common share, for aggregate gross proceeds of $386,852. Share issue costs of $170,790 were recorded as a reduction to share capital.
Shareholders of record on November 7, 2022 received one right (a “Right”) for each common share held. 2.95 Rights entitles the holder to purchase one common share of the Company at a price of $0.18 per Common Share.
Private Placement
On December 22 the Company announced a multi-tranche private placement (the “Private Placement”) at $0.195 per share. At December 22, 2022 the Company issued 1,148,282 common shares for gross proceeds of $223,915 in the first tranche, less issuance costs of $7,732.
January 25, 2023, the Company closed the Private Placement by issuing an additional 8,510,000 common shares, at $0.195 per common shares, for additional aggregate gross proceeds of approximately $1,659,450, less issuance costs of $1,170.
The proceeds from both Offerings are being used to commence SFD® surveys, and for general and administrative costs.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as of the date of this MD&A other than office premise non-lease operating costs with the Landlord. If the Company were to default on its office lease, the current month rent including operation costs plus the next three months become immediately due. Operating cost amounts are disclosed in the section “Liquidity and Capital Resources – Contractual Obligations.” NXT pays an estimated operating cost during the current year, but has the obligation to pay the actual operating costs incurred as defined in the office lease with the Landlord early in the first quarter of the preceding year if the estimate was low, or will receive a refund if the estimate was too high. Currently, the Company believes that the current operating cost estimate is reasonable and is consistent with discussions with the Landlord.
| NXT Energy Solutions Inc. | page | 21 |
| MD&A for the year ended December 31, 2022 |
|
Transactions with Related Parties
Related party fees incurred were as follows:
|
|
| Q4-22 |
|
| Q4-21 |
|
| YE-22 |
|
| YE-21 |
| ||||
| Legal fees |
| $ | 46,508 |
|
| $ | 20,117 |
|
| $ | 92,308 |
|
| $ | 85,815 |
|
| Design services1 |
|
| - |
|
|
| - |
|
|
| - |
|
| $ | 4,013 |
|
1. US$3,000.
One of the members of NXT’s Board is a partner in a law firm which provides legal advice to NXT. Accounts payable and accrued liabilities includes a total of $76,843 ($16,000 as at December 31, 2021) payable to this law firm.
Accounts payable and accrued liabilities includes $nil ($11,467 as at December 31, 2021) related to reimbursement of expenses owing to an executive officer and $162,500 ($nil as at December 31, 2021) for the Board’s fees.
A company owned by a family member of an executive officer was contracted to provide presentation design services to the Company during 2021.
The Geothermal Right was acquired from the Company’s former CEO on April 18, 2021.
Critical Accounting Estimates
In preparing the audited consolidated financial statements, NXT is required to make estimates and assumptions that affect both the amount and timing of recording assets, liabilities, revenues, and expenses since the determination of these items may be dependent on future events. The Company uses the most current information available and exercises careful judgment in making these estimates and assumptions. In the opinion of management, the audited consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the Company’s significant accounting policies. The estimates and assumptions used are based upon management’s best estimate as at the date of the audited consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period when determined. Actual results may differ from those estimates.
Certain estimates and judgments have a material impact where the assumptions underlying these accounting estimates relate to matters that are highly uncertain at the time the estimate or judgment is made or are subjective. In 2022 and 2021, the estimates and judgments included the assessment of impairment indicators of intellectual property.
| NXT Energy Solutions Inc. | page | 22 |
| MD&A for the year ended December 31, 2022 |
|
The Company reviews intellectual property for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company considers both internal and external factors when assessing for potential indicators of impairment of its intellectual property, including the consideration of historical and forecasted SFD® related revenues, market capitalization, control premiums, and the SFD® related revenue multiples compared to industry peers. When indicators of impairment exist, the Company first compares the total of the estimated undiscounted future cash flows or the estimated sale price to the carrying value of an asset. If the carrying value exceeds these amounts, an impairment loss is recognized for the excess of the carrying value over the estimated fair value of the intellectual property.
Changes in Accounting Policies
The audited consolidated financial statements of NXT for YE-22 have been prepared by management in accordance with US GAAP. The Company has consistently used US GAAP for the eight most recently completed quarters. The accounting policies applied are consistent with those outlined in NXT’s annual audited consolidated financial statements for the year ended December 31, 2022, available on NXT’s website at www.nxtenergy.com and on SEDAR at www.sedar.com.
New Standard Effective During YE-22
Disclosures by Business Entities about Government Assistance: In June 2021 the Financial Accounting Standards Board issued new guidance that increases the transparency of government assistance including the disclosure of the types of assistance, and entity’s accounting for the assistance, and the effect of the assistance on an entity’s financial statements. The new guidance is effective for annual periods beginning after December 15, 2021. The Company adopted ASU 2021-10 on January 1, 2022. Adoption of ASU 2021-10 did not have a material impact on the Company’s financial statements.
Financial Instruments and Other Instruments
The Company’s non-derivative financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, long-term debt and lease obligations. The carrying value of these financial instruments approximates their fair values due to their short terms to maturity. NXT is not exposed to significant interest arising from these financial instruments, but is exposed to significant credit risk with accounts receivable. For accounts receivable, where possible, NXT requests advance payments and utilizes risk mitigation products offered by entities such as Export Development Canada including, for example, insurance coverage of contract accounts receivable, guarantee support for contract performance bonds, and wrongful call insurance for such bonds.
| NXT Energy Solutions Inc. | page | 23 |
| MD&A for the year ended December 31, 2022 |
|
NXT is exposed to foreign exchange risk as a result of holding foreign denominated financial instruments. Any unrealized foreign exchange gains and losses arising on such holdings are reflected in earnings at the end of each period.
As at December 31, 2022 and December 31, 2021, the Company held no derivative financial instruments. For more information relating to risks, see the section titled “Liquidity and Capital Resources – Net Working Capital”.
Outstanding Share Capital
|
|
| March 31, 2023 |
|
| December 31, 2022 |
|
| December 31, 2021 |
| |||
| Common Shares |
|
| 77,599,131 |
|
|
| 68,949,109 |
|
|
| 65,250,710 |
|
| Options |
|
| 2,696,370 |
|
|
| 461,320 |
|
|
| 358,660 |
|
| Deferred Share Units |
|
| 37,354 |
|
|
| 37,354 |
|
|
| 37,354 |
|
| Restricted Share Units |
|
| 296,668 |
|
|
| 348,334 |
|
|
| 696,666 |
|
| Total share capital and dilutive securities |
|
| 80,629,523 |
|
|
| 69,796,117 |
|
|
| 66,343,390 |
|
Current Director & Officer Share Capital
|
|
| March 31, 2023 |
|
| December 31, 2022 |
|
| December 31, 2021 |
| |||
| Charles Selby 1 |
|
| 408,161 |
|
|
| 408,161 |
|
|
| 408,161 |
|
| Gerry Sheehan 1 |
|
| 77,000 |
|
|
| 77,000 |
|
|
| - |
|
| John Tilson 1 |
|
| 6,887,490 |
|
|
| 6,887,490 |
|
|
| 5,916,208 |
|
| Bruce G. Wilcox 1 |
|
| 500,005 |
|
|
| 500,005 |
|
|
| 410,000 |
|
| Eugene Woychyshyn 2 |
|
| 553,723 |
|
|
| 514,937 |
|
|
| 185,445 |
|
| Total Director and Officer Share Capital |
|
| 8,426,379 |
|
|
| 8,387,593 |
|
|
| 6,919,814 |
|
| 1 Director of NXT |
| 2 Officer of NXT |
Disclosure Controls and Procedures (“DCPs”) and
Internal Controls over Financial Reporting (“ICFR”)
NXT’s members of the Management Committee of the Board of Directors and Chief Financial Officer (“CFO”) (together the “Responsible Officers”) are responsible for establishing and maintaining DCPs, or causing them to be designed under their supervision, for NXT to provide reasonable assurance that material information relating to the Company is made known to the Responsible Officers by others within the organization, particularly during the period in which the Company’s year-end consolidated financial statements and MD&A are being prepared.
DCPs and other procedures are designed to ensure that information required to be disclosed in reports that are filed is recorded, summarized, and reported within the time periods specified by the relevant securities regulatory authorities in either Canada or the United States of America. DCPs include controls and procedures designed to ensure that information required to be disclosed in our reports is communicated to management, including our Responsible Officers, to allow timely decisions regarding required disclosure.
| NXT Energy Solutions Inc. | page | 24 |
| MD&A for the year ended December 31, 2022 |
|
The Company has established and maintains ICFR using the criteria that were set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). The control framework was designed or caused to be designed under the supervision of the Responsible Officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP.
In evaluating the effectiveness of the Company’s DCPs, as defined under the rules adopted by the Canadian securities regulatory authorities and by the United States Securities and Exchange Commission, the Company’s Responsible Officers concluded that there are material weaknesses in the Company’s ICFR that have a direct impact on the Company’s DCPs:
|
| · | due to the limited number of staff, it is not feasible to achieve adequate segregation of incompatible duties. NXT partially mitigates this deficiency by adding management and Audit Committee review procedures over the areas where inadequate segregation of duties are of the greatest concern; and |
|
|
|
|
|
| · | NXT does not have a sufficient level of staff with specialized expertise to adequately conduct separate preparation and a subsequent independent review of certain complex or highly judgmental accounting issues. NXT partially mitigates this deficiency by preparing financial statements with their best judgments and estimates of the complex accounting matters, and relies on reviews by management, external consultants, and the Audit Committee. |
From time to time, to reduce these risks and to supplement a small corporate finance function, the Company engages various outside experts and advisors to assist with various accounting, controls, and tax issues in the normal course.
Given the small size of the Company’s finance team, management has established a practice of increased engagement of the Company’s Disclosure Committee and Audit Committee in reviewing the public disclosure and has increased the engagement of external consultants and legal counsel as well.
The Responsible Officers concluded that, as at December 31, 2022, its ICFR is not effective and as a result, its DCPs are not effective. NXT reached this conclusion based upon its assessment that there is a more than remote likelihood that its ICFR will not prevent or detect material misstatements if they should exist in the Company’s consolidated financial statements. The Responsible Officers continue to take certain actions to mitigate these material weaknesses including:
|
| · | the implementation of controls with regards to the review procedures surrounding its disclosure; and |
|
| · | engagement of third party specialists. |
In addition, the CFO engages subject matter consultants as the need arises.
There were no changes to the Company’s ICFR in Q4-22.
| NXT Energy Solutions Inc. | page | 25 |
| MD&A for the year ended December 31, 2022 |
|
It should be noted that a control system, including the Company’s DCPs and ICFR, no matter how well conceived, can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met, and it should not be expected that the DCPs and ICFR will prevent all errors or fraud.
Additional Information
Additional information related to the Company, including the Company’s Annual Information Form, is available on NXT’s website at www.nxtenergy.com and on SEDAR at www.sedar.com.
| NXT Energy Solutions Inc. | page | 26 |
| MD&A for the year ended December 31, 2022 |
|
EXHIBIT 99.3
NXT ENERGY SOLUTIONS INC.
ANNUAL INFORMATION FORM
FOR THE YEAR ENDED 31 DECEMBER 2022
March 31, 2023
Table of Contents
| 1 | ADVISORIES |
| 1 |
|
|
|
|
|
|
|
| 2 | CORPORATE STRUCTURE |
| 2 |
|
|
|
|
|
|
|
| 2.1 | COMPANY INFORMATION. |
| 2 |
|
| 2.2 | INTERCORPORATE RELATIONSHIPS |
| 2 |
|
|
|
|
|
|
|
| 3 | GENERAL DEVELOPMENT OF THE BUSINESS |
| 3 |
|
|
|
|
|
|
|
| 3.1 | THREE YEAR HISTORY. |
| 3 |
|
| (a) | 2020 |
| 3 |
|
| (b) | 2021 |
| 4 |
|
| (c) | 2022 |
| 6 |
|
| 3.2 | OUTLOOK. |
| 6 |
|
|
|
|
|
|
|
| 4 | BUSINESS OVERVIEW |
| 7 |
|
|
|
|
|
|
|
| 4.1 | COMPANY'S OPERATIONS AND PRINCIPAL ACTIVITIES |
| 7 |
|
| 4.2 | SEASONALITY OF THE COMPANY'S BUSINESS |
| 8 |
|
| 4.3 | SOURCES AND AVAILABILITY OF RAW MATERIALS AND EQUIPMENT |
| 8 |
|
| 4.4 | MARKETING CHANNELS |
| 9 |
|
| 4.5 | EMPLOYEES |
| 9 |
|
| 4.6 | PATENTS |
| 10 |
|
| 4.7 | COMPETITION |
| 10 |
|
| 4.8 | GOVERNMENT AND ENVIRONMENTAL REGULATION |
| 11 |
|
| 4.9 | PROPERTY, PLANT AND EQUIPMENT |
| 11 |
|
| (a) | Facilities / Office Premises |
| 11 |
|
| (b) | Equipment |
| 11 |
|
| (c) | Oil and Gas Properties |
| 12 |
|
|
|
|
|
|
|
| 5 | RISK FACTORS |
| 12 |
|
|
|
|
|
|
|
| 5.1 | FUTURE OPERATIONS |
| 12 |
|
| 5.2 | FINANCIAL STATEMENTS |
| 13 |
|
| 5.3 | COMMODITY PRICES |
| 13 |
|
| 5.4 | FOREIGN CURRENCY FLUCTUATIONS |
| 13 |
|
| 5.5 | DEBT SERVICE |
| 14 |
|
| 5.6 | INTEREST RATE FLUCTUATIONS |
| 14 |
|
| 5.7 | AVAILABILITY OF AIRCRAFT |
| 14 |
|
| 5.8 | SEGREGATION OF DUTIES |
| 15 |
|
| 5.9 | RELATED PARTY TRANSACTIONS |
| 15 |
|
| 5.10 | RIGHTS TO SFD® TECHNOLOGY |
| 15 |
|
| 5.11 | RELIANCE ON SPECIALIZED EQUIPMENT |
| 15 |
|
| 5.12 | GEOLOGICAL CONDITIONS |
| 16 |
|
| 5.13 | TECHNOLOGICAL IMPROVEMENT |
| 16 |
|
| 5.14 | RELIANCE ON KEY PERSONNEL |
| 16 |
|
| 5.15 | CYBER SECURITY. |
| 17 |
|
| 5.16 | ABILITY TO TRADE SHARES |
| 17 |
|
| 5.17 | DILUTION. |
| 17 |
|
| 5.18 | INTELLECTUAL PROPERTY |
| 18 |
|
| 5.19 | FLIGHT OPERATIONS |
| 19 |
|
| 5.20 | FOREIGN COUNTRIES |
| 19 |
|
| A) | CRIMINAL ACTIVITY AND SOCIAL INSTABILITY. |
| 19 |
|
| B) | POLITICAL INSTABILITY. |
| 20 |
|
| C) | COMMERCIAL DISPUTES |
| 20 |
|
| D) | CORRUPTION AND BRIBERY. |
| 20 |
|
| 5.21 | FLIGHT PERMITS |
| 20 |
|
| 5.22 | CREDIT RISK. |
| 21 |
|
| 5.23 | TAX MATTERS |
| 21 |
|
| 5.24 | OCCURRENCE OF NATURAL DISASTERS, EPIDEMICS OR OTHER EVENTS |
| 22 |
|
|
|
|
|
|
|
| 6 | DIVIDEND POLICY |
| 22 |
|
|
|
|
|
|
|
| 7 | CAPITAL STRUCTURE |
| 22 |
|
|
|
|
|
|
|
| 7.1 | COMMON SHARES |
| 22 |
|
| 7.2 | PREFERRED SHARES |
| 23 |
|
|
|
|
|
|
|
| 8 | MARKET FOR SECURITIES |
| 23 |
|
|
|
|
|
|
|
| 9 | ESCROWED AND RESTRICTED SECURITIES |
| 23 |
|
|
|
|
|
|
|
| 10 | DIRECTORS AND OFFICERS |
| 23 |
|
|
|
|
|
|
|
| 10.1 | CEASE TRADE ORDERS, BANKRUPTCIES, PENALTIES OR SANCTIONS |
| 27 |
|
| 10.2 | BOARD PRACTICES |
| 28 |
|
| (a) | Expiration Dates |
| 28 |
|
| (b) | Service Contracts |
| 28 |
|
| (c) | Board of Directors Mandate |
| 28 |
|
| 10.3 | BOARD COMMITTEES |
| 28 |
|
| (a) | Corporate Governance Committee |
| 28 |
|
| (b) | Disclosure Committee |
| 29 |
|
| (c) | Audit Committee |
| 29 |
|
| (d) | Compensation Committee |
| 31 |
|
| (e) | Strategic Planning Committee |
| 31 |
|
|
|
|
|
|
|
| 11 | CONFLICTS OF INTEREST |
| 31 |
|
|
|
|
|
|
|
| 12 | TRANSFER AGENT AND REGISTRAR |
| 32 |
|
|
|
|
|
|
|
| 13 | LEGAL PROCEEDINGS AND REGULATORY ACTIONS |
| 32 |
|
|
|
|
|
|
|
| 14 | INTERESTS OF EXPERTS |
| 32 |
|
|
|
|
|
|
|
| 15 | ADDITIONAL INFORMATION. |
| 32 |
|
|
|
|
|
|
|
| APPENDIX "A" |
| 33 |
| |
|
|
|
|
|
|
| APPENDIX "B" |
| 37 |
| |
1 ADVISORIES
Certain statements contained in this Annual Information Form ("AIF") constitute "forward-looking information" within the meaning of applicable securities laws. These statements typically contain words such as "anticipate", "believe", "could", "would", "should", "estimate", "expect", "intend", "seek", "may", "plan", "will", "target", "foresee" and similar words and phrases suggesting future outcomes or an outlook. Forward-looking statements in this AIF include, but are not limited to: payment of the Consideration (as defined below), and the satisfaction of the conditions thereto (including with respect to cash balances, receipt of funds, and the execution and completion of contracts); the development, commercialization and protection of the SFD® (as defined below) technology for geothermal resource exploration; the extent to which expanding the Company's scope of business to include exploring for both hydrocarbon and geothermal resources is anticipated to result in an expansion of its scope of revenue sources; estimates related to our future financial position and liquidity including certain contractual obligations; the implementation of cost reduction measures; the sufficiency of aircraft and general business insurance coverage, should it be required; and general business strategies and objectives.
Such forward-looking information is based on a number of assumptions which may prove to be incorrect. Assumptions have been made with respect to the following matters, in addition to any other assumptions identified in this AIF: our ability to market our SFD® technology and services to current and new customers; our ability to source personnel and equipment in a timely manner and at an acceptable cost; our ability to obtain all permits and approvals required; our ability to obtain financing on acceptable terms; our ability to obtain adequate insurance; foreign currency exchange and interest rates; and general business, economic and market conditions (including global commodity prices).
Although NXT believes that the expectations reflected in such forward-looking information are reasonable, undue reliance should not be placed on them as NXT can give no assurance that such expectations will prove to be correct. Forward-looking information is based on expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by NXT and are described in the forward-looking information. Material risks and uncertainties include, but are not limited to: the ability of management to execute its business plan; health, safety and the environment; the emergence of alternative competitive technologies; our ability to protect and maintain our intellectual property ("IP") and rights to our SFD® technology; our reliance on a limited number of key personnel; our reliance on a limited number of aircraft; our reliance on a limited number of clients; counterparty credit risk; foreign currency and interest rate fluctuations; inflation; geopolitical instability; risks associated with climate change; changes in, or in the interpretation of, laws, regulations or policies; general business, economic and market conditions (including global commodity prices); and other factors described herein under the heading "Risk Factors".
The forward-looking information contained in this AIF is made as of the date hereof and, except as required by applicable securities law, NXT undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise.
In this AIF, except as specified otherwise or unless the context requires otherwise, "we", "us", "our", the "Company", and "NXT" refer to NXT Energy Solutions Inc. and its subsidiaries. All references to "fiscal" in connection with a year shall mean the year ended December 31. Information herein is presented as at December 31, 2022, unless otherwise noted.
AIF for the year ended December 31, 2022
| 1 |
All financial information contained herein is expressed in Canadian dollars unless otherwise stated. The information in this AIF is given as of December 31, 2022 unless otherwise indicated.
2 CORPORATE STRUCTURE
2.1 Company Information
NXT Energy Solutions Inc. is a Calgary-based technology company whose proprietary and patented Stress Field Detection ("SFD®") survey system utilizes quantum-scale sensors to detect gravity field perturbations in an airborne survey method which can be used both onshore and offshore to remotely identify traps and reservoirs with hydrocarbon and geothermal exploration potential. The SFD® survey system enables NXT's clients to focus their exploration decisions concerning land commitments, data acquisition expenditures and prospect prioritization on areas with the greatest potential. SFD® is environmentally friendly and unaffected by ground security issues or difficult terrain and is the registered trademark of NXT. NXT provides its clients with an effective and reliable method to reduce time, costs and risks related to exploration.
We are continued under the Business Corporations Act (Alberta). There have been no material amendments to our Articles of Continuance other than those filed on: (i) December 27, 2006 providing for the creation of the first series of preferred shares in the capital of the Company ("Preferred Shares"); and (ii) September 19, 2008 providing for the name change from Energy Exploration Technologies Inc. to NXT Energy Solutions Inc. Our registered office and head office is located at Suite 302, 3320 - 17th Avenue SW, Calgary, Alberta, Canada, T3E 0E8. Our phone number is (403) 264-7020.
We are a reporting issuer in Alberta, Ontario and British Columbia and are principally governed by the Alberta Securities Commission in accordance with the Securities Act (Alberta). We are a foreign private issuer under United States securities laws and are subject to the regulation of the United States Securities in accordance with the Securities Exchange Act of 1934, as amended.
2.2 Intercorporate Relationships
The following table provides a list of all subsidiaries and other companies controlled by NXT:
| Subsidiaries |
| Date and Manner of Incorporation |
| Authorized Share Capital |
| Issued and Outstanding Shares |
| Nature of the Business |
| % of each Class of Shares owned by NXT |
| NXT Energy USA, Inc. |
| October 20, 1995 by Articles of Incorporation – State of Nevada, USA |
| 20,000,000 common shares |
| 5,000,000 common shares |
| Inactive |
| 100% |
| NXT Aero USA, Inc. |
| August 28, 2000 by Articles of Incorporation – State of Nevada, USA |
| 1,000 common shares 4,000 preferred shares |
| 100 common shares |
| Inactive |
| 100% |
| Cascade Petroleum Inc. (Formerly Survey Services International Inc.)¹ |
| September 6, 2011 by Articles of Incorporation – Province of Alberta |
| Unlimited number of common shares |
| 100 common shares |
| Inactive |
| 100% |
| NXT Energy Services (SFD) Inc. |
| December 2008 by Articles of Incorporation – Canada |
| Unlimited number of common shares |
| 100 common shares |
| Inactive |
| 100% |
| PetroCaza Exploration Inc. |
| May 2015 by Articles of Incorporation – Province of Alberta |
| Unlimited number of common and preferred shares |
| 100 common shares |
| Inactive |
| 100% |
¹ On January 16, 2017, the name of Survey Services International Inc. was changed to "Cascade Petroleum Inc."
AIF for the year ended December 31, 2022
| 2 |
In addition, in March 2015, NXT registered NXT Energy Solutions Inc. (Sucursal Bolivia) as a wholly-owned "branch" entity under the laws of the Plurinational State of Bolivia, to contract and conduct survey operations in Bolivia. Operations have now ceased in Bolivia and we closed the branch in 2021.
3 GENERAL DEVELOPMENT OF THE BUSINESS
3.1 Three Year History
We have an opportunity to provide our services in any region of the world where oil and gas exploration activities are conducted. However, we choose to be strategic and focus our limited marketing and sales resources on a limited number of markets in the early stages of commercialization.
A summary of revenues derived in our primary geographic market segments for the last three fiscal years is below:
| Year ended December 31 |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
| International |
| $ | - |
|
| $ | 3,134,250 |
|
| $ | - |
|
| Other |
|
| - |
|
|
| - |
|
|
| 136,566 |
|
|
|
|
| - |
|
|
| 3,134,250 |
|
|
| 136,566 |
|
(a) 2020
On August 25, 2020, shareholders of the Company and subsequently the Toronto Stock Exchange (the "TSX") approved, a new Employee Share Purchase Plan (the "ESP Plan"). The ESP Plan allows employees and other individuals determined by NXT's Board of Directors (the "Board") to be eligible to contribute a minimum of 1% and a maximum of 10% of their earnings for the purchase of Common Shares, such contribution to be matched by the Company. Common Shares contributed by the Company may be issued from treasury or acquired through the facilities of the TSX. The Company began to issue Common Shares under the ESP Plan during Q4-20.
During Q2-20, an additional SFD® acquisition system consisting of eight new sensors was built and tested during which included four cascade devices. NXT now has four SFD® systems which increases our operational readiness and reliability.
AIF for the year ended December 31, 2022
| 3 |
Research and development work during the year focused on improving interpretation algorithms to increase efficiency of the interpretation process and transform the SFD® data to align more with the presentation of results of seismic surveys in the geophysical industry.
NXT received confirmation of a patent granted from the European Patent Office bringing the total number of countries granting the patent internationally to 44 at that time.
(b) 2021
The Company completed the delivery of certain pre-existing Hydrocarbon Right SFD® data to its customer (the "Pre-existing SFD® Data Sale"). The Company has been fully paid for the Pre-existing SFD® Data Sale.
On April 18, 2021, the Company acquired the rights to the geothermal applications of the SFD® technology (the "Geothermal Right") from Mr. George Liszicasz, its former Chairman, President and Chief Executive Officer ("CEO") of NXT (the "Acquisition"). The agreement providing for the Acquisition was negotiated between Mr. Liszicasz and a special committee of the Board comprised entirely of independent directors (the "Committee"). The Board delegated authority to the Committee to perform the negotiations. The initially negotiated consideration payable by the Company in connection with the Acquisition included the following:
|
| 1. | US$40,000 (CAD$50,310) signature payment, which was paid in April 2021; |
|
|
|
|
|
| 2. | 300,000 Common Shares, which were issued in December 2021; |
|
|
|
|
|
| 3. | CAD$15,000 signature milestone payment paid in August 2021; |
|
|
|
|
|
| 4. | US$200,000 milestone payment which will become due in the event that the Company’s cash balance exceeds CAD$5,000,000 due to receipt of funds from operations; and |
|
|
|
|
|
| 5. | US$250,000 milestone payment which will become due in the event that the Company executes and completes, and receives full payment for, an SFD® contract valued at US$10,000,000 or greater, provided such contract is entered into and completed, and payment of at least US$5,000,000 is received, by April 18, 2023 (collectively, the "Consideration"). |
Geothermal applications of the SFD® technology include naturally occurring sub-surface fluid reservoirs or rock conditions from which heat can be extracted and utilized for generating electric power, or for direct utilization in industrial, agricultural or domestic applications. The main subsurface properties such as porosity, permeability and impermeable cap rock that are vital in the search for oil and gas resources and are equally critical for locating the most prospective geothermal resources. For these reasons, the SFD® technology has a natural extension to geothermal applications.
Since first commercialized in 2007 for hydrocarbon use, NXT’s non-intrusive SFD® airborne technology enables its customers to significantly improve drill success rates while reducing the overall negative environmental impact of traditional large-scale ground surveys by minimalizing disruptions to community life and surface use. NXT anticipates applying for patent protection for the geothermal applications of SFD® once development of the SFD® sensors reach appropriate milestones.
As industries worldwide transition toward a low-carbon economy, geothermal energy has gained greater prominence for its environmental benefits as a non-intermittent renewable energy source. NXT will begin to utilize the research and marketing skillsets acquired in hydrocarbon resources to develop and commercialize the application of the SFD® technology for geothermal resource exploration. By expanding the Company’s scope of business to include exploring for both hydrocarbon and geothermal resources, the Company anticipates that its scope of revenue sources will expand as well.
AIF for the year ended December 31, 2022
| 4 |
|
| (i) | Description of Review and Approval Process |
The Acquisition constituted a "related party transaction" for the purposes of Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions ("MI 61‑101") on the basis that Mr. Liszicasz is a director, officer and control person of the Company.
The Acquisition was reviewed and unanimously approved by the Committee. The Committee took into consideration the fair market value of the Geothermal Right as determined by them acting in good faith. Due to the fair market value not being readily determinable, the Committee considered the potential value to be realized by the Company in exercising the Geothermal Right, the value of the Consideration being offered to Mr. Liszicasz, and the effect on the Company’s share ownership before and after the completion of the Acquisition.
The Acquisition was exempt from the formal valuation and disinterested shareholder approval requirements typically applicable to related party transactions under MI 61-101 on the basis that, at the time the Acquisition was agreed to, neither the fair market value of the Geothermal Right (as determined by the Committee acting in good faith, due to the fair market value not being readily determinable), nor the fair market value of the Consideration to be received by Mr. Liszicasz for the Geothermal Right, exceeded 25% of the Company’s market capitalization, calculated as of April 18, 2021 as follows:
|
| · | fair market value of the Geothermal Right and fair market value of the Consideration, approximately $837,947, if all of the milestones are met; |
|
| · | market capitalization of the Company, approximately $44,579,810; and |
|
| · | fair market value as a percentage of market capitalization, 1.88%. |
Following the issuance of the 300,000 Common Shares, Mr. Liszicasz’s ownership increased to 15,378,679 Common Shares (representing approximately 23.56% of the Company’s then 65,250,710 Common Shares.
The estate of Mr. Liszicasz retains all rights, title and interest in and to the SFD® technologies for all other commercial applications, except for respect to hydrocarbons and geothermal resources.
As of December 31, 2022, the Company has recognized $275,610 for the acquisition Geothermal Right, which is the combination of the US$40,000 and CAD$15,000 signature payments, the value of the 300,000 Common Shares and legal costs. The cost of the remaining two milestones will be recognized when it is deemed probable that these two milestones will be achieved as determined by a special committee of the Board of Directors, comprised entirely of independent directors. As of December 31, 2022 the remaining two milestones are still deemed not probable of being achieved.
Progress continues with respect to the development of the geothermal sensor family for which NXT has received advisory services and funding from the National Research Council of Canada Industrial Research Assistance Program (the “NRC IRAP”) during 2021. NXT tested existing SFD® sensors under different operating parameters associated with subsurface conditions favourable for geothermal resources. The test results have demonstrated that the development of a dedicated Geothermal Right sensor family can be accelerated.
NXT has done development work on processing algorithms that will assist in the attribute mapping, interpretation and integration of SFD® data. A number of new approaches, algorithms, and models have been successfully trialed and provide a more definitive approach to corroborating SFD® results by direct spatial comparison with subsurface properties that are pertinent to both hydrocarbon and geothermal applications. While these methods require final formalization and further field testing, NXT expects that the eventual implementation of these enhancements will help drive the integration of SFD® data and results into the overall upstream exploration cycle.
AIF for the year ended December 31, 2022
| 5 |
In July 2021, the Company began receiving advisory services and funding of up to $50,000 from the NRC IRAP to support the research and development of the SFD® technology for geothermal applications. The objective of this project was to test, identify and analyze the desired elements of the SFD® geothermal sensor response over known geothermal areas with the ultimate goal of providing a green upstream geophysical service for advancing renewable power initiatives in Canada and abroad. This project was completed in November 2021 for total funding of $50,000 from the NRC IRAP.
In July 2021, NXT announced its patent application in India was officially granted by the Office of the Controller General of Patents, Designs and Trade Marks. Additionally the Company received notice in Q1-22 that its Brazilian Patent Application has been allowed. As of the date of this MD&A, NXT has been granted SFD® patents in India (July 2021), Russia (January 2017), Japan (July 2017), Canada (August 2017), Mexico (September 2017), the United States (two patents were granted in November 2017 and September 2018, respectively), China (April 2018), and Europe (January 2020). In total, NXT has obtained SFD® patents or received patent allowances in 46 countries. These patents protect our proprietary SFD® technology and serve as independent third-party recognition of our technological invention in terms of practical applicability, conceptual novelty, and knowledge advancement.
(c) 2022
On December 2, 2022, NXT closed the Rights Offering that had been announced on October 31, 2022. The Company issued 2,149,180 common shares a price of $0.18 per common share, for aggregate gross proceeds of $386,852. Share issue costs of $170,790 were recorded as a reduction to share capital.
On December 22 the Company announced a multi-tranche private placement (the “Private Placement”) at $0.195 per share. At December 22, 2022 the Company issued 1,148,282 common shares for gross proceeds of $223,915 in the first tranche, less issuance costs of $7,732.
January 25, 2023, the Company closed the Private Placement by issuing an additional 8,510,000 common shares, at $0.195 per common shares, for additional aggregate gross proceeds of approximately $1,659,450, less issuance costs of $1,170.
Given the passing of Mr. George Liszicasz, former Chairman, President and Chief Executive Officer ("CEO"), the Board of Directors has formally empowered a committee of the Board to assume the CEO’s duties. The Committee, which meets several times weekly with NXT management, consists of Lead Director Charles Selby and Directors Gerry Sheehan and Bruce G. Wilcox, who collectively possess senior operating and management experience in the Energy and Capital Markets Industries. The Committee will undertake its executive role, until further notice, in close cooperation with NXT’s qualified management team that will continue to manufacture SFD® systems, perform SFD® surveys, and provide vital interpretation as contracts are finalized.
3.2 Outlook
In 2023, NXT intends to continue its business model of providing SFD® surveys on a fee-for-service basis, marketing of multi-client data and is also beginning to review a vertical model where it will share in successful production as a result of SFD® recommendations.
AIF for the year ended December 31, 2022
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4 BUSINESS OVERVIEW
4.1 Company's Operations and Principal Activities
We utilize our proprietary, airborne SFD® survey system to provide a service for the geothermal and oil and gas exploration industry. NXT provides a rapid and cost-effective method for our clients to evaluate large land areas for their exploration potential. NXT’s principal markets have been in South America, Africa and Asia.
The underlying technology employed by our SFD® survey system was invented by Mr. George Liszicasz, our former President, CEO, and Chairman. The technology was initially licensed to the Company by Mr. Liszicasz until December 31, 2006 through a series of consecutive license agreements. On December 31, 2006, NXT obtained the rights to the technology from Mr. Liszicasz pursuant to the terms of a Technology Transfer Agreement (the "TTA").
Upon execution of the TTA, Mr. Liszicasz transferred to NXT all his rights and entitlements to the SFD® technology for use in the field of hydrocarbon exploration. For further details of the TTA, see "Related Party Transactions – Technology Transfer Agreement" below.
SFD® technology for the purposes of the TTA is defined as the theories of quantum physics and engineering which are utilized in the operation of stress field detectors used by NXT for the reception, collection and recording of subsurface geological stresses for hydrocarbon exploration.
SFD® sensors remotely respond to gravity perturbations and changes in subsurface density and stress regimes that are meaningful for oil and gas exploration. These responses are captured as raw data that, when interpreted, can provide an indirect method to detect the presence of geological features such as structures, faults, fractures and reefs that are often associated with traps and reservoir accumulations. SFD® is highly effective in frontier and under-explored areas, in offshore or onshore environments, and over any terrain. The SFD® survey system has been demonstrated to quickly focus exploration resources, offering the benefit of reducing the risk, time and expense associated with frontier exploration.
Following completion of the aerial surveys, we deliver our clients a detailed report and maps of the surveyed area that identifies, ranks and recommends areas with SFD® indications of reservoir potential.
In 2006, we commenced our current business model and began providing SFD® survey services to clients on a fee-for-service basis. In accordance with this model, we have not invested either directly or indirectly in exploration or development wells or engaged in other exploration or production activities. Our current business model minimizes our capital requirements, thereby conserving cash, and minimizes any perceived or real conflicts between the interests of NXT and its survey clients.
NXT's primary business model is to earn revenues by conducting SFD® surveys for clients on a fee-for-service basis. Secondly, we may be able to negotiate to earn revenue from gross overriding royalty income and/or other incentive fees from clients should they generate production on areas recommended by SFD® surveys. Finally, in the future, we may earn a fee by providing other related geological and geophysical integration services to clients.
We also continue to utilize high-quality local sales representatives with key knowledge of their respective areas, potential clients and the exploration potential of a region allowing us to cover larger areas and more clients with minimum fixed cost. Our sales representatives continue to pursue SFD® opportunities in numerous regions. To ensure our sales representatives follow industry best practices, each representative is required to annually certify they adhere to NXT's Code of Conduct and Business Ethics.
AIF for the year ended December 31, 2022
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NXT has been effective in positioning the SFD® method as an established geophysical tool for oil and gas exploration following the successful completion of projects in Canada, the United States, Columbia, Argentina, Bolivia, Mexico, Pakistan and most recently in Africa. Our efforts have been supported with the publication of technical papers, creation of project case studies and the development of a strong list of references and recommendation letters. In addition, NXT has now been granted patents or received patent allowance in 46 separate countries.
Our overall objective remains to continue to increase industry awareness and appreciation of the value of our SFD® survey system and our strategy to achieve this includes maximizing client endorsement opportunities (such as through joint case studies) and targeting the most appropriate markets (i.e. where SFD® provides the maximum benefits). Our specific tactics include:
| 1. | focusing the majority of sales resources on high profile primary markets with national oil companies that offer maximum opportunities for success; |
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| 2. | building upon success in this initial market, and step out to other markets in Latin America, Africa and South Asia; |
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| 3. | pursuing expressions of interest from qualified potential client "bluebirds" from all other locations in the world. The bluebird model is defined as an opportunity that arises, not from deliberate targeted sales initiatives, but in response to unsolicited client enquiries; |
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| 4. | continuing to conduct pilot surveys to expand our knowledge base and provide documentation to support the use of SFD® in new applications. Each new application opens more market opportunities and provides valuable case studies to support our sales initiatives; and |
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| 5. | responding to opportunities to present at technical conferences, publish papers in periodicals and generally maximize our opportunities to educate the industry on SFD® capabilities and document case study successes. |
As we continue to progress and grow our project pipeline on a fee-for-survey-projects basis, we remain optimistic given our progress during the year. NXT continues the development of an alternative business line though the sale of "Multi-Client Datasets" focused on national oil companies and the development of their national exploration strategies. The purpose of this alternatively strategy has been to integrate our SFD® technology into the standard exploration process of such organizations. We believe this approach will be instrumental in helping us to build an independent and steady backlog of smaller scale data sales enabling us to enhance and smooth our revenue flow while pursuing larger fee-for-survey-projects, royalty interests, bonuses and participation rights in recommended prospects.
4.2 Seasonality of the Company's Business
There is no seasonality to our business. However, NXT has a very cyclical business, as revenue activity is dependent upon the level of capital investment in exploratory drilling in the oil and gas industry and the size and timing of a limited number of survey contracts each year.
4.3 Sources and Availability of Raw Materials and Equipment
We do not foresee any constraints upon materials or equipment that will impede our ability to execute our business plan or affect our ability to conduct and/or expand our business. Our main direct project input costs are aircraft operating costs and data interpretation staff.
AIF for the year ended December 31, 2022
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In order to conduct our survey operations, we require the following:
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| · | Survey aircraft – Historically, we have both owned aircraft and chartered aircraft from independent charter aircraft companies. From 2009 to December 2015, we utilized an aircraft charter agreement with Air Partners, a Calgary-based air-charter operator, to provide aircraft, crew and maintenance services for our survey operations worldwide In December 2015, we acquired a jet aircraft from Air Partners which was previously charter hired to NXT. In April, 2017, NXT completed a sale and leaseback agreement of its aircraft with a Calgary-based international aircraft services organization. The terms of the agreement resulted in NXT selling its 1997 Cessna Citation Ultra 560 jet aircraft. We currently rely on Air Partners as the manager / operator of the aircraft which we use in SFD® survey operations. |
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| · | SFD® sensors – All of the survey sensors are currently manufactured in-house. Certain machining is required by third-party machine shops, with final assembly performed by our technical staff. The sensors, once assembled, require flight testing prior to being considered acceptable for operational use. Not all sensors meet the performance criteria for operational use; however, we have demonstrated our ability to manufacture new functional SFD® sensors. |
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| · | SFD® assembly – The units in which the sensors are housed in are custom-designed, fabricated and assembled in-house or through subcontracted vendors. We utilize the services of Transport Canada approved Design Approval Representatives to prepare subsequent type certificates ("STC") for the installation of our SFD® units in each aircraft that we utilize for surveys. The time to obtain an STC approval for the installation of our SFD® units into any proposed aircraft type may require several months. |
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| · | Computer hardware and software (Data Acquisition System, SFD® Signal Conditioning Unit, and data interpretation software) – During 2016, a new data acquisition system completed final testing. The software was developed by in-house personnel and will be utilized on future surveys. The hardware we use in our SFD® survey systems (other than the SFD® unit), and the balance of the computer software we use, are all readily available from retail or wholesale sources. |
We are not dependent upon any other third-party contract manufacturers or suppliers to satisfy our technology requirements.
4.4 Marketing Channels
We largely use direct sales methods with use of independent commissioned sales representatives in international markets.
4.5 Employees
As of the fiscal year ended December 31, 2022 we had a total of 10 employees. NXT has no employees that are members of a labor union. The following summarizes the number of employees and independent contractors by main job function as at December 31, 2022:
| Function | Employees | Contractors | Total |
| Senior management team | 2 | - | 2 |
| Finance, administration and sales | 2 | 1 | 3 |
| Operations and technical development | 6 | - | 6 |
| Total | 10 | 1 | 11 |
AIF for the year ended December 31, 2022
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All of the above noted staff are based in Canada. The six operations and technical development staff includes one research scientist holding a Ph.D. and three geoscientists. We periodically engage other technical and administrative contract personnel as required on a project basis.
4.6 Patents
In May 2012, we commenced a "provisional" patent application process in the United States and formally filed a patent on May 22, 2013, which was subsequently published on November 28, 2013. We intend to continue expanding the process with additional formal patent applications in the future. We understand that our right to patent the SFD® technology is not compromised by our ongoing commercial use of the technology, as the components of the SFD® technology have never been disclosed to third parties (except under very limited and confidential terms) or released in any manner into the public domain.
In 2017, our Initiatives to expand and protect our IP (including patenting and new research and development initiatives) were very successful. Squire Patton Boggs LLP, a United States-based leader in IP protection, has been advising NXT on our IP strategy, including the prior filing of an initial United States provisional patent application in May 2012. In November 2014, NXT filed a related patent amendment submission in the United States and since that time has undertaken new patent applications in select strategic international markets.
NXT has been granted SFD® patents in India (July 2021), Russia (January 2017), Japan (July 2017), Canada (August 2017), Mexico (September 2017), the United States (two patents were granted in November 2017 and September 2018, respectively), China (April 2018), and Europe (January 2020). In total, NXT has obtained SFD® patents in 46 countries. These patents protect our proprietary SFD® technology and serve as independent third-party recognition of our technological invention in terms of practical applicability, conceptual novelty, and knowledge advancement.
4.7 Competition
Our SFD® airborne survey service is based upon a proprietary technology, which is capable of remotely identifying, from a survey aircraft, subsurface anomalies associated with potential hydrocarbon traps with a resolution that we believe is technically superior to other airborne survey systems. To our knowledge there is no other company employing technology comparable to our SFD® survey system for oil and natural gas exploration.
Seismic is the standard technology used by the oil and gas industry to image subsurface structures. It is our view that the SFD® survey system is highly complementary to seismic analysis. Our system may reduce the need for seismic in wide‑area reconnaissance but will not replace the role of seismic in verifying structure, closure and selecting drilling locations. The seismic industry is very competitive with many international and regional service providers.
The SFD® system can be used as a focusing tool for seismic. With a SFD® survey, a large tract (i.e. over 5,000 square kilometers) of land can be evaluated quickly to identify locations with indications of reservoir potential. Seismic surveys, although effective in identifying these locations, are much more expensive, require significantly more time and impose a much greater negative impact on local communities and the environment. An SFD® survey deployed first can provide necessary information to target a seismic program over a limited area of locations selected by SFD®. This approach can result in a more effective seismic program and reduce the overall cost, time, community resistance and environmental impact required to locate and qualify a prospect.
The industry uses other technologies for wide area oil and natural gas reconnaissance exploration, such as aeromagnetic and gravity surveys. These systems can provide regional geological information, such as basement depth, sedimentary thickness and major faulting and structural development; however, these other airborne techniques are not as suitable for identifying areas with reservoir potential as the SFD® system.
AIF for the year ended December 31, 2022
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4.8 Government and Environmental Regulation
The operation of our business, namely conducting aerial SFD® surveys and interpreting SFD® data, is not subject to material governmental or environmental regulation in Canada or the United States with the exception of flight rules issued by Transport Canada and the Federal Aviation Authority governing the use of commercial aircraft, including rules relating to low altitude flights. The requirements in other countries vary greatly and may require permits and/or provide other restrictions to conducting flight operations in the country that may restrict our ability to perform SFD® surveys as freely as in Canada and the United States.
For example, in Colombia, SFD® surveys must comply with three requirements not encountered in Canada and the United States. These requirements are:
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| i) | customs obligations and bonds related to the importation and exportation of the aircraft into Colombia; |
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| ii) | obtaining permits from the local aviation authority; and |
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| iii) | obtaining permits from the Colombian Air Force. |
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NXT has successfully operated in the past in Colombia in accordance with these requirements.
With our past experience in Canada, the United States, Nigeria, Bolivia, Mexico, Colombia and other countries, we do not anticipate any unusual government controls or regulations that might significantly prevent timely completion of SFD® surveys. However, we may encounter unforeseen government regulations or restrictions in other countries that may impair or restrict our ability to conduct surveys, which could limit our ability to earn revenue or potentially expose us to forfeiture of performance bonds.
4.9 Property, Plant and Equipment
| (a) | Facilities / Office Premises |
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In August 2015, NXT moved to a new office premises (11,333 square feet) at 3320 – 17th Avenue SW in Calgary under a 10-year lease at an initial estimated minimum monthly lease payment of $48,279 (including building operating costs) commencing in October 2015. On March 15, 2022, the Company surrendered 828 square feet of its office building lease to the landlord.
| (b) | Equipment |
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Our SFD® technology is comprised of three main components, as detailed in the first three items below, which we collectively refer to as our SFD® survey system. This system is generally stored at our Calgary office facility unless deployed during survey operations when this equipment would travel with the aircraft or be stored in a locked facility at the survey location when not in use. In addition, there is extensive interpretation equipment located in Calgary. The main categories of equipment we use are:
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| · | Stress Field Detector – The stress field detector, or SFD® system, including a unit which houses the SFD® sensors, is the principal component of our technology. The SFD® sensors respond to fine-scale perturbations in the gravitational field caused by changes in subsurface density and stress distribution. These responses are transformed through electromechanical transduction into electronic digital signals as the output. The SFD® method has proven highly effective at identifying potential hydrocarbon traps in a wide variety of geological settings onshore and offshore. Airborne SFD® surveys are currently conducted utilizing an array of 22 SFD® sensors, consisting of six primary, eight secondary and eight research and development sensors, allowing multiple independent SFD® signals to be acquired at all points of a designed survey. |
AIF for the year ended December 31, 2022
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| · | SFD® Signal Conditioning Unit – This self-contained unit contains electronic circuits for powering the sensors and for stabilizing and conditioning electronic signals. All sensor output is directly connected to this unit and after signal conditioning is completed, all output is forwarded to the computer system.
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| Data Acquisition System – This is used in conjunction with the SFD® sensor array on surveys. Our data acquisition system is a compact, portable computer system which concurrently acquires the electronic digital signals from the SFD® sensor array and other pertinent client data, including the GPS location information of the data.
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| · | Interpretation Theatre – Once returned to our base of operations, the SFD® data collected is processed and converted into a format that can be used by our interpretation staff using systems consisting of generally off-the-shelf computer equipment, high definition monitors, projectors and screens. This equipment is generally permanently set up at our Calgary office facility. A remote SFD® data interpretation theatre is available and may be deployed during survey operations and would be set up in a facility at the survey client's city.
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| (c) | Oil and Gas Properties |
We have minor historical interests in a limited number of acreage holdings of undeveloped lands in western Canada. These assets are not a material asset and have been written off in our financial statements. We are not affected by any significant environmental concerns, nor is there any planned significant capital additions contemplated.
5 RISK FACTORS
Investing in our Common Shares involves a high degree of risk. In addition to the other information included in this AIF, you should carefully consider the risks described below before purchasing our Common Shares. If any of the following risks actually occur, our business, financial condition and results of operations could materially suffer. As a result, the trading price of our Common Shares could decline, and you might lose all or part of your investment.
5.1 Future Operations
NXT is still in the early stages of realizing widespread commercialization of its SFD® technology. Its ability to generate cash flow from operations will depend on its ability to service its existing clients and develop new clients for its SFD® services. Management recognizes that the commercialization phase can last for several years, and that it can have significant economic dependence on a small number of clients, which can have a material effect on the Company's operating results and financial position.
The events described in the following paragraphs highlight that there is substantial doubt about NXT’s ability to continue as a going concern within one year after the date that these consolidated financial statements have been issued. The Company’s current cash position is not expected to be sufficient to meet the Company’s obligations and planned operations for a year beyond the date that these consolidated financial statements have been issued.
AIF for the year ended December 31, 2022
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The Company has deferred payment of operating costs, including payroll and other general and administrative costs. Subsequent to December 31, 2022, the Company completed a private placement which resulted in raising an additional net proceeds of $1,658,280. Further financing options that may or may not be available to the Company include issuance of new equity, debentures or bank credit facilities. The need for any of these options will be dependent on the timing of securing new SFD® related revenues and obtaining financing on terms that are acceptable to both the Company and the financier.
NXT continues to develop its pipeline of opportunities to secure new revenue contracts. However, the Company’s longer-term success remains dependent upon its ability to convert these opportunities into successful contracts, to continue to attract new client projects, expand its revenue base to a level sufficient to exceed fixed operating costs, and generate consistent positive cash flow from operations. The occurrence and timing of these events cannot be predicted with sufficient certainty.
The consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for these consolidated financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. These adjustments could be material.
5.2 Financial Statements
The preparation of financial statements requires our management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including the disclosure of contingent assets and liabilities as well as revenues and expenses recorded in our financial statements. Estimates made relate primarily to the measurement of accrued liabilities, stock-based compensation expense, valuation of future income tax assets, estimates for asset retirement obligations, and the useful lives of capital assets and IP.
The estimates and assumptions are reviewed periodically and are based upon the best information available to management; however, we cannot provide assurance that future events will not prove that these estimates and assumptions are inaccurate. Any revisions to our estimates and assumptions may have a material impact on our future reported net income or loss and assets and liabilities.
5.3 Commodity Prices
NXT's customer base is in the oil and natural gas exploration industry, which is exposed to risks of volatility in oil and natural gas commodity prices. As such, demand for our services and prospective revenues may become adversely impacted by fluctuations in oil and natural gas prices. The impact of price changes on our ability to enter into SFD® survey contracts cannot be readily determined at this time. However, in general, if commodity prices decline significantly, our opportunity to obtain and execute SFD® survey contracts may also likely decline, at least in the short term. Therefore, NXT focuses on national oil companies as they have a long term strategic view and are not as affected by short-term oil fluctuations.
5.4 Foreign Currency Fluctuations
The Company is exposed to foreign exchange risk in relation to its holding of significant United States Dollar ("USD") balances in cash and cash equivalents, short-term investments, accounts receivable, note receivable, deposits, leases, accounts payables, accrued liabilities, lease obligations and entering into USD revenue contracts. To mitigate exposure to fluctuations in foreign exchange, the Company does not currently enter into hedging contracts, but uses strategies to reduce the volatility of USD assets including converting excess USD to Canadian dollars. As at December 31, 2022, the Company held net U.S. dollar liabilities totaling US$231,161. Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2022 would have had an approximately $31,327 effect on the unrealized foreign exchange gain or loss for the year. Changes in currency exchange rates could have an adverse effect on the Company's business, financial condition and results of operations.
AIF for the year ended December 31, 2022
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5.5 Debt Service
NXT may finance a significant portion of its operations through debt. Amounts paid in respect of interest and principal on debt incurred by NXT may impair NXT's ability to satisfy its other obligations. Variations in interest rates and scheduled principal repayments could result in significant changes in the amount required to be applied to debt service before payment by NXT of its debt obligations. Lenders may be provided with security over substantially all of the assets of NXT. If NXT becomes unable to pay its debt service charges or otherwise commits an event of default such as bankruptcy, a lender may be able to foreclose on or sell the assets of NXT.
5.6 Interest Rate Fluctuations
We periodically invest available cash in short term investments that generate interest income that will be affected by any change in interest rates. The Company’s long-term debt interest is fixed at 4% until 2031. The Company also recorded interest expense of 15.70% on the financial liability of its aircraft lease for the years 2019 to 2021 which resulted from the deferred gain of the sales and leaseback agreement of its aircraft. This interest expense ended in April 2022.
5.7 Availability of Aircraft
In April 2017, NXT completed a sale and leaseback agreement of its aircraft with a Calgary-based international aircraft services organization (the "Lessor"). The terms of the agreement resulted in NXT selling its 1997 Cessna Citation Ultra 560 jet aircraft that was purchased in 2015. NXT has leased the aircraft over an initial term of 60 months and retains all existing operating rights and obligations. NXT was required to make monthly payments to the Lessor of approximately US$39,500 until April 2022.
In Q4-21 the Company extended the term of its Aircraft Leasing Agreement effective in the second quarter of 2022 for a period of 24 months with payments of approximately US$22,500 (CDN$28,675) per month, or US$270,000 (CDN$344,099) per year. Should NXT want to repurchase the aircraft at the end of the extended term, the purchase price will be US$1.21 million.
When the aircraft is not needed for use by NXT, we seek to earn charter hire reimbursements from the aircraft through a third party, Air Partners.
Air Partners also has access to an alternate, similar model aircraft (certified for the use of our survey equipment) which could be charter hired for use by NXT if needed.
In the event that NXT's aircraft is not available (due to damage, a need for extensive repairs, or other unforeseen events) to conduct survey projects, there is a risk that suitable alternative aircraft may not be available on a timely basis from other charter operators when needed. This inability to conduct survey operations could have a material adverse effect on the Company's business, financial condition and results of operations.
AIF for the year ended December 31, 2022
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5.8 Segregation of Duties
Certain duties that are most appropriately segregated between different employees are, due to our current limited staff, assigned to one individual.
Standard internal control methodology involves the separation of incompatible functions by assigning these functions to separate individuals and in larger organizations to separate departments. We often cannot allocate these functions to separate individuals because our administrative staff is limited.
Although we have adopted alternative control methods designed to mitigate for the reduced ability to separate incompatible functions, these alternative controls may not operate at the same level of precision and there is more than a remote likelihood that our internal control over financial reporting will not prevent or detect material misstatements if they should exist in our financial statements. This lack of separation of duties exposes us to potential misappropriation of funds, embezzlement and other forms of fraud and could have a material adverse effect on our business, financial condition and results of operations.
5.9 Related Party Transactions
We may periodically enter into related party transactions with directors, officers and/or shareholders. In addition to the related party transactions discussed elsewhere herein (i.e. the TTA, the Acquisition, and the Targeted Issuer Bid). One of the members of NXT's Board, Thomas Valentine, is a partner in the law firm Norton Rose Fulbright Canada LLP which provides legal services to NXT.
Although we publicly disclose all related party transactions and manage potential conflicts of interest through mandated adherence to our Code of Conduct & Business Ethics and the maintenance of a strong independent Board, all related party transactions have the potential for conflicts of interest that may compromise the ability of Board members to exercise their fiduciary responsibility to the Company.
5.10 Rights to SFD® Technology
Our rights to ownership and use of SFD® technology depended on Mr. Liszicasz having the lawful right to sell to NXT the exclusive rights to exploit the SFD® technology for the exploration of hydrocarbons and the Geothermal Right as agreed to in the TTA.
A risk exists that an unknown party may claim some legal entitlement to our IP, our rights to commercialize this IP or our right to create SFD® devices and processes. However, we believe that such a claim would be without merit.
The SFD® technology is an essential component of our business plan. If a third party challenged our lawful entitlement to this technology, the legal defense of our right to the technology may be expensive and could cause a loss of our right to the SFD® technology, or a protracted legal process to assert our right to the technology would have a material adverse effect on the Company's business, financial condition and results of operations.
5.11 Reliance on Specialized Equipment
We rely on specialized data acquisition equipment, including a limited number of SFD® sensor devices, to conduct our aerial SFD® survey operations. We would be at risk if these survey sensors were to become damaged, destroyed, worn out, stolen or in any way became unavailable for use in operations prior to us creating and testing additional sensors. Should the sensors become unavailable for any reason, our ability to conduct surveys could be delayed for several months as we built new sensors. During this period we may become unable to satisfy contractual obligations, which may jeopardize future revenue opportunities and may potentially result in a client drawing on a contract performance bond posted by the Company or otherwise making claims against the Company for breach of contract. In addition, an inability to satisfy contractual obligations may have an adverse effect on our developing reputation within the oil and gas community.
AIF for the year ended December 31, 2022
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NXT mitigates this risk by researching new designs, constructing additional SFD® sensor devices and obtaining replacement cost insurance on each SFD® sensor.
5.12 Geological Conditions
SFD® surveys have not been tested over all potential geological conditions. Some geological conditions may subsequently be proven to be unsuited for SFD® surveys thereby creating unforeseen limitations to the application of SFD® surveys.
Any limitation to the application of SFD® surveys has the potential of restricting future revenue opportunities and if not properly disclosed to industry clients, such limitations may impact the reputation of the Company with these clients.
5.13 Technological Improvement
Unless we pursue ongoing technological improvement and development, we may be unable to respond to changes in customer requirements or new competitive technologies.
We must continue to refine and develop our SFD® survey system to make it scalable for growth and to respond to potential future competitive pressures. These improvements require substantial time and resources. Furthermore, even if resources are available, there can be no assurance that the Company will be commercially or technically successful in enhancing the technology. If we are unable to keep pace with new technologies, evolving industry standards and demands, that could have a material adverse effect on our business, financial condition and results of operations.
5.14 Reliance on Key Personnel
We rely on a limited number of key personnel who collectively possess the knowledge and skills to conduct SFD® surveys and interpret SFD® data as required to meet contract obligations. Additional or replacement personnel may not be found and trained quickly. The loss of any of these key persons or increased demand for our services from clients could impair our ability to meet contract obligations, thereby adversely impacting our reputation and our ability to earn future revenue from clients.
The Company's future success depends, to a significant extent, on the continued service of its key technical and management personnel and on our ability to continue to attract and retain qualified employees. The loss of the services of our employees or a failure to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and results of operations. We do not have "key person" insurance on any of our personnel.
We depend on key staff members that are involved in the SFD® data interpretation process and to continue to enhance our technology. We are working to minimize dependency on key personnel. Currently, a total of four persons, two of which are highly experienced, are trained to interpret SFD® signals. In addition, the Company is developing interpretation algorithms which will reduce the reliance on human interpretation. A process of formal documentation of the ongoing research and development of the sensor technology, the acquisition/survey methodologies, and the processing and interpretation work flows is ongoing and will be part of the management systems.
Within the Province of Alberta, the skilled personnel that we require may periodically be in short supply and there is specialized training required that can take several months in order for a new employee to become effective. If we cannot hire these key personnel, we have inadequate time to train them or should we lose current personnel, then our ability to accept contracts or meet contract commitments may be adversely affected, thereby restricting our ability to earn revenue.
AIF for the year ended December 31, 2022
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5.15 Cyber Security
Our ability to manage our operations successfully is critical to our success. Our business relies on our ability to electronically gather, compile, process, store and distribute data and other information. Unintended interruptions or failures resulting from computer and telecommunications failures, equipment or software malfunction, power outages, catastrophic events, security breaches (such as unauthorized access by hackers), social engineering schemes, unauthorized access, errors in usage by our employees, computer viruses, ransomware or malware, and other events could harm our business.
We have undertaken efforts and other steps to enhance our data security infrastructure. Any security breach or failure in our computer equipment, systems or data could result in the interruption of our business operations and adversely impact our financial results.
5.16 Ability to Trade Shares
There is no certainty that an investor can trade our Common Shares on public markets at a stable market price. The Company has historically had a limited public market for our Common Shares on the TSX and the United States OTC Markets Group's Venture Stage Marketplace (the "OTC") and there is a risk that a broader or more active public trading market for our Common Shares will not develop or be sustained, or that current trading levels will not be sustained.
The market price for the Common Shares on the exchanges where our Common Shares are listed has been, and we anticipate will continue to be, extremely volatile and subject to significant price and volume fluctuations in response to a variety of external and internal factors. This is especially true with respect to emerging companies such as ours. Examples of external factors, which can generally be described as factors that are unrelated to the operating performance or financial condition of any particular company, include changes in interest rates and worldwide economic and market conditions, as well as changes in industry conditions, such as changes in oil and natural gas prices, oil and natural gas inventory levels, regulatory and environment rules, and announcements of technology innovations or new products by other companies. Examples of internal factors, which can generally be described as factors that are directly related to our consolidated financial condition or results of operations, would include release of reports by securities analysts and announcements we may make from time to time relative to our operating performance, clients exploration results, financing, advances in technology or other business developments.
Because we have a limited operating history and a limited history of profitability to date, the market price for the Common Shares is more volatile than that of a seasoned issuer. Changes in the market price of the Common Shares, for example, may have no connection with our operating results or the quality of services provided to clients. No predictions or projections can be made as to what the prevailing market price for the Common Shares will be at any time, or as to what effect, if any, that the sale of Common Shares or the availability of Common Shares for sale at any time will have on the prevailing market price. Given the relatively low historic trading volumes, small trades of Common Shares can adversely and potentially dramatically affect the market prices for those shares. Accordingly, investors in our Common Shares should anticipate both volatile stock price and poor liquidity unless these conditions change.
5.17 Dilution
Our right to issue additional securities at any time could have an adverse effect on your proportionate ownership.
AIF for the year ended December 31, 2022
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We are authorized under our Articles of Continuance to issue an unlimited number of Common Shares an unlimited number of Preferred Shares. We may issue Common Shares and Preferred Shares under such circumstances and in such manner and at such times, prices, amounts and purposes as our Board may, in its discretion, determine to be necessary and appropriate, subject to compliance with all applicable exchange regulations and corporate and securities laws. Any such issue of Common Shares or Preferred Shares would dilute the proportionate ownership of the current holders of those securities.
5.18 Intellectual Property
We may not be able to protect our trade secrets and IP from competitors who would use this knowledge to eliminate or reduce our technological advantage.
Our success and future revenue growth will depend, in part, on our ability to protect our IP. We have commenced an IP strategy process to obtain patents related to the SFD® technology, while also utilizing "trade secrets" protection of the proprietary nature of our technology as applicable.
Initiatives to expand and protect our IP (including patenting and new research and development initiatives) have been very successful. Squire Patton Boggs LLP, a United States-based leader in IP protection, has been advising NXT on our IP strategy, including the prior filing of an initial United States provisional patent application in May 2012. In November 2014, NXT filed a related patent amendment submission in the United States and since that time has undertaken new patent applications in select strategic international markets.
So far, SFD® patents have been granted in India (July 2021), Russia (January 2017), Japan (July 2017), Canada (August 2017), Mexico (September 2017), the United States (two patents were granted in November 2017 and September 2018, respectively), China (April 2018), and Europe (January 2020). In summary, the total number of countries granting our patents is 46. In addition, one more patent application in Brazil is pending. The patents serve an important purpose of the protection for our proprietary SFD® technology. The patents also serve as multiple independent third-party recognitions of the technological invention in terms of practical applicability, conceptual novelty, and knowledge advancement.
The patent protection application process requires disclosure of at least some aspects of our SFD® technology to third parties and ultimately public disclosure. This disclosure could significantly increase the risk of unlawful use of our technology by third parties. Furthermore, we have no assurance that, even if we seek patent protection, a patent could be registered to protect our IP in all or any jurisdictions within North America or other countries throughout the world. If registered, there can be no assurance that it would be sufficiently broad to protect our technology or that any potential patent would not be challenged, invalidated or circumvented or that any right granted thereunder would provide meaningful protection or a competitive advantage to us. Finally, protection afforded by patents is limited by the financial resources available to legally defend IP rights. We currently do not possess the required financial resources to fund a lengthy defense of our rights if challenged by a much larger competitor or an oil and gas company.
We enjoy common and contract law protection of our technology and trade secrets. Employees and contractors are governed by confidentiality agreements as well as a fiduciary responsibility to protect our technology, supporting documentation and other proprietary information.
AIF for the year ended December 31, 2022
| 18 |
Our strongest protection of the SFD® technology comes from restricting access to knowledge concerning the technology. Only a very limited number of NXT personnel have access to or knowledge of the underlying SFD® technology and no one employee and only one officer has access or knowledge of all aspects of the SFD® system. Currently, no third party has any significant knowledge of the technology. As further protection, SFD® equipment does not leave the direct control of NXT employees, thereby preventing unauthorized replication of the equipment.
The Company reassesses the appropriateness of its IP protection strategy on an ongoing basis and seeks advice from IP advisors as necessary.
It is possible that a third party will copy or otherwise obtain and use the Company's technology without authorization, develop a similar technology independently or design around the Company's secrets. Accordingly, there can be no assurance that the steps taken by the Company to prevent misappropriation or infringement of our IP will be successful.
An inability to protect our IP would make it possible for competitors to offer similar products and services that could have a material adverse effect on our business, financial condition and results of operations.
5.19 Flight Operations
We experience operational hazards in our flight operations that may subject us to potential claims in the event that an incident or accident occurs.
The flight operations of SFD® surveys are subject to the hazards associated with general flight operations. An aircraft accident may cause personal injury and loss of life, as well as severe damage to and destruction of property or the SFD® sensors and related equipment.
Independent third parties provide all the services required to maintain, operate the aircraft and they bear the primary risks of flight operations. These services are provided by an organization accredited by Transport Canada to operate aircraft in accordance with Transport Canada approved and audited operating procedures. The aircraft operator employs the required pilots, aircraft maintenance engineers, support personnel and ensures that they operate within their Transport Canada operating certificate. Our employees do not perform any airworthiness or flight safety operations.
We require the flight contractor to maintain appropriate insurance coverage for the risks associated with aircraft operations and we obtain insurance coverage to provide us with additional risk protection. In addition, we maintain general business insurance coverage and believe that this insurance and the policy limits are appropriate for the operational risks that we incur.
Despite our policy to not operate the aircraft directly and our insurance coverage, we cannot avoid or alternatively be insured for all risks of flight operations. In the event of an incident or accident we may be sued by injured parties in excess of our policy limits or for damages that are not covered by our insurance policy. The magnitude of a lawsuit of this nature is not determinable. Furthermore, to the extent that our SFD® equipment is damaged, we may be unable to conduct SFD® surveys for several months following an accident.
5.20 Foreign Countries
We conduct operations in foreign countries, which exposes us to several risks that may have a material adverse effect on the Company.
AIF for the year ended December 31, 2022
| 19 |
a) Criminal Activity and Social Instability
We operate in foreign countries that can experience significant social upheaval and criminal activity. Systemic criminal activity in a country or isolated criminal acts may disrupt operations, impact our ability to earn revenue, dramatically add to our cost of operations or potentially prevent us from earning any survey revenue in a country.
b) Political Instability
Any changes in regulations or shifts in political attitudes are beyond the control of the Company and may adversely affect our business. Exploration may be affected in varying degrees by government regulations which have the effect of restricting exploration and production activities. These changes may adversely impact the laws and policies governing price controls, export controls, foreign exchange controls, income taxes, expropriation of property, environmental legislation, site safety or other areas.
Currently, there are no restrictions (other than the payment of local withholding taxes) on the repatriation back to Canada of our earnings in foreign countries in which we have operated, such as Nigeria; however, there can be no assurance that significant restrictions on repatriation to Canada of earnings will not be imposed in the future.
Our operations may also be adversely affected by changes in laws and policies in Canada impacting foreign travel and immigration, foreign trade, taxation and investment.
c) Commercial Disputes
While operating in a foreign country, we are subjected to local commercial laws which often involve executing contracts in a foreign language. Although every effort is made to ensure we have access to an accurate English translation, misunderstandings and potential disputes between parties may arise.
In the event of a dispute arising in connection with our foreign operations for any reason, we may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdictions of the courts of Canada or enforcing Canadian judgments in such other jurisdictions. We may also be hindered or prevented from enforcing our rights with respect to a government instrumentality because of the doctrine of sovereign immunity.
Accordingly, these risk factors have the potential of adversely reducing the level of survey revenue from our clients, our ability to operate effectively or our ability to be paid for our services and may have a material adverse effect on our financial position.
Where possible, NXT utilizes risk mitigation products offered by entities such as Export Development Canada ("EDC"). EDC financial products include insurance coverage of contract accounts receivable, guarantee support for contract performance bonds, and wrongful call insurance for such bonds.
d) Corruption and Bribery
Foreign markets may be susceptible to a higher risk of corruption and bribery. All of NXT's employees, contractors, and independent sales agents are required to adhere to the Company's Code of Conduct & Business Ethics, which prohibits illegal activities, including any acts of bribery or corruption. NXT conducts due diligence on all of its sales representatives and distributors and requires them to complete annual certifications that they adhere to the Company's Anti-Bribery and Anti-Corruption Policy.
5.21 Flight Permits
We rely upon the right to conduct airborne surveys in foreign countries. These foreign operations expose us to the risks that we will be prevented from conducting surveys when requested by clients.
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The operation of our business, namely conducting aerial SFD® surveys and interpreting SFD® data, is not subject to material governmental or environmental regulation in Canada and the United States with the exception of flight rules issued by Transport Canada and the Federal Aviation Administration governing the use of commercial aircraft, including rules relating to low altitude flights. The requirements in other countries vary greatly and may require permits and/or provide other restrictions to conducting flight operations in the country that may restrict our ability to perform SFD® surveys.
For example, in South American countries in which we have operated, such as Colombia and Bolivia, SFD® surveys must comply with additional requirements not encountered in Canada and the United States, including customs obligations and bonds related to the importation and exportation of the aircraft into the country, obtaining permits from the local aviation authority, and obtaining permits from the local Air Force. We have successfully operated in South America, Africa and other global regions in accordance with these typical requirements.
Based on our North America and international experience to date, we do not anticipate any government controls or regulations that will prevent timely completion of SFD® surveys. However, we may encounter government restrictions in other countries that may impact or restrict our ability to conduct surveys.
If we encounter government regulation and restrictions that impact or prevent us from conducting surveys in any country, then we will not be able to earn revenue in the country and we may be exposed to forfeiting any performance bonds which may have been issued.
5.22 Credit Risk
Credit risk arises from the potential that the Company may incur a loss if counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms. The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The carrying value of cash and cash equivalents, short-term investments, and accounts receivable reflects management’s assessment of credit risk. At December 31, 2022, cash and cash equivalents included balances in bank accounts placed with financial institutions with investment grade credit ratings. The Company manages Accounts Receivable credit risk by requiring advance payments before entering into certain contract milestones and when possible, accounts receivable insurance.
5.23 Tax Matters
The Company and its subsidiaries are subject to income and other taxes in Canada, the United States and numerous foreign jurisdictions. Changes in tax laws or interpretations thereof or tax rates in the jurisdictions in which the Company or its subsidiaries do business could adversely affect the Company's results from operations, returns to shareholders, and cash flow. Our effective tax rates could also be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. While management believes the Company and its subsidiaries are in compliance with current prevailing tax laws and requirements, one or more taxing jurisdictions could seek to impose incremental or new taxes on the Company or its subsidiaries or the Company or its subsidiaries could be subject to assessment, reassessment, audit, investigation, inquiry or judicial or administrative proceedings by any such taxing jurisdiction. The timing or impacts of any such assessment, reassessment, audit, investigation, inquiry or judicial or administrative proceedings or any future changes in tax laws, including the impacts of proposed regulations, cannot be predicted. Any adverse tax developments, including legislative changes, judicial holdings or administrative interpretations, could have a material and adverse effect on the results of operations, financial condition and cash flows of the Company.
AIF for the year ended December 31, 2022
| 21 |
5.24 Occurrence of Natural Disasters, Epidemics or Other Events
Our business could be materially and adversely affected by natural disasters, such as fires or floods, the outbreak of a widespread health epidemic or pandemic, separate from COVID-19, or other events, such as wars, including the military conflict between Russia and Ukraine, acts of terrorism, power shortages or communication interruptions. The occurrence of a disaster or similar event could materially disrupt our business and operations. These events could also cause us to close our operating facilities temporarily, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. In addition, our net sales could be materially reduced to the extent that a natural disaster, health epidemic or other major event harms the economies of the countries in which we operate. As such, the outbreak of hostilities between Russia and Ukraine could result in more widespread conflict and could have a severe adverse effect on the surrounding regions and the related markets, and on our business, financial condition and results of operations. The duration of the conflict and related events and whether it will escalate further cannot be predicted. Our operations could also be severely disrupted if our customers, partners and other third-party providers or other participants were affected by natural disasters, health epidemics, or other major events, such as wars and military conflicts.
We caution that the factors referred to above and those referred to as part of particular forward-looking statements may not be exhaustive and that new risk factors emerge from time to time in our rapidly changing business environment.
6 DIVIDEND POLICY
We have never paid any cash dividends on our Common Shares and we do not anticipate that we will pay any dividends in the foreseeable future. Our current business plan is to retain any future earnings to finance the expansion of our business. Any future determination to pay cash dividends will be at the discretion of our Board and will be dependent upon our consolidated financial condition, results of operations, capital requirements and other factors as our Board may deem relevant at that time.
7 CAPITAL STRUCTURE
7.1 Common Shares
The Company is authorized to issue an unlimited number of Common Shares. There were 68,949,109 Common Shares outstanding at December 31, 2022, and there are 77,599,131 fully paid and non-assessable Common Shares issued and outstanding as of March 31, 2023. The holders of Common Shares are entitled to dividends (subject to any prior rights of the holders of Preferred Shares) if, as and when declared by the Board.
The holders of Common Shares are entitled to one vote per share at any meeting of the shareholders of the Company and to receive in the event of liquidation or dissolution (subject to any prior rights of the holders of Preferred Shares), all assets of the Company as are distributable to the holders of shares.
The complete description of the rights, privileges, restrictions and conditions of the Common Shares is included in our Articles of Continuance, a copy of which is available through the Company's issuer profile on SEDAR at www.sedar.com.
AIF for the year ended December 31, 2022
| 22 |
7.2 Preferred Shares
The Company is authorized to issue an unlimited number of Preferred Shares, issuable in series. The Board may by resolution fix before issuance, the designation, rights, privileges, restrictions and conditions to attach to the Preferred Shares of each series. The Preferred Shares are entitled to preference over the Common Shares with respect to the payment of dividends, if any, and in the event of liquidation, dissolution or winding-up of the Company. As of March 31, 2023, there are no Preferred Shares outstanding.
The complete description of the rights, privileges, restrictions and conditions of the Preferred Shares is included in our Articles of Continuance, a copy of which is available through the Company's issuer profile on SEDAR at www.sedar.com.
8 MARKET FOR SECURITIES
The following tables set forth the price history of the Common Shares listed on the OTC in the United States and on the TSX in Canada.
|
| TSX | OTC | ||||
| Month Ended | High | Low | Volume | High | Low | Volume |
|
| (CDN$) | (CDN$) |
| (US$) | (US$) |
|
| December 31, 2022 | $0.215 | $0.180 | 176,668 | $0.169 | $0.120 | 341,514 |
| November 30, 2022 | $0.235 | $0.160 | 1,122,903 | $0.180 | $0.125 | 894,079 |
| October 31, 2022 | $0.365 | $0.170 | 550,418 | $0.270 | $0.156 | 209,706 |
| September 30, 2022 | $0.570 | $0.370 | 88,541 | $0.455 | $0.279 | 54,968 |
| August 31, 2022 | $0.690 | $0.570 | 67,660 | $0.523 | $0.437 | 51,700 |
| July 31, 2022 | $0.690 | $0.580 | 26,210 | $0.540 | $0.457 | 33,935 |
| June 30, 2022 | $0.810 | $0.640 | 173,842 | $0.644 | $0.520 | 173,335 |
| May 31, 2022 | $0.790 | $0.530 | 712,794 | $0.600 | $0.410 | 1,259,619 |
| April 30, 2022 | $0.600 | $0.530 | 79,900 | $0.473 | $0.410 | 85,644 |
| March 31, 2022 | $0.560 | $0.500 | 94,632 | $0.455 | $0.397 | 65,128 |
| February 28, 2022 | $0.570 | $0.520 | 66,971 | $0.444 | $0.384 | 165,174 |
| January 31, 2022 | $0.680 | $0.530 | 152,345 | $0.532 | $0.419 | 59,629 |
9 ESCROWED AND RESTRICTED SECURITIES
There are no securities held in escrow and no securities subject to a contractual restriction on transfer.
10 DIRECTORS AND OFFICERS
Our Articles of Continuance provide the Board shall be comprised of a minimum of one director and a maximum of 15 directors. At present, our Board is comprised of five members.
Our directors are elected by our shareholders at each annual meeting of shareholders and hold the position either until the next annual shareholders' meeting, the date of their resignation or until a successor is appointed.
AIF for the year ended December 31, 2022
| 23 |
The following sets forth information, including directorships in other reporting issuers, as of March 31, 2023, for our directors, and executive officer:
| Charles Selby Calgary, Alberta, Canada
Director since January 2006 | Mr. Selby obtained a Bachelor of Science (Hons.) degree in Chemical Engineering from Queen’s University, a Juris Doctorate degree from the University of Calgary, and is a registered Professional Engineer and lawyer in the Province of Alberta. He previously practiced law for two large Canadian law firms, specializing in securities and international transactions primarily in the energy business. Mr. Selby served as Vice President of Pengrowth Corporation for almost 20 years participating in the growth of that entity to an enterprise value of more than $4 billion. He also has served as a director and officer of a number of reporting issuers in the oil and natural gas industry including Arakis Energy Corp., with operations in the Sudan. Since 2017 he is President and Director of Caledonian Midstream Corporation, a company that has natural gas and oil production together with a sour natural gas plant and infrastructure in the Alberta foothills and is also the CEO and a director of Wildcat Royalty Corporation.
Mr. Selby is the Lead Director of NXT. He is also Chair of the Compensation Committee and a member of the Disclosure, Management, and the Strategic Planning Committees. |
| John Tilson Montecito, California, USA
Director since February 2015 | After obtaining his Master of Business Administration degree from the University of Southern California and his Chartered Financial Analyst designation, Mr. Tilson had a distinguished career as an analyst, portfolio manager, and advisor in the United States investment and financial industry with firms such as Sutro & Company and EF Hutton & Company. Mr. Tilson joined Roger Engemann & Associates, Inc. in 1983 when assets under management were roughly US$160 million. During his tenure there, the Pasadena Group of Mutual Funds was started, with Pasadena Capital Corporation formed as the holding company for the mutual funds and investment management business. After working as an Analyst and Portfolio Manager, Mr. Tilson later became Executive Vice President & Managing Director of Pasadena Capital Corporation. Assets under management had grown to over US$5 billion by the time the firm was sold to Phoenix Companies in 1997. Mr. Tilson later retired in 2005.
From 2006 to 2012, Mr. Tilson was a member of the Board of Trustees, including three years serving as VP and Chairman of the Long-Range Planning Committee for Lotusland, a Santa Barbara non-profit organization established by Madame Ganna Walska.
Mr. Tilson is the Chair of the Strategic Planning Committee and Audit Committee, and a member of the Compensation Committee, the Governance Committee and the Audit Committee. |
AIF for the year ended December 31, 2022
| 24 |
| Thomas E. Valentine Calgary, Alberta, Canada
Director since November 2007 Corporate Secretary since April 2014 | Mr. Valentine is a Partner with Norton Rose Fulbright Canada LLP, where he has practiced law, both as a barrister and a solicitor, since being admitted to the Law Society of Alberta in 1987. He is a member of the firm's Energy and Infrastructure Practice Group and is involved in energy-related matters throughout the Middle East, North Africa, the Commonwealth of Independent States, Asia and South America.
Mr. Valentine is Corporate Secretary of Touchstone Exploration Inc., and formerly was a director of two other Canadian public companies, Calvalley Petroleum Inc. (to May 2015) and Veraz Petroleum Ltd. (to December 2012).
Mr. Valentine holds a Bachelor of Arts degree from the University of British Columbia, a Bachelor of Laws degree from Dalhousie University, and a Master of Laws degree from the London School of Economics.
Mr. Valentine is the Chair of the Governance Committee and a member of the Compensation and Audit Committees.
|
| Bruce G. Wilcox New York, New York, USA Director since June 2015
| Mr. Wilcox has had a long career as an investment company CEO, analyst and portfolio manager. He spent most of his career with Cumberland Associates, LLC, a New York equity fund, from 1986 through retirement in 2010, progressing from analyst / portfolio manager to partner (1989), and Chairman of the Management Committee (1997). Mr. Wilcox specialized in Cumberland's investments in the energy industry (exploration and production and service companies), with an emphasis on value and long-term holdings. During his tenure, the fund's assets under management ranged from US$0.7 billion to $1.5 billion.
From 1984 to 1986, Mr. Wilcox was with Central National-Gottesman, Inc. as an analyst and portfolio manager on a team responsible for a $500 million listed equity portfolio.
Mr. Wilcox was CEO of E Street Management, LLC from 2016 through 2020 which managed a long/short equity fund of funds. The E Street Fund ceased operations on December 31, 2020 to allow the principals to pursue other opportunities.
From January 2011 to present he has also been one of three managing members of Xiling Fund III, LLC, part of a series of private equity funds (US$100+ million) which specialize in investing in museum-quality Imperial Chinese porcelains, archaic bronzes and ink paintings.
Mr. Wilcox obtained a Bachelor of Arts (Honors), in Modern Chinese from the University of California, Santa Barbara (1977), and a Master of International Management from the American Graduate School of International Management in Phoenix (1980).
Mr. Wilcox is a member of several Boards, including the Teachers College of Colombia University (2003 to date, including acting as the Chair of the Investment Committee), the University of California Santa Barbara Foundation (2003 to date, including as former Chair of the Board of Trustees, Investment and Finance Committees), and is a Trustee (2001 to date) of the Manhattan Institute For Policy Research, a leading urban, state, and national policy institution, which works on matters such as energy policy.
Mr. Wilcox is a member of the Audit, Disclosure, Governance, Strategic Planning and Management Committees. |
AIF for the year ended December 31, 2022
| 25 |
| Gerry Sheehan Dublin, Ireland
Director since July 2021
| Mr. Sheehan has worked continuously in international oil and gas exploration, development, and production for over 38 years. He has broad technical and business development experience in Africa South Asia and Europe.
Mr. Sheehan began his career in 1982 as a geophysicist working with the British National Oil Corporation ("BNOC"), after privatization becoming Britoil plc. He evaluated acreage in the United Kingdom, Dutch, Danish, Irish and Norwegian sectors. In 1986 he transferred to the BNOC Houston office as a technical auditor. He was later seconded to the Global Basin Evaluation Team, focusing on Africa and Asia.
In 1987 Mr. Sheehan joined the fledgling oil company Tullow Oil plc. as part of the founding technical team. The company was successful in Senegal on a World Bank-sponsored gas to power project. New acreage was secured in the UK onshore, Pakistan, Syria and Yemen, with follow-on successful exploration and field development projects.
From 1992 to 1998, Mr. Sheehan held the position of Chief Geophysicist. The company enjoyed ongoing successes in South Asia culminating in the discovery and development of the one trillion cubic feet-sized Bangora gas field in Bangladesh, operated on behalf of Texaco and Chevron. His project team also deployed on the successful re-development of the offshore Espoir field in Cote d’Ivoire, West Africa, with partners Canadian Natural Resources and Addax Petroleum.
From 1998 to 2006 he held the post of International Exploration Manager, this role also encompassed a business development responsibility. This was a time of rapid growth and expansion in the company with new assets acquired in West Africa, North Africa, Central and Eastern Europe and South Asia. In 2004, Mr. Sheehan led the technical due-diligence team on the corporate acquisition of Energy Africa plc. The enlarged company rapidly expanded its footprint in Africa with notable oil exploration successes in Ghana and Uganda, both countries now seen as significant oil provinces.
In 2007 Mr. Sheehan founded a private company, Blackstairs Energy. The company acquired oil field rehabilitation projects in Romania, and exploration acreage in Armenia and Senegal. The company also undertook technical and commercial asset evaluations on behalf of third parties.
In 2014 Mr. Sheehan was a founder of T5 Oil & Gas, a private London-based oil and gas company. T5 is a licence partner in a portfolio of assets in Gabon, comprising offshore oil production and a suite of un-developed oil and gas fields, both offshore and onshore, now being advanced to development. |
AIF for the year ended December 31, 2022
| 26 |
|
| Mr. Sheehan holds a Bachelor of Science degree in Geology and a Master of Science in Applied Geophysics, both obtained from the National University of Ireland. He is a Fellow of the Geological Society (FGS, elected 2009) and is an active member of the American Association of Petroleum Geologists (AAPG, 1986) and the Society of Exploration Geophysicists (SEG, 1996).
Mr. Sheehan is a member of the Management Committee. |
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|
|
| Eugene Woychyshyn Calgary, Alberta, Canada
VP Finance and Chief Financial Officer since December 2018 | Mr. Woychyshyn brings to NXT over 25 years of leadership experience in multiple industries and worldwide regions including North America, Europe and Asia. Mr. Woychyshyn has extensive hands-on experience and accomplishments in mergers and acquisitions, organizational restructuring, purchasing, treasury, financial reporting and control, compliance, human resource management and tax planning. In almost ten years as an expatriate with assignments in Norway, China, the United States and South East Asia, Mr. Woychyshyn developed international business competencies.
Mr. Woychyshyn originally served as a consultant to NXT from November 2017 to November 2018, providing controllership services. From 2015 to 2017 he was the Chief Financial Officer of Imaging Dynamics Company Limited.
Mr. Woychyshyn is a Chartered Professional Accountant, CA, who holds a Bachelor of Commerce (Hons) degree from the University of Manitoba and a Masters of Business Administration degree from St. Joseph's University, Philadelphia PA.
Mr. Woychyshyn is a member of the Disclosure and Management Committees.
|
As of March 31, 2023, the directors and officers of NXT, as a group, beneficially owned or controlled or directed, directly or indirectly, 8,426,379 Common Shares or approximately 10.9% of the issued and outstanding Common Shares.
10.1 Cease Trade Orders, Bankruptcies, Penalties or Sanctions
None of the directors or executive officers is, or has been in the last ten years, a director, CEO or chief financial officer of any company, including NXT, that: (i) was subject to a cease trade order or order similar to a cease trade order or an order that denied the relevant company access to any exemption under securities legislation for a period of more than 30 consecutive days that was issued while the director or executive officer was acting in that capacity; or (ii) was subject to a cease trade order, an order similar to a cease trade order, or an order that denied the relevant company access to any exemption under securities legislation after the proposed director ceased to be a director, CEO or chief financial officer and which resulted from an event that occurred while that person was acting in such a capacity.
AIF for the year ended December 31, 2022
| 27 |
None of the directors or executive officers is, or has been in the last ten years, a director or executive officer of any company, including NXT, that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.
None of the directors or executive officers has, within the last ten years, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold their assets.
Messrs. Tilson and Valentine are considered "independent" within the meaning of Canadian securities law.
10.2 Board Practices
| (a) | Expiration Dates |
No director or member of our administrative, or supervisory bodies has an expiration date for their current term of office. Directors are elected by shareholders at the annual meeting of shareholders and hold the position either until the next annual shareholders' meeting or until a successor is appointed. The period during which each individual has served as a director is set out in the table under "Directors and Officers".
| (b) | Service Contracts |
No non-executive directors have service contracts with the Company or any of its subsidiaries that provide benefits upon termination.
| (c) | Board of Directors Mandate |
The principal role of the Board is stewardship of the Company through the creation of shareholder value, including the protection and enhancement of the value of its assets, as the fundamental objective. The stewardship responsibility means that the Board oversees the general operation of the business and management, which is responsible for the day-to-day conduct of the business. The Board must assess and ensure systems are in place to manage the risks of the Company's business with the objective of preserving the Company's assets. The Board, through the CEO, sets the attitude and disposition of the Company towards compliance with applicable laws, environmental, safety and health policies, financial practices and reporting. In addition to its primary accountability to shareholders, the Board is also accountable to employees, government authorities, other stakeholders and the public. The Mandate of the Board is attached as Appendix "B".
10.3 Board Committees
| (a) | Corporate Governance Committee |
The Company and the Board recognize the importance of corporate governance to the effective management of the Company and to its shareholders. The Company's approach to significant issues of corporate governance is designed with a view to ensuring that the business and affairs of the Company are effectively managed so as to enhance shareholder value. The Mandate of the Corporate Governance Committee is posted on the Company’s website and may be viewed at www.nxtenergy.com or you may request a copy be mailed to you by writing to our offices at Suite 302, 3320 – 17th Avenue SW Calgary, Alberta, Canada, T3E 0B4.
AIF for the year ended December 31, 2022
| 28 |
The Board and management endorse the need to establish forward-looking governance policies and to continuously evaluate and modify them to ensure their effectiveness.
| (i) | Composition |
Mr. Valentine (Chair), Mr. Wilcox and Mr. Tilson are members of the Corporate Governance Committee. Mr. Valentine and Mr. Tilson and are independent.
| (ii) | Responsibilities |
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The Corporate Governance Committee's duties, as outlined in its charter, are to deal with the Company's approach to corporate governance and the promotion of compliance with industry and regulatory standards. The committee is responsible for overseeing and assessing the functioning of the Board and the committees of the Board and for the development, recommendation to the Board, implementation and assessment of effective corporate governance principles and guidelines. The Committee's responsibilities also include identifying new candidates for appointment as directors and recommending that the Board select qualified director candidates for election at the next annual meeting of shareholders.
| (b) | Disclosure Committee |
| (i) | Composition |
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The Disclosure Committee currently consists of Mr. Wilcox and Mr. Selby and Mr. Woychyshyn.
| (ii) | Responsibilities |
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The Disclosure Committee's duties are to ensure that the Company provides timely, accurate and balanced disclosure of all material information about the Company and to provide fair and equal access to such information. All news releases, including but not limited to releases of material information, are managed by the Disclosure Committee. If the information has been determined by the Disclosure Committee to be material, news releases will be prepared, reviewed and then disseminated through a news-wire service that provides simultaneous service to widespread news services and financial media. Additionally, the Disclosure Committee is responsible for ensuring public disclosure through filing these news releases on SEDAR, EDGAR, and our website.
| (c) | Audit Committee |
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| (i) | Composition |
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The Audit Committee consists of Messrs. Tilson (Chair), Wilcox, and Valentine. Mr. Tilson and Mr. Valentine are independent. Mr. Tilson and Mr. Wilcox are financially literate. The Audit Committee Charter is attached in Appendix "A".
| (A) | Bruce Wilcox |
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Mr. Wilcox holds a Master of International Management from the American Graduate School of International Management in Phoenix. His career as an investment company CEO, analyst and portfolio manager was spent primarily with Cumberland Associates, LLC, a New York-based equity fund, where he was a partner, and served as Chairman of the Managing Committee.
| (B) | John Tilson |
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After obtaining a Master of Business Administration degree and his Chartered Financial Analyst designation, Mr. Tilson had a distinguished career as an analyst, portfolio manager, and advisor in the United States investment and financial industry with such firms as Sutro & Company and EF Hutton & Company. Mr. Tilson is retired.
AIF for the year ended December 31, 2022
| 29 |
| (C) | Thomas Valentine |
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Mr. Valentine is a lawyer. He has practiced law, both as a barrister and a solicitor, since being admitted to the Law Society of Alberta in 1987. He is a member of the his firm’s Energy and Infrastructure Practice Group and is involved in energy-related matters throughout the Middle East, North Africa, the Commonwealth of Independent States, Asia and South America.
Mr. Tilson and Mr. Wilcox of the Audit Committee have the educational background and experience that provides them with the knowledge and ability to understand accounting policies and related financial reporting and disclosure issues, in order to fulfill their duties and responsibilities as an Audit Committee member. Mr. Valentine will undertake to meet the requirements to become financially literate.
Given the passing of Mr. Liszicasz and the establishment of the management committee, on a temporary basis and in exceptional circumstances, National Instrument 52-110 permits the conduct of business by an Audit Committee which does not meet the requirement that the Audit Committee be fully independent provided that a majority of the Committee satisfy the test of independence. With Mr. Tilson and Mr. Valentine being independent, the Audit Committee meets this requirement.
| (ii) | Oversight |
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The Board has adopted all recommendations by the Audit Committee with respect to the nomination and compensation of the external auditor.
| (iii) | Pre-Approval Policies and Procedures |
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The Audit Committee has adopted a formal policy requiring the pre-approval of all audit and non-audit related services to be provided by the Company's principal auditor prior to the commencement of the engagement, subject to the following:
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| · | the Audit Committee will review annually a list of audit, audit related, recurring tax and other non-audit services and recommend pre-approval of those services for the upcoming year. Any additional requests will be addressed on a case-by-case specific engagement basis; |
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| · | for engagements not on the pre-approved list, the Audit Committee has delegated to the Chair of the Audit Committee the authority to pre-approve individual non-audit service engagements with expected costs of up to $50,000 (annual aggregate total) subject to reporting to the Audit Committee, at its next scheduled meeting; and |
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| · | for engagements not on the pre-approved list and with expected costs greater than $50,000 (annual aggregate total), the entire Audit Committee must approve this service, generally at its next scheduled meeting. |
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| (iv) | Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees |
AIF for the year ended December 31, 2022
| 30 |
The following table sets forth the aggregate audit fees, audit-related fees, tax fees, and all other fees of our principal accountants and all other fees billed for products and services provided by our principal accountants for each of the fiscal years ended December 31, 2022 and 2021.
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| 2022 | 2021 |
| Audit fees | $407,670 | $234,330 |
| Audit-related fees | - | - |
| Tax fees | 12,273 | 1,338 |
| Other fees | - | - |
| Total fees | 419,943 | 235,668 |
Our Audit Committee nominates and engages our independent auditors to audit our financial statements. Our Audit Committee also requires management to obtain the Audit Committee's approval on a case-by-case basis before engaging our independent auditors to provide any audit or permitted non-audit services to the Company or any of our subsidiaries. All fees shown have been pre-approved by the Audit Committee.
| (d) | Compensation Committee |
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| (i) | Composition |
Messrs. Selby (Chair), Tilson, and Valentine are members of the Compensation Committee. Mr. Tilson and Mr. Valentine are independent. The charter or mandate of the Compensation Committee is posted on the Company’s website and may viewed at www.nxtenergy.com or you may request a copy be mailed to you by writing to our offices at Suite 302, 3320 – 17th Avenue SW, Calgary, Alberta, Canada, T3E 0B4.
| (ii) | Responsibilities |
The Compensation Committee's duties, as outlined in its charter, are to deal with the assessment of management and succession to key positions and compensation within the Company. The Compensation Committee shall assist the Board in discharging the Board's oversight responsibilities relating to the compensation and retention of key senior management employees, and in particular the CEO, with the skills and expertise needed to enable the Company to achieve its goals and strategies at fair and competitive compensation and appropriate performance incentives. In discharging its responsibilities, the Compensation Committee will report and, where appropriate make recommendations to the Board in respect of the matters identified in the charter.
| (e) | Strategic Planning Committee |
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| (i) | Composition |
Messrs. Tilson (Chair), Selby and Wilcox are members of the Strategic Planning Committee. Mr. Tilson is independent. The Strategic Planning Committee assists with addressing long range planning considerations, including plans for growth and management succession.
11 CONFLICTS OF INTEREST
Potential material conflicts of interest with directors, officers and insiders are discussed in sections 3.1, 5.8 and 5.9 of this AIF, which include related party transactions and segregation of duties.
AIF for the year ended December 31, 2022
| 31 |
Technology Transfer Agreement
Upon execution of the TTA on December 31, 2006, Mr. Liszicasz transferred all his rights and entitlements to the SFD® technology for use in the field of hydrocarbon exploration to NXT in exchange for receiving 10,000,000 non-voting, convertible Preferred Shares. Effective May 22, 2013, Mr. Liszicasz formally converted 2,000,000 of these Preferred Shares into 2,000,000 Common Shares. NXT's independent members of the Board elected to retain the SFD® technology by converting the remaining outstanding Preferred Shares to Common Shares effective August 31, 2015.
Following the conversion, Mr. Liszicasz retained the rights to utilize the SFD® technology in all other potential field-of-use applications. Please also refer to "Section 3.1 Three Year History (b) 2021" for discussion on the Acquisition.
12 TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar is Computershare Trust Company of Canada, located in Calgary, Alberta, Canada at #800, 324 - 8th Avenue SW, Calgary, AB T2P 2Z2, www.computershare.com.
13 LEGAL PROCEEDINGSAND REGULATORY ACTIONS
The Company was not party to, and its property was not the subject of, any legal proceedings during the year ended December 31, 2022, and no settlement agreements were entered into before a court relating to securities legislation or with a securities regulatory authority during the period. Furthermore, to the best of our knowledge, there are no legal or regulatory proceedings existing or pending which have had or may have significant effects on the Company's financial position or profitability, and no such proceedings are pending or known to be contemplated by governmental or regulatory authorities.
14 INTERESTS OF EXPERTS
KPMG LLP are the auditors of the Company and have confirmed with respect to the Company that they are independent within the meaning of the relevant rules and related interpretations prescribed by the relevant professional bodies in Canada and any applicable legislation or regulations, and also that they are independent accountants with respect to the Company under all relevant United States professional and regulatory standards.
15 ADDITIONAL INFORMATION
The Company's consolidated financial statements are stated in Canadian dollars and are prepared in accordance with United States generally accepted accounting principles. Additional information relating to NXT can be found on SEDAR at www.sedar.com.
Additional information, including directors' and officers' remuneration, principal holders of NXT's securities, and options to purchase securities, is included in the information circular for NXT's most recent annual meeting of shareholders that involves the election of directors. Additional financial information is contained in NXT's audited consolidated financial statements and management's discussion and analysis for the year ended December 31, 2022.
AIF for the year ended December 31, 2022
| 32 |
APPENDIX "A"
AUDIT COMMITTEE CHARTER
INTRODUCTION
This charter (the "Charter") has been adopted to govern the composition, mandate, responsibilities and authority of the Audit Committee (the "Committee") of the Board of Directors (the "Board") of NXT Energy Solutions Inc. (the "Company").
COMPOSITION AND PROCEDURES
| 1. | The Committee shall be appointed by the Board and shall be composed of three directors, with at least two of whom being "independent" as required by the Business Corporations Act (Alberta) (the "Act"). |
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| 2. | The Board will appoint the chair of the Committee. |
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| 3. | Quorum for meetings shall be a majority of the members of the Committee, present in person or by telephone or other telecommunication device that permits all persons participating in the meeting to speak and to hear each other. |
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| 4. | Meetings of the Committee shall be conducted as follows: |
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| (a) | the Committee shall meet, in person or by teleconference, at least four times annually at such times and locations as may be requested by the chair of the Committee. Notice of meetings to the members shall be the same as set out in the by-laws of the Company for meetings of the Board. The Auditors or any member of the Committee may request a meeting of the Committee; and |
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| (b) | management representatives may be invited to attend meetings (except private sessions with the Auditors as defined below). |
PRIMARY RESPONSIBILITIES OF THE COMMITTEE
The primary responsibilities of the Committee are:
| 1. | To recommend to the Board: |
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| (a) | the external auditor (the "Auditors") to be nominated for appointment by the Shareholders of the Company for the purpose of preparing or issuing the Auditor's report or performing other audit, review or attest services for the Company; and |
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| (b) | the compensation of the Auditors. |
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| 2. | To oversee the work of the Auditors in preparing or issuing the Auditor's report on the Company's annual consolidated financial statements or performing other audit, review or attest services for the Company including the resolution of disagreements between management of the Company and the Auditors regarding financial reporting. |
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| 3. | To pre-approve, as required by the Act and subject to the exemptions in the Act, all non-audit services to be provided to the Company by the Auditors. The Committee may, in accordance with the requirements of the Act, delegate to one or more members of the Committee the authority to pre-approve non-audit services to be provided by the Auditors, provided that all such pre-approvals of non-audit services shall be presented to the Committee at its first scheduled meeting following such pre-approval. |
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| 4. | To review: |
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| (a) | the Company's unaudited quarterly consolidated financial statements for the first, second and third quarters of the Company's fiscal year ("quarterly statements") and the Company's audited annual consolidated financial statements ("annual statements"); |
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| (b) | the Management's Discussion and Analysis ("MD&A") prepared in conjunction with the quarterly and annual statements; and |
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| (c) | all press releases to be issued by the Company with respect to its annual and quarterly earnings and press releases on other material financial reporting matters. |
| 5. | To satisfy itself that adequate procedures are adopted by the Company for the review of the Company's public disclosure of financial information extracted or derived from the Company's financial statements other than the public disclosure referred to in section 4 above, and to regularly assess the adequacy of such procedures. |
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| 6. | To satisfy itself that adequate procedures are adopted and oversee the maintenance of procedures for: |
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| (a) | the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters; and |
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| (b) | the confidential anonymous submission by employees of the Company and its subsidiaries of concerns regarding questionable accounting or auditing matters. |
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| 7. | To review and approve the Company's and its subsidiaries' hiring policies regarding partners, employees and former partners and employees of the current and former Auditors of the Company and its subsidiaries. | |
AUTHORITY OF THE COMMITTEE
Subject to prior consultation with the Chief Executive Officer or the Chief Financial Officer (except in unusual circumstances), the Committee is authorized to:
| 1. | engage independent counsel and other advisors it determines necessary to carry out the Committee's duties and responsibilities; |
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| 2. | set and require the Company to pay the compensation and charged expenses for any advisors engaged by the Committee; and |
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| 3. | communicate directly with any internal audit staff of the Company and its subsidiaries (if any) and the Auditors. |
AIF for the year ended December 31, 2022
| 34 |
ADDITIONAL RESPONSIBILITIES AND DUTIES OF THE COMMITTEE
Auditors
| 1. | The Committee shall ensure that the Company requires and instructs the Auditors to report directly to the Committee. |
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| 2. | The Committee is responsible for ensuring the independence of the Auditors. On an annual basis, the Committee shall obtain a formal written statement from the Auditors delineating all relationships between the Auditors and the Company and confirming the independence of the Auditors. This written statement shall be obtained in conjunction with the audit of the annual financial statements after each fiscal year end. |
Review of Annual Financial Statements
The Committee shall review the annual financial statements and related MD&A of the Company prior to their public release and shall report the results of its review to the Board and make recommendations to the Board with respect to Board approval of the financial statements and related MD&A. At the Committee meeting at which the Company's annual financial statements are to be reviewed, the Committee shall meet, in person or by teleconference, with representatives of the Auditors and with the Company's management to assess and understand the annual financial statements and the results of the audit including, but not limited to:
| 1. | that the Company's system of internal controls and financial reporting systems are adequate to produce fair and complete disclosure of its financial results; |
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| 2. | that the Company's reporting is complete and fairly presents its financial condition in accordance with generally accepted accounting principles; |
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| 3. | that accounting judgments and estimates used by management are reasonable and do not constitute earnings management; |
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| 4. | that risk management policies are in place to identify and reduce significant financial and business risks; and |
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| 5. | that the Company has in place a system to ensure compliance with applicable laws, regulations and policies. |
Review of Quarterly Financial Statements
The Committee shall review the interim quarterly financial statements and related MD&A of the Company prior to their public release and shall report the results of its review to the Board and make recommendations to the Board with respect to Board approval of the quarterly statements and related MD&A unless the Board has delegated to the Committee the authority to approve the quarterly statements and related MD&A, in which case the Committee shall also approve the quarterly statements and related MD&A. The review by the Company shall be substantially completed prior to the issuance of a press release respecting the quarterly financial results. The Committee shall meet with the Company's management to assess and understand the interim quarterly financial statements and to discuss the results of their preparation and review.
AIF for the year ended December 31, 2022
| 35 |
Other Responsibilities and Duties
| 1. | As part of the quarterly and annual reviews described above, the Committee will: |
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| (a) | meet with management in the absence of the Auditors for the annual review; |
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| (b) | meet with the Auditors in the absence of management for the annual review; |
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| (c) | review with management and the Auditors any proposed changes in major accounting policies, the presentation and impact of significant risks and uncertainties, and key estimates and judgments of management that may be material to financial reporting; |
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| (d) | review with management and the Auditors any significant financial reporting issues discussed during the fiscal period and the method of resolution; |
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| (e) | review any problems experienced by the Auditors in performing the annual audit, including any restrictions imposed by management or significant accounting issues on which there was a disagreement with management; |
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| (f) | obtain an explanation from management of all significant variances between comparative reporting periods; |
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| (g) | review the post-audit or management letter, containing the recommendations of the Auditors, and management's response and subsequent follow up to matters raised by the Auditors; |
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| (h) | review any evaluation of internal controls by the Auditors, together with management's response; and |
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| (i) | review and reassess the Charter for adequacy at least annually and make changes as it deems necessary. |
| 2. | In addition to the quarterly and annual reviews, the Committee will: |
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| (a) | prior to the commencement of each annual audit, meet with the Auditors to review the Auditors' audit plan for the ensuing audit; |
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| (b) | review with management and the Auditors all material accounting and financial issues affecting the Company not dealt with in annual and quarterly reviews; and |
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| (c) | review annually and recommend changes to the Company's Code of Conduct & Business Ethics. |
| 3. | The Committee shall perform such other duties as may be required by the Board or as may be delegated to the Committee by the Board. |
AIF for the year ended December 31, 2022
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APPENDIX "B"
BOARD OF DIRECTORS MANDATE
PURPOSE
The principal role of the Board of Directors (the "Board") of NXT Energy Solutions Inc. (the "Company") is stewardship of the Company through the creation of shareholder value, including the protection and enhancement of the value of its assets, as the fundamental objective. The stewardship responsibility means that the Board oversees the conduct of the business and management, which is responsible for the day‑to‑day conduct of the business. The Board must assess and ensure systems are in place to manage the risks of the Company's business with the objective of preserving the Company's assets. The Board, through the Chief Executive Officer ("CEO"), sets the attitude and disposition of the Company towards compliance with applicable laws, environmental, safety and health policies, financial practices and reporting. In addition to its primary accountability to shareholders, the Board is also accountable to employees, government authorities, other stakeholders and the public.
PRIMARY RESPONSIBILITIES
The principal responsibilities of the Board, which are required to ensure the overall stewardship of the Company are as follows:
| 1. | the Board must ensure that there are long‑term goals in place and must adopt a strategic planning process. The CEO, with the approval of the Board, must establish long‑term goals for the Company. The CEO formulates the Company's strategy, policies and proposed actions and presents them to the Board for approval. The Board brings objectivity and judgment to this process. The Board ultimately approves, on an annual basis, the strategic plan which takes into account, among other things, the opportunities and risks of the Company's business; |
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| 2. | the Board must identify and have an understanding of the principal risks associated with the Company's businesses and must ensure that appropriate systems are in place which effectively monitor and manage those risks; |
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| 3. | the Board must ensure that processes are in place to enable it to monitor and measure management's, and in particular the CEO's, performance in achieving the Company's stated objectives. These processes should include appropriate training, development and succession planning of management; |
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| 4. | to the extent feasible, the Board shall satisfy itself as to the integrity of the CEO and other executive officers and that the CEO and other executive officers create a culture of integrity throughout the Company; |
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| 5. | the Board must ensure that the necessary internal controls and management systems are in place that effectively monitor the Company's operations and ensure compliance with applicable laws, regulations and policies; |
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| 6. | the Board must monitor compliance with the Company's Code of Business Conduct and Ethics; and |
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| 7. | the Board must ensure the Company has adopted a communication policy which effectively communicates with and receives feedback from shareholders. The Board must also ensure that the Company has appropriate processes in place to effectively communicate with employees, government authorities, other stakeholders and the public. |
AIF for the year ended December 31, 2022
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NON‑DELEGABLE RESPONSIBILITIES
Pursuant to the Business Corporations Act (Alberta) (the "Act"), certain matters are considered to be of such importance, so as to warrant the attention of all Directors and, accordingly, the Act prescribes that the following matters either cannot be delegated or may only be delegated in a qualified or partial manner:
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| · | the submission of items to shareholders for their approval; |
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| · | the filling of a vacancy among the directors or in the office of auditor; |
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| · | the appointment of additional directors; |
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| · | the issue of securities; |
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| · | the declaration of dividends; |
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| · | the purchase, redemption or other acquisition of the Company's own shares; |
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| · | the payment of certain commissions prescribed by the Act; |
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| · | the approval of a management proxy circular; |
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| · | the approval of annual financial statements; and |
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| · | the adoption, amendment or repeal of by‑laws. |
CUSTOMARY BOARD MATTERS
The following typifies matters customarily considered by the Board in fulfilling its responsibility for stewardship of the Company. The Board may determine it appropriate to delegate certain of these matters to committees of the Board:
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| · | the appointment of officers, other than executive officers; |
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| · | adopting a process to consider the competencies and skills the Board, as a whole, should possess and assess the competencies and skills of each Board member and consider the appropriate size of the Board, with a view to facilitating effective decision-making; |
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| · | determining the remuneration of directors and auditors; |
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| · | reviewing and recommending to shareholders, changes to capital structure; |
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| · | approving the Company's long-term strategy and the annual capital expenditure plan of the Company and its subsidiaries and where appropriate any supplementary capital plan; |
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| · | approving banking, borrowing and investment policies; |
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| · | determining dividend policy; |
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| · | developing the Company's approach to corporate governance including, without limitation, developing a set of corporate governance principles and guidelines; |
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| · | approving the holding, location and date of meetings of shareholders; |
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| · | appointment of members to committees of the Board of Directors and approving terms of reference for and the matters to be delegated to such committees; |
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| · | granting any waivers from the Company's Code of Business Conduct and Ethics for the benefit of the Company's directors or executive officers; |
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| · | granting and delegating authority to designated officers and employees including the authority to commit capital, open bank accounts, sign bank requisitions and sign contracts, documents and instruments in writing; |
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| · | determining the number of directors and recommending nominees for election by the shareholders; |
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| · | approving amendments to the Company's existing: Stock Option Plan, employee benefits plans, or such other plans as the Company approves from time to time; |
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| · | approving the acquisition or disposition or certain corporate assets; and |
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| · | appointing the Company's transfer agents and registrars. |
BOARD COMMITTEES
The Board of Directors has the authority to appoint a committee or committees of the Board and may delegate powers to such committees (with the exceptions prescribed by the Act). The matters to be delegated to committees of the Board and the constitution of such committees are assessed annually or more frequently as circumstances require. The following committees have been constituted:
| 1. | the Audit Committee, to deal with financial reporting and control systems; |
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| 2. | the Compensation Committee, to deal with the assessment of management and succession to key positions and compensation within the Company; |
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| 3. | the Disclosure Committee, to deal with the Company's approach to disclosure and the promotion of compliance; and |
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| 4. | the Corporate Governance Committee, to deal with the Company's approach to corporate governance and the promotion of compliance. |
COMPOSITION & PROCEDURE
The Board of Directors is elected annually by shareholders. The number of Directors to be elected at shareholders meetings is fixed by the by-laws. While the election of directors is ultimately determined by the shareholders, it is the policy of the Board that a majority of the Directors be independent (as defined under applicable stock exchange rules and securities laws).
The Chairman of the Board presides as Chair at all meetings of the Board and shareholders of the Company. The Corporate Secretary or the Recording Secretary attends all meetings of the Board and shareholders and records the proceedings thereof. The Corporate Secretary prepares and keeps minutes and records of all meetings of the Board.
AIF for the year ended December 31, 2022
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Meetings of the Board of Directors, including telephone conference meetings, are to be held at such time and place as the Chairman of the Board, or any two Directors, may determine. Notice of meetings shall be given to each Director in accordance with the by-laws. Meetings of the Board of Directors may be held without formal notice if all of the Directors are present and do not object to notice not having been given, or if those absent waive notice in any manner before or after the meeting.
Notice of meeting may be delivered personally, given by mail, facsimile or other electronic means of communication.
Each Board member is expected to attend Board meetings and meetings of committees of which he or she is a member and to become familiar with deliberations and decisions as soon as possible after any missed meetings. In that regard, members of the Board are expected to prepare for Board (and committee) meetings by reviewing meeting materials distributed to members of the Board, to the extent feasible, in advance of such meetings. Matters of a confidential or sensitive nature may be discussed at Board (or committee) meeting without advance distribution of meeting materials to members of the Board. It is expected that members of the Board will actively participate in determining and setting the long and short-term goals and interests of the Company.
In recognition of its independence, the Board shall regularly hold discussions without management present.
A resolution in writing signed by all the Directors entitled to vote on that resolution at a meeting of the Directors is as valid as if it had been passed at a meeting of the Directors. A copy of any such resolution in writing is kept with the minutes of the proceedings of the Directors.
At meetings of the Board, any matter requiring a resolution of the Directors is decided by a majority of the votes cast on the question; and in the case of an equality of votes, the Chair of the meeting is entitled to a second or casting vote.
The Board shall ensure that there is a process in place for annually evaluating the effectiveness of the Board, the committees of the Board and individual directors.
COMPENSATION
No director, unless they is are an officer of the Company, should receive remuneration from the Company other than compensation received in their capacity as a director.
AIF for the year ended December 31, 2022
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EXHIBIT 99.4
FORM 52-109F1
CERTIFICATION OF ANNUAL FILINGS
We, Bruce G. Wilcox, Gerry Sheehan and Charles Selby, together Directors and members of the Management Committee of the Board of Directors of NXT Energy Solutions Inc., certify the following:
| 1. | Review: We have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the "annual filings") of NXT Energy Solutions Inc. (the "issuer") for the financial year ended December 31, 2022. |
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| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, for the period covered by the annual filings. |
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| 3. | Fair presentation: Based on our knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the annual filings. |
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| 4. | Responsibility: The issuer's other certifying officer and we are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer. |
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| 5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer and we have, as at the financial year end |
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| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
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| (i) | material information relating to the issuer is made known to us by others, particularly during the period in which the annual filings are being prepared; and |
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| (ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
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| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP. |
| 5.1 | Control framework: The control framework the issuer's other certifying officer and we used to design the issuer's ICFR is the Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission. |
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| 5.2 | ICFR – material weakness relating to design: The issuer has disclosed in its annual MD&A for each material weakness relating to design existing at the financial year end |
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| (a) | a description of the material weakness; |
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| (b) | the impact of the material weakness on the issuer's financial reporting and its ICFR; and |
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| (c) | the issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness. |
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| 5.3 | N/A |
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| 6. | Evaluation: The issuer's other certifying officer and we have |
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| (a) | evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer's DC&P at the financial year end and the issuer has disclosed in its annual MD&A our conclusions about the effectiveness of DC&P at the financial year end based on that evaluation; and |
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| (b) | evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer's ICFR at the financial year end and the issuer has disclosed in its annual MD&A |
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| (i) | our conclusions about the effectiveness of ICFR at the financial year end based on that evaluation; and |
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| (ii) | for each material weakness relating to operation existing at the financial year end |
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| (A) | a description of the material weakness; |
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| (B) | the impact of the material weakness on the issuer's financial reporting and its ICFR; and |
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| (C) | the issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness. |
| 7. | Reporting changes in ICFR: The issuer has disclosed in its annual MD&A any change in the issuer's ICFR that occurred during the period beginning on October 1, 2022 and ended on December 31, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR. |
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| 8. | Reporting to the issuer's auditors and board of directors or audit committee: The issuer's other certifying officer and we have disclosed, based on our most recent evaluation of ICFR, to the issuer's auditors, and the board of directors or the audit committee of the board of directors any fraud that involves management or other employees who have a significant role in the issuer's ICFR. |
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| Date: March 31, 2023 | |
| "/s/ Charles Selby" | |
| Charles Selby | |
| Lead Director and member of the Management Committee of the Board of Directors | |
| "/s/ Bruce G. Wilcox" |
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| Bruce G. Wilcox |
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| Director and member of the Management Committee of the Board of Directors | |
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| "/s/ Gerry Sheehan" |
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| Gerry Sheehan |
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| Director and member of the Management Committee of the Board of Directors | |
| 2 |
EXHIBIT 99.5
FORM 52-109F1
CERTIFICATION OF ANNUAL FILINGS
I, Eugene Woychyshyn , Vice President, Finance and Chief Financial Officer of NXT Energy Solutions Inc., certify the following:
| 1. | Review: I have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the "annual filings") of NXT Energy Solutions Inc. (the "issuer") for the financial year ended December 31, 2022. |
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| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, for the period covered by the annual filings. |
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| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the annual filings. |
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| 4. | Responsibility: The issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer. |
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| 5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officers and I have, as at the financial year end |
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| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
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| (i) | material information relating to the issuer is made known to us by others, particularly during the period in which the annual filings are being prepared; and |
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| (ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
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| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP. |
| 5.1 | Control framework: The control framework the issuer's other certifying officers and I used to design the issuer's ICFR is the Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission. |
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| 5.2 | ICFR – material weakness relating to design: The issuer has disclosed in its annual MD&A for each material weakness relating to design existing at the financial year end |
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| (a) | a description of the material weakness; |
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| (b) | the impact of the material weakness on the issuer's financial reporting and its ICFR; and |
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| (c) | the issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness. |
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| 1 |
| 5.3 | N/A |
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| 6. | Evaluation: The issuer's other certifying officers and I have |
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| (a) | evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer's DC&P at the financial year end and the issuer has disclosed in its annual MD&A our conclusions about the effectiveness of DC&P at the financial year end based on that evaluation; and |
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| (b) | evaluated, or caused to be evaluated under our supervision, the effectiveness of the issuer's ICFR at the financial year end and the issuer has disclosed in its annual MD&A |
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| (i) | our conclusions about the effectiveness of ICFR at the financial year end based on that evaluation; and |
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| (ii) | for each material weakness relating to operation existing at the financial year end |
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| (A) | a description of the material weakness; |
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| (B) | the impact of the material weakness on the issuer's financial reporting and its ICFR; and |
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| (C) | the issuer's current plans, if any, or any actions already undertaken, for remediating the material weakness. |
| 7. | Reporting changes in ICFR: The issuer has disclosed in its annual MD&A any change in the issuer's ICFR that occurred during the period beginning on October 1, 2022 and ended on December 31, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR. |
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| 8. | Reporting to the issuer's auditors and board of directors or audit committee: The issuer's other certifying officers and I have disclosed, based on our most recent evaluation of ICFR, to the issuer's auditors, and the board of directors or the audit committee of the board of directors any fraud that involves management or other employees who have a significant role in the issuer's ICFR. |
| Date: March 31, 2023 | |
| "/s/ Eugene Woychyshyn" | |
| Eugene Woychyshyn | |
| Vice President, Finance and Chief Financial Officer |
| 2 |
EXHIBIT 99.6
EXHIBIT 99.7
