NXT Energy Solutions Inc 20-F for FY2023
NXT Energy Solutions Inc. (NSFDF)
About this 20-F
NXT Energy Solutions Inc filed this 20-F on April 26, 2024, covering the fiscal year ended December 31, 2023 (FY2023).
Headline figures
Fiscal year ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- 2.15M CAD
- compared with 0 CAD a year earlier
- Net loss
- 5.45M CAD
- compared with a net loss of 6.73M CAD a year earlier
- Diluted EPS
- -0.07 CAD
- compared with -0.10 CAD a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
Registration Statement Pursuant To Section 12(b) or (g) of the Securities Exchange Act of 1934 | |
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Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended | |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the transition period from __ to __ | |
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OR | |
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Shell Company Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
Date of event requiring this shell company report: | |
Commission file number
(Exact Name of Registrant as Specified in its Charter) |
Alberta,
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Phone:
Facsimile: 403-264-6442
(Name, Telephone, E-mail and/or Facsimile number and address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act: None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
78,025,237 common shares outstanding as of December 31, 2023 (
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Yes ☐
Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ |
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☒ | Emerging growth Company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board | ☐ | Other | ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes
Auditor Name: | Firm ID# | Auditor Location: |
TABLE OF CONTENTS
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MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
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PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
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20-F for the year ended December 31, 2023
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FORWARD-LOOKING STATEMENTS
NXT Energy Solutions Inc. is a Calgary-based technology company whose proprietary airborne SFD® survey system, applied in numerous basins around the world, uses the principles of quantum mechanics to infer stress anomalies of exploration interest. The method can be used both onshore and offshore to remotely identify areas conducive to fluid entrapment in order to recommend areas with commercial hydrocarbon and/or geothermal potential. The SFD® survey system enables our 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 Energy Solutions Inc. NXT Energy Solutions Inc. provides its clients with an effective and reliable method to reduce time, costs, and risks related to exploration.
Except for any historical information contained herein, the matters discussed in this Annual Report on Form 20-F contain certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business. These statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. This information also relate to our future prospects, developments and business strategies. These forward-looking statements are identified by their use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “will” and similar terms and phrases, including references to assumptions. These forward-looking statements involve risks and uncertainties, including current trend information, projections for deliveries and other trend projections, that may cause our actual future activities and results of operations to be materially different from those suggested or described in this Annual Report on Form 20-F.
| · | receipt of accounts receivable from the Turkish SFD® survey (as defined below); |
| · | receipt of the remaining US$900,000 from the Ataraxia Capital (“Ataraxia”) (subscription agreement and approval of terms for the remaining US$900,000 by the Toronto Stock Exchange (“TSX”); |
| · | the Company’s ability to successfully work with Synergy (defined herein) and Ataraxia to develop future business in the African continent; |
| · | receipt of funding under the NRC IRAP (as defined herein); |
| · | expectations regarding maintenance performed on the Company’s leased aircraft; |
| · | expectations regarding the future vesting, settlement and expiry of securities issued in connection with the Company’s share-based compensation plans; |
| · | expectations regarding the amortization of the Company’s intellectual property (“IP”) assets; |
| · | the Company’s ability to achieve the remaining milestone with respect to the Consideration (as defined below) owing to Mr. George Liszicasz, the future payment of such Consideration to the estate of Mr. George Liszicasz, 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; |
| · | expectations regarding competition within the industries in which the Company operates; |
| · | approval by the TSX to issue common shares for payables to the marketing consultant and the issuance of such shares in connection therewith; |
| · | the Company’s ability to continue operating as a going concern; |
| · | the Company’s ability to pay deferred operating costs such as payroll and general and administrative (“G&A”); |
| · | the Company’s ability to continue making payments on its office lease, its aircraft lease and the effects of any default under either such lease; |
| · | the Company’s ability to pay amounts owing on the Ataraxia Debentures or the November Debentures (both defined herein); |
| · | expectations regarding the future conversion of the Ataraxia Debentures or the November Debentures into common shares or preferred shares of the Company, as applicable; |
| · | expectations around the future appointment of a representative of MCAPM, LP and Michael P. Mork (together “Mork Capital”) to the Board, including the identity of such representative and the timing of such appointment; |
| · | the Company’s ability to repay the amounts owing under the HASCAP Loan (as defined herein); |
| · | the timing and value of payments owing under the Company’s office lease; |
| · | expectations regarding the Company’s DCPs and ICFR (each as defined herein), including the Company’s ability to further adjust such DCPs and ICFR and mitigate material weaknesses going forward; |
| · | estimates related to our future financial position and liquidity including certain contractual obligations; and |
| · | general business strategies and objectives. |
20-F for the year ended December 31, 2023
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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; |
| · | 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 and inflation); and |
| · | approval of the next phase of the NRC IRAP project. |
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 additional new revenue contracts; |
| · | health, safety, and the environment; |
| · | our ability to develop and commercialize the geothermal technology; |
| · | our ability to service existing debt; |
| · | our ability to protect and maintain our IP and rights to our SFD® technology; |
| · | our reliance on a limited number of key personnel; |
| · | our reliance on a single aircraft; |
| · | our reliance on a limited number of clients; |
| · | counterparty credit risk; |
| · | foreign currency and interest rate fluctuations; |
| · | the likelihood that the Company’s DCPs and ICFR (each 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). and |
| · | other factors described herein under “Risk Factors” (see Item 3. D.). |
If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected. Given these uncertainties, users of the information included in this Annual Report on Form 20-F, including investors and prospective investors, are cautioned not to place undue reliance on such forward-looking statements. We do not intend to update the forward-looking statements included in this Annual Report on Form 20-F.
In this Annual Report on Form 20-F, except as specified otherwise or unless the context requires otherwise, “we”, “our”, “us”, 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.
All financial information contained herein is expressed in Canadian dollars (“CDN$”) unless otherwise stated.
20-F for the year ended December 31, 2023
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
This Form 20-F is being filed as an annual report under the United States Securities Exchange Act of 1934, as amended, (the "U.S. Exchange Act") and, as such, there is no requirement to provide any information under this item.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
This Form 20-F is being filed as an annual report under the U.S. Exchange Act and, as such, there is no requirement to provide any information under this item.
ITEM 3. KEY INFORMATION
A. [Reserved].
B. Capitalization and indebtedness.
This Form 20-F is being filed as an annual report under the U.S. Exchange Act and, as such, there is no requirement to provide any information under this item.
C. Reasons for the offer and use of proceeds.
This Form 20-F is being filed as an annual report under the U.S. Exchange Act and, as such, there is no requirement to provide any information under this item.
D. Risk factors.
Investing in our common shares involves a high degree of risk. In addition to the other information included in this document, 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.
Our ability to continue operating.
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 the 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 the consolidated financial statements have been issued.
Since 2022, the Company has deferred payment of certain operating costs, including payroll and other general and administrative costs. During 2023 and subsequent to December 31, 2023, the Company completed private placements which resulted in raising an additional net proceeds of $5,079,612 and completed a SFD® survey which generated operating funds. 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.
20-F for the year ended December 31, 2023
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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 (defined below).
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.
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. 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.
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.
On March 22, 2024 the Company extended its Aircraft lease for three years, until March 28, 2027. The Aircraft Lease will be converted to a capital lease and the Company will own the aircraft at the end of the lease. Terms of the extension include a principle of US$1,210,000, an interest rate of 12%, and monthly payments of US$40,189. The Company has an early purchase option to acquire the aircraft on any of the following date, March 28, 2025, September 28, 2025, March 28, 2026 or September 28, 2026. The purchase price would be the amortized value of the lease liability, plus a four month interest penalty.
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.
20-F for the year ended December 31, 2023
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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.
Debt Service
NXT has financed 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. All of NXT’s debt is fixed rate. Lenders have been 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.
We rely on specialized equipment, including a limited number of SFD® sensors and this limitation may affect our ability to conduct business.
NXT relies 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. NXT mitigates this risk by researching new designs, constructing additional SFD® sensor devices and obtaining replacement cost insurance on each SFD® sensor.
Our financial position is affected by foreign currency fluctuations.
The Company is exposed to foreign exchange risk in relation to its potential 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 enter into hedging contracts to mitigate exposure to fluctuations in foreign exchange, but uses strategies to reduce the volatility of US$ assets and liabilities, including converting excess US$ to Canadian dollars. As at December 31, 2023, the Company held net U.S. dollar liabilities totaling US$1,179,649. Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2023 would have had an approximately $156,063 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.
Our net income or loss is impacted by 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 and both the November Debentures and the Ataraxia Debentures carry an interest rate of 10% until their maturity date which, in the case of each such convertible debenture, is two years after issuance. Any refinancing of the convertible debentures, or new debt financing could result in a significantly different interest rate.
Volatility in oil and natural gas commodity prices may affect demand for our services.
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.
20-F for the year ended December 31, 2023
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We are a small business with limited personnel and our inability to segregate duties between administrative staff is an internal control weakness.
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 our 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. (See also Item 15.)
We may periodically engage in transactions with related parties.
We may periodically enter into related party transactions. 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. Another director, Theodore Patsellis is also a board member of Pana Holdings Mauritius, the parent company of Ataraxia which holds US$1,400,000 of convertible debentures.
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.
Our rights to SFD® technology may be challenged and we may need to defend our rights to the technology in the courts.
For a full history of the Technology Transfer Agreement (the “TTA”) see also Item 4. part A, “Information on the Company - History and development of the Company”, and Item 4. part B. “Information on the Company - Business Overview – Technology Transfer Agreement”.
Our rights to ownership and use of SFD® technology depend on Mr. Liszicasz’s estate having the lawful right to sell to NXT the exclusive rights to exploit the SFD® technology for the exploration of hydrocarbons and the Geothermal Rights as agreed to in the TTA.
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.
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.
Surveys have not been tested over all potential 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.
20-F for the year ended December 31, 2023
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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.
The financial statements rely upon estimates and assumptions that could be incorrect.
In preparing the 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, 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 2023 and 2022, 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.
Cyberattacks or other breaches of our technology hardware and software, as well as risks associated with compliance and data privacy could have an adverse effect on our systems, our service to our customers, our reputation, our competitive position, and financial results.
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.
20-F for the year ended December 31, 2023
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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 in the United States (“U.S.”) OTC Markets Group’s Venture Stage Marketplace (the “OTCQB”) 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 stock is 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 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 NXT’s common shares can adversely and potentially dramatically affect the market prices for those shares.
Accordingly, investors in our common stock should anticipate both volatile stock price and poor liquidity unless these conditions change.
Our right to issue additional capital stock at any time could have an adverse effect on your proportionate ownership and voting rights.
Our right to issue additional securities at any time could have an adverse effect on a shareholder’s proportionate ownership.
We are authorized under our Articles of Continuance to issue an unlimited number of common shares and 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.
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.
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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 in the European Patent Office (January 2020). In summary, the total number countries granting our patents is forty-seven. 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 with 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.
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 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.
Development, Commercialization, and Protection of the Geothermal Rights
With the acquisition of the Geothermal Rights, the Company will continue to refine and develop the SFD® survey system to commercialize the Geothermal Rights. 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.
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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.
Worldwide instances of GPS jamming are becoming more common. NXT works closely with the contracting party and local regulatory and military authorities to ensure such instances are avoided in the designated survey areas.
Independent third parties provide all the services required to maintain and operate the aircraft and they mitigate 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.
We conduct operations in foreign countries, which exposes us to several risks that may have a material adverse effect on the Company.
Criminal Activity and Social Instability – We have operated in the past in foreign countries such as Colombia, which over the past two decades experienced significant social upheaval and criminal activity relating to drug trafficking, kidnapping and terrorist acts. While the situation has improved dramatically in recent years, there can be no guarantee that the situation will not deteriorate again, nor are these risks eliminated as yet. Furthermore, other potential international survey locations may have similar or other indeterminate criminal or social instability risks.
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.
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.
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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.
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, misunderstanding 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.
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 and business ethics, which prohibits illegal activities, including any acts of bribery or corruption.
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.
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, Nigeria, Türkiye, 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.
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, 2023, 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.
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Tax Matters
Payment made to NXT for services rendered to clients and branch office 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. 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.
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, or other events, such as wars, including the military conflicts, 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 conflicts and related events and whether they 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.
You will be subject to the penny stock rules to the extent our stock price on the OTCQB is less than $5.00.
Since the common shares are not listed on a national stock exchange within the United States, trading in the common shares on the OTCQB is subject, to the extent the market price for the common shares is less than $5.00 per share, to a number of regulations known as the "penny stock rules". The penny stock rules, subject to certain exemptions, require a broker‑dealer to deliver a standardized risk disclosure, the form of which is developed by the U.S. Securities and Exchange Commission (the “SEC”) to provide the customer with additional information, including current bid and offer quotations for the penny stock, the compensation of the broker‑dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, make a special written determination that the penny stock is a suitable investment for the purchaser and to receive the purchaser's written agreement to the transaction. To the extent these requirements may be applicable, they will reduce the level of trading activity in the secondary market for the common shares and may severely and adversely affect the ability of broker‑dealers to sell the common shares.
You should not expect to receive dividends in the foreseeable future.
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.
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We are a Canadian Company and our nationality may impair the enforceability of a judgment for any person resident outside Canada.
Since we are a Canadian company and most of our assets and key personnel are located in Canada, you may not be able to enforce a U.S. judgment for claims you may bring against us, our assets, our key personnel or many of the experts named in this document. This may prevent you from receiving compensation to which you may otherwise have a claim.
We are organized under the laws of Alberta, Canada and substantially all of our assets are normally located in Canada. In addition, all but two of our current members of our Board and all of our officers are residents of Canada. As a result, it may be impossible for you to affect service of process upon us or these individuals within the U.S. or to enforce any judgments in civil and commercial matters, including judgments under U.S. federal securities laws. In addition, a Canadian court may not permit you to bring an original action in Canada or to enforce in Canada a judgment of a U.S. court based upon civil liability provisions of the U.S. federal securities laws.
Recent United States Tax Proposals
Changes to U.S. tax laws (which changes may have retroactive application) could adversely affect the Company or holders of the common shares. In recent years, many changes to U.S. federal income tax laws have been proposed and made, and additional changes to U.S. federal income tax laws are likely to continue to occur in the future.
The U.S. Congress is currently considering numerous items of legislation which may be enacted prospectively or with retroactive effect, which legislation could adversely impact the Company’s financial performance and the value of the common shares. Additionally, states in which the Company operates or owns assets may impose new or increased taxes. If enacted, most of the proposals would be effective for the current or later years. The proposed legislation remains subject to change, and its impact on the Company and holders of the common shares is uncertain.
In addition, the Inflation Reduction Act of 2022 includes provisions that impact the U.S. federal income taxation of corporations. Among other items, this legislation includes provisions that impose a minimum tax on the book income of certain large corporations and an excise tax on certain corporate stock repurchases that is imposed on the corporation purchasing such stock. It remains unclear how this legislation will be implemented in certain respects by the U.S. Department of the Treasury and the Company cannot predict how this legislation or any future changes in tax laws might affect the Company or holders of the common shares.
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.
ITEM 4. INFORMATION ON THE COMPANY
A. History and development of the Company.
We are a technology company focused on providing a service to oil and natural gas exploration clients using our proprietary SFD® remote sensing airborne survey system. SFD® and NXT® are both registered trademarks of NXT Energy Solutions Inc.
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NXT’s corporate history is summarized as follows:
| · | NXT was incorporated under the laws of the State of Nevada on September 27, 1994 as Auric Mining Corporation. |
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| · | In January 1996, NXT acquired all of the common stock of NXT Energy USA, Inc. (which was then known as Pinnacle Oil Inc.) from its shareholders in exchange for common shares. As a consequence of this reverse acquisition, NXT Energy USA Inc. became a wholly owned subsidiary and its shareholders acquired a 92% controlling interest in NXT’s common shares. |
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| · | Prior to this reverse acquisition transaction, NXT was a corporate shell conducting no active business, and NXT Energy USA Inc. was a development stage R&D enterprise holding the worldwide rights to use what is now our SFD® technology for hydrocarbon exploration purposes. |
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| · | Shortly thereafter, on February 23, 1996 we changed our name to Pinnacle Oil International, Inc. and on June 13, 2000, subsequently changed our name to Energy Exploration Technologies. |
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| · | On October 24, 2003, our shareholders approved the continuance of the Company from the State of Nevada to the Province of Alberta, Canada under the Business Corporations Act (Alberta) (the “ABCA”). Also, our name was modified to Energy Exploration Technologies Inc. (“EETI”). |
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| · | On September 22, 2008 EETI changed its name to NXT Energy Solutions Inc. by way of Articles of Amendment filed pursuant to the ABCA. |
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| · | At the Annual Meeting of Shareholders on August 2, 2023 shareholders approved the cancellation of the outstanding Series 1 preferred shares and approve the creation of the Series 2 Preferred Shares to facilitate the conversion of the convertible debentures to be issued under the Ataraxia Subscription Agreement (as defined herein). |
Our registered office is located at 302, 3320 – 17th AVE SW, Calgary, Alberta, Canada, T3E 0B4 and our telephone 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) and the Business Corporations Act (Alberta). We are a foreign private issuer under United States securities laws and are subject to the regulation of the US Securities and Exchange Commission in accordance with the Exchange Act.
The underlying technology employed by our SFD® survey system was invented by Mr. Liszicasz, our former Chairman, President and Chief Executive Officer (“CEO”). 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, we obtained the rights to the technology from Mr. Liszicasz pursuant to the terms of the TTA.
Upon execution of the TTA, Mr. Liszicasz transferred to us all his rights and entitlements to the SFD® technology for use in the field of hydrocarbon exploration.
On April 18, 2021 the TTA was amended so that Mr. Liszicasz transferred to us all his rights and entitlements to the SFD® technology for the use in the field of geothermal resources. All other all rights, title, and interest in and to the SFD® technologies for all other commercial applications remained with Mr. Liszicasz.
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 SFD® used by NXT for the reception, collection and recording of subsurface geological stresses for hydrocarbon exploration and geothermal resources.
Our business does not normally rely on significant capital expenditures other than required regulatory additions to the aircraft. For 2024 we do not anticipate further significant upgrades for the aircraft. On March 22, 2024 the Company extended its Aircraft lease for three years, until March 28, 2027. The Aircraft Lease will be converted to a capital lease and the Company will own the aircraft at the end of the lease. Terms of the extension include a principle of US$1,210,000, an interest rate of 12%, and monthly payments of US$40,189. The Company has an early purchase option to acquire the aircraft on any of the following date, March 28, 2025, September 28, 2025, March 28, 2026 or September 28, 2026. For the last three fiscal years, the Company made capital expenditures for property and equipment of $32,322 (2023), $nil (2022) and $nil (2021).
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The Company does not currently have any significant capital expenditures in progress, or planned for the short term.
Given the passing in January 2023 of Mr. George Liszicasz, former Chairman, President and CEO, the Board formally empowered a committee of the Board to assume the CEO’s duties. The committee, met several times weekly with NXT management, consisted 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 undertook its executive role, until Mr. Bruce G. Wilcox was appointed Interim CEO on June 21, 2023.
SEC maintains an internet site (http://www.sec.gov), which contains reports, proxy and statements, and other information regarding NXT that we file electronically with the SEC. Our website is http://www.nxtenergy.com.
B. Business overview.
Description of the nature of the Company’s operations and principal activities
NXT Energy Solutions Inc. is a Calgary-based technology company whose proprietary airborne SFD® survey system, applied in numerous basins around the world, uses the principles of quantum mechanics to infer stress anomalies of exploration interest. The method can be used both onshore and offshore to remotely identify areas conducive to fluid entrapment in order to recommend areas with commercial hydrocarbon and/or geothermal potential. The SFD® survey system enables our 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 Energy Solutions Inc. NXT Energy Solutions Inc. provides its clients with an effective and reliable method to reduce time, costs, and risks related to exploration.
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, the Middle East and Asia.
The underlying technology employed by our SFD® survey system was invented by Mr. Liszicasz, our former President and Chief Executive Officer, 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 we obtained the rights to the technology from Mr. Liszicasz pursuant to the terms of 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 and on April 18, 2021 all his rights and entitlements to the SFD® technology for geothermal resources.
For further details of the TTA, see “Exhibit 4.1”.
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 and geothermal resources.
SFD® sensors remotely respond to gravity perturbations that are associated with subsurface density and stress regimes that are meaningful for hydrocarbon and geothermal exploration. These responses are captured as raw data that, when interpreted, can provide a qualitative method to detect the presence of geological features such as structures, faults, fractures and reefs that are often associated with fluid accumulations and transport. The SFD® technology can be deployed over any terrain in onshore, offshore and near-shore environments and has been used both for prospect level exploration and as a reconnaissance tool in in frontier and under-explored areas. The SFD® survey system has been demonstrated to quickly focus exploration resources, offering the benefit of reducing the risk, time and expense associated with the upstream cycle. As part of NXT’s SFD® services, recommendations with rankings are provided to the customer which helps prioritize their highest value prospects for exploration.
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Following completion of the aerial surveys, we deliver to 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 NXT to cover larger areas and more clients with minimum fixed cost. Our sales representatives continue to pursue SFD® opportunities in numerous regions including Africa, Latin America, and Asia. Furthermore, 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.
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, Africa and most recently in Türkiye. 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 forty-seven 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. | Focus sales resources on high profile primary markets which offer the maximum opportunity for success; |
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| 2. | Build upon success in this initial market, and step out to other markets in Turkiye, the Middle East, Latin America, and in South Asia; |
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| 3. | Pursue requests 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. | Continue 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. | Respond 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. |
We continue to progress and grow our project pipeline on a fee for survey project basis.
Description of the principal markets in which the Company competes
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 in a limited number of markets in the early stages of commercialization.
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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® related revenue and can vary significantly year-over-year.
In 2023, NXT’s revenue was from an SFD® survey to an independent oil and gas exploration company in Türkiye. There were no Revenues in 2022. Revenues for the years ended December 31, 2021 were generated solely from a single client and the Hydrocarbon Right. There were no revenues from the Geothermal Right in any of the periods.
A summary of SFD® related revenues derived in our primary geographic market segments for the last 3 fiscal years, and highlights of global survey operations, follows:
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International |
| $ | 2,145,716 |
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| $ | - |
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| $ | 3,134,250 |
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Other |
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| 2,145,716 |
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| 3,134,250 |
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International Market
On September 5, 2023, NXT announced that it has executed a contract to provide an SFD® survey to an independent oil and gas exploration company in Türkiye, which is strategically located at the junction of Eastern Europe, Central Asia and the Middle East (the “Turkish SFD® Survey”). NXT delivered the final SFD® survey results to its Turkish customer and performed the integration of SFD® data with the customers’ existing geological and geophysical data in March 2024. The Company’s Turkish customer and one of its partners had requested NXT to add additional line kilometers to the original Turkish SFD® Survey. All flight operations related to the data acquisition survey phase were completed in January 2024. As part of NXT’s SFD® services, recommendations with rankings are provided to the customer identifying their highest value prospects for exploration.
During 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.
Geothermal Update
Acquisition of the Geothermal Right
The Company acquired the rights to the geothermal applications of the SFD® technology (the "Geothermal Right") from Mr. George Liszicasz, the Company’s former Chairman, President and Chief Executive Officer of NXT on April 18, 2021 (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; |
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| 2. | 300,000 common shares in the capital of NXT ("Common Shares"), which were approved by the TSX and issued in December 2021; |
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| 3. | CAD$15,000 signature milestone payment paid in August 2021; |
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| 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 |
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| 5. | US$250,000 milestone payment which would have become due in the event that the Company executed and completed, and received full payment for, an SFD® contract valued at US$10,000,000 or greater, provided such contract was entered into and completed, and payment of at least US$5,000,000 was received, by April 18, 2023. This milestone has expired. |
20-F for the year ended December 31, 2023
| 19 |
| Table of Contents |
collectively, the "Consideration".
Geothermal applications of the SFD® technology include naturally occurring subsurface 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.
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 which 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, is approximately $837,947, if all of the milestones are met; |
| · | market capitalization of the Company is approximately $44,579,810; and |
| · | fair market value as a % of market capitalization is 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).
20-F for the year ended December 31, 2023
| 20 |
| Table of Contents |
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, 2023, the Company has recognized $275,610 for the Acquisition, 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 and legal costs. The cost of the remaining milestone will be recognized when it is deemed probable by the Committee that this milestone will be achieved.
Geothermal Right Development Update
Progress continues with respect to the development of the SFD-GT geothermal sensor technology. The Company’s first project related to such technology tested, identified, and analyzed 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. As of the date of this 20-F, the Company funding for the next phase of research has not been finalized.
Description of seasonality of the Company’s main business
There is no seasonality to our business. NXT does however, have a very cyclical business, as revenue activity is dependent upon the level of capital investment in exploration drilling in the oil & gas industry and the size and timing of a limited number of survey contracts each year.
Description of the sources and availability of raw materials
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.
In order to conduct our survey operations, we require the following:
| · | 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 Corp. (“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 and operator of the aircraft which we use in SFD® survey operations. On March 22, 2024 the Company extended its Aircraft lease for three years, until March 28, 2027. The Aircraft Lease will be converted to a capital lease and the Company will own the aircraft at the end of the lease. |
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| · | SFD® sensors – All of the 22 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, NXT completed final testing on a new data acquisition system. The software was developed by in-house personnel and is being utilized on SFD® 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. |
20-F for the year ended December 31, 2023
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| Table of Contents |
We are not dependent upon any other third-party contract manufacturers or suppliers to satisfy our technology requirements.
Description of marketing channels
We largely use direct sales methods with use of independent commissioned sales representatives in international markets.
Summary information on dependence on patents, licenses, and contracts
Patents
In May 2012, we commenced a “provisional” patent application process in the United States and formally filed a SFD® technology 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, NXT expanded and protected its IP (including patenting and new research and development initiatives). 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 in the European Union (January 2020). In total, NXT has obtained SFD® patents in forty-seven jurisdictions. 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.
Basis for statements made regarding competitive position
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 competitive with many international and regional service providers.
20-F for the year ended December 31, 2023
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The SFD® system can be used as a focusing tool for seismic. With a SFD® survey, a large tract (that is, a tract 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 as compared to traditional seismic surveying, and can 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.
Description of material effects of governmental & environmental regulation
SFD® Survey Flight Operations
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:
| 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. |
NXT has successfully operated in the past in Colombia in accordance with these requirements.
With our past experience in Canada, the United States, Türkiye, 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.
20-F for the year ended December 31, 2023
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C. Organizational structure.
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 | 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 | 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 Federal 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% | |
¹On January 16th, 2017, the name of Survey Services International Inc. was changed to “Cascade Petroleum Inc.”
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.
D. Property, plant and equipment.
Facilities / Office Premises
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 $29,657 commencing in October 2015. On March 15, 2022, the Company surrendered 828 square feet of its office building lease to the landlord. On April 1, 2024 NXT agreed to surrender an additional 3,200 square feet of its office building lease to the landlord and as consideration agreed to extend the current lease term for an additional five years to September 30, 2030.
Aircraft
In order to perform our survey services, NXT requires to fly the survey area in a jet aircraft. In April 2017, NXT completed a sale and leaseback agreement of its aircraft with 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. In December 2021, 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. On March 22, 2024 the Company extended its Aircraft lease for three years, until March 28, 2027. The Aircraft Lease will be converted to a capital lease and the Company will own the aircraft at the end of the lease. Terms of the extension include a principle of US$1,210,000, an interest rate of 12%, and monthly payments of US$40,189. The Company has an early purchase option to acquire the aircraft on any of the following date, March 28, 2025, September 28, 2025, March 28, 2026 or September 28, 2026.
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.
20-F for the year ended December 31, 2023
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Equipment
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:
| · | 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 R&D sensors, allowing multiple independent SFD® signals to be acquired at all points of a designed survey. |
| · | 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. |
| · | 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. |
| · | Interpretation Theatre – Once returned to our home base, 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 theater is available and may be deployed during survey operations and would be set up in a facility at the survey client's city. |
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. We have accrued approximately $27,030 for asset retirement obligations related to the minor non-operating interest in these oil and 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.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated Financial Statements and the notes to those statements incorporated by reference elsewhere in this Form 20-F. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this annual report, particularly under the caption “Risk Factors”.
20-F for the year ended December 31, 2023
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| Table of Contents |
A. Operating results.
Overall Operational Performance
Selected Annual Information |
| For the year ended December 31, |
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| 2023 |
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| 2022 |
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| 2021 |
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SFD® related revenue |
| $ | 2,145,716 |
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| $ | - |
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| $ | 3,134,250 |
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Net loss and comprehensive loss |
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| (5,451,112 | ) |
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| (6,733,076 | ) |
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| (3,123,799 | ) |
Net loss per common share - basic |
| $ | (0.07 | ) |
| $ | (0.10 | ) |
| ($0.05) |
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Net loss per common share - diluted |
| $ | (0.07 | ) |
| $ | (0.10 | ) |
| ($0.05) |
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Net increase (decrease) in cash |
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| 138,276 |
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| (1,994,418 | ) |
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| (432,291 | ) |
Cash and short term investments |
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| 401,713 |
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| 263,437 |
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| 2,807,855 |
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Total assets |
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| 15,184,760 |
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| 15,575,295 |
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| 21,584,371 |
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Lease liabilities |
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| 595,517 |
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| 1,246,723 |
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| 1,902,604 |
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Long-term liabilities |
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| 824,074 |
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| 935,185 |
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| 1,000,000 |
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Convertible debentures |
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| 3,355,989 |
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| - |
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| - |
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Summary financial highlights for the last three fiscal years are as follows:
Financial Highlights for 2023
| · | the Company commenced the Turkish SFD® Survey for an independent oil and gas exploration company in Türkiye. |
| · | the first two tranches of the November Debentures were received for a total of US$1.15 million (CDN$1.58 million) of cash; |
| · | ten-year strategic partnership in Africa with Synergy E&P Technologies Limited (“Synergy”) as described below; |
| · | The Ataraxia Debenture contributed $1.90 million of cash as defined and described below; |
| · | in June, the appointment of Interim Chief Executive Officer (“CEO”), Mr. Bruce G. Wilcox; |
| · | Private Placement (defined below) contributed $1.62 million of cash; |
| · | In Q1-23 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; |
| · | cash at December 31, 2023 was approximately $0.40 million; |
| · | net working capital was approximately ($1.86) million at December 31, 2023; |
| · | the Company recorded SFD®-related revenues of approximately $2.15 million; |
| · | a net loss of approximately $5.45 million was recorded for YE-23, including Stock Based Compensation Expense (“SBCE”) and amortization expense of approximately $1.97 million; |
| · | net loss per common share for YE-23 was $0.07 per share (basic) and $0.07 per share (diluted); |
| · | cash flow used in operating activities was approximately $4.83 million in the 2023 financial year; and |
| · | general and G&A expenses decreased by approximately $0.32 million (8%) in YE-23 as compared to YE-22. |
Financial Highlights for 2022
| · | 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 $6.73 million was recorded for 2022, including SBCE and amortization expense of $1.98 million; |
| · | net loss per common share for YE-22 was $0.10 basic and $0.10 diluted; |
| · | cash flow used in operating activities was $2.93 million during 2022; |
| · | G&A increased by $0.55 million (17%) in 2022 as compared to 2021; and |
| · | the Rights Offering and Private Placement (both defined herein) contributed $0.43 million of cash. |
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Financial Highlights for 2021
| · | The Company completed the 2021 advisory services and funding of $50,000 from the NRC IRAP to support the R&D of the SFD® technology for geothermal applications; |
| · | NXT also announces its patent application in Brazil and India have now been officially granted bringing the total number of countries in which NXT holds patents to 46; |
| · | On July 1, 2021 energy exploration veteran, Gerry Sheehan, joined the Board; |
| · | The Company acquired the Geothermal Right from Mr. George Liszicasz, Chairman, President and Chief Executive Officer of NXT; |
| · | The Company received $1,000,000 from the Business Development Bank of Canada’s (“BDC”) Highly Affected Sectors Credit Availability Program (the "HASCAP Loan"); |
| · | Cash and short-term investments at December 31, 2021 were $2.81 million; |
| · | Net working capital was $2.82 million at December 31, 2021; |
| · | The Company recorded SFD® related revenue of $3.13 million for 2021; |
| · | A net loss of $3.12 million was recorded for 2021, including stock based compensation and amortization expenses of $2.06 million; |
| · | Cash flow provided by (used in) operating activities was ($1.03) million 2021; |
| · | Net loss per Common Share for 2021 was ($0.05) basic and diluted; |
| · | G&A for 2021 as compared to 2020 decreased by $0.15 million or (5%) due to lower professional fees and business development costs, and recognition of the Canada Emergency Rent Subsidy offset by the ending of the Canada Emergency Wage Subsidy and higher SBCE. |
Consolidated Statements of Net Loss |
| For the year ended December 31, |
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| 2023 |
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| 2022 |
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| 2021 |
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SFD® related revenue |
| $ | 2,145,716 |
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| $ | - |
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| $ | 3,134,250 |
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SFD® related costs |
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Survey costs |
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| 2,249,126 |
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| 1,178,183 |
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| 1,224,168 |
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General and administrative |
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| 3,420,143 |
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| 3,736,431 |
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| 3,189,857 |
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Amortization expense |
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| 1,759,473 |
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| 1,768,727 |
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| 1,776,484 |
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| 7,428,742 |
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| 6,683,341 |
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| 6,190,509 |
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Other expense, net |
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| 168,086 |
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| 49,735 |
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| 67,540 |
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Loss before income taxes |
|
| (5,451,112 | ) |
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| (6,733,076 | ) |
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| (3,123,799 | ) |
Income tax expense (recovery) |
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| - |
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| - |
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| - |
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Net loss for the year |
|
| (5,451,112 | ) |
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| (6,733,076 | ) |
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| (3,123,799 | ) |
Revenue and expenses for the years ended December 31, 2023, 2022 and 2021
SFD® related revenues –In 2023 the Company recorded $2,145,746 of revenue from the Turkish SFD® survey. In 2021 the company sold Pre-existing SFD® data to a customer.
SFD® related costs – SFD® related costs include aircraft charter costs (net of charter hire reimbursements), lease expenses and aircraft operation and maintenance costs.
In 2023, 2022 and 2021, aircraft operations were incurred for aircraft handling and maintenance costs. In 2023 the Company incurred increased SFD® related costs due to the Turkish SFD® survey. Aircraft operations were higher in 2022 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, but overall survey project costs were $118,441 lower due to the costs incurred for the Pre-existing Data Sale in 2021.
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In 2021, SFD® related costs were higher compared to 2020 due to costs to deliver the Pre-existing SFD® Data, routine maintenance costs and lower charter hire reimbursements due to the COVID-19 pandemic. This was offset by lower aircraft lease costs, due to the favourable CDN$ to US$ exchange rate during 2021.
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.
G&A - G&A is a major component of NXT's total expenses. The categories included in G&A are as follows:
G&A |
| For the year ended December 31, |
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| 2023 |
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| 2022 |
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| 2021 |
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Salaries, benefits, and consulting charges |
| $ | 1,512,150 |
|
| $ | 1,688,262 |
|
| $ | 1,485,952 |
|
Board, professional fees, and public company costs |
|
| 753,468 |
|
|
| 818,087 |
|
|
| 720,269 |
|
Premises and administrative overhead |
|
| 822,019 |
|
|
| 818,987 |
|
|
| 647,943 |
|
Business development |
|
| 91,235 |
|
|
| 195,811 |
|
|
| 47,793 |
|
Total G&A before Stock based compensation |
|
| 3,178,872 |
|
|
| 3,521,147 |
|
|
| 2,901,957 |
|
Stock based compensation |
|
| 241,271 |
|
|
| 215,284 |
|
|
| 287,900 |
|
Total G&A |
|
| 3,420,143 |
|
|
| 3,736,431 |
|
|
| 3,189,857 |
|
G&A expenses decreased $316,288, or 8%, in YE-23 compared to YE 22 for the following reasons:
| · | salaries, benefits, and consulting charges decreased $176,112 or 10%, as the Company had one less headcount for the first half of 2023 and the new CEO’s compensation was less than the CEO compensation paid in 2022. In addition a portion of some salaries was allocated to direct labour expense to support the Turkish SFD® Survey; |
| · | board and professional fees and public company costs decreased $64,619, or 8%. More director fees were reimbursed in options in YE-23 versus YE-22 and audit fees were lower due to the Company changing its auditor. This was offset by increased professional fees due to the Ataraxia Debentures and November Debenture financing; |
| · | premises and administrative overhead costs increased $3,032, or 0%, due to spending for SFD® survey planning and related software upgrades. This was partially offset as the Company surrendered office space at the end of Q1-22 which lowered rent costs; |
| · | business development costs decreased $104,576 or 53% due to less travel expenses during YE-23 versus YE-22. The Company engaged in more travel to the middle east and Asia to pursue opportunities during 2022, while in 2023 the Company focused on the Turkish SFD® Survey and attended more virtual meetings; and |
| · | SBCE’s were higher in YE-23 as opposed to YE-22 by $25,987 or 12%. Stock Option expense was higher as options were granted in lieu of cash payments to certain directors. While the Company has engaged a marketing consultant, such consultant is intended to be paid in shares and not cash. This was offset by the Company’s restricted stock unit (“RSU”) expense being lower in 2023, as the Company’s share price at the vesting date of September 20, 2023 was lower than the share price at the 2022 vesting date. Please see the next section Stock-based Compensation Expenses for further information on the SBCE. |
20-F for the year ended December 31, 2023
| 28 |
| Table of Contents |
G&A increased $546,574 or 17%, in 2022 compared to 2021 for the following reasons:
| · | Salaries, benefits, and consulting charges increased $202,310 or 14%, as 2021 costs were reduced by the CEWS. This was partially offset in 2022 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 2021 costs were reduced by the CERS; |
| · | Business development costs for 2022 increased $148,018 from YE-21 due to increased meetings with potential customers during 2022; and |
| · | SBCE's were lower in 2022 vs 2021 by $72,616 or 25% as the Employee Share Purchase Plan (the "ESP Plan") expense is lower as there was no bonus accrual during 2022. See the section “Stock-based Compensation Expenses" for further information on the SBCE. |
Stock-based compensation
SBCE varies in any given 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 term of the contract and/or number of years for full vesting of the units, which is normally three years) of the resultant expense. Also, SBCE is a function of periodic changes in the inputs used in the Black-Scholes option valuation model, such as volatility in NXT's trailing share price and 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 of one-third at the end of each of the first three years following the date of grant. 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. 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 year ended December 31, 2020, the Company granted 1,200,000 RSUs to employees and officers. In 2023, 2022 and 2021, the Company settled the RSU vesting with shares and cash. 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 2023, 2022 and 2021 the Company has elected to issue Common Shares from treasury.
SBCE in YE-23 was higher compared to YE-22 by $25,987 or 12% due to the compensation owed to the marketing consultant and that options were granted in lieu of cash payments to certain directors. The RSU expense was lower as the Company’s share price at the vesting date of September 20, 2023 was lower versus the share price at September 30, 2022 and the 2022 vesting date and there were no RSUs in Q4-23. In addition, there was lower ESP Plan participation during YE-23 due to two less participants.
SBCE in 2022 is lower compared to 2021 by $72,616 or 25%. RSU costs in 2022 are higher than 2021 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 2022, 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 2023, 2022 and 2021.
Stock-based compensation expense |
| For the year ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Stock Option Expense |
| $ | 92,500 |
|
| $ | 22,551 |
|
| $ | 26,250 |
|
Deferred Share Units |
|
| - |
|
|
| - |
|
|
| - |
|
Restricted Stock Units |
|
| 62,441 |
|
|
| 153,343 |
|
|
| 154,715 |
|
Employee Share Purchase Plan |
|
| 30,508 |
|
|
| 39,390 |
|
|
| 106,935 |
|
Consultant Compensation |
|
| 55,822 |
|
|
| - |
|
|
| - |
|
Total SBCE Expenses |
|
| 241,271 |
|
|
| 215,284 |
|
|
| 287,900 |
|
20-F for the year ended December 31, 2023
| 29 |
| Table of Contents |
Amortization Expense
Property and equipment and Intellectual property is recorded at cost, less accumulated amortization, which is recorded over the estimated service lives of the assets using annual rates and methods which are also subject to ongoing tests of potential impairment of the recorded net book value.
Amortization Expense |
| For the year ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Property and equipment |
| $ | 60,959 |
|
| $ | 70,213 |
|
| $ | 82,564 |
|
Intellectual property |
|
| 1,698,514 |
|
|
| 1,698,514 |
|
|
| 1,693,920 |
|
Total Amortization Expense |
|
| 1,759,473 |
|
|
| 1,768,727 |
|
|
| 1,776,484 |
|
Property and equipment and related amortization expense. Property and equipment amortization was lower in 2023 compared to 2022, and 2022 compared to 2021, due to additional assets becoming fully amortized during the period and the Company not acquiring significant new assets in the periods. Amortization also decreases each year as the Company uses the declining balance method of amortization, thereby having the effect of lowering amortization each year on existing assets.
IP 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 Chief Executive Officer, on August 31, 2015. The value attributed to the acquired IP assets was $25.3 million. The IP assets are 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 an ongoing assessment of potential indicators of impairment of the recorded net book value. No impairments were recognized in 2023, 2022, or 2021.
As discussed in Item 4.B., the Company acquired the SFD® technology for the Geothermal Right from NXT’s Chairman, President and Chief Executive Officer 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 Expense (Income) |
| For the year ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Interest expense , net |
| $ | 160,262 |
|
| $ | 36,220 |
|
| $ | 37,955 |
|
Foreign exchange loss (gain) |
|
| (8,028 | ) |
|
| (15,340 | ) |
|
| 8,597 |
|
Intellectual property and other |
|
| 15,852 |
|
|
| 16,933 |
|
|
| 20,988 |
|
Loss on disposal of assets & lease modifications |
|
| - |
|
|
| 11,922 |
|
|
| - |
|
Total Other Expense (Income) |
|
| 168,086 |
|
|
| 49,735 |
|
|
| 67,540 |
|
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) the convertible debentures, and long-term debt. Interest expense increased in 2023 versus 2022 due to less short-term investments during 2023 and the Company issuing the two debentures in 2023Interest expense decreased in 2022 versus 2021 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.
20-F for the year ended December 31, 2023
| 30 |
| Table of Contents |
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, 2023 and 2022 and net assets in US$ at December 31, 2021, including accounts receivable, cash and cash equivalents, short-term investments, US$ lease obligations, convertible debentures and the security deposit for the aircraft, all of which have an effect on the unrealized foreign exchange gain and loss. For 2023 the exchange gain was the result of (i) the 2.4% stronger CDN$ to US$ rate between December 31, 2022 and December 31, 2023 and (ii) the Company having a large net liability in US$. At December 31, 2022, the CDN$ to US$ exchange rate was 6.3% lower as compared to the CDN$ to US$ exchange rate at December 31, 2021 and the Company had a net US$ asset for most of the year, resulting in the corresponding foreign exchange gain for YE-22. 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.
Intellectual property and other. In 2023, 2022 and 2021, the Company's IP and other expenses were associated with periodic patent maintenance and renewal fees required during these time periods.
We currently have no outstanding derivative financial instruments, such as foreign currency hedges.
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 2023, 2022 or 2021.
At the end of 2023, NXT has available for future Canadian income tax deduction purposes significant unrecorded deferred income tax assets, the benefit of which has not been recorded in the Company’s financial statements due to uncertainty regarding the amount and timing of their potential future utilization. These deferred income tax assets include non-capital losses carried-forward (expiring in 2027 to 2042) and other resource deductions totaling approximately $9.73 million.
Summary of Quarterly Results (Unaudited)
A summary of operating results for each of the trailing 8 quarters (including a comparison to each respective prior quarter) follows. The extent of the profit or loss each quarter is mainly due to the timing and the number of survey contracts that are underway, and variances in such non-cash items as SBCE, which can occasionally be a significant expense in any given quarter
Q4-23 |
|
| Q3-23 |
|
| Q2-23 |
|
| Q1-23 |
| ||||||
|
| Dec 31, 2023 |
|
| Sep 30, 2023 |
|
| Jun 30, 2023 |
|
| Mar 31, 2023 |
| ||||
SFD® related revenue |
| $ | 2,145,716 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Net income loss |
|
| (425,701 | ) |
|
| (1,703,956 | ) |
|
| (1,703,956 | ) |
|
| (1,614,647 | ) |
Loss per share - basic |
|
| (0.01 | ) |
|
| (0.02 | ) |
|
| (0.02 | ) |
|
| (0.02 | ) |
Loss per share – diluted |
|
| (0.01 | ) |
|
| (0.02 | ) |
|
| (0.02 | ) |
|
| (0.02 | ) |
Q4-22 |
|
| Q3-22 |
|
| Q2-22 |
|
| Q1-22 |
| ||||||
|
| Dec 31, 2022 |
|
| Sep 30, 2022 |
|
| Jun 30, 2022 |
|
| Mar 31, 2022 |
| ||||
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 | ) |
20-F for the year ended December 31, 2023
| 31 |
| Table of Contents |
Significant or Unusual Items Impacting Net Loss:
In Q4-23 the Company earned SFD®-related revenue and incurred SFD®-related costs due to the Turkish SFD® Survey, which reduced its net loss versus the previous seven quarters. During Q3-23 the Company decreased G&A spending due to less professional fees as there was minimal incremental financing during the quarter. This was offset by costs incurred to plan for the upcoming Turkish SFD® Survey and foreign exchange losses due to the weakening CDN$. In Q2-23 the Company incurred G&A costs due to increased business development activity and professional fees related to the Ataraxia Debentures. In Q1-23 the Company incurred lower SFD®-related costs as there was no unplanned maintenance on the aircraft, and lower G&A as the Company reduced its headcount by one. During Q4-22 costs were reduced primarily due to lower vacation accruals due to vacation timing, and SBCE. In Q3-22 the Company incurred lower SFD®-related costs as the aircraft had early completed its required maintenance. In Q2-22 the Company recorded unrealized foreign exchange gains as the CDN$ weakened versus the US$. In Q1-22, the Company incurred maintenance fees on its aircraft to have it available for up to 300 flight hours. In each quarter between Q1-22 and Q3-23, the Company incurred net losses due to incurred SFD®-related costs related to aircraft lease and aircraft maintenance costs, G&A expenses, and non-cash items such as SBCE, which can be a significant expense in any given quarter. More specific details are provided below:
| · | in Q4-23, SFD®-related revenue and SFD®-related costs increased due to the Turkish SFD® Survey and therefore reduced the Q4-23 loss versus the previous seven quarters. Interest expense increased due to the issuance of the November Debentures; |
| · | in Q3-23, costs decreased as G&A spending due to less professional fees , offset by costs incurred to plan for the Turkish SFD® Survey and increased foreign exchange losses due to the weakening CDN$; |
| · | in Q2-23, costs increased primarily due to higher professional fees and business development activity; |
| · | in Q1-23, costs were reduced primarily due to lower headcount and maintenance costs; |
| · | 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$; and |
| · | in Q1-22, the Company incurred maintenance fees on the leased aircraft to have it available for up to 300 flight hours. |
Strategic Investment
On May 24, 2023, the Company entered into a ten-year strategic alliance and associated financing with Synergy which grants Synergy an exclusive license to use, distribute, sub-license, market and sell NXT’s SFD® solutions in Africa. In addition, on September 30, 2023, NXT extended the exclusive license to include Ataraxia, an affiliate of Synergy. PE Energy Limited, an affiliate of Synergy and Ataraxia, has performed several commercial projects with NXT in Africa in the past.
Synergy and Ataraxia, with this new arrangement, will be advancing the SFD® technology to address energy security and transition in the African continent for both oil and gas and geothermal sources. Synergy, Ataraxia and NXT will work closely together to train local technical teams and regulatory authorities on the patented SFD® technology.
Building upon a record of successful collaborations underpinned by the continued market demand in Africa, Ataraxia executed a subscription agreement pursuant to which Ataraxia agreed to subscribe for an aggregate of US$2.3 million convertible debentures (collectively, the “Ataraxia Debentures”), with a subscription price to be advanced in instalments, of which it completed US$1.4 million during Q3-23 leaving an as yet unfunded balance of US$900,000. Please see ITEM 5B “Ataraxia Debentures” for further information on the Ataraxia Debentures.
B. Liquidity and capital resources.
Going Concern
The audited consolidated financial statements for 2023 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 the 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 the consolidated financial statements have been issued.
20-F for the year ended December 31, 2023
| 32 |
| Table of Contents |
Since 2022, the Company has deferred payment of certain operating costs, including payroll and other G&A costs. During 2023 and subsequent to December 31, 2023, the Company completed private placements which resulted in raising an additional net proceeds of $5,079,612 and completed an SFD® survey which generated operating funds. 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 Company’s 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, 2023 totaled $0.40 million. Net working capital totaled $(1.86) million. See the information in the section “Net Working Capital” for further information.
Risks related to having sufficient ongoing net working capital to execute survey project contracts are mitigated through NXT’s 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.
The Ataraxia Debentures are for a term of two years, payable on demand. The Ataraxia Debentures are secured by a general security agreement, subordinate to the long-term debt. See ITEM 5B “Ataraxia Debentures” for more information.
Ataraxia Debentures
On May 24, 2023 the Company announced a multi-tranche a two-year term US$2.3 million convertible debenture financing with Ataraxia. The terms of the subscription agreement with Ataraxia include an annual interest rate of 10%, paid quarterly, a fixed conversion price of US$0.143 per common share, and the right to appoint a board member. On May 31, 2023, the Company received US$1,200,000 (CDN$1,631,954) of the subscription price for the Ataraxia Debentures. The Company received an additional US$200,000 (CDN$265,560) tranche of the Ataraxia Debenture subscription price on July 10, 2023 for a total amount of US$1,400,000 (CDN$1,897,514). The US$900,000 balance of the Ataraxia Debentures remains unfunded and it is uncertain whether Ataraxia is able or willing to fund this balance.
The Ataraxia Debentures may also be converted into voting preferred shares with an annual dividend rate of 10% paid per quarter. The preferred shares are not transferable, but may be converted on a one-to-one basis into common shares. The Ataraxia Debentures are payable on demand and is secured by a general security agreement, subordinate to the long-term debt. As of the date of this 20-F no preferred or common shares have been issued pursuant to the conversion of the Ataraxia Debentures.
20-F for the year ended December 31, 2023
| 33 |
| Table of Contents |
The proceeds from the Ataraxia Debentures were used to fund general and administrative costs including working capital, business development and marketing activities to convert NXT’s existing opportunity pipeline into firm contracts. On May 31, 2023, the Company and Ataraxia entered into an Investor Rights Agreement (the “Investor Rights Agreement”) pursuant to which Ataraxia has been granted the right: (i) to nominate one person for election or appointment as a director of the Company; (ii) to have one representative of Ataraxia attend the Company’s board of director meetings as an observer (except any portion of a board of director meeting where the Company’s relationship with Ataraxia is to be a subject of discussion); (iii) to purchase up to its pro rata portion (calculated on a fully diluted basis) of any securities offered by the Company, subject to certain limitations set forth in the Investor Rights Agreement; and (iv) receive certain information regarding the Company, including annual and quarterly financial statements, annual budgets, the capitalization tables, and access to its premises upon reasonable notification. In each case Ataraxia will retain the rights set forth in the Investor Rights Agreement for so long as Ataraxia holds (i) any principal amount of the Ataraxia Debentures or (ii) common shares or Preferred Shares (as applicable), representing at least 5% of the outstanding common shares of the Company (on an as-converted basis, if Ataraxia holds Preferred Shares).
Both the Ataraxia Subscription Agreement, and the Investor Rights Agreement, are filed herewith as Exhibits 5.1 and 5.2.
November Debentures
On November 2, 2023, the Company received conditional approval from the TSX to offer a multi-tranche convertible debenture (the “November Debentures”) The November Debentures bear interest at 10.0% per annum, paid quarterly in arrears, and are due and payable two years after issuance of the November Debentures. The November Debentures are convertible into common shares of NXT at a conversion price of US$0.1808 (CDN$0.25).
On November 8, 2023 the Company issued the first tranche of the November Debentures for US$1,000,000 (approximately CDN$1,378,340) to MCAPM, LP and Michael P. Mork (together “Mork Capital”). As of December 31, 2023, Mork Capital had the right to obtain 5,530,973 common shares upon the conversion of the November Debentures at the fixed conversion price of US$0.1808 subject to shareholder approval at the next annual general meeting of shareholders (“AGM”). With the acquisition of the November Debentures, Mork Capital has the right to own, including the conversion of the first tranche of the November Debentures, 20,452,206 common shares, representing approximately 24.2% of the issued and outstanding common shares at December 31, 2023 (after giving effect to the conversion of the full amount of November Debentures as of December 31, 2023). The Company has agreed to appoint a representative from Mork Capital to its board of directors in the near future.
On December 22, 2023 the Company issued the second tranche of the November Debentures for US$150,000 (approximately CDN$199,260) which gives the subscriber the right to obtain 829,646 common shares upon the conversion of the November Debentures.
On January 12, 2024, the Company closed the final tranche of the November Debentures for an additional US$722,000 (approximately CDN$966,036). With the final tranche, the Company issued a total of US$1,872,000 (approximately CAD$2,543,636) for the November Debentures which will allow the subscribers to obtain an aggregate of up to 10,353,982 common shares. Insiders, which included Mork Capital, were issued November Debentures valued in the aggregate principal amount at US$1,522,000 (approximately CDN$2,076,776).
Mork Capital purchased an additional US$375,000 (approximately CDN$501,750) of November Debentures in the final tranche. Subject to shareholder approval at the next AGM, Mork Capital will have the right to own, after conversion of all of their November Debentures at a fixed price of US$0.1808, 22,526,321 common shares, representing approximately 28.8% of the issued and outstanding common shares, as of the date of this 20-F.
On January 12, 2024, all six current Directors, as of that date, participated in the November Debentures by converting their outstanding director fees payable as at December 31, 2023 into November Debentures valued, in the aggregate principal amount, at US$147,000 (approximately CDN$196,686). In connection with this issuance, the current directors have the right to obtain, in the aggregate, up to 813,053 Common Shares. The proceeds from November Debentures are being used for SFD® survey working capital requirements.
20-F for the year ended December 31, 2023
| 34 |
| Table of Contents |
Private Placement
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. On January 25, 2023, the Company closed the Private Placement by issuing an additional 8,510,000 common shares, at $0.195 per common share, for additional aggregate gross proceeds of approximately $1,659,450, less issuance costs of $37,393.
The proceeds from Private Placement were used for G&A expenses.
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 a $386,852. Share issue costs of $170,790 were recorded as a reduction to share capital.
The proceeds from Rights Offering were used for G&A expenses.
Non-GAAP Measure: This discussion includes references to the term “net working capital”, which does not have a standardized meaning prescribed by U.S. GAAP and may not be comparable to similar measures presented by other entities. NXT management uses this non-GAAP measure to improve our ability to assess liquidity at a point in time. Net working capital is defined as total current assets less total current liabilities, excluding amounts accumulated in work in progress and deferred revenue. Management excludes these amounts from the calculation as they do not represent future cash inflows or outflows to the Company.
NXT had net working capital of $(1,855,629) as at December 31, 2023 broken down as follows:
|
| December 31, |
|
| December 31, |
|
| net change |
| |||
|
| 2023 |
|
| 2022 |
|
| in 2023 |
| |||
Current assets (current liabilities): |
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
| $ | 401,713 |
|
| $ | 263,437 |
|
| $ | 138,276 |
|
Accounts receivable |
|
| 1,828,523 |
|
|
| 57,065 |
|
|
| 1,771,458 |
|
Prepaid expenses and deposits |
|
| 53,674 |
|
|
| 36,157 |
|
|
| 17,517 |
|
Accounts payable and accrued liabilities |
|
| (1,836,741 | ) |
|
| (1,276,236 | ) |
|
| (560,505 | ) |
Convertible debentures |
|
| (1,852,144 | ) |
|
| - |
|
|
| (1,852,144 | ) |
Current portion of long-term debt |
|
| (111,111 | ) |
|
| (111,111 | ) |
|
| - |
|
Current portion of lease obligation |
|
| (339,543 | ) |
|
| (650,315 | ) |
|
| 310,772 |
|
Total Net Working Capital |
|
| (1,855,629 | ) |
|
| (1,681,003 | ) |
|
| (174,626 | ) |
Net working capital at December 31, 2023 compared to December 31, 2022 decreased by $174,626, or 10%, due to the issuance of the Ataraxia Debentures which increased net working capital, but being partially offset by the November Debentures. Increased accounts payable were incurred for the Turkish SFD® Survey, which were offset in part by accounts receivable from the Turkish SFD® Survey and by a lower lease obligation
20-F for the year ended December 31, 2023
| 35 |
| Table of Contents |
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: |
|
|
| |
2024 |
| $ | 142,037 |
|
2025 |
|
| 137,593 |
|
2026 |
|
| 133,148 |
|
2027 |
|
| 128,704 |
|
2028 |
|
| 124,259 |
|
2029 to 2031 |
|
| 281,944 |
|
Total principal and interest payments |
|
| 947,685 |
|
Less interest |
|
| (123,611 | ) |
Total principal remaining |
|
| 824,074 |
|
Current portion of long-term debt |
|
| 111,111 |
|
Non-current portion of long-term debt |
|
| 712,963 |
|
Sources and uses of cash
The overall net changes in cash balances in each of the years noted below 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, for the last three fiscal years is as follows:
For the year ended December 31 |
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Cash provided by (used in): |
|
|
|
|
|
|
|
|
| |||
Operating activities |
| $ | (4,831,951 | ) |
| $ | (2,934,004 | ) |
| $ | (1,033,173 | ) |
Financing activities |
|
| 5,009,117 |
|
|
| 389,217 |
|
|
| 875,428 |
|
Investing activities |
|
| (32,322 | ) |
|
| 550,000 |
|
|
| (274,049 | ) |
Effect of foreign rate changes on cash |
|
| (6,569 | ) |
|
| 369 |
|
|
| (497 | ) |
Net cash inflow (outflow) |
|
| 138,275 |
|
|
| (1,994,418 | ) |
|
| (432,291 | ) |
Cash & cash equivalents, start of the year |
|
| 263,437 |
|
|
| 2,257,855 |
|
|
| 2,690,146 |
|
Cash & cash equivalents, end of the year |
|
| 401,712 |
|
|
| 263,437 |
|
|
| 2,257,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & cash equivalents |
|
| 401,712 |
|
|
| 263,437 |
|
|
| 2,257,855 |
|
Short-term investments |
|
| - |
|
|
| - |
|
|
| 550,000 |
|
Total |
|
| 401,712 |
|
|
| 263,437 |
|
|
| 2,807,855 |
|
Operating Activities
Net cash flow from operating activities listed above is a function of net income (loss) for the year, an add back of the net non-cash revenue and expense items (such as SBCE, amortization expense, deferred tax expense / (recovery) and the net change in year-end working capital items (for example, a net decrease in working capital in the year gives rise to a source of cash), with these components each year as follows:
For the year ended December 31, |
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Comprehensive loss for the year |
| $ | (5,452,708 | ) |
| $ | (6,733,076 | ) |
| ($3,123,799) |
| |
Total non-cash expense items and lease items |
|
| 1,914,845 |
|
|
| 2,043,965 |
|
|
| 2,076,909 |
|
|
|
| (3,537,863 | ) |
|
| (4,689,111 | ) |
|
| (1,046,890 | ) |
Change in non-cash working capital balances |
|
| (1,294,087 | ) |
|
| 1,755,107 |
|
|
| 13,717 |
|
Total cash provided by (used in) in operations |
|
| (4,831,950 | ) |
|
| (2,934,004 | ) |
|
| (1,033,173 | ) |
20-F for the year ended December 31, 2023
| 36 |
| Table of Contents |
Operating cash flow decreased by $1,897,948 in YE-23 as compared to YE-22 due to payments of several 2022 deferred costs in 2023 and working capital requirement to support the Turkish SFD® Survey. Also in Q1-22 the Company received payments for outstanding accounts receivable in US$200,000 (CDN$252,415).
Operating cash flow decreased by $1,900,831 in 2022 as compared to 2021 due larger payments for outstanding accounts receivable in 2021 for the Pre-existing SFD® Data Sale versus 2022 and increased G&A during 2022. Operating cash flow decreased by $2,373,927 in 2021 as compared to 2020 due to the payment of the Pre-existing SFD® Data Sale accounts receivable offset by timing of accounts payable and accrued liabilities.
Financing Activities
2023 – Net proceeds from the Private Placement was $1,622,057. Please see the section “Private Placement”. Proceeds from the Convertible Debentures were $3,457,555 (US$2,550,000). Please see the Item 5 B sections “Ataraxia Debentures” and “November Debentures”. Proceeds were also received from employee contributions under the ESP Plan and RSU’s. The Company began to repay its long-term debt, the HASCAP Loan, at the beginning of Q3-22. The Repayment of financial liability was for the sales and leaseback agreement on NXT’s aircraft which ended in Q1-22.
2022 – The Company began to repay its HASCAP Loan 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 "Liquidity and capital resources” for a discussion on the Offerings.
2021 – In 2021, proceeds of $1,000,000 were received from the HASCAP Loan. Additionally, proceeds were received from employee contributions under the ESP Plan which began in Q4-20. This was offset by payments on the financing liability and finance lease.
Investing Activities
2023 – The Company upgraded certain SFD® equipment in Q4-23 to enhance the data acquisition phase of the SFD® Survey.
2022 – Changes in short-term investments were for investments in guaranteed investment certificates to fund operations and investing of excess short-term cash.
2021 - $65,310 was incurred for cash payments on the Acquisition. Changes in short-term investments were for investments in guaranteed investment certificates to fund operations and investing of excess short-term cash.
C. Research and development, patents, and licenses, etc.
R&D expenditures incurred to develop, improve, and test the SFD® survey system and related components are expensed as incurred. Any IP that is acquired for the purpose of enhancing R&D projects, if there is no alternative use for the IP, is expensed in the period acquired.
Geothermal Right Development Update
Progress continues with respect to the development of the SFD-GT geothermal sensor technology. The Company’s first project related to such technology tested, identified, and analyzed 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. As of the date of this 20-F, the Company funding for the next phase of research has not been finalized.
20-F for the year ended December 31, 2023
| 37 |
| Table of Contents |
Patents
In Q1-22, NXT announced its patent application in Brazil has been allowed. As of the date of this 20-F, NXT has been granted SFD® patents on its SFD® technology in forty-seven jurisdictions, including 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). These patents protect our proprietary SFD® technology and serve as independent third-party recognition of our technological invention.
D. Trend information.
We have historically conducted a limited number of service contracts each year, the dollar value and timing of securing and ultimate delivery of which are subject to numerous external factors.
As noted previously, the amount and timing of our annual revenues can vary widely year to year, as we derive our revenues from a limited number of service contracts each year and each individual contract may have a large effect on the aggregate annual revenues and profits. For example, in 2012, we conducted our first contract with PEMEX, the National Oil Company of Mexico. This project was completed in 2012 and was our largest to that time, at US$5.8 million. In 2015, projects totaling US$13 million were completed in Bolivia for YPFB, then our next survey in Nigeria during 2019 was for US$8.9 million. In 2023 we commenced an SFD® survey in Turkiye. At the date of this 20-F current external trends such as in commodity prices could affect our operations for the current fiscal year. Please see Item 3 D for a discussion on these risks.
E. 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 2023 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 2023 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 2023 and 2022, the estimates and judgments included the assessment of impairment indicators of IP and recognition of SFD® related revenue.
The Company reviews IP 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 IP, 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 IP.
20-F for the year ended December 31, 2023
| 38 |
| Table of Contents |
Off-balance sheet arrangements.
The Company has no off-balance sheet arrangements as of the date of this 20-F other than office premise non-lease operating costs with Interloq Capital (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. [Note: the table was replaced with a principles-based liquidity and capital resources requirement focused on material short- and long- term cash requirements from known contractual and other 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 constant with discussions with the Landlord under the Company’s office lease.
Safe Harbor.
The Company seeks safe harbor for our forward-looking statements. Please see the section titled “Forward-Looking Statements” above.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and senior management.
Our articles of incorporation provide for a minimum of one director and a maximum of 15 directors comprising our Board. At present, our Board consists of five members.
Our directors are elected by our shareholders at our 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.
The following sets forth information, including directorships in other reporting issuers, as of the date of this 20-F, for our directors, and executive officers:
Theodore Patsellis Athens, Hellenic Republic
Director since June 2023 | Mr. Patsellis is a Greek attorney who was admitted to the Athens Bar Association in 1996. He is a Greek Ministry of Justice certified Mediator and has been the owner of a boutique Law firm since 2013. He holds a Bachelor Degree from the National and Kapodistrian University of Athens - Law Faculty and an LL.M. degree from the Ludwig-Maximilian University of Munich. Having worked for many years with Ernst & Young LLP, Hill International Inc. and several renowned law firms, Mr. Patsellis has acquired experience working in diversified environments and a variety of business cultures. With a strong German background and the experience of having lived and worked in Germany, Greece, Serbia and Romania as a lawyer and tax professional, he was able to lead various teams of professionals involved in large business transactions in the South-East European region. His expertise spans across mergers and acquisitions, corporate and transactional law, local and international taxation, corporate governance and compliance. His industry knowledge ranges from the telecommunications and energy sectors to the retail, hospitality and consumer products, pharmaceuticals, and real estate. In addition to NXT, as of the date hereof, he sits on the Board of Directors of PANA Holdings in Mauritius and Vivid Living Co. S.A. in Greece.
Mr. Patsellis is a member of the Audit, and the Strategic Planning Committees. |
20-F for the year ended December 31, 2023
| 39 |
| Table of Contents |
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 Audit, Compensation, Disclosure Committees and a member of the Strategic Planning Committee. |
|
|
Gerry Sheehan Dublin, Leinster, Ireland
Director since July 2021
| Mr. Sheehan has worked continuously in international oil and gas exploration, development, and production for over 40 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 operated 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 exploration and field development projects.
From 1992 to 1998, Mr. Sheehan held the position of Chief Geophysicist. The company operated in South Asia culminating in the discovery and development of a one trillion cubic feet-sized Bangora gas field in Bangladesh, operated on behalf of Texaco and Chevron. His project team also deployed on the re-development of the offshore Espoir field in Cote d’Ivoire, West Africa, with partners Canadian Natural Resources Limited and Addax Petroleum.
From 1998 to 2006 Mr. Sheehan held the post of International Exploration Manager, this role also encompassed a business development responsibility. This was a time of 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 company expanded its footprint in Africa with oil exploration successes in Ghana and Uganda.
In 2007 Mr. Sheehan founded a private company, Blackstairs Energy plc. 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.
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 the chair of the Strategic Planning Committee and a member of the Governance Committee. |
20-F for the year ended December 31, 2023
| 40 |
| Table of Contents |
John Tilson Montecito, California, USA
Director since February 2015 | Mr. Tilson obtained his Master of Business Administration degree from the University of Southern California and further obtained his Chartered Financial Analyst designation. Following this, Mr. Tilson worked 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. During his tenure in such position, 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 Vice President and Chairman of the Long-Range Planning Committee for Lotusland, a Santa Barbara non-profit organization established by Madame Ganna Walska.
Mr. Tilson is a member of the Audit Committee, the Compensation Committee and the Governance Committee. |
|
|
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. His principal occupation is as a lawyer.
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 Committee. |
20-F for the year ended December 31, 2023
| 41 |
| Table of Contents |
Bruce G. Wilcox New York, New York, USA
Interim Chief Executive Officer since June 2023
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.
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 invests 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, now a part of Arizona State University).
Mr. Wilcox is a member of several boards, including the Teachers College of Columbia University (2003 to date, including serving as the Chair of the Investment Committee for that entire period), the University of California Santa Barbara Foundation (2003 to date, including as former Chair of the Board of Trustees, Investment and Finance Committees), and was a Trustee (2001 to May 2023) 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 Disclosure Committee.
|
Eugene Woychyshyn Calgary, Alberta, Canada
VP Finance and CFO 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, USA.
Mr. Woychyshyn is a member of the Disclosure Committee. |
20-F for the year ended December 31, 2023
| 42 |
| Table of Contents |
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, except as noted below 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.
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.
Charlies Selby was a board member of Montana Exploration Corp. ("MEC") when it was issued a cease trade order by the Alberta Securities Commission on May 4, 2018 against MEC for failing to file its annual audited financial statements, annual management's discussion and analysis and certification of annual filings within the required time period. MEC ceased operations in June 2021.
Messrs. Patsellis, Selby, Sheehan, Tilson and Valentine are considered “independent” within the meaning of Canadian securities law.
B. Compensation
Executive Compensation
The following table sets out certain information regarding the annual and long‑term compensation of the Interim Chief Executive Officer, the Chief Financial Officer, and former Chief Executive Officer as at December 31, 2023. The Chief Financial Officer is based in the Calgary, Canada head office and the Interim Chief Executive officer is based in New York, New York, USA. Both are paid in Canadian dollars.
Summary compensation table for the year ended December 31, 2023:
Name & Principal Position |
| Salary (1) |
|
| Share-based rewards (2) |
|
| Other (3) |
|
| Total |
| ||||
Bruce G. Wilcox, Interim CEO(4) |
| $ | 116,769 |
|
| $ | - |
|
| $ | - |
|
| $ | 116,769 |
|
Eugene Woychyshyn, VP of Finance & CFO |
| $ | 180,000 |
|
| $ | 3,533 |
|
| $ | 1,822 |
|
| $ | 225,355 |
|
George Liszicasz, President & CEO(5) |
| $ | 18,866 |
|
| $ | 744 |
|
| $ | 841 |
|
| $ | 20,451 |
|
__________________________
(1) Accrued salary.
(2) Share-based rewards represents the Company match to the executive’s contribution to the ESP Plan and stock option grants
(3) “Other” consists of any vehicle allowance paid ($548 for Mr. Liszicasz) plus the taxable portion of company paid amounts for group health benefits.
(4) Mr. Wilcox became the Interim CEO on June 21, 2023.
(5) Mr. Liszicasz passed away on January 21, 2023.
(See Item 6.E “Share Ownership” for details regarding stock options, DSUs, RSUs, and ESP Plan shares granted to officers).
No amount is set aside or accrued by the Company or its subsidiaries to provide pension, retirement or similar benefits to officers or directors.
20-F for the year ended December 31, 2023
| 43 |
| Table of Contents |
Director Compensation
NXT compensates directors for serving on our Board by paying a combination of an annual cash retainer as well granting stock options to purchase NXT common shares.
In 2023, the directors’ fees were not paid in cash. Mr. Patsellis, Mr. Selby, Mr. Tilson, Mr. Valentine, and Mr. Wilcox elected to receive all or part of their outstanding compensation in stock options during the year. All remaining compensation owed at December 31, 2023, except for Mr. Ingriselli, was converted to November debentures at January 12, 2024. The annual retainer was based on $30,000 ($35,000 in the case of the Chairman of the Audit Committee). Total compensation payable for 2023 is summarized as follows:
|
| 2023 |
| |
Frank Ingriselli(1) |
| $ | 1,731 |
|
Theodore Patsellis(2) |
|
| 17,308 |
|
Charles Selby |
|
| 32,692 |
|
Gerry Sheehan |
|
| 30,000 |
|
John Tilson |
|
| 30,000 |
|
Tom Valentine |
|
| 30,000 |
|
Bruce G. Wilcox(3) |
|
| 16,468 |
|
(1) Mr. Ingriselli resigned from the Board effective January 20, 2023.
(2) Mr. Patsellis was appointed a director effective June 5, 2023.
(3) Mr. Wilcox became the Interim CEO effective June 21, 2023 and waived receiving further director fees from that date.
We do not provide additional compensation for committee participation (other than as noted previously regarding the minor additional amount for service as the Chairman of the Audit Committee). (See Item 6.E “Share ownership” for details regarding stock options and DSUs granted to directors.)
The Company reimburses directors for out-of-pocket expenses for attending Board and committee meetings. We do not provide termination benefits for directors.
C. Board practices.
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 Item 6.A – “Directors and senior management”.
Service Contracts
No directors have service contracts with the Company or any of its subsidiaries that provide benefits upon termination of employment.
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 posted on the Company 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.
20-F for the year ended December 31, 2023
| 44 |
| Table of Contents |
Board Committees
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 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.
The Board and management endorse the need to establish forward-looking governance policies and to continuously evaluate and modify them to ensure their effectiveness.
Composition of the Corporate Governance Committee
Mr. Valentine (Chair), Mr. Sheehan and Mr. Tilson are members of the Corporate Governance Committee. All members of the Corporate Governance Committee are independent within the meaning of Canadian National Instrument 58-101.
Responsibilities of the Corporate Governance Committee
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 director and recommending that the Board select qualified director candidates for election at the next annual meeting of shareholders.
DISCLOSURE COMMITTEE
Composition of the Disclosure Committee
The Disclosure Committee currently consists of Mr. Selby, Mr. Wilcox and Mr. Woychyshyn (VP of Finance & Chief Financial Officer (“CFO”) of the Company).
Responsibilities of the Disclosure Committee
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.
STRATEGIC PLANNING COMMITTEE
Composition of the Strategic Planning Committee
Messrs. Sheehan (Chair), Selby, and Patsellis are the current members of the Strategic Planning Committee. All members of the Strategic Planning Committee are independent within the meaning of National Instrument 58-101 – Disclosure of Corporate Governance Practices.
20-F for the year ended December 31, 2023
| 45 |
| Table of Contents |
Responsibilities of the Strategic Planning Committee
The Strategic Planning Committee's duties are to set out the long-term goals of the Company and to take an active role in the development and execution of plans to achieve those goals. The Committee participates in establishing priority areas of Company business, assessment of strategic initiatives from Company senior executives with regard to development and implementation control of the Company Strategy and business area specific strategies of the Company. The Committee also makes recommendations regarding the overall organization and management structure including areas where management needs to be strengthened, reviewing the organizational job descriptions, requirements and also procedures for coordination of organizational management and Board resources. The Committee is actively involved in the Company’s strategic planning process and reviews all materials relating to the strategic plan with management. The Board is responsible for reviewing and approving the strategic plan. At least one Board meeting each year is centered on discussing and considering the strategic plan, which takes into account the risks and opportunities of the business. Management must seek the Board’s approval for any transaction that would have a significant impact on the strategic plan.
AUDIT COMMITTEE
Composition of the Audit Committee
The Audit Committee consists of Messrs. Selby (Chair), Tilson, and Patsellis. All members of the Audit Committee are independent within the meaning of National Instrument 52-110 – Audit Committees, and each member is financially literate. The Company’s Audit Committee Charter is posted on our 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. All members of the Audit Committee have an 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 a member of the Audit Committee.
Charles Selby
Mr. Selby is both a lawyer and professional engineer, with past legal experience specializing in securities and corporate finance matters. He has served on the board or in senior management roles with a number of private firms as well as reporting issuers in the oil and natural gas industry. Mr. Selby has previously served on the audit committees of Alta Canada Energy Corp. and served as the audit committee chairman for Idaho Natural Resources Corp. (formerly Bridge Resources Corp.).
John Tilson
After obtaining a Master of Business Administration degree and his Chartered Financial Analyst designation, Mr. Tilson had a 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 now retired.
Theodore Patsellis
Mr. Patsellis, obtained Bachelor Degree from the National and Kapodistrian University of Athens - Law Faculty and an LL.M. degree from the Ludwig-Maximilian University of Munich. His expertise comprises mergers and acquisitions, corporate and transactional law, local and international taxation, corporate governance and compliance. He has acquired experience working in diversified environments and a variety of business cultures as a lawyer and tax professional. He led a team of professionals involved in large business transactions in the South-East European region.
Audit Committee Oversight - The Company’s Board has adopted all recommendations by the Audit Committee with respect to the nomination and compensation of the external auditor.
20-F for the year ended December 31, 2023
| 46 |
| Table of Contents |
Pre-Approval Policies and Procedures - 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:
| · | 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; |
|
|
|
| · | for engagements not on the pre-approved list, the Audit Committee has delegated to the Chair of the 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 |
|
|
|
| · | 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. |
COMPENSATION COMMITTEE
Composition of the Compensation Committee
Messrs. Selby (Chair), Tilson and Valentine are the current members of the Compensation Committee. All members are independent within the meaning of National Instrument 58-101 – Disclosure of Corporate Governance Practices and have extensive direct financial and legal experience which is relevant to fulfilling their responsibilities related to executive compensation. Mr. Selby has approximately 20 years of experience in advising a Canadian company on compensation issues and has served on the compensation committees of the board of directors of other reporting issuers. Mr. Valentine currently serves on the compensation committee of two public companies, and has dealt with compensation and employment law issues for 25 years. Mr. Tilson’s career as an executive and managing director at various firms dealing with human resource matters has also given him experience in dealing with compensation related issues. The charter of the Compensation Committee is posted on the Company’s website and may viewed at www.nxtenergy.com. Investors may also request a copy be mailed to them by writing to our offices at Suite 302, 3320 – 17th Avenue SW, Calgary, Alberta, Canada, T3E 0B4.
Responsibilities of the Compensation Committee
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.
D. Employees
Fiscal year ended December 31, 2023
As of the fiscal year ended December 31, 2023, we had a total of 11 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, 2023:
Function |
| employees |
|
| contractors |
|
| total |
| |||
Senior management team |
|
| 2 |
|
|
| - |
|
|
| 2 |
|
Finance, administration and sales |
|
| 3 |
|
|
| - |
|
|
| 3 |
|
Operations and technical development |
|
| 6 |
|
|
| - |
|
|
| 6 |
|
Total |
|
| 11 |
|
|
| - |
|
|
| 11 |
|
Ten of the above noted staff are based in Canada; our Interim CEO is based in New York City, New York, USA. The six operations and technical development staff include one research scientist holding a Ph.D., two geoscientists, two engineer and an information technology professional. We periodically engage other technical and administrative contract personnel as required on a project basis.
20-F for the year ended December 31, 2023
| 47 |
| Table of Contents |
Fiscal year ended December 31, 2022
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 |
|
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.
Fiscal year ended December 31, 2021
As of the fiscal year ended December 31, 2021, 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, 2021:
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 |
|
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.
E. Share ownership.
Information on the ownership of our common shares is given under Item 7, Major Shareholders and Related Party Transactions.
20-F for the year ended December 31, 2023
| 48 |
| Table of Contents |
Summary of Stock Options, Restricted Share Units and Stock Appreciation Rights Granted To Executive Officers and Directors
All stock options have been granted pursuant to the Stock Option Plan (the “Plan”) of the Company or predecessor plans with substantially the same terms. The Plan is approved and ratified by shareholders every three years at the Company’s annual general meeting (“AGM”). The Plan, was re-approved and ratified at the Company’s AGM held on June 6, 2022. Pursuant to this Plan, all stock option grants must be approved by the Board. Stock options may be granted to the directors, officers and employees of NXT and to consultants retained by the Company. The aggregate number of common shares reserved for issuance under this Plan, and any other plan of the Company, shall not, at the time of the stock option grant, exceed ten percent of the total number of issued and outstanding shares (calculated on a non-diluted basis) unless the Company receives the permission of the stock exchange or exchanges on which the shares are then listed to exceed such threshold. No stock option shall be exercisable for a period exceeding five (5) years from the date the stock option is granted unless the Company receives the permission of the stock exchange or exchanges on which the shares are then listed and as specifically provided by the Board and as permitted under the rules of any stock exchange or exchanges on which the shares are then listed, and in any event, no stock option shall be exercisable for a period exceeding ten (10) years from the date the option is granted.
Stock options are generally issued with a three year vesting period wherein entitlement to exercise one third of the options granted shall vest at the end of each of the first three years following the grant date. The exercise price for an option grant is set at the last trade price on the date preceding the grant or some higher price at the discretion of the Board.
The RSU is approved and ratified by shareholders every three years at the Company’s AGM. The RSU, as was re-approved and ratified at the Company’s AGM held on August 2, 2023. Pursuant to the RSU, all grants must be approved by the Board of the Company. RSU’s may be granted to the directors, officers and employees of NXT and to consultants retained by the Company. The aggregate number of common shares reserved for issuance under this Plan, and any other plan of the Company, shall not, at the time of the RSU grant, exceed ten percent of the total number of issued and outstanding shares (calculated on a non-diluted basis). The RSU’s are generally issued with a three year vesting where they shall vest at the end of each of the first three years following the grant date. The price is determined on the vesting date.
DSU Plan was approved and ratified by the shareholders at the Company’s annual meeting on June 6, 2022. The DSU Plan is a long-term incentive plan that permits the grant of DSUs to qualified directors, as determined by the Board in its absolute discretion (collectively, the "Designated Participants"). Designated Participants are required to elect (in respect of each calendar year) the amount of the aggregate annual retainer or fee to be received in the form of DSUs, cash, Common Shares purchased on the secondary market, or a combination thereof, subject to requirements imposed by the Board to receive a specified minimum value of his or her annual retainer or fee in the form of DSUs. DSUs granted under the DSU Plan are to be settled at the election of the Board in cash, Common Shares issued from treasury (subject to Shareholder approval of unallocated entitlements thereunder every three years thereafter), or, at the election of the Board, or a combination of cash and Common Shares.
The ESP Plan is approved and ratified by shareholders every three years at the Company’s AGM. The ESP Plan was initially approved and ratified at the Company’s AGM held on August 2, 2023. The shareholders of the Company and subsequently the TSX approved, the ESP 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 2023, 2022 and 2021 the Company has elected to issue common shares from treasury.
The following stock options, RSUs, and ESP Plan matches were granted to NXT’s executive officers and directors in the three prior fiscal years ended December 31, 2023, 2022, and 2021 and to date of this 20-F. No DSUs were granted.
2024 to the date of this 20-F:
| · | A total of 200,000 RSU were granted to officers of the Company on February 21, 2024; and |
| · | A total of 37,420 common shares were matched by the Company through the ESP Plan for executive officers for the year to date period ended as of the date of this 20-F. |
20-F for the year ended December 31, 2023
| 49 |
| Table of Contents |
In 2023:
| · | A total of 150,000 of stock options held by an officer of the Company expired; |
| · | A total of 566,500 stock options with an average exercise price of $0.222 per common share were earned by a directors of the Company in lieu of director fees; |
| · | A total of 850,000 stock options with an average exercise price of $0.216 per common share were granted to directors and an officer of the Company; |
| · | A director forfeited 100,000 stock options with an average exercise price of $0.216 upon his resignation from the Board; |
| · | No RSUs were granted to officers of the Company; |
| · | No DSUs were earned by directors of the Company; and |
| · | A total of 78,571 common shares were matched by the Company through the ESP Plan for executive officers for the year ended December 31, 2023. |
In 2022:
| · | A total of 134,060 stock options with a weighted average exercise price of $0.40 per common share were earned by a director of the Company in lieu of director fees and 31,400 stock options held by a director with a weighted average exercise price of $0.51 were cancelled; |
| · | No RSUs were granted for the year ending December 31, 2022 to officers of the Company; |
| · | No DSUs were granted for the year ending December 31, 2022 to directors of the Company; and |
| · | A total of 34,082 common shares were matched by the Company through the ESP Plan for executive officers for the year ended December 31, 2022. |
In 2021:
| · | A total of 62,660 stock options with a weighted average exercise price of $0.56 per common share were earned by a director of the Company in lieu of director fees; |
| · | No RSUs were granted for the year ending December 31, 2021 to officers of the Company; |
| · | No DSUs were granted for the year ending December 31, 2021 to directors of the Company; and |
| · | A total of 73,531 common shares were matched by the Company through the ESP Plan for executive officers for the year ended December 31, 2021. |
The following table sets forth information regarding outstanding stock options which have been granted to our directors and officers as of the date of the 20-F. All options are issued at an exercise price set at the weighted average trading price on the five trading dates prior to the grant date. Each option entitles the option holder to acquire one common share of the Company.
20-F for the year ended December 31, 2023
| 50 |
| Table of Contents |
Issued and outstanding stock options held by directors and officers of the Company (as of the date of this 20-F)
|
|
|
|
| Option |
| Option |
| # of |
|
| % of total |
| |||
Name and |
| Exercise |
|
| Grant |
| Expiry |
| options |
|
| outstanding |
| |||
Position |
| Price |
|
| Date |
| Date |
| held |
|
| options |
| |||
Theodore Patsellis |
| $ | 0.259 |
|
| 14-Sep-23 |
| 14-Sep-28 |
|
| 100,000 |
|
|
|
| |
Director |
| $ | 0.252 |
|
| 28-Sep-23 |
| 28-Sep-28 |
|
| 36,400 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| 136,400 |
|
|
| 4.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles Selby |
| $ | 0.216 |
|
| 06-Jan-23 |
| 06-Jan-28 |
|
| 100,000 |
|
|
|
|
|
Lead Director |
| $ | 0.264 |
|
| 11-Jan-23 |
| 11-Jan-28 |
|
| 177,200 |
|
|
|
|
|
|
| $ | 0.200 |
|
| 05-Jun-23 |
| 05-Jun-28 |
|
| 55,400 |
|
|
|
|
|
|
| $ | 0.252 |
|
| 28-Sep-23 |
| 28-Sep-28 |
|
| 42,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 375,050 |
|
|
| 12.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerry Sheehan |
| $ | 0.216 |
|
| 06-Jan-23 |
| 06-Jan-28 |
|
| 100,000 |
|
|
| 3.4 | % |
Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Tilson |
| $ | 0.51 |
|
| 30-Sep-20 |
| 30-Sep-25 |
|
| 16,000 |
|
|
|
|
|
Director |
| $ | 0.44 |
|
| 30-Jun-21 |
| 30-Jun-26 |
|
| 21,360 |
|
|
|
|
|
|
| $ | 0.68 |
|
| 30-Sep-21 |
| 30-Sep-26 |
|
| 14,750 |
|
|
|
|
|
|
| $ | 0.62 |
|
| 31-Dec-21 |
| 31-Dec-26 |
|
| 18,050 |
|
|
|
|
|
|
| $ | 0.72 |
|
| 31-May-22 |
| 31-May-27 |
|
| 24,460 |
|
|
|
|
|
|
| $ | 0.68 |
|
| 30-Jun-22 |
| 30-Jun-27 |
|
| 17,500 |
|
|
|
|
|
|
| $ | 0.174 |
|
| 21-Nov-22 |
| 21-Nov-27 |
|
| 69,200 |
|
|
|
|
|
|
| $ | 0.216 |
|
| 06-Jan-23 |
| 06-Jan-28 |
|
| 155,200 |
|
|
|
|
|
|
| $ | 0.252 |
|
| 28-Sep-23 |
| 28-Sep-28 |
|
| 36,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 372,920 |
|
|
| 12.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Valentine |
| $ | 0.216 |
|
| 06-Jan-23 |
| 06-Jan-28 |
|
| 100,000 |
|
|
|
|
|
Director |
| $ | 0.200 |
|
| 05-Jun-23 |
| 05-Jun-28 |
|
| 110,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 210,800 |
|
|
| 7.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce G. Wilcox |
| $ | 0.216 |
|
| 06-Jan-23 |
| 06-Jan-28 |
|
| 100,000 |
|
|
|
|
|
Director |
| $ | 0.264 |
|
| 09-Jan-23 |
| 09-Jan-28 |
|
| 52,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 152,650 |
|
|
| 5.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eugene Woychyshyn |
| $ | 0.216 |
|
| 06-Jan-23 |
| 06-Jan-28 |
|
| 250,000 |
|
|
| 8.5 | % |
VP Finance & CFO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of stock options held by officers and directors |
|
|
|
|
|
|
|
|
|
| 1,597,820 |
|
|
| 54.5 | % |
20-F for the year ended December 31, 2023
| 51 |
| Table of Contents |
Issued and outstanding RSUs held by directors and officers of the Company (as of the date of this 20-F)
|
| RSU |
| RSU |
|
|
| % of total |
| |||
Name and |
| Grant |
| Expiry |
| Outstanding |
|
| Outstanding |
| ||
Position |
| Date |
| Date |
| RSUs |
|
| RSUs |
| ||
Bruce G. Wilcox |
| 21-Feb-24 |
| 21-Feb-27 |
|
| 80,000 |
|
|
| 8.7 | % |
Interim CEO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eugene Woychyshyn |
| 21-Feb-24 |
| 21-Feb-27 |
|
| 120,000 |
|
|
| 13.1 | % |
VP Finance & CFO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 200,000 |
|
|
| 21.8 | % |
Issued and outstanding DSUs held by directors of the Company (as of the date of this 20-F)
Charles Selby has 37,354 DSUs at the date of this 20-F.
F. Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation
Not applicable.
20-F for the year ended December 31, 2023
| 52 |
| Table of Contents |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major shareholders.
The following table sets forth information concerning the beneficial ownership of our common shares as of the date of this 20-F by persons who beneficially own 5% or more of the outstanding common shares of NXT, each person who is a director of NXT, each executive officer named in this Form 20-F, each individual referenced in Item 6.E above and all directors and executive officers as a group. For the purposes of this Form 20-F, a person is considered to be a “beneficial owner” of common shares in the Company if that person has, or shares with another person, the power to direct the vote or disposition of the common shares or to receive the economic benefit of ownership of the common shares.
A person is also deemed to be a beneficial owner of a common share if that person has the right to acquire the share within 60 days by option or other agreement (whether or not, in the case of a stock option, the current market price of the underlying common share is below the stock option exercise price). Therefore, the table below also reflects, for each such beneficial owner, the number of options exercisable into common shares, RSUs and DSUs to vest, within 60 days of the date of this 20-F that are owned by each beneficial owner, but, in determining the percentage ownership and general voting power of such person, does not assume the exercise of options or the conversion of securities owned by any other person.
We believe that the beneficial owners of common shares listed below, based on information they furnished, have sole voting and investment power over the number of shares listed opposite their names. The percentage of beneficial ownership is based on 78,157,389 common shares issued and outstanding as of the date of this 20-F. This total of 78,157,389 excludes all outstanding options that are exercisable within 60 days of 20-F, and any outstanding convertible debentures, but which both are adjusted for each person’s % purposes as noted in footnote 4 below).
Beneficial Ownership of Directors and Officers (“D&O”) |
| Beneficially Owned as at the date of this 20-F |
|
| Percent of Common Shares 5 |
| ||
|
|
|
|
|
|
| ||
Directors and Officers: |
|
|
|
|
|
| ||
Theodore Patsellis1 |
|
| 75,117 |
|
| * | 3 | |
Charles Selby 1 |
|
| 749,583 |
|
| * | 3 | |
Gerry Sheehan1 |
|
| 325,894 |
|
| * | 3 | |
John Tilson1 |
|
| 7,254,437 |
|
|
| 9.24 | % |
Thomas Valentine1 |
|
| 298,853 |
|
| * | 3 | |
Bruce G. Wilcox 1,2 |
|
| 794,641 |
|
|
| 1.01 | % |
Eugene Woychyshyn2 |
|
| 805,017 |
|
|
| 1.03 | % |
Total D & O Common Shares |
|
| 10,303,542 |
|
|
| 13.13 | % |
Major Shareholders (> 5%): |
|
|
|
|
|
|
|
|
Alberta Green Ventures Limited Partnership |
|
| 6,764,945 |
|
|
| 8.66 | % |
Ataraxia |
|
| 9,790,209 |
|
|
| 11.13 | % |
Chee Pheng Cheng |
|
| 12,513,222 |
|
|
| 16.01 | % |
Mork Capital4 |
|
| 22,526,321 |
|
|
| 26.27 | % |
20-F for the year ended December 31, 2023
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| Table of Contents |
1 Director of NXT
2 Officer of NXT
3 Beneficially owns less than one percent of the total outstanding common shares.
4 Mr. Mork controls MCAPM, LP. Mr. Mork owns 2,886,233 common shares. MCAPM, LP owns 12,035,000 common shares.
5 For each beneficial owner’s percentage of common shares calculation, it is assumed that any stock options and convertible debenture that they hold which are, or will become exercisable within 60 days of the date of this 20-F have been exercised (while also assuming that no one else similarly exercises), and such options are thus included in both the numerator and denominator for purposes of each of their own person’s calculations as follows:
|
| common |
|
| vested & |
|
| convertible |
|
|
|
| ||||
|
| shares |
|
| exercisable |
|
| debentures, if |
|
| Pro forma |
| ||||
|
| held |
|
| options |
|
| converted |
|
| total |
| ||||
Ataraxia |
|
| - |
|
|
| - |
|
|
| 9,790,209 |
|
|
| 9,790,209 |
|
Mork Capital |
|
| 14,921,233 |
|
|
| - |
|
|
| 7,605,088 |
|
|
| 22,526,321 |
|
Patsellis |
|
| - |
|
|
| 36,400 |
|
|
| 38,717 |
|
|
| 75,117 |
|
Selby |
|
| 408,161 |
|
|
| 275,050 |
|
|
| 66,372 |
|
|
| 749,583 |
|
Sheehan |
|
| 77,000 |
|
|
| - |
|
|
| 248,894 |
|
|
| 325,894 |
|
Tilson |
|
| 6,887,490 |
|
|
| 272,920 |
|
|
| 94,027 |
|
|
| 7,254,437 |
|
Valentine |
|
| - |
|
|
| 110,800 |
|
|
| 188,053 |
|
|
| 298,853 |
|
Wilcox |
|
| 565,000 |
|
|
| 52,650 |
|
|
| 176,991 |
|
|
| 794,641 |
|
|
|
| 22,858,884 |
|
|
| 747,820 |
|
|
| 18,208,351 |
|
|
| 41,815,055 |
|
Major changes in the last 3 years in the percentage ownership of persons who beneficially own (as at the respective December 31, year-end dates) 5% or more of the outstanding common shares of NXT were:
| 1. | Mork Capital acquired US$1,000,000 of convertible debentures on November 8, 2023 and US$375,000 on January 12, 2024 which together may be converted to 6,605,088 common shares. |
| 2. | On January 12, 2024 John Tilson acquired $17,000 of convertible debentures which may be converted to 94,027 common shares. |
| 3. | On March 5, 2024, Ms. Cheng acquired beneficial ownership of 2,000,000 common shares pursuant to the settlement of the Estate of George Liszicasz, the former CEO of NXT, which estate Ms. Cheng is a beneficiary |
| 4. | On August 4, 2024 Ms. Cheng acquired beneficial ownership of 11,072,001 common shares pursuant to the settlement of the Estate of George Liszicasz. |
| 5. | During 2023 and 2024 Mr. Cheng has sold common shares on the public markets. |
| 6. | Ataraxia acquired US$1,200,000 of convertible debentures on May 31, 2023 and US$200,000 on July 10, 2023 which together may be converted to 9,790,209 preferred or common shares. |
| 7. | Mork Capital acquired 8,750,000 common shares through the Private Placement between December 23, 2022 and January 11, 2023. |
| 8. | John Tilson acquired 351,282 common shares through the Private Placement on December 23, 2022. |
| 9. | Mr. Liszicasz entered into a matrimonial settlement dated December 23, 2019 that includes the transfer of 800,000 NXT common shares to his former spouse by March 31, 2020 and 1,458,333 NXT common shares on January 19, 2023. |
| 10. | Since May 22, 2020 Mr. Tilson has gifted 635,500 NXT common shares. |
| 11. | Since August 17, 2021 Mr. Tilson acquired common shares in acquisitions on the public markets. |
20-F for the year ended December 31, 2023
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NXT is a foreign private issuer for its current fiscal year. As of the last business day of the Company’s second fiscal quarter, the 50% of the Company’s executive officers are Canadian citizens who reside in Canada, the majority of the Company’s assets are in Canada and the Company is administered principally in Canada. Two of the six directors of the Company are Canadian citizens as of the date of this 20-F. The Company’s major shareholders in common shares have the same voting rights as other holders of common shares. The Company is not directly or indirectly owned or controlled by another corporation, a foreign government or any other natural or legal persons severally or jointly. There are no arrangements known to the Company which may result in a change of control of the Company.
B. Related party transactions.
Summarized below are certain other transactions and business relationships between NXT and persons who are related parties, for the current fiscal year ended December 31, 2023 through the date of this 20-F:
| · | Details of stock options which have been granted to related parties during the above noted period are included with Item 6.E above. No stock options have been exercised by related parties in these periods; |
| · | One of the members of NXT’s Board, Mr. Thomas Valentine is a partner in the law firm Norton Rose Fulbright, which provides legal advice to NXT. In 2023, NXT incurred legal costs of $129,600 with this firm, for which a total of $36,938 is included in accounts payable as at December 31, 2023. Norton Rose Fulbright continues to provide legal services to NXT. In 2024, as of the date of this 20-F, total fees incurred are approximately $20,352 for which $32,481 is still outstanding; |
| · | Another member of NXT’s Board of Directors is a board member of Pana Holdings Mauritius, the parent company of Ataraxia Capital, which holds the Ataraxia Debentures. Accounts payable and accrued liabilities includes a total of $19,699 (US$14,890) to Ataraxia Capital and total interest expense was $107,792 (US$79,356). Ataraxia continues to hold the Ataraxia Debentures. In 2024, as of the date of this 20-F, total interest expense incurred is approximately $60,414 (US$42,411) for which $40239 (US$29,727) is payable; and |
| · | All members of the Board of Directors acquired November Debentures on January 12, 2024 for a total of $196,686 (US$147,000). As of the date of this 20-F total interest expense incur for the Directors’ November Debentures was $5,679 (US$4,097) of which $705 (US$520) was payable. |
C. Interests of experts and counsel.
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated statements and other financial information.
The Company’s consolidated financial statements are stated in Canadian dollars and are prepared in accordance with U.S. generally accepted accounting principles.
The financial statements and notes thereto as required under Item 8 are attached as Exhibit 15.1 to this annual report and are incorporated by reference herein. The audit report of MNP LLP (“MNP”) is included therein immediately preceding the consolidated financial statements and is also incorporated by reference herein.
No significant events or changes have occurred subsequent to the date of the December 31, 2023 consolidated financial statements, except as otherwise disclosed herein Item 8.B.
Legal Proceedings
To the best of the Company's knowledge, there are no legal or arbitration 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 authorities.
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Dividend Policy
The Company does not pay dividends.
B. Significant Changes.
As of the date of this 20-F, three subsequent events have occurred subsequent to the date of consolidated financial statements for the year ended December 31, 2023:
| · | On April 1, 2024 NXT agreed to surrender an 3,200 square feet of its office building lease to the landlord and as consideration agreed to extend the current lease term for an additional five years, to September 30, 2030. |
|
|
|
| · | On March 22, 2024 the Company extended its Aircraft lease for three years, until March 28, 2027. The Aircraft Lease will be converted to a capital lease and the Company will own the aircraft at the end of the lease. Terms of the extension include a principle of US$1,210,000, an interest rate of 12%, and monthly payments of US$40,189. The Company has an early purchase option to acquire the aircraft on any of the following date, March 28, 2025, September 28, 2025, March 28, 2026 or September 28, 2026. The purchase price would be the amortized value of the lease liability, plus a four month interest penalty. |
|
|
|
| · | On February 21, 2024 the Company granted 1,035,000 RSUs to employees and officers which will vest over a three year period. 120,000 of the RSUs have been forfeited since February 21, 2024. |
|
|
|
| · | On January 12, 2024, the Company closed the final tranche of the November Debentures for an additional US$722,000 (approximately CDN$966,036). Including the final tranche, the Company issued a total of US$1,872,000 (approximately CAD$2,543,636) of the November Debentures, which will allow the subscribers to obtain an aggregate of up to 10,353,982 common shares. Insiders which included Mork Capital and all of the directors of NXT, were issued November Debentures valued, in the aggregate principal amount, at US$1,522,000 (approximately CDN$2,076,776). |
|
|
|
|
| Mork Capital purchased an additional US$375,000 (approximately CDN$501,750) of November Debentures in the final tranche. Subject to shareholder approval at the next AGM, Mork Capital will have the right to own, after conversion of all of their November Debentures at a fixed price of US$0.1808, 22,526,321 common shares, representing approximately 26.3% of the issued and outstanding common shares, as of the date of this 20-F. |
NXT’s interim unaudited consolidated financial statements for the 3-month period ended March 31, 2024 are planned to be released on or before May 15, 2024.
ITEM 9. THE OFFER AND LISTING
A. Offer and listing details.
Our common shares are currently quoted in the U.S. on the OTC Markets QB Exchange under the symbol “NSFDF”, in Canada on the TSX under the symbol “SFD”. There have been no trading suspensions over the last three years.
B. Plan of distribution.
Not applicable.
C. Markets.
Our common shares are currently quoted in the U.S. on the OTC Markets QB Exchange under the symbol “NSFDF”, in Canada on the TSX under the symbol “SFD” effective from March 22, 2016, and in Europe on the Frankfurt and Berlin Exchanges (both of these listings are inactive) under the symbol “EFW”.
20-F for the year ended December 31, 2023
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D. Selling shareholders.
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the issue.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share capital.
Not applicable.
B. Memorandum and articles of association.
NXT was incorporated in the State of Nevada in 1994. With respect to the foregoing items, the law applicable to NXT in the Province of Alberta is not significantly different from that in the State of Nevada. NXT was established in Alberta pursuant to a Certificate of Continuance issued October 24, 2003 by the Registrar of Corporations of the Province of Alberta. NXT’s Alberta Corporate Access Number is 2010730915. The Articles of Continuance of NXT were amended to create the Series 1 Preferred Shares on December 28, 2006, and provide that there are no restrictions on the nature of the business that may be carried on by NXT. On September 19, 2008, pursuant to Articles of Amendment, the name of the Company was changed from Energy Exploration Technologies Inc. to NXT Energy Solutions Inc. At the Annual Meeting of Shareholders on August 2, 2023 shareholders approved the cancellation of the outstanding Series 1 preferred shares and approve the creation of the Series 2 Preferred Shares to facilitate the conversion of the convertible debentures to be issued under the Ataraxia Subscription Agreement (as defined herein).
Quorum
The Board of NXT may fix the quorum for meetings of the Board or of a committee of the Board, but unless so fixed, a majority of the directors or of a committee of directors holding office at the time of the meeting constitutes a quorum provided that no business may be transacted unless at least half of the directors present are resident Canadians. Business cannot be transacted without a quorum. A quorum of directors may vote on any matter of business properly brought before the meeting provided that where a director is a party to a material contract or proposed material contract or is a director or an officer of or has a material interest in any person who is a party to a material contract or proposed material contract with NXT, such director must disclose his or her interest at the earliest possible date, request the conflict be noted in the minutes of the meeting and with few exceptions, refrain from voting on the matter in which the director has a conflict of interest. There is no limitation on the Board to vote on matters of their remuneration as a director, officer, employee or agent of NXT or of an affiliate of NXT.
Borrowing Powers
The Board may, without authorization of the shareholders of NXT:
| (a) | borrow money on the credit of NXT; |
| (b) | issue, reissue, sell or pledge debt obligations of NXT; |
| (c) | subject to restrictions respecting financial assistance prescribed in the ABCA, guarantee, on behalf of NXT, the performance of an obligation of any person; and |
| (d) | mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of NXT, owned or subsequently acquired, to secure any obligation of NXT. |
The Board of NXT may, by resolution, delegate to a director, a committee of directors or an officer all or any of the foregoing borrowing powers.
20-F for the year ended December 31, 2023
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Directors
A person is qualified to be or stand for election as a director provided such person is at least 18 years of age, is not bankrupt and is not mentally incapacitated pursuant to applicable mental health legislation of the Province of Alberta or pursuant to an order of the courts of the Province of Alberta. There is no provision in NXT’s Articles or By-Laws relating to the retirement or non-retirement of directors under an age limit requirement. There is also no requirement in NXT’s Articles or By-Laws for a director to hold securities of NXT.
Pursuant to the ABCA, a director or officer shall not be disqualified by his office, or be required to vacate his office, by reason only that he is a party to, or is a director or officer or has a material interest in any person who is a party to, a material contract or proposed material contract with NXT or subsidiary thereof. Such a director or officer shall, however, disclose the nature and extent of his interest in the contract at the time and in the manner provided by the ABCA. Any such contract or proposed contract shall be referred to the Board of NXT or shareholders for approval even if such contract is one that in the ordinary course of NXT's business would not require approval by the Board or shareholders. Subject to the provisions of the ABCA, a director shall not by reason only of his office be accountable to NXT or to its shareholders for any profit or gain realized from such a contract or transaction, and such contract or transaction shall not be void or voidable by reason only of the director's interest therein, provided that the required declaration and disclosure of interest is properly made, the contract or transaction is approved by the directors or shareholders, and it is fair and reasonable to NXT at the time it was approved and, if required by the ABCA, the director refrains from voting as a director on the contract or transaction and absents himself from the director's meeting at which the contract is authorized or approved by the directors, except attendance for the purpose of being counted in the quorum.
Rights Attached to Common Shares
The holders of the common shares are entitled to dividends as and when declared by the directors of NXT, to one vote per share at meetings of shareholders of NXT, and upon liquidation, subject to the rights of the holders of preferred shares, are entitled to share rateably with the holders of the common shares in all distributions of assets of NXT.
Rights Attached to Preferred Shares
At the Annual Meeting of Shareholders on August 2, 2023 shareholders approved the cancellation of the outstanding Series 1 preferred shares and approve the creation of the Series 2 Preferred Shares to facilitate the conversion of the convertible debentures to be issued under the Ataraxia Subscription Agreement (as defined herein).
Holders of Series 2 Preferred Shares are entitled to receive notice of and to attend and vote at all meetings of NXT (except meetings of holders of another class of shares) and shall be entitled to one vote per Series 2 Preferred Share at any such meeting. Dividends on the Series 2 Preferred Shares may be declared by the Board at the rate of 10% per annum on the sum of the Redemption Price thereof (as defined below). If declared, such dividends shall accrue and compound, and shall be cumulative from the respective date of issuance of the Series 2 Preferred Shares. Upon the liquidation of NXT, the holders of such Series 2 Preferred Shares shall be entitled to receive an amount equal to the redemption price of $0.143 per Series 2 Preferred Share (the “Redemption Price”) before the distribution of any part of the property and assets of NXT to the holders of its common shares. Following the payment of such Redemption Price, the Series 2 Preferred Shares shall be entitled to participate with the holders of common shares then outstanding on a pro rata basis as a single class of shareholders with respect to the distribution of the remaining property and assets of NXT. On written notice, the Series 2 Preferred Shares shall be convertible into common shares of NXT, on a basis of one Preferred Share to one common share. Common shares shall not be convertible into Series 2 Preferred Shares. The Series 2 Preferred Shares shall not be transferred without the prior consent of the Board.
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.sedarplus.ca.
20-F for the year ended December 31, 2023
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Alteration of the Rights of Shareholders
Under the ABCA, any substantive change to the Articles (including, but not limited to, change of any maximum number of shares that NXT is authorized to issue, creation of new classes of shares, add, change or remove any rights, privileges, restrictions and conditions in respect of all or any of its shares, whether issued or unissued, change the shares of any class or series, whether issued or unissued, into a different number of shares of the same class or series or into the same or a different number of shares of other classes or series) or other fundamental changes to the capital structure of NXT, including a proposed amalgamation or continuance of NXT out of the jurisdiction, requires shareholder approval by not less than 2/3 of the votes cast by shareholders voting in person or by proxy at a shareholders’ meeting called for that purpose. In certain prescribed circumstances, holders of shares of a class or of a series are entitled to vote separately as a class or series on a proposal to amend the Articles whether or not shares of a class or series otherwise carry the right to vote. The holders of a series of shares of a class are entitled to vote separately as a series only if the series is affected by an amendment in a manner different from other shares of the same class.
Meetings of Shareholders
NXT’s By-Laws provide that the Board shall call an annual meeting of shareholders to be held not later than fifteen months after holding the last preceding annual meeting. NXT’s By-Laws provide that the Board may at any time call a special meeting of shareholders. Only the registered holders of shares are entitled to receive notice of and vote at annual and special meetings of shareholders, except to the extent that:
| (a) | if a record date is fixed, the person transfers ownership of any of the person’s shares after the record date; or |
|
|
|
| (b) | if no record date is fixed, the person transfers ownership of any of the person’s shares after the date on which the list of shareholders is prepared; and |
|
|
|
| (c) | the transferee of those shares; |
| · | produces properly endorsed share certificates; or |
| · | otherwise establishes ownership of the shares; and |
| · | demands, not later than ten (10) days before the meeting, that the transferee’s name be included in the list before the meeting; and |
| · | in which case the transferee is entitled to vote the shares. |
The ABCA also permits the holders of not less than 5% of the issued voting securities of NXT to give notice to the Board requiring them to call and hold a meeting of NXT.
The only persons entitled to be present at a meeting of shareholders are:
| (a) | the shareholders entitled to vote at the meeting; |
| (b) | the Board of NXT; |
| (c) | the external auditor of NXT; and |
| (d) | any others who, although not entitled or required under the provisions of the ABCA, any unanimous shareholder agreement, or the Articles or the By-Laws, are allowed to be present at the meeting. |
Any other person may be admitted only on the invitation of the Chairperson of the meeting or with the consent of the meeting.
There are no restrictions in NXT’s Articles or By-Laws as to the number of shares that may be held by non-residents other than restrictions set out in the Investment Canada Act (the “ICA”) (Canada), as further described under Item 10.D – “Exchange Controls” below.
20-F for the year ended December 31, 2023
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Change of Control
There are no specific provisions in the Articles or By-Laws of NXT that have the effect of delaying, deferring or preventing a change of control of NXT and that would operate only with respect to a merger, acquisition or corporate restructuring involving NXT (or any of its subsidiaries). Notwithstanding this, the Board, under the general powers conferred to it under NXT’s By-Laws, have the authority to approve and invoke a shareholders rights plan that will protect shareholders from unfair, abusive or coercive take-over strategies, including the acquisition or control of NXT by a bidder in a transaction or series of transactions that does not treat all shareholders equally or fairly or that does not afford all shareholders an equal opportunity to share in any premium paid upon an acquisition of control. NXT has not adopted such a plan.
Shareholder Ownership Disclosure
There are no provisions in NXT’s By-Laws regarding public disclosure of individual shareholdings.
C. Material contracts.
Each material contract, other than contracts entered into in the ordinary course of business, to which the Company has been a party, for the two years immediately preceding publication of this annual report, is summarized elsewhere herein. Please see the Letter Agreement: Geothermal Right Item 4.B. Also see Item 3. D for a description of the Sales Leaseback contract.
On May 24, 2023, the Company and Ataraxia entered into the Ataraxia Subscription Agreement.
On May 31, 2023, the Company and Ataraxia entered into an Investor Rights Agreement (the “Investor Rights Agreement”) pursuant to which Ataraxia has been granted the right: (i) to nominate one person for election or appointment as a director of the Company; (ii) to have one representative of Ataraxia attend the Company’s board of director meetings as an observer (except any portion of a board of director meeting where the Company’s relationship with Ataraxia is to be a subject of discussion); (iii) to purchase up to its pro rata portion (calculated on a fully diluted basis) of any securities offered by the Company, subject to certain limitations set forth in the Investor Rights Agreement; and (iv) receive certain information regarding the Company, including annual and quarterly financial statements, annual budgets, the capitalization tables, and access to its premises upon reasonable notification. In each case Ataraxia will the rights set forth in the Investor Rights Agreement for so long as Ataraxia holds (i) any principal amount of the Ataraxia Debentures or (ii) common shares or Preferred Shares (as applicable), representing at least 5% of the outstanding common shares of the Company (on an as-converted basis, if Ataraxia holds Preferred Shares).
D. Exchange controls.
There is no law, governmental decree or regulation in Canada that restricts the export or import of capital, or which would affect the remittance of dividends or other payments by the Company to non-resident holders of Common Shares, other than withholding tax.
E. Taxation.
Certain United States Federal Income Tax Considerations
The following is a general summary of certain material U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of common shares of the Company.
This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. Holder arising from and relating to the acquisition, ownership and disposition of common shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences to such U.S. Holder, including, without limitation, specific tax consequences to a U.S. Holder under an applicable income tax treaty. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any particular U.S. Holder. This summary does not address the U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences to U.S. Holders of the acquisition, ownership and disposition of common shares. In addition, except as specifically set forth below, this summary does not discuss applicable tax reporting requirements. Each prospective U.S. Holder should consult its own tax advisors regarding the U.S. federal, U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of common shares as discussed in this summary.
20-F for the year ended December 31, 2023
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No legal opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the “IRS”) has been requested, or will be obtained, regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares. This summary is not binding on the IRS and the IRS is not precluded from taking a position that is different from, or contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the conclusions described in this summary.
Scope of this Summary
Authorities
This summary is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations (whether final, temporary, or proposed) promulgated under the Code, published rulings of the IRS, published administrative positions of the IRS, the Convention Between Canada and the United States of America with Respect to Taxes on Income and Capital, signed September 26, 1980, as amended (the “Canada-U.S. Tax Convention”), and U.S. court decisions that are applicable, and, in each case, as in effect and available, as of the date of this document. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive or prospective basis, which could affect the U.S. federal income tax considerations described in this summary. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective basis.
U.S. Holders
For purposes of this summary, the term "U.S. Holder" means a beneficial owner of common shares that is for U.S. federal income tax purposes:
| · | an individual who is a citizen or resident of the United States; |
| · | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia; |
| · | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
| · | a trust that (1) is subject to the primary supervision of a court within the U.S. and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. |
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed
This summary does not address the U.S. federal income tax considerations applicable to U.S. Holders that are subject to special provisions under the Code, including, but not limited to, U.S. Holders that: (a) are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) are financial institutions, underwriters, insurance companies, real estate investment trusts, or regulated investment companies; (c) are broker-dealers, dealers, or traders in securities or currencies that elect to apply a mark-to-market accounting method; (d) have a “functional currency” other than the U.S. dollar; (e) own common shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other integrated transaction; (f) acquire common shares in connection with the exercise of employee stock options or otherwise as compensation for services; (g) hold common shares other than as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment purposes); (h) are subject to the alternative minimum tax; (i) are partnerships or other pass-through entities (and investors in such partnerships or pass-through entities); (j) are S corporations (and shareholders or investors in such S corporations); (k) own, have owned or will own (directly, indirectly, or by attribution) 10% or more of the total combined voting power or value of the outstanding shares of the Company; (l) are U.S. expatriates or former long-term residents of the U.S.; (m) hold common shares in connection with a trade or business, permanent establishment, or fixed base outside the United States; or (n) are subject to special tax accounting rules with respect to the common shares. U.S. Holders that are subject to special provisions under the Code, including, but not limited to, U.S. Holders described immediately above, should consult their own tax advisors regarding the U.S. federal, U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of common shares.
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If an entity or arrangement that is classified as a partnership (or other “pass-through” entity) for U.S. federal income tax purposes holds common shares, the U.S. federal income tax consequences to such entity or arrangement and the partners (or other owners or participants) of such entity or arrangement generally will depend on the activities of the entity or arrangement and the status of such partners (or owners or participants). This summary does not address the tax consequences to any such partner (or owner or participants). Partners (or other owners or participants) of entities or arrangements that are classified as partnerships or as “pass-through” entities for U.S. federal income tax purposes should consult their own tax advisors regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership and disposition of common shares.
Passive Foreign Investment Company Rules
If the Company were to constitute a PFIC for any year during a U.S. Holder’s holding period, then certain potentially adverse rules would affect the U.S. federal income tax consequences to a U.S. Holder resulting from the acquisition, ownership and disposition of common shares. The Company believes that it was not a PFIC for its most recently completed tax year and, based on current business plans and financial expectations, the Company does not anticipate that it will be a PFIC for its current tax year. No opinion of legal counsel or ruling from the IRS concerning the status of the Company as a PFIC has been obtained or is currently planned to be requested. However, PFIC classification is fundamentally factual in nature, generally cannot be determined until the close of the tax year in question and is determined annually. Additionally, the analysis depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. In addition, whether any corporation will be a PFIC for any tax year depends on the assets and income of such corporation over the course of each tax year and, as a result, cannot be predicted with certainty as of the date of this document. Accordingly, there can be no assurance that the IRS will not challenge any determination made by the Company (or any subsidiary of the Company) concerning its PFIC status. Each U.S. Holder should consult its own tax advisors regarding the PFIC status of the Company and each subsidiary of the Company.
In addition, in any year in which the Company is classified as a PFIC, a U.S. Holder will be required to file an annual report with the IRS containing such information as Treasury Regulations and/or other IRS guidance may require. A failure to satisfy such reporting requirements may result in an extension of the time period during which the IRS can assess a tax. U.S. Holders should consult their own tax advisors regarding the requirements of filing such information returns under these rules, including the requirement to file an IRS Form 8621 annually.
The Company generally will be a PFIC under Section 1297 of the Code if, after the application of certain “look-through” rules with respect to subsidiaries in which the Company holds at least 25% of the value of such subsidiary, for a tax year, (a) 75% or more of the gross income of the Company for such tax year is passive income (the “income test”) or (b) 50% or more of the value of the Company’s assets either produce passive income or are held for the production of passive income (the “asset test”), based on the quarterly average of the fair market value of such assets. “Gross income” generally includes all sales revenues less the cost of goods sold, plus income from investments and incidental or outside operations or sources, and “passive income” generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions. Active business gains arising from the sale of commodities generally are excluded from passive income if substantially all of a foreign corporation’s commodities are stock in trade or inventory, depreciable property used in a trade or business or supplies regularly used or consumed in the ordinary course of its trade or business, and certain other requirements are satisfied.
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If the Company were a PFIC in any tax year during which a U.S. Holder held common shares, such holder generally would be subject to special rules with respect to “excess distributions” made by the Company on the common shares and with respect to gain from the disposition of common shares. An “excess distribution” generally is defined as the excess of distributions with respect to the common shares received by a U.S Holder in any tax year over 125% of the average annual distributions such U.S. Holder has received from the Company during the shorter of the three preceding tax years, or such U.S. Holder’s holding period for the common shares. Generally, a U.S. Holder would be required to allocate any excess distribution or gain from the disposition of the common shares ratably over its holding period for the common shares. Such amounts allocated to the year of the disposition or excess distribution would be taxed as ordinary income, and amounts allocated to prior tax years would be taxed as ordinary income at the highest tax rate in effect for each such year and an interest charge at a rate applicable to underpayments of tax would apply.
While there are U.S. federal income tax elections that sometimes can be made to mitigate these adverse tax consequences (including the “QEF Election” under Section 1295 of the Code and the “Mark-to-Market Election” under Section 1296 of the Code), such elections are available in limited circumstances and must be made in a timely manner.
U.S. Holders should be aware that, for each tax year, if any, that the Company is a PFIC, the Company can provide no assurances that it will satisfy the record-keeping requirements of a PFIC, or that it will make available to U.S. Holders the information such U.S. Holders require to make a QEF Election with respect to the Company or any subsidiary that also is classified as a PFIC.
Certain additional adverse rules may apply with respect to a U.S. Holder if the Company is a PFIC, regardless of whether the U.S. Holder makes a QEF Election. These rules include special rules that apply to the amount of foreign tax credit that a U.S. Holder may claim on a distribution from a PFIC. Subject to these special rules, foreign taxes paid with respect to any distribution in respect of stock in a PFIC are generally eligible for the foreign tax credit. U.S. Holders should consult their own tax advisors regarding the potential application of the PFIC rules to the ownership and disposition of shares, and the availability of certain U.S. tax elections under the PFIC rules.
General Rules Applicable to the Ownership and Disposition of Common Shares
The following discussion describes the general rules applicable to the ownership and disposition of the common shares but is subject in its entirety to the special rules described above under the heading “Passive Foreign Investment Company Rules.”
Distributions on Common Shares
A U.S. Holder that receives a distribution, including a constructive distribution, with respect to a common share will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of the current and accumulated “earnings and profits” of the Company, as computed for U.S. federal income tax purposes. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates if the Company is a PFIC for the tax year of such distribution or the preceding tax year. To the extent that a distribution exceeds the current and accumulated “earnings and profits” of the Company, such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder's tax basis in the common shares and thereafter as gain from the sale or exchange of such common shares. (See “Sale or Other Taxable Disposition of Common Shares” below). However, the Company may not maintain the calculations of its earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder may have to assume that any distribution by the Company with respect to the common shares will constitute ordinary dividend income. Dividends received on common shares by corporate U.S. Holders generally will not be eligible for the “dividends received deduction.” Subject to applicable limitations and provided the Company is eligible for the benefits of the Canada-U.S. Tax Convention, dividends paid by the Company to non-corporate U.S. Holders, including individuals, generally will be eligible for the preferential tax rates applicable to long-term capital gains for dividends, provided certain holding period and other conditions are satisfied, including that the Company not be classified as a PFIC in the tax year of distribution or in the preceding tax year. The dividend rules are complex, and each U.S. Holder should consult its own tax advisors regarding the application of such rules.
Sale or Other Taxable Disposition of Common Shares
Upon the sale or other taxable disposition of common shares, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the U.S. dollar value of cash received plus the fair market value of any property received and such U.S. Holder's tax basis in such common shares sold or otherwise disposed of. A U.S. Holder’s tax basis in common shares generally will be such holder’s U.S. dollar cost for such common shares. Gain or loss recognized on such sale or other disposition generally will be long-term capital gain or loss if, at the time of the sale or other disposition, the common shares have been held for more than one year.
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Preferential tax rates currently apply to long-term capital gain of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gain of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.
Additional Considerations
Receipt of Foreign Currency
The amount of any distribution paid to a U.S. Holder in foreign currency, or payment received on the sale, exchange or other taxable disposition of common shares, generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). If the foreign currency received is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who receives payment in foreign currency and engages in a subsequent conversion or other disposition of the foreign currency after the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Different rules apply to U.S. Holders who use the accrual method of tax accounting. Each U.S. Holder should consult its own U.S. tax advisors regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.
Foreign Tax Credit
Dividends paid on the common shares will be treated as foreign-source income, and generally will be treated as “passive category income” or “general category income” for U.S. foreign tax credit purposes. Any gain or loss recognized on a sale or other disposition of common shares generally will be United States source gain or loss. Certain U.S. Holders that are eligible for the benefits of the Canada-US Tax Convention may elect to treat such gain or loss as Canadian source gain or loss for U.S. foreign tax credit purposes. The Code applies various complex limitations on the amount of foreign taxes that may be claimed as a result by U.S. taxpayers. In addition, Treasury Regulations that apply to taxes paid or accrued (the “Foreign Tax Credit Regulations”) impose additional requirements for Canadian withholding taxes to be eligible for a foreign tax credit, and there can be no assurance that those requirements will be satisfied. The Treasury Department has recently released guidance temporarily pausing the application of certain of the Foreign Tax Credit Regulations.
Subject to the PFIC rules and the Foreign Tax Credit Regulations, each as discussed above, a U.S. Holder that pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on the common shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid or accrued (whether directly or through withholding) by a U.S. Holder during a year. The foreign tax credit rules are complex and involve the application of rules that depend on a U.S. Holder’s particular circumstances. Accordingly, each U.S. Holder should consult its own U.S. tax advisors regarding the foreign tax credit rules.
Backup Withholding and Information Reporting
Under U.S. federal income tax law and Treasury Regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, U.S. return disclosure obligations (and related penalties) are imposed on individuals who are U.S. Holders that hold certain specified foreign financial assets in excess of certain threshold amounts. The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a non-U.S. entity. U.S. Holders may be subject to these reporting requirements unless their common shares are held in an account at certain financial institutions. Penalties for failure to file certain of these information returns are substantial. U.S. Holders should consult with their own tax advisors regarding the requirements of filing information returns, including the requirement to file an IRS Form 8938.
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Payments made within the U.S., or by a U.S. payer or U.S. middleman, of dividends on, and proceeds arising from the sale or other taxable disposition of, common shares will generally be subject to information reporting and backup withholding tax, currently at the rate of 24%, if a U.S. Holder (a) fails to furnish such U.S. Holder’s correct U.S. taxpayer identification number (generally on IRS Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, certain exempt persons, such as U.S. Holders that are corporations, generally are excluded from these information reporting and backup withholding rules. Backup withholding is not an additional tax. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS in a timely manner.
The discussion of reporting requirements set forth above is not intended to constitute a complete description of all reporting requirements that may apply to a U.S. Holder. A failure to satisfy certain reporting requirements may result in an extension of the time period during which the IRS can assess a tax and, under certain circumstances, such an extension may apply to assessments of amounts unrelated to any unsatisfied reporting requirement. Each U.S. Holder should consult its own tax advisors regarding the information reporting and backup withholding rules.
THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSIDERATIONS APPLICABLE TO U.S. HOLDERS WITH RESPECT TO THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF COMMON SHARES. U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSIDERATIONS APPLICABLE TO THEM IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.
F. Dividends and paying agents.
Not applicable.
G. Statement by experts.
Not applicable.
H. Documents on display.
We will furnish our shareholders with annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP. We intend, although we are not obligated to do so, to furnish when requested by our shareholders quarterly reports by mail with the assistance of a corporate services provider, which will include unaudited interim financial information prepared in conformity with U.S. GAAP for each of the three quarters of each fiscal year following the end of each such quarter. We may discontinue providing quarterly reports at any time without prior notice to our shareholders. For additional information on the Company, please consult our website at www.nxtenergy.com, or the SEDAR+ website at http://www.sedarplus.com.
Our reports and other information, including this annual report and the exhibits hereto, as filed with the SEC in accordance with the Exchange Act, may be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, Washington, D.C. 20549. In addition, copies of such reports and other information filed with the SEC can be obtained from www.sec.gov.
J. ANNUAL REPORT TO SECURITY HOLDERS.
Not applicable.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As at December 31, 2023 and to date in 2024, we do not have any variable interest bearing debt facilities. We have fixed interest bearing debt facilities with the HASCAP Loan, Ataraxia Debentures, and November Debentures (See Item 5B.). As at December 31, 2023 and to date in 2024 we do not have any forward / futures hedging contracts in place to manage risks related to foreign currency or interest rate fluctuations.
Currency Fluctuations
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, 2023, the Company held net U.S. dollar liabilities totaling US$1,179,649. Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2023 would have had an approximately $156,063 effect on the unrealized foreign exchange gain or loss for the year.
Interest Fluctuations
We periodically invest available cash in short-term investments that generate interest income that will be affected by any change in interest rates. At December 31, 2023 there were no short-term investments held by the Company. The Company’s long-term debt interest is fixed at 4% until 2031 and both the November Debentures and the Ataraxia Debentures carry an interest rate of 10% until their maturity date which, in the case of each such convertible debenture, is two years after issuance. Any refinancing of the convertible debentures, or new debt financing could result in a significantly different interest rate. We currently do not have any variable interest rate debt.
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.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There have not been any defaults, dividend arrears or delinquencies.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
There have been no material modifications to the rights of security holders except as outlined in Item 4.B “Summary information on dependence on patents, licenses and contracts” within this Form 20-F.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures (“DCP”) designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports is accumulated and communicated to management, to allow timely decisions regarding required disclosure. As discussed below, the Responsible Officers (as defined below) concluded that, as at December 31, 2023, its DCPs are not effective.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company's CEO and CFO, together the "Responsible Officers") are responsible for establishing and maintaining DCP, 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 quarterly and year-end consolidated financial statements, Form 20-F and Management Discussion and Analysis are being prepared.
As of December 31, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our Responsible Officers, of the effectiveness of the design and operation of the Company’s DCP as defined under the rules adopted by the Canadian securities regulatory authorities and in Rule 13a-15(e) of the Exchange Act. The evaluation concluded that there are material weaknesses in the Company’s ICFR that have a direct impact on the Company’s DCP as discussed in more detail below.
Our management, under the supervision of the Responsible Officers, is also responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) as defined in Rule 13a-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our Responsible Officers assessed the effectiveness of our ICFR as of December 31, 2023. In making this assessment, they used the criteria established in Internal Control – Integrated Framework 2013, issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control (“COSO”).
Our ICFR were not required to be independently audited. Accordingly, no independent audit was performed over the effectiveness of internal controls as at December 31, 2023 and this annual report does not include an attestation report of the Company’s registered public accounting firm regarding ICFR. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
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During this process, we identified the following material weaknesses in the Company’s ICFR that have a direct impact on the Company’s DCP:
| · | 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, 2023, its ICFR is not effective and as a result its DCPs are not sufficiently 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: (i) the implementation of controls with regards to the review procedures surrounding its disclosure; and (ii) engagement of third-party specialists. In addition, the CFO engages subject matter consultants as the need arises.
Changes in Internal Controls
There were no changes to the Company’s ICFR in 2023.
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.
There were no other changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the period ended December 31, 2023.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board has determined that we have at least one audit committee “financial expert” (as defined under Item 16.A of Form 20-F) serving on our Audit Committee. The Audit Committee consists of Messrs. Selby (Chair), Tilson, and Patsellis. All members of the NXT Audit Committee has relevant experience in understanding and evaluating financial information, generally accepted accounting principles, control systems and audit committee functions. They are considered financial experts, and all are “independent” directors, as that term is defined under the listing standards of NASDAQ.
ITEM 16B. CODE OF ETHICS
NXT has in place a Code of Conduct & Business Ethics (the “Code of Conduct”) that applies to all of our directors, officers, employees, and consultants. This Code of Conduct is incorporated in our Employee Handbook, is an integral part of our employee contracts and our Employee Handbook and contains Company policies on Business Ethics, Employee Practices and Conflicts of Interest.
During 2023, the Company did not significantly amend its Code of Conduct or grant any waiver, including any implicit waiver, from any provision of the Code of Conduct to any of its directors, officers or employees. Copies of NXT’s Code of Conduct are available without charge to any person upon request from NXT’s Chief Financial Officer at nxt_info@nxtenergy.com or at NXT’s headquarters at Suite 302, 3320 – 17th Avenue SW, Calgary Alberta, Canada, T3E 0B4, and on the Company website, www.nxtenergy.com.
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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate audit fees, audit-related fees, tax 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, 2023, 2022 and 2021.
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Audit fees1. |
| $ | 261,803 |
|
| $ | 407,670 |
|
| $ | 234,330 |
|
Audit-related fees |
|
| - |
|
|
| - |
|
|
| - |
|
Tax fees2. |
|
| - |
|
|
| 12,273 |
|
|
| 1,338 |
|
Total fees |
|
| 261,803 |
|
|
| 419,943 |
|
|
| 235,668 |
|
1. Aggregate of fees for audit of annual financial statements, review of quarterly financial statements and consent letters.
2. Fees for reviewing annual tax returns and foreign jurisdiction tax compliance.
Audit Committee’s Pre-approval Policies and Procedures
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.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
On April 25, 2023, KPMG LLP (“KPMG”), which is currently serving as NXT’s Principal Accountant, informed NXT that it has declined to stand for reappointment as NXT’s independent auditor for the audit of the fiscal year ended December 31, 2023. The resignation of the Predecessor Auditor was considered and approved by the Audit Committee and the Board of Directors of the Company. There is no dispute between NXT and KPMG and KPMG will continue to perform interim review services for NXT in connection with the Company’s fiscal quarter ended March 31, 2023.
KPMG’s reports on the Company’s financial statements for the fiscal years ended December 31, 2022 and 2021 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles, except as follows: KPMG LLP’s report on the consolidated financial statements of NXT as of and for the years ended December 31, 2022 and 2021 contained a separate paragraph stating that “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.”
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During the two most recent fiscal years of the Company and through the date of this annual report on Form 20-F, there has not been any disagreement over any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to KPMG’s satisfaction, would have caused it to make reference to the subject matter of the disagreements in their report, or any “reportable event” as that term is defined in Item 16F(a)(1)(v) of Form 20-F except for the material weakness in the Company’s internal controls over financial reporting disclosed in Item 15 of the Company’s Form 20-F for the fiscal year ended December 31, 2022 and the Company’s Form 20-F for the fiscal year ended December 31, 2021. The material weaknesses relating to the effectiveness of internal controls have not been remediated as of the date of this Form 20-F.
The Company has provided KPMG with a copy of the foregoing disclosure and has requested and received from KPMG a letter addressed to the SEC stating whether they agree with the above statements. A copy of KPMG’s letter, dated May 10, 2023, is filed herewith as Exhibit 15.1.
MNP LLP was appointed auditor of the Company as of the fiscal year ended December 31, 2023 at the annual meeting of shareholders on August 2, 2023.
ITEM 16G. CORPORATE GOVERNANCE
Not applicable.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I – DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 16J – INSIDER TRADING POLICIES
Not applicable.
ITEM 16K – CYBERSECURITY
The Company recognizes the importance of cybersecurity in protecting our intellectual property, operations, and data. The Company’s cybersecurity risk management processes are integral to our risk management framework. We conduct regular cybersecurity risk analysis to identify potential threats and vulnerabilities within our IT infrastructure, applications, and operational procedures. We have implemented and maintain various information security processes and software designed to identify, assess and manage material cybersecurity threats to our computer networks, third party hosted services, communications systems, hardware/software, customer/internal data, intellectual property and confidential information.
Our IT department helps identify, assess and manage our cybersecurity threats and risks by monitoring and evaluating our threat environment using various methods including, for example, manual tools, automated tools, analyzing reports of threats from credible third parties such as Microsoft and the Canadian Centre for Cyber Security, conducting scans of the network footprint and authentication methods. We implement and maintain various technical, physical, and organizational measures, processes, standards and policies designed to manage and mitigate material risks from cybersecurity threats to our Information Systems and Data such as disaster recovery/business continuity plans, network security controls, data segregation, access controls, physical security, systems monitoring and employee training.
We integrate cybersecurity risk considerations into our planning processes, ensuring that potential impacts on our business operations, reputation, and financial condition are adequately assessed and mitigated. Our contracts with third-party providers include specific security requirements and obligations to protect our data and systems. We acquire appropriate liability coverage to cover potential losses from a cybersecurity breach. We have not identified risks from known cybersecurity threats, including as a result of a prior cybersecurity incident, that have materially affected, or are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition.
Our cybersecurity risk assessment and management processes are implemented and maintained by our CFO and our IT Manager wo conduct regular briefing with our staff for education and compliance. The Company’ board of directors plays a crucial role in overseeing our company’s cybersecurity posture including receiving updates on cybersecurity matters from our IT Manager.
20-F for the year ended December 31, 2023
| 70 |
| Table of Contents |
PART III
ITEM 17. FINANCIAL STATEMENTS
The Company’s consolidated financial statements and related notes are prepared in accordance with U.S. generally accepted accounting principles and included in Item 18 to this annual report.
ITEM 18. FINANCIAL STATEMENTS
The Company’s consolidated financial statements and related notes for the years ended December 31, 2023, 2022 and 2021, together with the report of MNP LLP, Chartered Professional Accountants, have been prepared in accordance with U.S. generally accepted accounting principles and are attached as exhibit 15.1 hereto and are incorporated into the report.
20-F for the year ended December 31, 2023
| 71 |
| Table of Contents |
ITEM 19. EXHIBITS [note: remember that this need to be hyperlinked to previously posted docs.]
EXHIBIT INDEX
Exhibit No. |
| Description |
1.1 |
| Articles of Incorporation of Auric Mining Corporation as filed with the Nevada Secretary of State on September 27, 1994 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form 10 filed on June 29, 1998) |
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1.2 |
| Amendment to Articles of Incorporation of Auric Mining Corporation as filed with the Nevada Secretary of State on February 23, 1996 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form 10 filed on June 29, 1998) |
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1.3 |
| Certificate of Amendment to Articles of Incorporation of Pinnacle Oil International, Inc. as filed with the Nevada Secretary of State on April 1, 1998 (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form 10 filed on June 29, 1998) |
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5.1 |
| Ataraxia Convertible Debenture Subscription Agreement |
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5.2 |
| Ataraxia Investor Rights Agreement |
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20-F for the year ended December 31, 2023
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| Table of Contents |
Exhibit No. |
| Description |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and President | |
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| Rule 13a-14(a)/15d-14(a) Certification of VP Finance and Chief Financial Officer | |
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| Section 1350 Certification of Chief Executive Officer and President | |
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| Section 1350 Certification of VP Finance and Chief Financial Officer | |
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| Management’s Discussion and Analysis for the year ended December 31, 2023 | |
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15.4 |
| Management’s Discussion and Analysis for the year ended December 31, 2022 |
20-F for the year ended December 31, 2023
| 73 |
| Table of Contents |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
NXT Energy Solutions Inc. |
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By: | "/s/ Bruce G. Wilcox" |
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Bruce G. Wilcox |
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Director and Interim Chief Executive Officer |
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Dated: April 26, 2024 |
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20-F for the year ended December 31, 2023
74 |
EXHIBIT 2.1
DESCRIPTION OF SECURITIES REGISTERED UNDER SECTION 12 OF THE EXCHANGE ACT
NXT Energy Solutions Inc. (“NXT” or the “Company”) has the following securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”):
| Title of each class |
| Trading symbol |
| Name of each exchange on which registered |
| Common Shares |
| NSFDF |
| The OTC Markets QB Exchange |
This exhibit contains a description of the rights of the holders of common shares. The following summary is subject to and qualified in its entirety by NXT’s articles of incorporation (the “Articles of Incorporation”), by-laws (the “By-Laws”) and by applicable Alberta and Canadian law, particularly the Business Corporations Act (Alberta) (the “ABCA”). This is not a summary of all the significant provisions of the Articles of Incorporation, By-Laws or of Alberta or Canadian law and does not purport to be complete. Capitalized terms used but not defined herein have the meanings given to them in the Company’s annual report on Form 20-F to which this description of securities registered under section 12 of the Exchange Act (the “Description of Securities”) is an exhibit.
Item 9. General
Item 9.A.3 Pre-emptive rights
The Articles of Incorporation permit the issuance of an unlimited number of common shares, and shareholders have no pre-emptive rights in connection with such further issuance.
Item 9.A.5 Type and class of securities
The Company is authorized to issue an unlimited number of common shares, no par value. All common shares are issued in registered form and there are not restrictions on the free transferability of such common shares, except for any transfer restrictions imposed by applicable securities laws.
Item 9.A.6 Limitations or qualifications
Not applicable.
Item 9.A.7 Other rights
Not applicable.
Item 10.B Memorandum and articles of association
Item 10.B.3 Shareholder rights
Dividends
The holders of common shares are entitled to receive any dividend declared by the Board of the Company on the common shares, provided that NXT shall be entitled to declare dividends on any other classes of shares without being obliged to declare dividends on the common shares.
NXT is authorized to issue an unlimited number of preferred shares, issuable in one or more series, none of which are issued and outstanding as of the date hereof. With respect to the payment of dividends, NXT’s preferred shares, if issued, would be entitled to preference over the common shares.
| 1 |
Voting Rights
The holders of common shares are entitled to attend and vote at all meetings of the shareholders of the Company. The directors stand for reelection at the same intervals and cumulative voting is not permitted.
Rights Upon Dissolution
Subject to the rights, privileges, restrictions and conditions attaching to any other class of NXT’s shares, the holders of the common shares are entitled to share equally in such of the Company’s property as is distributable to the holders of common shares. With respect to the distribution of assets or the return of capital in the event of liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, any preferred shares, if issued, would be entitled to preference over the common shares.
Redemption Provisions
Not applicable.
Sinking fund provisions
Not applicable.
Capital Calls
Not applicable.
Discrimination provisions
Not applicable.
Item 10.B.4 Changes to shareholder rights
Action Necessary to Change the Rights of Shareholders
NXT’s shareholders can authorize the alteration or amendment of the Articles of Incorporation to create or vary the rights, privileges, restrictions and conditions attached to any of NXT’s shares by passing a special resolution. However, the rights, privileges, restrictions and conditions attached to any class or series of shares may not be amended unless the shareholders holding shares of that class or series to which the right or special right is attached consent by a separate special resolution (subject to certain exceptions for separate class votes). A special resolution means a resolution passed by a majority of not less than two thirds of the votes cast by the applicable class or series of shareholders who vote in person or by proxy at a meeting.
Amendments to the By-Laws
NXT’s Board may make, amend or repeal any By-Law that regulates the business or affairs of the Company. If the directors make, amend or repeal a by-law, they are required under the ABCA to submit such action to the shareholders at the next meeting of shareholders and the shareholders may confirm, reject or amend the action by an ordinary resolution. If the action is rejected by the shareholders or if the directors do not submit the action to shareholders at the next shareholder meeting, the action will cease to be effective and no subsequent resolution of the directors to make, amend or repeal a by-law that has substantially the same purpose or effect will be effective until it is confirmed by the shareholders.
| 2 |
Item 10.B.6 Limitations
There are no restrictions on the rights of non-resident or foreign shareholders to hold or exercise voting rights with respect to NXT’s common shares.
Item 10.B.7 Change in control
The Articles of Incorporation and the By-Laws do not contain any change of control limitations with respect to a merger, acquisition or corporate restructuring that involves NXT. Notwithstanding this, the Board of directors, under the general powers conferred to it under NXT’s By-Laws, have the authority to approve and invoke a shareholders rights plan that will protect shareholders from unfair, abusive or coercive take-over strategies, including the acquisition or control of NXT by a bidder in a transaction or series of transactions that does not treat all shareholders equally or fairly or that does not afford all shareholders an equal opportunity to share in any premium paid upon an acquisition of control.
Item 10.B.8 Disclosure of shareholdings
Although applicable securities laws regarding shareholder ownership by certain persons require disclosure, neither the Articles of Incorporation nor the By-Laws provide for any ownership threshold above which shareholder ownership must be disclosed.
Item 10.B.9 Differences in the law
For a discussion of the significant differences of the law applicable to NXT and the law in the US, please see the section entitled ‘PROPOSAL NO. 1: CONTINUANCE OF ENERGY EXPLORATION TECHNOLOGIES AS A CORPORATION ORGANIZED UNDER THE LAWS OF THE PROVINCE OF ALBERTA’ of the Form Def 14A filed at the time of the Company’s continuance from Nevada to Alberta on October 3, 2003.
Item 10.B.10 Changes in capital
The requirements imposed by the Articles of Incorporation governing changes in capital are not more stringent than is required by law.
| 3 |
EXHIBIT 12.1
CERTIFICATION
I, Bruce G. Wilcox, Director and Interim Chief Executive Officer of NXT Energy Solutions Inc., certify that:
| 1. | I have reviewed this annual report on Form 20-F of NXT Energy Solutions Inc.; |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; |
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| 4. | The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: |
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| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles; |
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| (c) | Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| (d) | Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and |
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| 5. | The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s Board of directors (or persons performing the equivalent functions): | |
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| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and |
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| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. |
Date: April 26, 2024
"/s/ Bruce G. Wilcox"
Bruce G. Wilcox
Director and Interim Chief Executive Officer
EXHIBIT 12.2
CERTIFICATION
I, Eugene Woychyshyn, VP of Finance and Chief Financial Officer, certify that:
| 1. | I have reviewed this annual report on Form 20-F of NXT Energy Solutions Inc.; |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; |
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| 4. | The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: |
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| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles; |
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| (c) | Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| (d) | Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and |
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| 5. | The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s Board of directors (or persons performing the equivalent functions): | |
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| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and |
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| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. |
Dated: April 26, 2024
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| /s/ Eugene Woychyshyn |
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| Eugene Woychyshyn |
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| VP Financial Officer and CFO |
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EXHIBIT 13.1
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. §§ 1350(a) and (b)), the undersigned hereby certifies in their capacity as officers of NXT Energy Solutions Inc. (the “Company”) that the Annual Report of the Company on Form 20-F for the year ended December 31, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 26, 2024
"/s/ Bruce G. Wilcox"
Bruce G. Wilcox
Director and Interim Chief Executive Officer
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO NXT ENERGY SOLUTIONS INC. AND WILL BE RETAINED BY NXT ENERGY SOLUTIONS INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
EXHIBIT 13.2
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. §§ 1350(a) and (b)), the undersigned hereby certifies in his capacity as an officer of NXT Energy Solutions Inc. (the “Company”) that the Annual Report of the Company on Form 20-F for the year ended December 31, 2022 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 26, 2024
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| /s/ Eugene Woychyshyn |
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| Eugene Woychyshyn |
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| VP Finance and CFO |
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A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO NXT ENERGY SOLUTIONS INC. AND WILL BE RETAINED BY NXT ENERGY SOLUTIONS INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
EXHIBIT 15.1
NXT ENERGY SOLUTIONS INC.
Consolidated Financial Statements
For the Years ended
December 31, 2023, 2022 and 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of NXT Energy Solutions Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of NXT Energy Solutions Inc. (the Company) as at December 31, 2023, and the related consolidated statements of loss and comprehensive loss, shareholders’ equity, and cash flows for the year ended December 31, 2023, and the related notes and schedules (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
The consolidated financial statements of the Company as at December 31, 2022 and for the years ended December 31, 2022 and 2021, were audited by other auditors whose report dated March 31, 2023, expressed an unqualified opinion on those consolidated financial statements.
Material Uncertainty Related to 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 cash position is not expected to be sufficient to meet the Company’s obligations and planned operations for a year beyond the date of auditor’s report, unless additional financing is obtained or new revenue contracts are completed. This raises substantial doubt about the Company’s ability to continue as a going concern. Management's plans regarding 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 financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 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.
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 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 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
MNP LLP |
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Suite 2000, 112 - 4th Avenue SW, Calgary AB, T2P 0H3
| 1.877.500.0792 T: 403.263.3385 F: 403.269.8450
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MNP.ca |
Revenue recognition
Critical Audit Matter Description
The Company recognized revenue of $2,145,716 for the year ended December 31, 2023. As described in Notes 2 and 21 to the consolidated financial statements, 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 is recognized over time by measuring the progress toward satisfaction of its performance obligation to the customer. 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.
The accounting for contracts that are not complete at the reporting date involves significant judgment, particularly as it relates to determining the total anticipated costs at completion.
Audit Response
We responded to this matter by performing procedures in relation to revenue recognition. Our audit work in relation to this included, but was not restricted to, the following:
| · | Agreeing key contractual terms to the executed service agreement signed in the year ended December 31, 2023. |
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| · | Agreeing total revenue per the agreement to the issued invoices and other supporting documentation and reconciling it to the revenue recognized during the reporting period. |
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| · | Inquiring of management and operational personnel to understand the status of the project and relevant activities. |
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| · | Evaluating the reasonableness of management’s calculation of the total anticipated costs at completion, including testing of significant inputs, such as estimated labour costs, material costs, subcontractor costs, and other costs, to appropriate supporting documentation. |
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| · | Testing the costs incurred to date as at the end of the reporting period, including costs accrued as at December 31, 2023, by testing cut-off and inspecting supporting documents for a sample of transactions. |
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| · | Recalculating revenue recognized during the year ended December 31, 2023, based on the total anticipated costs at completion and costs incurred to date as at the end of the reporting period. |
Going Concern
Critical Audit Matter Description
As described in Note 1 to the consolidated financial statements, 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, unless additional financing is obtained or new revenue contracts are completed.
We identified the assessment of the ability of the Company to continue as a going concern as a critical audit matter due to the significant assumptions and judgements made by management in estimating future cash flows, which are subject to high degree of uncertainty.
This matter is also described in the “Material Uncertainty Related to Going Concern” section of our report.
Audit Response
We responded to this matter by performing procedures in relation to the assessment of the ability of the Company to continue as a going concern. Our audit work in relation to this included, but was not restricted to, the following:
| · | Obtaining an understanding from management on the Company’s future plans for the operations, including financing arrangements. |
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| · | Evaluating the key assumptions used in management’s model to estimate future cash flows by comparing assumptions used by management against historical performance, budgets, economic and industry indicators and publicly available information. |
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| · | Comparing the assumptions related to revenue projections to those used in assessments of impairment indicators for non-financial assets. |
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| · | Assessing the adequacy of the going concern disclosure included in Note 1 to the consolidated financial statements and considering whether these appropriately reflected the assessments that management performed. |
Chartered Professional Accountants
We have served as the Company’s auditor since 2023.
Calgary, Canada
March 27, 2024
| [1] |
NXT ENERGY SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
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Common shares (Note 15): - authorized unlimited |
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| $ |
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| $ |
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Going Concern (Note 1) Commitments (Note 14) Subsequent event (Notes 7, 10,17) |
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Signed "Charles Selby" |
| Signed "Bruce G. Wilcox" |
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Director |
| Director |
|
The accompanying notes are an integral part of these consolidated financial statements.
| [2] |
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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| 2023 |
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| 2021 |
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| 2021 |
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Revenue |
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SFD® related revenue (Note 21) |
| $ |
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| $ |
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| $ |
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Expenses |
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SFD® related costs, net |
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General and administrative expenses (Note 17, 22, 23) |
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Amortization (Note 6, 8) |
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Other expenses (income) |
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Interest expense, net |
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Foreign exchange loss (gain) |
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| ( | ) |
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| ( | ) |
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Intellectual property and other |
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Loss before income taxes |
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Income tax expense (Note 18) |
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Net loss and comprehensive loss |
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| ( | ) |
Net loss per share (Note 16) |
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Basic |
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| ( | ) |
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| ( | ) |
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Diluted |
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| ( | ) |
The accompanying notes are an integral part of these consolidated financial statements.
| [3] |
NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
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| For the Year ended December 31, |
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| 2023 |
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| 2022 |
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| 2021 |
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Cash from (used in): (Lease payments in prior years have been reclassified to improve presentation.) |
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Operating activities |
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Net loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Items not affecting cash: |
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Stock based compensation expense (Note 17) |
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Amortization |
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Accretion expense (recovery) (Note 13) |
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Non-cash lease amortization and accretion |
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Unrealized foreign exchange (gain) loss |
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Loss on disposal of assets and lease modifications |
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Change in deposits |
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Change in non-cash working capital balances (Note 20) |
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Lease payments |
|
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Prepaid Ling-term insurance |
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Net cash used in operating activities |
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Financing activities |
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Proceeds from the Employee Share Purchase plan (Note 17) |
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Proceeds for Restricted Stock Units |
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Proceeds from (repayment of) long-term debt (Note 11) |
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Net proceeds from Rights Offering (Note 15) |
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Net proceeds from Private Placement (Note 15) |
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Net proceeds from Convertible Debentures (Note 10) |
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Share issuance costs for Geothermal (Note 15) |
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Repayment of financial liability and lease obligation |
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Net cash from (used in) financing activities |
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Investing activities |
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Acquisition of intellectual property (Note 8) |
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Purchase of property and equipment, net |
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Proceeds from (used in) short-term investments |
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Net cash from (used in) investing activities |
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Effect of foreign exchange rate changes on cash and cash equivalents |
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Net decrease in cash and cash equivalents |
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| ( | ) |
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Cash and cash equivalents, beginning of the year |
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Cash and cash equivalents, end of the year |
| $ |
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| $ |
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| $ |
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Supplemental information |
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Cash interest paid (received) |
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Cash taxes paid |
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The accompanying notes are an integral part of these consolidated financial statements.
| [4] |
NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Shareholders' Equity
(Expressed in Canadian dollars)
|
| For the Year ending December 31, |
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| 2023 |
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| 2022 |
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| 2021 |
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Common Shares |
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Balance at beginning of the year |
| $ |
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| $ |
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| $ |
| |||
Issuance of common stock, net of share issuance costs for: |
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Rights Offering (Note 15) |
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Private placement (Note 15) |
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Employee Share Purchase Plan (Note 15) |
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Restricted Stock Unit Plan (Note 15) |
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Acquisition of SFD® Geothermal Right (Note 15) |
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Balance at end of the year |
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Contributed Capital |
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Balance at beginning of the year |
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Issuance of Equity for intellectual property (Note 15) |
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Transfer of equity to common shares (Note 15) |
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| ( | ) | ||
Recognition of stock based compensation expense (Note 17) |
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Balance at end of the year |
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Deficit |
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Balance at beginning of the year |
|
| ( | ) |
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| ( | ) |
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| ( | ) |
Net loss |
|
| ( | ) |
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| ( | ) |
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| ( | ) |
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Balance at end of the year |
|
| ( | ) |
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| ( | ) |
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| ( | ) |
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Total Shareholders' Equity at end of the year |
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The accompanying notes are an integral part of these consolidated financial statements.
| [5] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(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 and listed on the Toronto Stock Exchange (“TSX”).
NXT's proprietary Stress Field Detection ("SFD®") technology is an airborne survey system that utilizes the principles of quantum mechanics to infer stress anomalies of exploration interest. The method can be used both onshore and offshore to remotely identify areas conducive to fluid entrapment in order to recommend areas with commercial hydrocarbon and/or geothermal potential.
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.
Since 2022, the Company has deferred payment of certain operating costs, including payroll and other general and administrative costs. During 2023 and subsequent to December 31, 2023, the Company completed private placements which resulted in raising an additional net proceeds of $
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.
| [6] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(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 2023 and 2022, the estimates and judgments included the assessment of impairment indicators of intellectual property and recognition of SFD® related revenue.
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, lease interest rates and terms, 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, 2023 have been prepared by management in accordance with generally accepted accounting principles of the United States of America (“US GAAP”).
| [7] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
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, 2023 and 2022, 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, 2023 the fair value of the share based payment “Compensation Expense” was based on share price using Level I inputs. 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.
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.
| [8] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
The determination of the fair value of the acquisition of the Intellectual property (Note 8) 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:
Survey equipment | |
Aircraft equipment | |
Computers | |
Furniture and other equipment | |
Leasehold improvements |
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.
| [9] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(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.
Convertible Debentures
Convertible debentures are recorded as a current liability if the Company has an obligation to deliver cash to the holder on demand on or before the maturity date and a long-term liability if non-demand and the maturity date is greater than one year. If the convertible debentures are converted to either voting preferred or common shares, the preferred or common shares will be classified as equity. Interest on the convertible debenture is accrued as earned. Dividends on preferred shares will only be accrued on dividends declared by the Board of Directors of the Company.
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 2023, 2022 and 2021.
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.
| [10] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
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.
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.
| [11] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
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.
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.
| [12] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
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.
| [13] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
3. Accounts Receivable
|
| December 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Trade receivables |
| $ |
|
| $ |
| ||
Other receivables |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Allowance for doubtful accounts |
|
|
|
|
|
| ||
Net accounts receivable |
|
|
|
|
|
| ||
The entire trade receivable was with one client as of December 31, 2023. Approximately $
4. Prepaid expenses and deposits
|
| December 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
| ||
Prepaid expenses |
| $ |
|
| $ |
| ||
Deposit |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
5. 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, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
| ||
Prepaid expenses |
| $ |
|
| $ |
| ||
Building |
|
|
|
|
|
| ||
Aircraft |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
| [14] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
6. Property and equipment
|
| December 31, 2023 |
| |||||||||
|
| Cost |
|
| Accumulated |
|
| Net book |
| |||
|
| Base |
|
| Amortization |
|
| value |
| |||
Survey equipment |
| $ |
|
| $ |
|
| $ |
| |||
Computers and software |
|
|
|
|
|
|
|
|
| |||
Furniture and other equipment |
|
|
|
|
|
|
|
|
| |||
Leasehold improvements |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
|
| December 31, 2022 |
| |||||||||
|
| Cost |
|
| Accumulated |
|
| Net book |
| |||
|
| Base |
|
| Amortization |
|
| value |
| |||
Survey equipment |
| $ |
|
| $ |
|
| $ |
| |||
Computers and software |
|
|
|
|
|
|
|
|
| |||
Furniture and other equipment |
|
|
|
|
|
|
|
|
| |||
Leasehold improvements |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
7. Right of use assets
|
| December 31, 2023 |
| |||||||||
|
| Cost |
|
| Accumulated |
|
| Right of |
| |||
|
| Base |
|
| Amortization |
|
| Use |
| |||
Aircraft |
| $ |
|
| $ |
|
| $ |
| |||
Office Building |
|
|
|
|
|
|
|
|
| |||
Printer |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2022 | ||||||||||
|
| Cost |
|
| Accumulated |
|
| Right of |
| |||
|
| Base |
|
| Amortization |
|
| Use |
| |||
Aircraft |
| $ |
|
| $ |
|
| $ |
| |||
Office Building |
|
|
|
|
|
|
|
|
| |||
Printer |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
| [15] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
Subsequent Event
On March 22, 2024 the Company extended its Aircraft lease for three years, until March 28, 2027. The Aircraft Lease will be converted to a capital lease and the Company will own the aircraft at the end of the lease. Terms of the extension include a principle of US$
8. Intellectual property
|
| December 31, 2023 |
| |||||||||
|
| Cost |
|
| Accumulated |
|
| Net book |
| |||
|
| Base |
|
| amortization |
|
| Value |
| |||
SFD® Hydrocarbon Right acquired |
| $ |
|
| $ |
|
| $ |
| |||
SFD® Geothermal Right acquired |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
|
| December 31, 2022 |
| |||||||||
|
| Cost |
|
| Accumulated |
|
| Net book |
| |||
|
| Base |
|
| amortization |
|
| Value |
| |||
SFD® Hydrocarbon Right acquired |
| $ |
|
| $ |
|
| $ |
| |||
SFD® Geothermal Right acquired |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
SFD® Hydrocarbon Right
During 2015, NXT acquired the rights to the SFD® technology for use in the exploration of hydrocarbons (“Hydrocarbon Right”) from Mr. George Liszicasz, the former President and CEO of NXT (“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 $
The Hydrocarbon Right is being amortized on a straight line basis over its estimated useful life of
| [16] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
SFD® Geothermal Right
The Company acquired the SFD® technology rights for geothermal resources (“Geothermal Right”) from the 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$ |
| 2. | |
| 3. | CDN$ |
| 4. | US$ |
| 5. | US$ |
As of December 31, 2023, the Company has recognized $
The current book value of the Geothermal Right is being amortized on a straight line basis over its estimated useful life of
Reconciliation of Intellectual Property
|
| SFD® Hydrocarbon Right |
|
| SFD® Geothermal Right |
|
| Total |
| |||
Net book value at December 31, 2021 |
| $ |
|
| $ |
|
| $ |
| |||
Amortization |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Net book value at December 31, 2022 |
|
|
|
|
|
|
|
|
| |||
Amortization |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Net book value at December 31, 2023 |
|
|
|
|
|
|
|
|
| |||
| [17] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
9. Accounts payable and accrued liabilities
|
| December 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Accrued liabilities related to: |
|
|
|
|
|
| ||
Consultants and professional fees |
| $ |
|
| $ |
| ||
Payroll related |
|
|
|
|
|
| ||
Board of director’s fees |
|
|
|
|
|
| ||
Interest payable |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Trade payables and other |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
10. Convertible Debentures
On May 31, 2023 the Company issued a two-year term convertible debenture for US$1,200,000 (CDN$
On November 2, 2023, the Company received conditional approval from the TSX to offer a multi-tranche convertible debenture (the "November Debentures") The November Debentures bear interest at
On November 8, 2023 the Company issued the first tranche of the November Debentures for US$1,000,000 (approximately CDN$
| [18] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
On December 22, 2023 the Company issued the second tranche of the November Debentures for US$150,000 (approximately CDN$199,260) which gives the subscriber the right to obtain an additional 829,646 common shares upon the conversion of the November Debentures.
Repayment of principal and interest (US$): |
| US$ |
|
| CDN$1. |
| ||
2024 |
| $ | 255,000 |
|
| $ |
| |
2025 |
|
| 2,740,000 |
|
|
|
| |
Total principal and interest payments |
|
| 2,995,000 |
|
|
|
| |
Less interest |
|
| (445,000 | ) |
|
| ( | ) |
Less Debt issuance costs |
|
| (13,273 | ) |
|
| ( | ) |
Net principal remaining |
|
| 2,536,727 |
|
|
|
| |
Current portion of convertible debentures |
|
| 1,400,000 |
|
|
|
| |
Non-current portion of convertible debentures |
|
| 1,136,727 |
|
|
|
| |
1. | Converted at 1.32296 |
Subsequent Event
On January 12, 2024, the Company closed the final tranche of the November Debentures for an additional US$722,000 (approximately CDN$
Mork Capital purchased an additional US$375,000 (approximately CDN$
11. Long-term debt
On May 26, 2021, the Company received $
| [19] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
Repayment of principal and interest: |
|
|
| |
2024 |
| $ |
| |
2025 |
|
|
| |
2026 |
|
|
| |
2027 |
|
|
| |
2028 |
|
|
| |
2029 to 2031 |
|
|
| |
Total principal and interest payments |
|
|
| |
Less interest |
|
| ( | ) |
Total principal remaining |
|
|
| |
Current portion of long-term debt |
|
|
| |
Non-current portion of long-term debt |
|
|
| |
12. Lease obligation
|
| December 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Aircraft |
| $ |
|
| $ |
| ||
Office Building |
|
|
|
|
|
| ||
Printer |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Current portion of lease obligations |
|
|
|
|
|
| ||
Long-term lease obligations |
|
|
|
|
|
| ||
Maturity of lease liabilities: |
| Weighted Average Remaining Lease Term | ||||
2024 |
| $ |
|
| ||
2025 |
|
|
|
| ||
2026 |
|
|
|
| ||
Total lease payments |
|
|
|
|
| |
Less imputed interest |
|
| ( | ) |
|
|
Total discounted lease payments |
|
|
|
|
| |
Current portion of lease obligations |
|
|
|
|
| |
Non-current portion of lease obligations |
|
|
|
|
| |
|
| Lease Term Till |
| Option to Extend |
| Incremental Borrowing Rate |
| |
Aircraft |
|
|
|
| % | |||
Office Building |
|
| No |
|
| % | ||
Printer |
|
| No |
|
| % | ||
| [20] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
As of December 31, 2023 and December 31, 2022 all of the Company’s leases were classified as operating leases. The Company’s total operating lease expenditures for the period ended December 31, 2023 was $
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
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
ARO balance, beginning of the year |
| $ |
|
| $ |
|
| $ |
| |||
Accretion expense |
|
|
|
|
|
|
|
|
| |||
Change in ARO estimates |
|
|
|
|
|
|
|
| ( | ) | ||
ARO balance, end of the year |
|
|
|
|
|
|
|
|
| |||
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 |
| |
2024 |
| $ |
| |
2025 |
|
|
| |
Total |
|
|
| |
| [21] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
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, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| # of shares |
|
| $ amount |
|
| # of shares |
|
| $ amount |
| ||||
As at the beginning of the year |
|
|
|
|
|
|
|
|
|
| $ |
| ||||
Rights offering, net of issuance costs |
|
| - |
|
|
| - |
|
|
|
|
|
|
| ||
Private placement, net of issuance costs |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Employee Share Purchase Plan (Note 17) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Restricted Stock Units |
|
|
|
|
|
|
|
|
|
|
|
| ||||
As at the end of the year |
|
|
|
|
|
|
|
|
|
|
|
| ||||
For the year ended December 31, | ||||||||
|
| 2021 |
| |||||
|
| # of shares |
|
| $ amount |
| ||
As at the beginning of the year |
|
|
|
| $ |
| ||
Employee Share Purchase Plan |
|
|
|
|
|
| ||
Restricted Stock Units |
|
|
|
|
|
| ||
SFD® Geothermal Right (Note 8) |
|
|
|
|
|
| ||
As at the end of the year |
|
|
|
|
|
| ||
On December 22, 2022 the Company announced a multi-tranche private placement (the “Private Placement”) at $
On December 2, 2022, NXT closed the Rights Offering that had been announced on October 31, 2022. The Company issued
In December 2021, the TSX approved the issuance of
| [22] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
16. Loss per share
|
| For the years ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Net loss for the year |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Weighted average number of shares outstanding for the year: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
| |||
Diluted |
|
|
|
|
|
|
|
|
| |||
Net loss per share – Basic |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Net loss per share – Diluted |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
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.
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, 2023, include stock options, deferred share units (“DSUs”) and the employee share purchase plan (“ESP Plan”). The following tables provide information about stock option, RSUs, DSU, and ESP Plan activity.
For the years ended December 31, | ||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Stock Option Expense |
| $ |
|
| $ |
|
| $ |
| |||
Restricted Stock Units |
|
|
|
|
|
|
|
|
| |||
Employee Share Purchase Plan |
|
|
|
|
|
|
|
|
| |||
Compensation Expense |
|
|
|
|
|
|
|
|
| |||
Total stock based compensation expense |
|
|
|
|
|
|
|
|
| |||
Stock Options:
The following is a summary of stock options which are outstanding as at December 31, 2023.
Exercise price per share |
| # of options outstanding |
| # of options exercisable |
| Average remaining life (in years) |
$ |
|
|
| |||
$ |
|
|
| |||
$ |
|
|
| |||
$ |
|
|
| |||
$ |
|
| - |
| ||
$ |
|
|
| |||
$ |
|
|
| |||
$ |
|
|
| |||
$ |
|
|
| |||
$ |
|
|
| |||
$ |
|
|
| |||
$ |
|
|
| |||
$ |
|
|
| |||
$ |
|
|
| |||
|
|
|
| [23] |
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, 2022 and 2021 are as follows:
For the years ended December 31, | ||||||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
|
|
|
|
| weighted |
|
|
|
|
| Weighted |
| ||||
|
| # of stock |
|
| average |
|
| # of stock |
|
| Average |
| ||||
|
| Options |
|
| exercise price |
|
| Options |
|
| exercise price |
| ||||
Options outstanding, start of the year |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
Granted |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
Forfeited |
|
| ( | ) |
| $ | ( | ) |
|
| - |
|
|
|
| |
Expired |
|
| ( | ) |
| $ | ( | ) |
|
| - |
|
|
|
| |
Cancelled |
|
| - |
|
|
|
|
|
| ( | ) |
| $ | ( | ) | |
Options outstanding, end of the year |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
Options exercisable, end of the year |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
For the year ended December 31, | ||||||||
|
| 2021 |
| |||||
|
|
|
|
| Weighted |
| ||
|
| # of stock |
|
| Average |
| ||
|
| Options |
|
| exercise price |
| ||
Options outstanding, start of the year |
|
|
|
| $ |
| ||
Granted |
|
|
|
| $ |
| ||
Expired |
|
| ( | ) |
| $ | ( | ) |
Options outstanding, end of the year |
|
|
|
| $ |
| ||
Options exercisable, end of the year |
|
|
|
| $ |
| ||
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.
| [24] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(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 |
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Expected dividends paid per common share |
| Nil |
|
| Nil |
|
| Nil |
| |||
Expected life in years |
|
|
|
|
|
|
|
|
| |||
Weighted average expected volatility in the price of common shares |
|
| % |
|
| % |
|
| % | |||
Weighted average risk free interest rate |
|
| % |
|
| % |
|
| % | |||
Weighted average fair market value per share at grant date |
| $ |
|
| $ |
|
| $ |
| |||
Forfeiture rate |
|
| % |
|
| % |
|
| % | |||
On January 6, 2023
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, 2022 and 2021 are as follows:
|
| For the years ended December 31, |
| |||||||||
Opening balance |
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Opening balance |
|
|
|
|
|
|
|
|
| |||
Granted |
|
| - |
|
|
| - |
|
|
| - |
|
Closing balance |
|
|
|
|
|
|
|
|
| |||
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 shares 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.
| [25] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(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, 2022 and 2021 are as follows:
For the years ended December 31, | ||||||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| # of RSUs |
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| FV/Unit |
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| # of RSUs |
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| FV/Unit |
| ||||
RSUs outstanding, start of the year |
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|
|
| $ |
|
|
|
|
| $ |
| ||||
Granted |
|
| - |
|
|
|
|
|
| - |
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|
|
| ||
Common shares issued |
|
| ( | ) |
| ($ |
|
|
| ( | ) |
| ($ |
| ||
Payroll withholdings settled in cash |
|
| ( | ) |
| ($ |
|
|
| ( | ) |
| ($ |
| ||
RSUs outstanding, end of the year |
|
| - |
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|
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|
|
|
|
| $ |
| |||
For the year ended December 31, |
| |||||||
|
| 2021 |
| |||||
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| # of RSUs |
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| FV/Unit |
| ||
RSUs outstanding, start of the year |
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|
|
| $ |
| ||
Granted |
|
| - |
|
|
|
| |
Common shares issued |
|
| ( | ) |
| ($ |
| |
Payroll withholdings settled in cash |
|
| ( | ) |
| ($ |
| |
Forfeited |
|
| ( | ) |
| ($ |
| |
RSUs outstanding, end of the year |
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|
|
| $ |
| ||
On February 21, 2024 the Company granted
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.
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, 2022 and 2021 are as follows:
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| # of shares |
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| $ amount |
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| # of shares |
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| $ amount |
| ||||
Purchased by employees |
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| $ |
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| $ |
| ||||
Matched by the Company |
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Total Common Shares issued |
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| [26] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
For the year ended December 31, |
| |||||||
|
| 2021 |
| |||||
|
| # of shares |
|
| $ amount |
| ||
Purchased by employees |
|
|
|
| $ |
| ||
Matched by the Company |
|
|
|
|
|
| ||
Bonus match by the Company |
|
|
|
|
|
| ||
Total Common Shares issued |
|
|
|
|
|
| ||
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 $
Compensation Expense:
On October 1, 2023 the Company entered into a four month service agreement with a marketing consultant to provide sales and market services to introduce potential customers to the SFD® technology, attend trade shows, and update the Company’s market systems. The consultant agreed to be compensated in Common Shares only for approximately US$
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.
| [27] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(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, | ||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net loss before income taxes |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Canadian statutory income tax rate |
|
| % |
|
| % |
|
| % | |||
Income tax (recovery) at statutory income tax rate |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Effect of non- deductible expenses and other items: |
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|
|
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|
|
Stock-based compensation and other expenses |
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| |||
Change in statutory tax rates |
|
|
|
|
| ( | ) |
|
| ( | ) | |
Foreign exchange adjustments |
|
|
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|
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|
| |||
True-up |
|
| ( | ) |
|
| ( | ) |
|
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| |
US loss expiry and Other |
|
|
|
|
| ( | ) |
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| ||
Change in valuation allowance |
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|
| ( | ) | ||
Income tax expense (recovery) |
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|
|
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|
| |||
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, | ||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Net operating losses carried forward: |
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|
|
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|
|
| |||
Canada (expiration dates 2027 to 2042) |
| $ |
|
| $ |
|
| $ |
| |||
USA (expiration dates 2024 to 2026) |
|
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| |||
Timing differences on property & equipment, Right |
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|
|
|
of Use of Assets, Lease obligations and financing costs |
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SRED Expenditures |
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| |||
Foreign Tax Credit |
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Intellectual property |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Less valuation allowance |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
19. Financial instruments
Non-derivative financial instruments:
The Company's non-derivative financial instruments consist of cash and cash equivalents, accounts receivable, deposits, accounts payables and accrued liabilities, long-term debt and convertible debentures. 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.
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, 2023, cash and cash equivalents included balances in bank accounts placed with financial institutions with investment grade credit ratings and Accounts Receivable. The Company manages Accounts Receivable credit risk by requiring advance payments before entering into certain contract milestones and when possible, accounts receivable insurance.
| [28] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
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, 2023, the Company held net U.S. dollar liabilities totaling US$
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, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Accounts receivable |
| $ | ( | ) |
| $ |
|
| $ |
| ||
Prepaid expenses and deposits |
|
| ( | ) |
|
|
|
|
|
| ||
Accounts payable and accrued liabilities |
|
|
|
|
|
|
|
|
| |||
Contractual obligations |
|
|
|
|
|
|
|
| ( | ) | ||
|
|
| ( | ) |
|
|
|
|
|
| ||
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 years ended December 31, 2023 and 2021 were generated solely from the Hydrocarbon Right and only one customer in each year, but not the same customer between years. There were no revenues attributable to the Geothermal Right since its acquisition in 2021.
| [29] |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2023, 2022 and 2021
(Expressed in Canadian dollars unless otherwise stated)
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
International |
| $ |
|
| $ |
|
| $ |
| |||
Other |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
22. Government Grants
During the year ended December 31, 2021 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, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
CEWS |
| $ |
|
| $ |
|
| $ |
| |||
CERS |
|
|
|
|
|
|
|
|
| |||
NRC IRAP |
|
|
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|
|
| |||
Government grants recognized |
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|
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|
|
|
|
| |||
23. 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 $
Another member of NXT’s Board of Directors is a board member of Pana Holdings Mauritius, the parent company of Ataraxia Capital, which holds convertible debentures (Note 10). Accounts payable and accrued liabilities includes a total of $
A company owned by a family member of a former executive officer was contracted to provide presentation design services to the Company during 2021.
|
| For the years ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Legal Fees |
| $ |
|
| $ |
|
| $ |
| |||
Interest Expense1. |
|
|
|
|
|
|
|
|
| |||
Design Services2. |
|
|
|
|
|
|
|
|
| |||
| 1. | US$79,356 |
|
|
|
| 2. | US$3000 |
| [30] |
EXHIBIT 15.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Annual Report on Form 20-F of our auditor’s report dated March 27, 2024 with respect to the consolidated financial statements of NXT Energy Solutions Inc. as at December 31, 2023 and for the year ended December 31, 2023.
We also consent to the incorporation by reference in the Registration Statement No. 333- 146890 on Form S-8 of our auditor’s report dated March 27, 2024 with respect to the consolidated financial statements of NXT Energy Solutions Inc. as at December 31, 2023 and for the year ended December 31, 2023, as incorporated by reference in this Annual Report on Form 20-F of NXT Energy Solutions Inc. for the year ended December 31, 2023, as filed with the United States Securities and Exchange Commission.
Chartered Professional Accountants
April 26, 2024
Calgary, Canada
| MNP LLP |
|
| Suite 2000, 112 - 4th Avenue SW, Calgary AB, T2P 0H3 | 1.877.500.0792 T: 403.263.3385 F: 403.269.8450 |
EXHIBIT 15.3
NXT ENERGY SOLUTIONS INC.
Management’s Discussion and Analysis
For the year ended
December 31, 2023
Management’s Discussion and Analysis
This management’s discussion and analysis (“MD&A”) was prepared by management of NXT Energy Solutions Inc. (“NXT”, “we”, “us”, “our” or the “Company”) based on information available as at March 27, 2024 and unless otherwise stated, has been approved by the Board of the Company (the “Board”), and should be reviewed in conjunction with the audited consolidated financial statements and related notes for the period ended December 31, 2023 (the “audited consolidated financial statements”). This MD&A covers the unaudited three and audited twelve month periods ended December 31, 2023, with comparative amounts for the unaudited three and audited twelve month periods ended December 31, 2022.
Our functional and reporting currency is the Canadian dollar. All references to “dollars,”, “$” 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:
|
| · | receipt of accounts receivable from the Turkish SFD® survey (as defined below); |
|
| · | receipt of the remaining US$900,000 from the Ataraxia subscription agreement and approval of terms for the remaining US$900,000 by the Toronto Stock Exchange (“TSX”); |
|
| · | the Company’s ability to successfully work with Synergy and Ataraxia (each as defined herein) to develop future business in the African continent; |
|
| · | receipt of funding under the NRC IRAP (as defined herein); |
|
| · | expectations regarding maintenance performed on the Company’s leased aircraft; |
|
| · | expectations regarding the future vesting, settlement and expiry of securities issued in connection with the Company’s share-based compensation plans; |
|
| · | expectations regarding the amortization of the Company’s intellectual property (“IP”) assets; |
|
| · | the Company’s ability to achieve the remaining milestone with respect to the Consideration (as defined below) owing to Mr. George Liszicasz, the future payment of such Consideration to the estate of Mr. George Liszicasz, 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; |
|
| · | expectations regarding competition within the industries in which the Company operates; |
| NXT Energy Solutions Inc. | page | 2 |
| MD&A for the year ended December 31, 2023 |
|
|
| · | approval by the TSX to issue common shares for payables to the marketing consultant and the issuance of such shares in connection therewith; |
|
| · | the Company’s ability to continue operating as a going concern; |
|
| · | the Company’s ability to pay deferred operating costs such as payroll and G&A; |
|
| · | the Company’s ability to continue making payments on its office lease, its aircraft lease and the effects of any default under either such lease; |
|
| · | the Company’s ability to pay amounts owing und the Ataraxia Debentures or the November Debentures; |
|
| · | expectations regarding the future conversion of the Ataraxia Debentures or the November Debentures into common shares or preferred shares of the Company, as applicable; |
|
| · | expectations around the future appointment of a representative of Mork Capital to the Board, including the identity of such representative and the timing of such appointment; |
|
| · | the Company’s ability to repay the amounts owing under the HASCAP Loan (as defined herein); |
|
| · | the timing and value of payments owing under the Company’s office lease; |
|
| · | expectations regarding the Company’s DCPs and ICFR (each as defined herein), including the Company’s ability to further adjust such DCPs and ICFR and mitigate material weaknesses going forward; |
|
| · | 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; |
|
| · | 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 and inflation); and |
|
| · | approval of the next phase of the NRC IRAP project. |
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 additional new revenue contracts; |
|
| · | health, safety, and the environment; |
|
| · | our ability to develop and commercialize the geothermal technology; |
|
| · | our ability to service existing debt; |
|
| · | our ability to protect and maintain our IP and rights to our SFD® technology; |
| NXT Energy Solutions Inc. | page | 3 |
| MD&A for the year ended December 31, 2023 |
|
|
| · | our reliance on a limited number of key personnel; |
|
| · | our reliance on a single aircraft; |
|
| · | our reliance on a limited number of clients; |
|
| · | counterparty credit risk; |
|
| · | foreign currency and interest rate fluctuations; |
|
| · | the likelihood that the Company’s DCPs and ICFR (each 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 “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 Outlook
This MD&A contains future-oriented financial information and financial outlook information (collectively, “FOFI”) about expectations regarding financial results which are subject to the same assumptions, risk factors, limitations and qualifications as set out under the heading “Forward-Looking Information”. The actual financial results of the Company may vary from the amounts set out herein and such variation may be material. The Company and its management believe that the financial outlook has been prepared on a reasonable basis, reflecting management’s best estimates and judgments, and the FOFI contained in this MD&A was approved by management as of the date hereof. However, because this information is subjective and subject to numerous risks, it should not be relied on as necessarily indicative of future results. Except as required by applicable securities laws, the Company undertakes no obligation to update such FOFI. FOFI contained in this MD&A was made as of the date hereof and was provided for the purpose of providing further information about the Company’s anticipated future business operations. Readers are cautioned that the FOFI contained in this MD&A should not be used for purposes other than for which it is disclosed herein.
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. It is composed of cash and cash equivalents, accounts receivable, prepaid expenses and deposits, accounts payable and accrued liabilities, convertible debentures, the current portion of long-term debt and the current portion of the Company’s lease obligations. Net working capital 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.
| NXT Energy Solutions Inc. | page | 4 |
| MD&A for the year ended December 31, 2023 |
|
Description of the Business
NXT is a Calgary-based technology company whose proprietary airborne SFD® survey system (“SFD®”), applied in numerous basins around the world, uses the principles of quantum mechanics to infer stress anomalies of exploration interest. The method can be used both onshore and offshore to remotely identify areas conducive to fluid entrapment in order to recommend areas with commercial hydrocarbon and/or geothermal potential. The SFD® survey system enables our 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.
Financial and Operational Highlights
Key financial and operational highlights for Q4-23 are summarized below:
|
| · | during the quarter, the Company commenced the Turkish SFD® Survey for an independent oil and gas exploration company in Türkiye. See “Discussion of Operations – SFD® Survey in Türkiye; |
|
| · | the first two tranches of the November Debentures, as defined and described below, were received for a total of US$1.15 million (CDN$1.58 million) of cash; |
|
| · | cash at December 31, 2023 was approximately $0.40 million; |
|
| · | net working capital was approximately ($1.86) million at December 31, 2023 versus approximately ($3.47) million at September 30, 2023; |
|
| · | the Company recorded SFD®-related revenues of approximately $2.15 million; |
|
| · | a net loss of $0.43 million was recorded for Q4-23, including stock-based compensation expense (“SBCE”) and amortization expense of approximately $0.50 million; |
|
| · | a net loss of approximately $5.45 million was recorded for YE-23, including SBCE and amortization expense of approximately $1.97 million; |
|
| · | net loss per common share for Q4-23 was $0.01 per share (basic) and $0.01 per share (diluted); |
|
| · | net loss per common share for YE-23 was $0.07 per share (basic) and $0.07 per share (diluted); |
|
| · | cash flow used in operating activities was approximately $1.47 million during Q4-23 and $4.83 million in the 2023 financial year; and |
|
| · | general and administrative (“G&A”) expenses decreased by approximately $0.04 million (5%) in Q4-23 as compared to Q4-22 and G&A expenses decreased by approximately $0.32 million (8%) in YE-23 as compared to YE-22. |
Key financial and operational highlights occurring subsequent to Q4-23 are summarized below:
|
| · | NXT completed the Turkish SFD® Survey, delivered the final results thereof to its Turkish customers and completed the integration of SFD® data with such customers’ existing geological and geophysical data; |
|
| · | NXT and HULOOLQ LTD. (known as “Qamia”), an Abu Dhabi based startup focused on “deep tech” disruptive technologies, entered into a sales agency agreement covering the United Arab Emirates (“UAE”); |
|
| · | On March 22, the Company extended its lease on its aircraft for an additional three years as a capital lease. Under the terms of the lease, the Company will own the aircraft at the end of the term; and |
|
| · | the November Debentures were finalized for a total of US$1.87 million (CDN$2.54 million). US$0.72 million (approximately CDN$0.97 million) of that was received in Q1-24. |
| NXT Energy Solutions Inc. | page | 5 |
| MD&A for the year ended December 31, 2023 |
|
Selected Annual Information
| Figures are given in “($)” |
| YE-23 |
|
| YE-22 |
|
| YE-21 |
| |||
| Total assets |
| $ | 15,184,760 |
|
| $ | 15,575,295 |
|
| $ | 21,584,371 |
|
| Lease liabilities |
|
| 595,517 |
|
|
| 1,246,723 |
|
|
| 1,902,604 |
|
| Convertible debentures |
|
| 3,355,989 |
|
|
| - |
|
|
| - |
|
| Long-term debt |
|
| 824,074 |
|
|
| 935,185 |
|
|
| 1,000,000 |
|
| Revenue |
|
| 2,145,716 |
|
|
| - |
|
|
| 3,134,250 |
|
| Net loss |
|
| (5,451,112 | ) |
|
| (6,733,076 | ) |
|
| (3,123,799 | ) |
| Net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
| ($0.07) |
|
| ($0.10) |
|
| $ | (0.05 | ) | ||
| Diluted |
| ($0.07) |
|
| ($0.10) |
|
| $ | (0.05 | ) | ||
Total assets decreased between YE-21 through YE-23 as cash and short-term investments were used for operating activities offset by revenue recognized from the Turkish SFD® Survey (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. The costs of such lease extensions were 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 and received a loan of $1 million under such program (the “HASCAP Loan”). The Company anticipates repaying the HASCAP Loan over a nine-year period. There were no SFD® surveys in YE-22. For YE-21 revenue was due to the sale of Pre-existing SFD® Data. YE-23 revenue and reduction in the net loss from YE-22 was the result of the Turkish SFD® Survey discussed below.
Discussion of Operations
SFD® Survey in Turkiye
On September 5, 2023, NXT announced that it has executed a contract to provide an SFD® survey to an independent oil and gas exploration company in Türkiye, which is strategically located at the junction of Eastern Europe, Central Asia and the Middle East (the “Turkish SFD® Survey”). NXT delivered the final SFD® survey results to its Turkish customer and performed the integration of SFD® data with the customers’ existing geological and geophysical data in March 2024. The Company’s Turkish customer and one of its partners had requested NXT to add additional line kilometers to the original Turkish SFD® Survey. All flight operations related to the data acquisition survey phase were completed in January 2024. As part of NXT’s SFD® services, recommendations with rankings are provided to the customer identifying their highest value prospects for exploration. The accounts receivable from this Turkish SFD® Survey are insured by Export Development Canada.
Strategic Investment
On May 24, 2023, the Company entered into a ten-year strategic alliance and associated financing with Synergy E&P Technologies Limited (“Synergy”) which grants Synergy an exclusive license to use, distribute, sub-license, market and sell NXT’s SFD® solutions in Africa. In addition, on September 30, 2023, NXT extended the exclusive license to include Ataraxia Capital (“Ataraxia”), an affiliate of Synergy.
PE Energy Limited, an affiliate of Synergy and Ataraxia, has performed several commercial projects with NXT in Africa in the past.
| NXT Energy Solutions Inc. | page | 6 |
| MD&A for the year ended December 31, 2023 |
|
Synergy and Ataraxia, with this new arrangement, will be advancing the SFD® technology to address energy security in and transition in the African continent for both oil and gas and geothermal sources. Synergy, Ataraxia and NXT will work closely together to train local technical teams and regulatory authorities on the patented SFD® technology.
Building upon a record of successful collaborations underpinned by the continued market demand in Africa, Ataraxia executed a subscription agreement pursuant to which Ataraxia agreed to subscribe for an aggregate of US$2.3 million convertible debentures (collectively, the “Ataraxia Debentures”), with a subscription price to be advanced in instalments, of which it completed US$1.4 million during Q3-23 leaving an as yet unfunded balance of US$900,000. Please see the section “Liquidity and Capital Resources – Ataraxia Debentures” for further information on the Ataraxia Debentures.
Acquisition of the Geothermal Rights
The Company acquired the SFD® technology rights for geothermal resources (“Geothermal Right”) from Mr. George Liszicasz, the former President and Chief Executive Officer (“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. | a US$40,000 (CDN$50,310) signature payment, which became due immediately and was paid on April 22, 2021; |
|
| 2. | a CDN$15,000 signature milestone payment paid in August 2021; |
|
| 3. | 300,000 common shares, which were issued in December 2021; |
|
| 4. | a 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 the receipt of specifically defined funds from operations; and |
|
| 5. | a US$250,000 milestone payment, payable in the event that the Company executed, completed and received full payment for an SFD® contract valued at US$10,000,000 or greater, provided that such contract was entered into and completed and payment of at least US$5,000,000 was received by April 18, 2023. This milestone expired as of April 18, 2023, and no such payments were made in connection with this milestone. |
As of December 31, 2023, the Company has paid $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 milestone will be paid when it is deemed probable that the milestone 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. As of December 31, 2023, the remaining milestone has not been achieved.
Geothermal Right Development Update
Progress continues with respect to the development of the SFD-GT geothermal sensor technology. The Company’s first project related to such technology tested, identified, and analyzed 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 $200,000 to NRC IRAP for a funding and research plan for the next phase to support the research and development of the SFD® technology for geothermal applications. As of the date of this MD&A, the Company funding for the next phase of research has not been finalized.
| NXT Energy Solutions Inc. | page | 7 |
| MD&A for the year ended December 31, 2023 |
|
Patents
In Q1-22, NXT announced its patent application in Brazil has been allowed. As of the date of this MD&A, NXT has been granted SFD® patents on its SFD® technology in forty-seven jurisdictions, including Brazil (February 2022), India (July 2021), Russia (January 2017), Japan (July 2017), Canada (August 2017), Mexico (September 2017), the United States (two patents were granted in November 2017 and September 2018, respectively), China (April 2018), and Europe (January 2020). These patents protect our proprietary SFD® technology and serve as independent third-party recognition of our technological invention.
Change of Auditor
Effective April 25, 2023, KPMG LLP indicated that they will not stand for reappointment as the auditor of the Company for the fiscal year ended December 31, 2023. MNP LLP was appointed auditor of the Company as of the fiscal year ended December 31, 2023, at the annual meeting of shareholders on August 2, 2023. This has resulted in an audit fee reduction as noted below in the section, “Discussion of Operations–G&A Expenses”.
| NXT Energy Solutions Inc. | page | 8 |
| MD&A for the year ended December 31, 2023 |
|
Summary of Operating Results
| Figures are given in “($)” |
| Q4-23 |
|
| Q4-22 |
|
| YE-23 |
|
| YE-22 |
| ||||
| SFD®-related revenue |
| $ | 2,145,716 |
|
| $ | - |
|
| $ | 2,145,716 |
|
| $ | - |
|
| Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| SFD®-related costs, net |
|
| 1,280,927 |
|
|
| 203,891 |
|
|
| 2,249,126 |
|
|
| 1,178,183 |
|
| G&A expenses |
|
| 775,881 |
|
|
| 813,771 |
|
|
| 3,420,143 |
|
|
| 3,736,431 |
|
| Amortization |
|
| 439,869 |
|
|
| 442,097 |
|
|
| 1,759,473 |
|
|
| 1,768,727 |
|
|
|
|
| 2,496,667 |
|
|
| 1,459,759 |
|
|
| 7,428,742 |
|
|
| 6,683,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other Expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest expense, net |
|
| 77,901 |
|
|
| 9,969 |
|
|
| 160,262 |
|
|
| 36,220 |
|
| Foreign exchange gain |
|
| (5,109 | ) |
|
| (1,165 | ) |
|
| (8,028 | ) |
|
| (15,340 | ) |
| Intellectual property and other |
|
| 1,948 |
|
|
| 986 |
|
|
| 15,852 |
|
|
| 28,855 |
|
|
|
|
| 74,740 |
|
|
| 9,790 |
|
|
| 168,086 |
|
|
| 49,735 |
|
| Loss before income taxes |
|
| (425,701 | ) |
|
| (1,469,549 | ) |
|
| (5,451,112 | ) |
|
| (6,733,076 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income tax expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss and comprehensive loss |
|
| (425,701 | ) |
|
| (1,469,549 | ) |
|
| (5,451,112 | ) |
|
| (6,733,076 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss per share – basic |
| $ | (0.01 | ) |
| $ | (0.02 | ) |
| $ | (0.07 | ) |
| $ | (0.10 | ) |
| Net loss per share – diluted |
| $ | (0.01 | ) |
| $ | (0.02 | ) |
| $ | (0.07 | ) |
| $ | (0.10 | ) |
Quarterly operating results. Net loss for Q4-23 compared to Q4-22 decreased by $1,043,848 and by $0.01 per share-basic. The main reason for the reduced loss was contribution of the Turkish SFD® Survey. There were no SFD®-related revenues in Q4-22. As a result, SFD® related-revenues increased $2,145,746 and SFD®-related costs, net, were $1,077,036 higher due to the Turkish SFD® Survey. G&A expenses decreased by $37,890, compared to Q4-22, due to allocation of costs to the SFD®-related costs and lower travel costs. Interest expense, net, increased by $67,932 in Q4-23 versus Q4-22 due to the Ataraxia Debentures and November Debentures interest charges. IP and other expenses related mostly to costs associated with maintaining and renewing certain SFD® patents.
Full year operating results. Net loss for YE-23 compared to YE-22 decreased by $1,281,964, or $0.03 per share-basic. The main reason for the reduced loss was contribution of the Turkish SFD® Survey. There were no SFD®-related revenues in YE-22. As a result, SFD® related-revenues increased $$2,145,746 and SFD®-related costs, net, were $1,070,943 higher due to the Turkish SFD® Survey. G&A expenses decreased by $316,288, compared to YE-22, due primarily to allocation of costs to the SFD®-related costs, one less headcount for one half of the year, less travel costs, and lower professional fees. Interest expense, net, increased by $124,042 in YE-23 versus YE-22 due to the Ataraxia Debentures and November Debentures. For YE-23 the exchange gain was the result of the stronger CDN$ to US$ rate between December 31, 2022 and December 31, 2023 and the Company having a net liability in US$. At December 31, 2022, the CDN$ to US$ exchange rate was lower as compared to the CDN$ to US$ exchange rate at December 31, 2021 and the Company had a net US$ asset for most of the year, resulting in the corresponding foreign exchange gain for YE-22. Intellectual property and other expenses related mostly to costs associated with maintaining and renewing certain SFD® patents.
| NXT Energy Solutions Inc. | page | 9 |
| MD&A for the year ended December 31, 2023 |
|
SFD®-Related Costs, Net
| SFD®-Related Costs (Figures are given in “$”) |
| Q4-23 |
|
| Q4-22 |
|
| Net change |
|
| % |
| ||||
| Aircraft lease costs |
| $ | 91,560 |
|
| $ | 89,798 |
|
| $ | 1,762 |
|
|
| 2 |
|
| Aircraft operations |
|
| 206,395 |
|
|
| 119,162 |
|
|
| 87,233 |
|
|
| 73 |
|
| Survey projects |
|
| 982,972 |
|
|
| (5,069 | ) |
|
| 988,041 |
|
| >100 |
| |
| Total SFD®-related costs, net |
|
| 1,280,927 |
|
|
| 203,891 |
|
|
| 1,077,036 |
|
| >100 |
| |
| SFD®-Related Costs (Figures are given in “$”) |
| YE-23 |
|
| YE-22 |
|
| Net change |
|
| % |
| ||||
| Aircraft lease costs |
| $ | 364,013 |
|
| $ | 404,777 |
|
| $ | (40,764 | ) |
|
| (10 | ) |
| Aircraft operations |
|
| 876,804 |
|
|
| 776,548 |
|
|
| 100,256 |
|
|
| 13 |
|
| Survey projects |
|
| 1,008,309 |
|
|
| (3,142 | ) |
|
| 1,011,451 |
|
| >100 |
| |
| Total SFD®-related costs, net |
|
| 2,249,126 |
|
|
| 1,178,183 |
|
|
| 1,070,943 |
|
|
| 91 |
|
SFD®-related costs include aircraft charter costs (net of charter hire reimbursements), lease expenses, and aircraft operation and maintenance costs. The monthly lease rate was higher in Q4-23 versus Q4-22 due to the weaker CDN$ versus the US$. In Q4-23, Aircraft operations were $87,233 higher as maintenance and repairs were performed before the aircraft began the Turkish SFD® Survey. Survey projects were $988,041 higher due to costs to perform the Turkish SFD® Survey.
In YE-23, aircraft lease costs were lower compared to YE-22 by $40,764 due to lower monthly lease rates in the lease extension agreement. Aircraft operations were $100,256 higher as maintenance and repairs were performed before the aircraft began the Turkish SFD® Survey and pilot certifications. This was offset by maintenance done on the aircraft in Q1-22 to add 300 flight hours. Survey projects were $1,011,451 higher due to costs to perform the Turkish SFD® Survey.
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. There were no charter hire reimbursements during YE-23 or YE-22.
On March 22, 2024 the Company extended its Aircraft lease for three years, until March 28, 2027. The Aircraft Lease will be converted to a capital lease and the Company will own the aircraft at the end of the lease. Terms of the extension include a principle of US$1,210,000, an interest rate of 12%, and monthly payments of US$40,189. The Company has an early purchase option to acquire the aircraft on any of the following date, March 28, 2025, September 28, 2025, March 28, 2026, or September 28, 2026. The purchase price would be the amortized value of the lease liability, plus a four-month interest penalty.
G&A Expenses
| G&A Expenses (Figures are given in “$”) |
| Q4-23 |
|
| Q4-22 |
|
| Net change |
|
| % |
| ||||
| Salaries, benefits and consulting charges |
| $ | 343,684 |
|
| $ | 380,617 |
|
| $ | (36,933 | ) |
|
| (10 | ) |
| Board and professional fees, public company costs |
|
| 154,790 |
|
|
| 169,548 |
|
|
| (14,758 | ) |
|
| (9 | ) |
| Premises and administrative overhead |
|
| 202,897 |
|
|
| 189,419 |
|
|
| 13,478 |
|
|
| 7 |
|
| Business development |
|
| 11,582 |
|
|
| 46,995 |
|
|
| (35,413 | ) |
|
| (75 | ) |
| Stock-based compensation |
|
| 62,928 |
|
|
| 27,192 |
|
|
| 35,736 |
|
|
| 131 |
|
| Total G&A Expenses |
|
| 775,881 |
|
|
| 813,771 |
|
|
| (37,890 | ) |
|
| (5 | ) |
| G&A Expenses (Figures are given in “$”) |
| YE-23 |
|
| YE-22 |
|
| Net change |
|
| % |
| ||||
| Salaries, benefits and consulting charges |
| $ | 1,512,150 |
|
| $ | 1,688,262 |
|
| $ | (176,112 | ) |
|
| (10 | ) |
| Board and professional fees, public company costs |
|
| 753,468 |
|
|
| 818,087 |
|
|
| (64,619 | ) |
|
| (8 | ) |
| Premises and administrative overhead |
|
| 822,019 |
|
|
| 818,987 |
|
|
| 3,032 |
|
|
| 0 |
|
| Business development |
|
| 91,235 |
|
|
| 195,811 |
|
|
| (104,576 | ) |
|
| (53 | ) |
| Stock-based compensation |
|
| 241,271 |
|
|
| 215,284 |
|
|
| 25,987 |
|
|
| 12 |
|
| Total G&A Expenses |
|
| 3,420,143 |
|
|
| 3,736,431 |
|
|
| (316,288 | ) |
|
| (8 | ) |
| NXT Energy Solutions Inc. | page | 10 |
| MD&A for the year ended December 31, 2023 |
|
G&A expenses decreased $37,890, or 5%, in Q4-23 compared to Q4-22 for the following reasons:
|
| · | salaries, benefits, and consulting charges decreased $36,933 or 10%, as a portion of some salaries were allocated as direct labour expense to support the Turkish SFD® Survey; |
|
|
|
|
|
| · | board and professional fees and public company costs decreased $14,758, or 9%, as audit fees are lower due to the change of auditor; |
|
|
|
|
|
| · | premises and administrative overhead costs increased $13,478 , or 7%, due to spending for SFD® survey planning and related software upgrades; |
|
|
|
|
|
| · | business development costs decreased 35,413 or 75%. In Q4-22 the Company travelled to the middle east and Asia to pursue opportunities while in Q4-23 the Company focused on the Turkish SFD® Survey; and |
|
|
|
|
|
| · | SBCE’s were higher in Q4-23 versus Q4-22 by $35,736 or 131% as compensation is intended to be paid to a marketing consultant in shares only began in Q4-23. Please see the next section “Discussion of Operations– Stock-based Compensation Expenses” for further information on the SBCE. |
G&A expenses decreased $316,288, or 8%, in YE-23 compared to YE 22 for the following reasons:
|
| · | salaries, benefits, and consulting charges decreased $176,112 or 10%, as the Company had one less headcount for the first half of 2023 and the new CEO’s compensation was less than the CEO compensation paid in Q4-22. In addition a portion of some salaries was allocated to direct labour expense to support the Turkish SFD® Survey; |
|
|
|
|
|
| · | board and professional fees and public company costs decreased $64,619, or 8%. More director fees were reimbursed in options in YE-23 versus YE-22 and audit fees were lower due to the Company changing its auditor. This was offset by increased professional fees due to the Ataraxia and November Debenture financing; |
|
|
|
|
|
| · | premises and administrative overhead costs increased $3,032, or 0%, due to spending for SFD® survey planning and related software upgrades. This was partially offset as the Company surrendered office space at the end of Q1-22 which lowered rent costs; |
|
|
|
|
|
| · | business development costs decreased $104,576 or 53% due to less travel expenses during YE-23 versus YE-22. The Company engaged in more travel to the middle east and Asia to pursue opportunities during 2022, while in 2023 the Company focused on the Turkish SFD® Survey and attended more virtual meetings; and |
|
|
|
|
|
| · | SBCE’s were higher in YE-23 as opposed to YE-22 by $25,987 or 12%. Stock Option expense was higher as options were granted in lieu of cash payments to certain directors. While the Company has engaged a marketing consultant, such consultant is intended to be paid in shares and not cash. This was offset by the Company’s RSU expense being lower in 2023, as the Company’s share price at the vesting date of September 20, 2023 was lower than the share price at the 2022 vesting date. Please see the next section “Discussion of Operations – Stock-based Compensation Expenses” for further information on the SBCE. |
| NXT Energy Solutions Inc. | page | 11 |
| MD&A for the year ended December 31, 2023 |
|
Stock-based Compensation Expenses
| Stock-based Compensation Expenses (Figures are given in “$”) |
| Q4-23 |
|
| Q4-22 |
|
| Net change |
|
| % change |
| ||||
| Stock Option Expense |
| $ | - |
|
| $ | 7,500 |
|
| $ | (7,500 | ) |
|
| (100 | ) |
| DSUs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| RSUs |
|
| - |
|
|
| 12,280 |
|
|
| (12,280 | ) |
|
| (100 | ) |
| ESP Plan |
|
| 7,106 |
|
|
| 7,412 |
|
|
| (306 | ) |
|
| (4 | ) |
| Consultant Compensation |
|
| 55,822 |
|
|
| - |
|
|
| 55,822 |
|
|
| 100 |
|
| Total SBCE |
|
| 62,928 |
|
|
| 27,192 |
|
|
| 35,736 |
|
|
| 131 |
|
| Stock-based Compensation Expenses (Figures are given in “$”) |
| YE-23 |
|
| YE-22 |
|
| Net change |
|
| % change |
| ||||
| Stock Option Expense |
| $ | 92,500 |
|
| $ | 22,551 |
|
| $ | 69,949 |
|
| >100 | % | |
| DSUs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| RSUs |
|
| 62,441 |
|
|
| 153,343 |
|
|
| (90,902 | ) |
|
| (59 | ) |
| ESP Plan |
|
| 30,508 |
|
|
| 39,390 |
|
|
| (8,882 | ) |
|
| (23 | ) |
| Consultant Compensation |
|
| 55,822 |
|
|
| - |
|
|
| 55,822 |
|
|
| 100 |
|
| Total SBCE |
|
| 241,271 |
|
|
| 215,284 |
|
|
| 25,987 |
|
|
| 12 |
|
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. On January 6, 2023 the Company granted 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: one-third upon collection of US$6.5 million, one-third upon the collection of the next US$7.0 million and the final one-third upon collection of an additional US$7.5 million.
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. No DSUs were granted in either 2023 or 2022. Currently 37,354 DSUs are outstanding.
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. The Company has settled the RSU vesting with common shares and cash. As at December 31, 2023 there are no RSUs outstanding, but on February 21, 2024 the Company granted 1,035,000 RSUs to employees and officers which will vest over a three year period.
| NXT Energy Solutions Inc. | page | 12 |
| MD&A for the year ended December 31, 2023 |
|
The 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 and 2023 the Company has elected to issue common shares from treasury.
On October 1, 2023, the Company entered into a four month service agreement with a marketing consultant to provide sales and market services to introduce potential customers to the SFD® technology, attend trade shows, and update the Company’s market systems. The consultant agreed to be compensated in common shares only for approximately US$16,000 per month, based on the five day volume average price at the end of each month. Issuance of any shares under such agreement is subject to prior approval from the TSX. If the TSX does not approve the share issuance, the marketing consultant will be paid in cash. As of December 31, 2023, 360,139 common shares (or equivalent of US$48,000), less withholding taxes, per the agreement, are due to the marketing consultant. In February of 2024 this contract was extended for one month.
SBCE in Q4-23 was higher compared to Q4-22 by $35,736 or 131% due to the compensation owing to the marketing consultant. This was offset by zero Stock options or DSUs being issued and the RSUs being fully vested.
SBCE in YE-23 was higher compared to YE-22 by $25,987 or 12% due to the compensation owed to the marketing consultant and that options were granted in lieu of cash payments to certain directors. The RSU expense was lower as the Company’s share price at the vesting date of September 20, 2023 was lower versus the share price at September 30, 2022 and the 2022 vesting date and there were no RSUs in Q4-23. In addition, there was lower ESP Plan participation during YE-23 due to two less participants.
Amortization
| Amortization (Figures are given in “$”) |
| Q4-23 |
|
| Q4-22 |
|
| Net change |
|
| % |
| ||||
| Property and equipment |
| $ | 15,240 |
|
| $ | 17,468 |
|
| $ | (2,228 | ) |
|
| (13 | ) |
| Intellectual property |
|
| 424,629 |
|
|
| 424,629 |
|
|
| - |
|
|
| 0 |
|
| Total Amortization |
|
| 439,869 |
|
|
| 442,097 |
|
|
| (2,228 | ) |
|
| (1 | ) |
| Amortization (Figures are given in “$”) |
| YE-23 |
|
| YE-22 |
|
| Net change |
|
| % |
| ||||
| Property and equipment |
| $ | 60,959 |
|
| $ | 70,213 |
|
| $ | (9,254 | ) |
|
| (13 | ) |
| Intellectual property |
|
| 1,698,514 |
|
|
| 1,698,514 |
|
|
| - |
|
|
| 0 |
|
| Total Amortization Expenses |
|
| 1,759,473 |
|
|
| 1,768,727 |
|
|
| (9,254 | ) |
|
| (1 | ) |
Property and equipment and related depreciation expense. Property and equipment depreciation was lower in Q4-23 compared to Q4-22 and YE-23 compared to YE-22 as the Company did not acquire new assets until the end of 2023. Depreciation also decreases each year as the Company uses the declining balance method of depreciation, thereby having the effect of lowering depreciation 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 subject to ongoing assessment of potential indicators of impairment of the recorded net book value. No impairments were recognized in 2023 or 2022.
| NXT Energy Solutions Inc. | page | 13 |
| MD&A for the year ended December 31, 2023 |
|
As discussed in the section “Discussion of Operations – Acquisition of the Geothermal Rights”, the Company acquired the SFD® technology for the Geothermal Rights from NXT’s former 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 $68,902.
Other Expenses (Income)
| Other Expenses (Figures are given in “$”) |
| Q4-23 |
|
| Q4-22 |
|
| Net change |
|
| % |
| ||||
| Interest expense, net |
| $ | 77,901 |
|
| $ | 9,969 |
|
| $ | 67,932 |
|
|
| 681 |
|
| Foreign exchange loss (gain) |
|
| (5,109 | ) |
|
| (1,165 | ) |
|
| (3,944 | ) |
|
| (339 | ) |
| Intellectual property and other |
|
| 1,948 |
|
|
| 986 |
|
|
| 962 |
|
|
| 98 |
|
| Total Other Expenses, net |
|
| 74,740 |
|
|
| 9,790 |
|
|
| 64,950 |
|
|
| 663 |
|
| Other Expenses (Figures are given in “$”) |
| YE-23 |
|
| YE-22 |
|
| Net change |
|
| % |
| ||||
| Interest expense, net |
| $ | 160,262 |
|
| $ | 36,220 |
|
| $ | 124,042 |
|
|
| 342 |
|
| Foreign exchange loss (gain) |
|
| (8,028 | ) |
|
| (15,340 | ) |
|
| 7,312 |
|
|
| (48 | ) |
| Intellectual property and other |
|
| 15,852 |
|
|
| 16,933 |
|
|
| (1,081 | ) |
|
| (6 | ) |
| Loss on disposal of assets & lease modifications |
|
| - |
|
|
| 11,922 |
|
|
| (11,922 | ) |
|
| (100 | ) |
| Total Other Expenses, net |
|
| 168,086 |
|
|
| 49,735 |
|
|
| 118,351 |
|
|
| 238 |
|
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), long-term debt and the Ataraxia Debentures and November Debentures. Interest expense increased in Q4-23 versus Q4-22 and YE-23 versus YE-22 due to less short-term investments during 2023 and the Company issuing the two debentures in 2023.
Foreign exchange gain. This category of other expenses includes losses and gains caused by changes in the relative currency exchange values of US$ and CDN$. The Company held a net US$ liability at December 31, 2023 and a small US$ liability at December 31, 2022, which included accounts receivable, cash and cash equivalents, short-term investments, convertible debentures (2023 only), 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 Q4-23 the exchange gain was the result of (i) the 1.9% stronger CDN$ to US$ between September 30, 2023 and December 31, 2023 and (ii) the Company having a significant net liability in US$ of US$1,179,649. In Q4-22 the CDN$ to US$ was 0.9% stronger and the net liability in US$ was US$231,161 and resulted in the $1,165 exchange gain.
For YE-23 the exchange gain was the result of (i) the 2.4% stronger CDN$ to US$ rate between December 31, 2022 and December 31, 2023 and (ii) the Company having a large net liability in US$. At December 31, 2022, the CDN$ to US$ exchange rate was 6.3% lower as compared to the CDN$ to US$ exchange rate at December 31, 2021 and the Company had a net US$ asset for most of the year, resulting in the corresponding foreign exchange gain for YE-22.
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 | 14 |
| MD&A for the year ended December 31, 2023 |
|
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 YE-23 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-23 or YE-22.
Competition
NXT’s 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 it believes is technically superior to other airborne survey systems. To the Company’s knowledge, there is no other company employing technology comparable to its 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. NXT’s 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 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 (that is, a tract 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.
Risk and Uncertainties
Hydrocarbon and geothermal exploration operations involve a number of risks and uncertainties that may affect the consolidated financial statements and are reasonably likely to affect them in the future. These risks and uncertainties are discussed in detail in the NXT Annual Information Form (“AIF”) for the Year Ended December 31, 2023, “Section 5 Risk Factors”, dated March 27, 2024 and available as an electronic copy on NXT’s website at www.nxtenergy.com and on SEDAR+ at www.sedarplus.ca..
| NXT Energy Solutions Inc. | page | 15 |
| MD&A for the year ended December 31, 2023 |
|
We caution that the factors referred to in the AIF 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 the rapidly changing business environment.
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:
| (Figures are given in “$”) |
| Q4-23 |
|
| Q3-23 |
|
| Q2-23 |
|
| Q1-23 |
| ||||
| SFD®-related revenue |
| $ | 2,145,716 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| Net loss |
|
| (425,701 | ) |
|
| (1,703,956 | ) |
|
| (1,706,809 | ) |
|
| (1,614,647 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss per share – basic |
| $ | (0.01 | ) |
| $ | (0.02 | ) |
| $ | (0.02 | ) |
| $ | (0.02 | ) |
| Loss per share – diluted |
| $ | (0.01 | ) |
| $ | (0.02 | ) |
| $ | (0.02 | ) |
| $ | (0.02 | ) |
| (Figures are given in “$”) |
| 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 | ) |
In Q4-23 the Company earned SFD®-related revenue and incurred SFD®-related costs due to the Turkish SFD® Survey, which reduced its net loss versus the previous seven quarters. During Q3-23 the Company decreased G&A spending due to less professional fees as there was minimal incremental financing during the quarter. This was offset by costs incurred to plan for the upcoming Turkish SFD® Survey and foreign exchange losses due to the weakening CDN$. In Q2-23 the Company incurred G&A costs due to increased business development activity and professional fees related to the Ataraxia Debentures. In Q1-23 the Company incurred lower SFD®-related costs as there was no unplanned maintenance on the aircraft, and lower G&A as the Company reduced its headcount by one. During Q4-22 costs were reduced primarily due to lower vacation accruals due to vacation timing, and SBCE. In Q3-22 the Company incurred lower SFD®-related costs as the aircraft had early completed its required maintenance. In Q2-22 the Company recorded unrealized foreign exchange gains as the CDN$ weakened versus the US$. In Q1-22, the Company incurred maintenance fees on its aircraft to have it available for up to 300 flight hours. In each quarter between Q1-22 and Q3-23, the Company incurred net losses due to incurred SFD®-related costs related to aircraft lease and aircraft maintenance costs, G&A expenses, and non-cash items such as SBCE, which can be a significant expense in any given quarter. More specific details are provided below:
|
| · | in Q4-23, SFD®-related revenue and SFD®-related costs increased due to the Turkish SFD® Survey and therefore reduced the Q4-23 loss versus the previous seven quarters. Interest expense increased due to the issuance of the November Debentures; |
|
| · | in Q3-23, costs decreased as G&A spending due to less professional fees , offset by costs incurred to plan for the Turkish SFD® Survey and increased foreign exchange losses due to the weakening CDN$; |
|
| · | in Q2-23, costs increased primarily due to higher professional fees and business development activity; |
| NXT Energy Solutions Inc. | page | 16 |
| MD&A for the year ended December 31, 2023 |
|
|
| · | in Q1-23, costs were reduced primarily due to lower headcount and maintenance costs; |
|
| · | 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$; and |
|
| · | in Q1-22, the Company incurred maintenance fees on the leased aircraft to have it available for up to 300 flight hours. |
Liquidity and Capital Resources
Going Concern
The audited consolidated financial statements for 2023 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 the audited 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 the audited consolidated financial statements have been issued.
Since 2022, the Company has deferred payment of certain operating costs, including payroll and other G&A costs. During 2023 and subsequent to December 31, 2023, the Company completed private placements which resulted in raising an additional net proceeds of $5,079,612 and completed an SFD® survey which generated operating funds. 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 Company’s 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, 2023 totaled $0.40 million. Net working capital totaled $(1.86) million. See the information in the section “Liquidity and Capital Resources – Net Working Capital” for further information.
| NXT Energy Solutions Inc. | page | 17 |
| MD&A for the year ended December 31, 2023 |
|
Risks related to having sufficient ongoing net working capital to execute survey project contracts are mitigated through NXT’s normal practice of obtaining advance payments and progress payments from customers throughout the course of the projects, which often span three to four months. In addition, where possible, risk of default on client billings has been mitigated through the use of export insurance programs offered by Export Development Canada.
The Company does not have provisions in its leases, contracts, or other arrangements that would trigger additional funding requirements or early payments except that if the Company were to default on its office lease, the current month rent, plus the next three months, become immediately due. If the Company were to default on the aircraft lease, the Company would be required to deliver the aircraft back to the Lessor.
The Ataraxia Debentures are for a term of two years, payable on demand. The Ataraxia Debentures are secured by a general security agreement, subordinate to the long-term debt. See “Liquidity and Capital Resources – Ataraxia Debentures” for more information.
| NXT Energy Solutions Inc. | page | 18 |
| MD&A for the year ended December 31, 2023 |
|
Net Working Capital (Non-GAAP Measure)
| Net Working Capital (Figures are given in “$”) |
| December 31, 2023 |
|
| December 31, 2022 |
|
| Net Change |
|
| % |
| ||||
| Current assets (current liabilities) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Cash and cash equivalents |
| $ | 401,713 |
|
| $ | 263,437 |
|
| $ | 138,276 |
|
|
| 52 |
|
| Accounts receivable |
|
| 1,828,523 |
|
|
| 57,065 |
|
|
| 1,771,458 |
|
| >100 |
| |
| Prepaid expenses and deposits |
|
| 53,674 |
|
|
| 36,157 |
|
|
| 17,517 |
|
|
| 48 |
|
| Accounts payable and accrued liabilities |
|
| (1,836,741 | ) |
|
| (1,276,236 | ) |
|
| (560,505 | ) |
|
| (44 | ) |
| Convertible debentures |
|
| (1,852,144 | ) |
|
| - |
|
|
| (1,852,144 | ) |
|
| (100 | ) |
| Current portion of long-term debt |
|
| (111,111 | ) |
|
| (111,111 | ) |
|
| - |
|
|
| - |
|
| Current portion of lease obligation |
|
| (339,543 | ) |
|
| (650,315 | ) |
|
| 310,772 |
|
|
| 48 |
|
| Total Net Working Capital |
|
| (1,855,629 | ) |
|
| (1,681,003 | ) |
|
| (174,626 | ) |
|
| (10 | ) |
NXT had net working capital of $(1,855,629) as at December 31, 2023.
Net working capital at December 31, 2023 compared to December 31, 2022 decreased by $174,626, or 10%, due to the issuance of the Ataraxia Debentures which increased net working capital, but being partially offset by the November Debentures. Increased accounts payable were incurred for the Turkish SFD® Survey, which were offset in part by accounts receivable from the Turkish SFD® Survey and by a lower lease obligation. See “Advisories – Non-GAAP measures” for further information.
Accounts Payable and Accrued Liabilities
| (Figures are given in “$”) |
| December 31, 2023 |
|
| December 31, 2022 |
|
| Net Change |
|
| % |
| ||||
| Trade accounts payable |
| $ | (386,194 | ) |
| $ | (270,956 | ) |
| $ | (115,238 | ) |
|
| (43 | ) |
| Deferred advisory board payable |
|
| (24,805 | ) |
|
| (25,410 | ) |
|
| 605 |
|
|
| 2 |
|
| Accrued liabilities |
|
| (633,850 | ) |
|
| (356,950 | ) |
|
| (276,900 | ) |
|
| (78 | ) |
| Accrued interest |
|
| (38,222 | ) |
|
| (507 | ) |
|
| (37,715 | ) |
| >(100 | ) | |
| Accrued directors’ fees payable |
|
| (228,199 | ) |
|
| (162,500 | ) |
|
| (65,699 | ) |
|
| (40 | ) |
| Salaries payable |
|
| (444,857 | ) |
|
| (363,594 | ) |
|
| (81,263 | ) |
|
| (22 | ) |
| Vacation pay accrued |
|
| (78,246 | ) |
|
| (62,413 | ) |
|
| (15,833 | ) |
|
| (25 | ) |
| RSU and ESP Plan liability |
|
| (2,368 | ) |
|
| (33,906 | ) |
|
| 31,538 |
|
|
| 93 |
|
| Total accounts payable |
|
| (1,836,741 | ) |
|
| (1,276,236 | ) |
|
| (560,505 | ) |
|
| 44 |
|
Accounts payable and accrued liabilities increased by $560,505 or 44%, as at December 31, 2023 compared to December 31, 2022 for the following reasons:
|
| · | trade accounts payable increased by $115,238, or 43%, due to invoiced working capital requirements for the Turkish SFD® Survey; |
|
| · | accrued liabilities increased by $276,900, or 78%, due to estimated working capital requirements for the Turkish SFD® Survey; |
|
| · | accrued directors’ fees payable increased by $65,699, or 40%, as cash payment of directors’ fees continued to be deferred, but were offset partially by some directors taking their fees in the form of stock options during the year; |
|
| · | salaries payable increased by $81,263 or 22%, as the Company continued its salary deferral program until May 2023, but paid 25% of the deferred salary to employees in Q3-23; |
|
| · | vacation pay accrued increased by $15,833, or 25%, due to the timing of vacations; and |
|
| · | RSU and ESP Plan liability decreased 31,538 or 93% due to the RSU becoming fully vested in Q3-23. |
| NXT Energy Solutions Inc. | page | 19 |
| MD&A for the year ended December 31, 2023 |
|
Cash Flow
| Cash Flow-from/(used in) (Figures are given in “$”) |
| Q4-23 |
|
| Q4-22 |
|
| YE-23 |
|
| YE-22 |
| ||||
| Operating activities |
| $ | (1,468,589 | ) |
| $ | (704,187 | ) |
| $ | (4,831,950 | ) |
| $ | (2,934,004 | ) |
| Financing activities |
|
| 1,539,226 |
|
|
| 413,790 |
|
|
| 5,009,117 |
|
|
| 389,217 |
|
| Investing activity |
|
| (32,322 | ) |
|
| - |
|
|
| (32,322 | ) |
|
| 550,000 |
|
| Effect of foreign exchange changes on cash |
|
| (6,010 | ) |
|
| (20,008 | ) |
|
| (6,569 | ) |
|
| 369 |
|
| Net source (use) of cash |
|
| 32,305 |
|
|
| (310,405 | ) |
|
| 138,276 |
|
|
| (1,994,418 | ) |
| Cash and cash equivalents, start of period |
|
| 369,408 |
|
|
| 573,842 |
|
|
| 263,437 |
|
|
| 2,257,855 |
|
| Cash and cash equivalents, end of period |
|
| 401,713 |
|
|
| 263,437 |
|
|
| 401,713 |
|
|
| 263,437 |
|
| Short-term investments, end of period |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| Total cash and short-term investments, end of the period |
|
| 401,713 |
|
|
| 263,437 |
|
|
| 401,713 |
|
|
| 263,437 |
|
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 (Figures are given in “$”) |
| Q4-23 |
|
| Q4-22 |
|
| YE-23 |
|
| YE-22 |
| ||||
| Net loss for the period |
| $ | (425,701 | ) |
| $ | (1,469,549 | ) |
| $ | (5,452,708 | ) |
| $ | (6,733,076 | ) |
| Total non-cash expense and lease items |
|
| 481,372 |
|
|
| 510,165 |
|
|
| 1,914,845 |
|
|
| 2,043,966 |
|
| Operating activities before change in non-cash working capital balances |
|
| 55,671 |
|
|
| (959,384 | ) |
|
| (3,537,863 | ) |
|
| (4,689,110 | ) |
| Change in non-cash working capital balances |
|
| (1,524,260 | ) |
|
| 255,196 |
|
|
| (1,294,087 | ) |
|
| 1,755,107 |
|
| Total cash used in operating activities |
|
| (1,468,589 | ) |
|
| (704,188 | ) |
|
| (4,831,950 | ) |
|
| (2,934,004 | ) |
Operating cash flow decreased by $764,401 in Q4-23 as compared to Q4-22 due to working capital demands of the Turkish SFD® Survey in Q4-23. In Q4-22 the company deferred the payment of several costs to conserve cash.
Operating cash flow decreased by $1,897,948 in YE-23 as compared to YE-22 due to payments of several 2022 deferred costs in 2023 and working capital requirement to support the Turkish SFD® Survey. Also in Q1-22 the Company received payments for outstanding accounts receivable in US$200,000 (CDN$252,415).
| NXT Energy Solutions Inc. | page | 20 |
| MD&A for the year ended December 31, 2023 |
|
| Financing Activities (Figures are given in “$”) |
| Q4-23 |
|
| Q4-22 |
|
| YE-23 |
|
| YE-22 |
| ||||
| Repayment of long-term debt |
| $ | (27,778 | ) |
| $ | (27,778 | ) |
| $ | (111,111 | ) |
| $ | (64,815 | ) |
| Proceeds from stock compensation plans |
|
| 6,963 |
|
|
| 9,324 |
|
|
| 40,616 |
|
|
| 49,738 |
|
| Net proceeds from Rights Offering |
|
| - |
|
|
| 216,062 |
|
|
| - |
|
|
| 216,062 |
|
| Net proceeds from Private Placement |
|
| - |
|
|
| 216,182 |
|
|
| 1,622,057 |
|
|
| 216,182 |
|
| Proceeds from Convertible Debentures |
|
| 1,560,041 |
|
|
| - |
|
|
| 3,457,555 |
|
|
| - |
|
| Repayment of finance liability |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (27,950 | ) |
| Total cash from (used in) financing activities |
|
| 1,539,226 |
|
|
| 413,790 |
|
|
| 5,009,117 |
|
|
| 389,217 |
|
The Company began to repay its long-term debt (the HASCAP Loan, as defined herein) at the beginning of Q3-22. Proceeds were received from employee contributions under the ESP Plan and RSU’s. The Repayment of financial liability was for the sales and leaseback agreement on NXT’s aircraft which ended in Q1-22. Proceeds from the Convertible Debentures were $3,457,555 (US$2,550,000). Please see the sections “Ataraxia Debentures” and “November Debentures”.
In YE-23 net proceeds from the Private Placement (as defined below) was $1,622,057. Please see the section “Private Placement”.
| Investing Activity (Figures are given in “$”) |
| Q4-23 |
|
| Q4-22 |
|
| YE-23 |
|
| YE-22 |
| ||||
| Purchase of property, plant & equipment |
| $ | (32,322 | ) |
| $ | - |
|
| $ | (32,322 | ) |
| $ | - |
|
| Proceeds from short-term investments |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 550,000 |
|
| Total Cash used in Investing Activity |
|
| (32,322 | ) |
|
| - |
|
|
| (32,322 | ) |
|
| 550,000 |
|
The Company upgraded certain SFD® equipment in Q4-23 to enhance the data acquisition phase of the SFD® Survey. Changes in short-term investments were for investments in guaranteed investment certificates to fund operations and investing of excess short-term cash.
Contractual Obligations
Leases
The estimated minimum annual commitments for the Company’s lease components as at December 31, 2023 are listed in the following table:
| Lease payment obligations: 2>(Figures are given in “$”) |
| Total2. |
|
| 2024 |
|
| 2025 |
|
| 2026 |
| ||||
| Office |
| $ | 597,576 |
|
| $ | 341,472 |
|
| $ | 256,104 |
|
| $ | - |
|
| Office operating costs |
|
| 394,196 |
|
|
| 225,255 |
|
|
| 168,941 |
|
|
| - |
|
| Aircraft lease1 |
|
| 37,043 |
|
|
| 37,043 |
|
|
| - |
|
|
| - |
|
| Office equipment |
|
| 9,987 |
|
|
| 3,424 |
|
|
| 3,424 |
|
|
| 3,139 |
|
| Total |
|
| 1,038,802 |
|
|
| 607,194 |
|
|
| 428,469 |
|
|
| 3,139 |
|
|
| 1. | US$ payments have been converted to CDN$ at a rate of 1.32296. |
|
|
|
|
|
| 2. | (Figures are given in “$”) |
| NXT Energy Solutions Inc. | page | 21 |
| MD&A for the year ended December 31, 2023 |
|
Debentures
| Repayment of principal and interest (US$) as of December 31, 2023 |
| US$ |
|
| CDN$1 |
| ||
| 2024 |
| $ | 255,000 |
|
| $ | 337,355 |
|
| 2025 |
|
| 2,740,000 |
|
|
| 3,624,910 |
|
| Total principal and interest payments |
|
| 2,995,000 |
|
|
| 3,962,265 |
|
| Less interest |
|
| (445,000 | ) |
|
| (588,717 | ) |
| Less Debt issuance costs |
|
| (13,273 | ) |
|
| (17,559 | ) |
| Net principal remaining |
|
| 2,536,727 |
|
|
| 3,355,989 |
|
| Current portion of convertible debentures |
|
| 1,400,000 |
|
|
| 1,842,566 |
|
| Non-current portion of convertible debentures |
|
| 1,136,727 |
|
|
| 1,513,423 |
|
|
| 1. | US$ payments have been converted to CDN$ at a rate of 1.32296. |
Ataraxia Debentures
On May 24, 2023 the Company announced a multi-tranche a two-year term US$2.3 million convertible debenture financing with Ataraxia. The terms of the subscription agreement with Ataraxia include an annual interest rate of 10%, paid quarterly, a fixed conversion price of US$0.143 per common share, and the right to appoint a board member. On May 31, 2023, the Company received US$1,200,000 (CDN$1,631,954) of the subscription price for the Ataraxia Debentures. The Company received an additional US$200,000 (CDN$265,560) tranche of the Ataraxia Debenture subscription price on July 10, 2023 for a total amount of US$1,400,000 (CDN$1,897,514). The US$900,000 balance of the Ataraxia Debentures remains unfunded and it is uncertain whether Ataraxia is able or willing to fund this balance.
The Ataraxia Debentures may also be converted into voting preferred shares with an annual dividend rate of 10% paid per quarter. The preferred shares are not transferable, but may be converted on a one-to-one basis into common shares. The Ataraxia Debentures are payable on demand and is secured by a general security agreement, subordinate to the long-term debt. As of the date of this MD&A no preferred or common shares have been issued pursuant to the conversion of the Ataraxia Debentures.
The proceeds from the Ataraxia Debentures were used to fund general and administrative costs including working capital, business development and marketing activities to convert NXT’s existing opportunity pipeline into firm contracts. On May 31, 2023, the Company and Ataraxia entered into an Investor Rights Agreement (the “Investor Rights Agreement”) pursuant to which Ataraxia has been granted the right: (i) to nominate one person for election or appointment as a director of the Company; (ii) to have one representative of Ataraxia attend the Company’s board of director meetings as an observer (except any portion of a board of director meeting where the Company’s relationship with Ataraxia is to be a subject of discussion); (iii) to purchase up to its pro rata portion (calculated on a fully diluted basis) of any securities offered by the Company, subject to certain limitations set forth in the Investor Rights Agreement; and (iv) receive certain information regarding the Company, including annual and quarterly financial statements, annual budgets, the capitalization tables, and access to its premises upon reasonable notification. In each case Ataraxia will retain the rights set forth in the Investor Rights Agreement for so long as Ataraxia holds (i) any principal amount of the Ataraxia Debentures or (ii) common shares or Preferred Shares (as applicable), representing at least 5% of the outstanding common shares of the Company (on an as-converted basis, if Ataraxia holds Preferred Shares).
| NXT Energy Solutions Inc. | page | 22 |
| MD&A for the year ended December 31, 2023 |
|
Both the Ataraxia subscription agreement, and the Investor Rights Agreement, are publicly available under the Company’s profile on SEDAR+ at www.sedarplus.ca.
November Debentures
On November 2, 2023, the Company received conditional approval from the TSX to offer a multi-tranche convertible debenture (the “November Debentures”) The November Debentures bear interest at 10.0% per annum, paid quarterly in arrears, and are due and payable two years after issuance of the November Debentures. The November Debentures are convertible into common shares of NXT at a conversion price of US$0.1808 (CDN$0.25).
On November 8, 2023 the Company issued the first tranche of the November Debentures for US$1,000,000 (approximately CDN$1,378,340) to MCAPM, LP and Michael P. Mork (together “Mork Capital”). As of December 31, 2023, Mork Capital had the right to obtain 5,530,973 common shares upon the conversion of the November Debentures at the fixed conversion price of US$0.1808 subject to shareholder approval at the next annual general meeting of shareholders (“AGM”). With the acquisition of the November Debentures, Mork Capital has the right to own, including the conversion of the first tranche of the November Debentures, 20,452,206 common shares, representing approximately 24.2% of the issued and outstanding common shares at December 31, 2023 (after giving effect to the conversion of the full amount of November Debentures as of December 31, 2023). The Company has agreed to appoint a representative from Mork Capital to its board of directors in the near future.
On December 22, 2023 the Company issued the second tranche of the November Debentures for US$150,000 (approximately CDN$199,260) which gives the subscriber the right to obtain 829,646 common shares upon the conversion of the November Debentures.
On January 12, 2024, the Company closed the final tranche of the November Debentures for an additional US$722,000 (approximately CDN$966,036). With the final tranche, the Company issued a total of US$1,872,000 (approximately CAD$2,543,636) for the November Debentures which will allow the subscribers to obtain an aggregate of up to 10,353,982 common shares. Insiders, which included Mork Capital, were issued November Debentures valued in the aggregate principal amount at US$1,522,000 (approximately CDN$2,076,776).
Mork Capital purchased an additional US$375,000 (approximately CDN$501,750) of November Debentures in the final tranche. Subject to shareholder approval at the next AGM, Mork Capital will have the right to own, after conversion of all of their November Debentures at a fixed price of US$0.1808, 22,526,321 common shares, representing approximately 28.8% of the issued and outstanding common shares, as of the date of this MD&A.
On January 12, 2024, all six current Directors, as of that date, participated in the November Debentures by converting their outstanding director fees payable as at December 31, 2023 into November Debentures valued, in the aggregate principal amount, at US$147,000 (approximately CDN$196,686). In connection with this issuance, the current directors have the right to obtain, in the aggregate, up to 813,053 Common Shares. The proceeds from November Debentures are being used for SFD® survey working capital requirements.
| NXT Energy Solutions Inc. | page | 23 |
| MD&A for the year ended December 31, 2023 |
|
Private Placement
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. On January 25, 2023, the Company closed the Private Placement by issuing an additional 8,510,000 common shares, at $0.195 per common share, for additional aggregate gross proceeds of approximately $1,659,450, less issuance costs of $37,393.
The proceeds from Private Placement were used for G&A expenses.
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 a $386,852. Share issue costs of $170,790 were recorded as a reduction to share capital.
The proceeds from Rights Offering were used for G&A expenses.
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 $1,000,000 non-revolving ten-year term credit facility with an interest rate of 4%. Repayment terms were interest only until May 26, 2022, and monthly principal plus interest payments for the remaining nine years. The HASCAP Loan is secured by a general security agreement and is guaranteed by BDC.
| Repayment of long-term debt principal and interest: (Figures are given in “$”) |
|
|
| |
| 2024 |
| $ | 142,037 |
|
| 2025 |
|
| 137,593 |
|
| 2026 |
|
| 133,148 |
|
| 2027 |
|
| 128,704 |
|
| 2028 |
|
| 124,259 |
|
| 2029 to 2031 |
|
| 281,944 |
|
| Total principal and interest payments |
|
| 947,685 |
|
| Less interest |
|
| (123,611 | ) |
| Total principal remaining |
|
| 824,074 |
|
| Current portion of long-term debt |
|
| 111,111 |
|
| Non-current portion of long-term debt |
|
| 712,963 |
|
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 as per the office lease agreement with its 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 in the first quarter of the following year if the estimate was low. Conversely, it will receive a refund if the estimate was too high. Currently, the Company believes that the operating cost estimate is reasonable and is consistent with discussions with the landlord under the Company’s office lease.
| NXT Energy Solutions Inc. | page | 24 |
| MD&A for the year ended December 31, 2023 |
|
Transactions with Related Parties
Related party fees incurred were as follows:
| (Figures are given in “$”) |
| Q4-23 |
|
| Q4-22 |
|
| YE-23 |
|
| YE-22 |
| ||||
| Legal fees |
| $ | 13,472 |
|
| $ | 46,508 |
|
| $ | 129,600 |
|
| $ | 92,308 |
|
| Interest Expense1. |
| $ | 47,654 |
|
| $ | - |
|
|
| 107,792 |
|
| $ | - |
|
|
| 1. | US$79,356 |
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 $36,938 ($76,843 as at December 31, 2022) payable to this law firm.
Another member of NXT’s Board is a board member of Pana Holdings Mauritius, the parent company of Ataraxia which holds the Ataraxia Debentures. Accounts payable and accrued liabilities includes a total of $19,699 (US$14,890) ($nil as at December 31, 2022) to Ataraxia.
Accounts payable and accrued liabilities include $228,199 ($162,500 as at December 31, 2022) for Board of Director’s fees.
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 2023 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 2023 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 2023 and 2022, the estimates and judgments included the assessment of impairment indicators of IP and recognition of SFD® related revenue.
The Company reviews IP 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 IP, 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 IP.
| NXT Energy Solutions Inc. | page | 25 |
| MD&A for the year ended December 31, 2023 |
|
Changes in Accounting Policies
The audited consolidated financial statements of NXT for YE-23 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, 2023, available on NXT’s website at www.nxtenergy.com and on SEDAR+ atwww.sedarplus.ca.
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 convertible debentures. 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 rate fluctuations 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 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, 2023 and December 31, 2022, the Company held no derivative financial instruments. For more information relating to risks, see the section titled “Liquidity and Capital Resources – Net Working Capital”.
| NXT Energy Solutions Inc. | page | 26 |
| MD&A for the year ended December 31, 2023 |
|
Outstanding Share Capital
|
|
| March 27, 2024 |
|
| December 31, 2023 |
|
| December 31, 2022 |
| |||
| Common shares |
|
| 78,121,746 |
|
|
| 78,025,237 |
|
|
| 68,949,109 |
|
| Dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Ataraxia Debentures converted at US$0.1430 |
|
| 9,790,209 |
|
|
| 9,790,209 |
|
|
| - |
|
| November Debentures converted at US$0.1808 |
|
| 10,353,982 |
|
|
| 6,360,619 |
|
|
| - |
|
| Stock Options |
|
| 2,927,820 |
|
|
| 2,927,820 |
|
|
| 461,320 |
|
| DSUs |
|
| 37,354 |
|
|
| 37,354 |
|
|
| 37,354 |
|
| RSUs |
|
| 1,035,000 |
|
|
| - |
|
|
| 348,334 |
|
| Total share capital and dilutive securities |
|
| 102,266,111 |
|
|
| 97,141,239 |
|
|
| 69,796,117 |
|
The dilutive securities in the above table reflect the number of common shares that would be issued if the dilutive securities were fully converted or exercised by the holder of the dilutive security. The above table does not include estimated share compensation payable to the marketing consultant at December 31, 2023 of 360,139 common shares, (December 31, 2022 – nil common shares), and (March 27, 2024 – 634,439 common shares) as this is subject to approval by the TSX.
Current Director & Officer Common Share Holdings
|
|
| March 27, 2024 |
|
| December 31, 2023 |
|
| December 31, 2022 |
| |||
| Charles Selby 1 |
|
| 408,161 |
|
|
| 408,161 |
|
|
| 408,161 |
|
| Gerry Sheehan 1 |
|
| 77,000 |
|
|
| 77,000 |
|
|
| 77,000 |
|
| John Tilson 1 |
|
| 6,887,490 |
|
|
| 6,887,490 |
|
|
| 6,887,490 |
|
| Bruce G. Wilcox 1,2 |
|
| 565,000 |
|
|
| 500,005 |
|
|
| 500,005 |
|
| Eugene Woychyshyn 2 |
|
| 787,874 |
|
|
| 730,176 |
|
|
| 514,937 |
|
| Total Director and Officer Share Capital |
|
| 8,725,525 |
|
|
| 8,599,832 |
|
|
| 8,387,593 |
|
|
| 1 Director of NXT |
|
| 2 Officer of NXT |
Disclosure Controls and Procedures (“DCPs”) and
Internal Controls over Financial Reporting (“ICFR”)
NXT’s CEO 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 | 27 |
| MD&A for the year ended December 31, 2023 |
|
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 external consultants, legal counsel, the Company’s Disclosure Committee and Audit Committee in reviewing the public disclosure.
The Responsible Officers concluded that, as at December 31, 2023, 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 audited 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 experts used above. |
In addition, the CFO engages subject matter consultants as the need arises.
There were no changes to the Company’s ICFR in Q4-23.
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.
| NXT Energy Solutions Inc. | page | 28 |
| MD&A for the year ended December 31, 2023 |
|
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.sedarplus.ca.
| NXT Energy Solutions Inc. | page | 29 |
| MD&A for the year ended December 31, 2023 |
|