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 |
OR
Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2022. |
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from __ to __
OR
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:
68,949,109 common shares outstanding as of December 31, 2022 (
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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FORWARD-LOOKING STATEMENTS
NXT Energy Solutions Inc. is a Calgary-based technology company whose proprietary and patented Stress Field Detection (“SFD®”) survey system utilizes quantum-scale sensors to detect gravity field perturbations in an airborne survey method, which can be used both onshore and offshore to remotely identify traps and reservoirs with hydrocarbon and geothermal exploration potential. The SFD® survey system enables NXT’s clients to focus their exploration decisions concerning land commitments, data acquisition expenditures, and prospect prioritization on areas with the greatest potential. SFD® is environmentally friendly and unaffected by ground security issues or difficult terrain and is the registered trademark of NXT. NXT provides its clients with an effective and reliable method to reduce time, costs, and risks related to exploration.
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.
Forward-looking statements in this document includes, but is not limited to:
| · | payment of the Consideration (as defined below), and the satisfaction of the conditions thereto (including with respect to cash balances, receipt of funds, and the execution and completion of contracts); |
| · | the development, commercialization, and protection of the SFD® technology for geothermal resource exploration; |
| · | the extent to which expanding the Company’s scope of business to include exploring for both hydrocarbon and geothermal resources is anticipated to result in an expansion of its scope of revenue sources; |
| · | the Company’s pursuit of opportunities to secure new revenue contracts; |
| · | estimates related to our future financial position and liquidity including certain contractual obligations; and |
| · | general business strategies and objectives. |
Such forward-looking information is based on a number of assumptions which may prove to be incorrect. Assumptions have been made with respect to the following matters, in addition to any other assumptions identified in this document:
| · | our ability to develop and market our SFD® technology and services to current and new customers; |
| · | our ability to source personnel and equipment in a timely manner and at an acceptable cost; |
| · | our ability to obtain all permits and approvals required; |
| · | our ability to obtain financing on acceptable terms; |
| · | our ability to obtain insurance to mitigate the risk of default on client billings; |
| · | foreign currency exchange and interest rates; |
| · | general business, economic, and market conditions (including global commodity prices); |
| · | the estimated costs of the Offerings (defined below); |
| · | approval of phase 2 of the NRC IRAP project; and |
| · | the use of funds raised under the Offerings. |
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Although NXT believes that the expectations reflected in such forward-looking statements 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 statements is based on expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by NXT and are described in the forward-looking information. Material risks and uncertainties include, but are not limited to:
| · | the ability of management to execute its business plan, including their ability to secure new revenue contracts; |
| · | health, safety, and the environment (including risks related to the COVID-19 pandemic); |
| · | our ability to develop and commercialize the geothermal technology; |
| · | our ability to service existing debt; |
| · | our ability to protect and maintain our intellectual property (“IP”) and rights to our SFD® technology; |
| · | our reliance on a limited number of key personnel; |
| · | our reliance on a limited number of aircraft; |
| · | our reliance on a limited number of clients; |
| · | counterparty credit risk; |
| · | foreign currency and interest rate fluctuations; |
| · | the likelihood that the Company’s ICFR (as defined below) will prevent or detect material misstatements in our audited consolidated financial statements; |
| · | changes in, or in the interpretation of, laws, regulations, or policies; and |
| · | general business, economic, and market conditions (including global commodity prices); 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.
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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.
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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.
The Company has deferred payment of operating costs, including payroll and other general and administrative costs. Subsequent to December 31, 2022, the Company completed a private placement (the “Private Placement”) which resulted in raising an additional net proceeds of $1,658,280. Further financing options that may or may not be available to the Company include issuance of new equity, debentures or bank credit facilities. The need for any of these options will be dependent on the timing of securing new SFD® related revenues and obtaining financing on terms that are acceptable to both the Company and the financier.
NXT continues to develop its pipeline of opportunities to secure new revenue contracts. However, the Company’s longer-term success remains dependent upon its ability to convert these opportunities into successful contracts, to continue to attract new client projects, expand its revenue base to a level sufficient to exceed fixed operating costs, and generate consistent positive cash flow from operations. The occurrence and timing of these events cannot be predicted with sufficient certainty.
The consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for the 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.
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).
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.
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Certain estimates and judgments have a material impact where the assumptions underlying these accounting estimates relate to matters that are highly uncertain at the time the estimate or judgment is made or are subjective. In 2022 and 2021, the estimates and judgments included the assessment of impairment indicators of intellectual property.
The Company reviews intellectual property for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company considers both internal and external factors when assessing for potential indicators of impairment of its intellectual property, including the consideration of historical and forecasted SFD® related revenues, market capitalization, control premiums, and the SFD® related revenue multiples compared to industry peers. When indicators of impairment exist, the Company first compares the total of the estimated undiscounted future cash flows or the estimated sale price to the carrying value of an asset. If the carrying value exceeds these amounts, an impairment loss is recognized for the excess of the carrying value over the estimated fair value of the intellectual property.
Other accounting estimates and judgments that may have a material impact on the financial statements include: the forward looking assumptions related to the going concern assumption, the estimated useful lives of intellectual property and property, plant and equipment, and the assumptions used to measure stock based compensation expense.
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, as commodity prices have declined 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.
Our financial position is affected by foreign currency fluctuations.
The Company is exposed to foreign exchange risk in relation to its holding of significant US$ balances of cash and cash equivalents, short-term investments, accounts receivable, deposits, accounts payables, accrued liabilities, lease obligations and entering into United States dollar SFD® related revenue contracts. To mitigate exposure to fluctuations in foreign exchange, the Company does not currently enter into hedging contracts, but uses strategies to reduce the volatility of United States Dollar assets including converting excess United States dollars to Canadian dollars. As at December 31, 2022, the Company held net U.S. dollar liabilities totaling US$231,161. Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2022 would have had an approximately $31,327 effect on the unrealized foreign exchange gain or loss for the year. Changes in currency exchange rates could have an adverse effect on the Company’s business, financial condition and results of operations.
Debt Service
NXT may finance a significant portion of its operations through debt. Amounts paid in respect of interest and principal on debt incurred by NXT may impair NXT’s ability to satisfy its other obligations. Variations in interest rates and scheduled principal repayments could result in significant changes in the amount required to be applied to debt service before payment by NXT of its debt obligations. Lenders may be provided with security over substantially all of the assets of NXT. If NXT becomes unable to pay its debt service charges or otherwise commits an event of default such as bankruptcy, a lender may be able to foreclose on or sell the assets of NXT.
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. (See Item 11). The Company’s long-term debt interest is fixed at 4% until 2031. The Company also is recorded interest expense of 15.70% on the financial liability of its aircraft lease for the years 2019 to 2021 which resulted from the deferred gain of the sales and leaseback agreement of its aircraft. This interest expense ended in April 2022.
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Availability of Aircraft.
In April 2017, NXT completed a sale and leaseback agreement of its aircraft with a Calgary-based international aircraft services organization (the “Lessor”). The terms of the agreement resulted in NXT selling its 1997 Cessna Citation Ultra 560 jet aircraft that was purchased in 2015. NXT has leased the aircraft over an initial term of 60 months and retains all existing operating rights and obligations. NXT was required to make monthly payments to the Lessor of approximately US$39,500 until April 2022.
In Q4-21 the Company extended the term of its Aircraft Leasing Agreement effective in the second quarter of 2022 for a period of 24 months with payments of approximately US$22,500 (CDN$28,675) per month, or US$270,000 (CDN$344,099) per year. Should NXT want to repurchase the aircraft at the end of the extended term, the purchase price will be US$1.21 million.
When the aircraft is not needed for use by NXT, we seek to earn charter hire reimbursements from the aircraft through a third party, Air Partners.
Air Partners also has access to an alternate, similar model aircraft (certified for the use of our survey equipment) which could be charter hired for use by NXT if needed.
In the event that NXT’s aircraft is not available (due to damage, a need for extensive repairs, or other unforeseen events) to conduct survey projects, there is a risk that suitable alternative aircraft may not be available on a timely basis from other charter operators when needed. This inability to conduct survey operations could have a material adverse effect on the Company’s business, financial condition and results of operations.
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 or two individuals depending on the task.
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 compensate for the reduced ability to separate incompatible functions, these alternative controls are not effective 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 NXT 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 with our officers and directors. The most significant transaction was a “Technology Transfer Agreement” (the “TTA”) that was executed on December 31, 2006 between NXT and Mr. George Liszicasz, our former Chief Executive Officer, President and Chairman (“CEO”) wherein we issued 10,000,000 convertible preferred shares to him in exchange for the rights to the SFD® technology for use in hydrocarbon exploration. In 2013, a total of 2,000,000 of these preferred shares were converted (on a one-to-one basis) into common shares, and the remaining 8,000,000 preferred shares were converted in August 2015. 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 (Please refer to Section 4. B for further discussion on Geothermal Right). In addition, one of the members of NXT’s Board of Directors (the “Board”), Thomas Valentine, is a partner in the law firm Norton Rose Fulbright Canada LLP which provides legal advice to NXT and a company owned by a family member of an executive officer was contracted to provide presentation design services to the Company.
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For a full history of 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”.
Although we manage this potential conflict of interest risk through 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 NXT shareholders.
Our rights to SFD® technology may be challenged and we may need to defend our rights to the technology in the courts.
Our rights to ownership and use of SFD® technology depended on Mr. Liszicasz having the lawful right to sell to NXT the exclusive rights to exploit the SFD® technology for the exploration of hydrocarbons as agreed to in the TTA.
A risk exists that an unknown party may claim some legal entitlement to our intellectual property (“IP”), our rights to commercialize this IP or our right to create SFD® devices and processes. However, we believe that such a claim would be without merit.
The SFD® technology is an essential component of our business plan. If a third party challenged our lawful entitlement to this technology, the legal defense of our right to the technology may be expensive and could cause a loss of our right to the SFD® technology, or a protracted legal process to assert our right to the technology would have a material adverse effect on the Company’s business, financial condition and results of operations.
We rely on specialized equipment, including a limited number of SFD® sensors and this limitation may affect our ability to conduct business.
We rely on specialized data acquisition equipment, including a limited number of SFD® sensor devices, to conduct our aerial SFD® survey operations. We would be at risk if these survey sensors were to become damaged, destroyed, worn out, stolen or in any way became unavailable for use in operations prior to us creating and testing additional sensors. Should the sensors become unavailable for any reason, our ability to conduct surveys could be delayed for several months as we built new sensors. During this period, we may become unable to satisfy contractual obligations, which may jeopardize future revenue opportunities and may potentially result in a client drawing on a contract performance bond posted by the Company or otherwise making claims against the Company for breach of contract. In addition, an inability to satisfy contractual obligations may have an adverse effect on our developing reputation within the oil and gas community.
NXT mitigates this risk by researching new designs, constructing additional SFD® sensor devices and obtaining replacement cost insurance on each SFD® sensor.
As the Company is in the early commercialization phase, 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.
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. Our inability to keep pace with new technologies and evolving industry standards and demands could have a material adverse effect on our business, financial condition and results of operations.
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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 whom are highly experienced, are trained to interpret SFD® signals. In addition, the Company is developing interpretation algorithms which will reduce the reliance on human interpretation. A process of formal documentation of the ongoing research and development of the sensor technology, the acquisition/survey methodologies, and the processing and interpretation work flows is ongoing and will be part of the management systems.
Within the Province of Alberta, the skilled personnel that we require may periodically be in short supply and there is specialized training required that can take several months in order for a new employee to become effective. If we cannot hire these key personnel, we have inadequate time to train them or should we lose current personnel, then our ability to accept contracts or meet contract commitments may be adversely affected, thereby restricting our ability to earn revenue.
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.
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.
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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.
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.
Our right to issue additional capital stock at any time could have an adverse effect on your proportionate ownership and voting rights.
We are authorized under our Articles of Incorporation to issue an unlimited number of common shares and an unlimited number of preferred shares. We may issue these 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. Proportionate ownership and voting rights of common shareholders could be adversely affected by the issuance of additional common shares which may result in common share value dilution.
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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 (“RD”) 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.
The patent protection application process requires disclosure of at least some aspects of our SFD® technology to third parties and ultimately public disclosure. This disclosure could significantly increase the risk of unlawful use of our technology by third parties. Furthermore, we have no assurance that, even if we seek patent protection, a patent could be registered to protect our IP in all or any jurisdictions within North America or other countries throughout the world. If registered, there can be no assurance that it would be sufficiently broad to protect our technology or that any potential patent would not be challenged, invalidated, or circumvented or that any right granted thereunder would provide meaningful protection or a competitive advantage to us. Finally, protection afforded by patents is limited by the financial resources available to legally defend IP rights. We currently do not possess the required financial resources to fund a lengthy defense of our rights if challenged by a much larger competitor or an oil and gas company.
We enjoy common and contract law protection of our technology and trade secrets. Employees and contractors are governed by confidentiality agreements as well as a fiduciary responsibility to protect our technology, supporting documentation and other proprietary information.
Our strongest protection of the SFD® technology comes from restricting access to knowledge concerning the technology. Only a very limited number of NXT personnel have access to or knowledge of the underlying SFD® technology and no one employee and only one officer has access or knowledge of all aspects of the SFD® system. Currently, no third party has any significant knowledge of the technology. As further protection, SFD® equipment does not leave the direct control of NXT employees, thereby preventing unauthorized replication of the equipment.
The Company reassesses the appropriateness of its IP protection strategy on an ongoing basis and seeks advice from IP advisors as necessary.
It is possible that a third party will copy or otherwise obtain and use the Company’s technology without authorization, develop a similar technology independently or design around the Company’s secrets. Accordingly, there can be no assurance that the steps taken by the Company to prevent misappropriation or infringement of our IP will be successful.
An inability to protect our IP would make it possible for competitors to offer similar products and services that could have a material adverse effect on our business, financial condition, and results of operations.
We experience operational hazards in our flight operations that may subject us to potential claims in the event that an incident or accident occurs.
We experience operational hazards in our flight operations that may subject us to potential claims in the event that an incident or accident occurs.
The flight operations of SFD® surveys are subject to the hazards associated with general flight operations. An aircraft accident may cause personal injury and loss of life, as well as severe damage to and destruction of property or the SFD® sensors and related equipment.
Independent third parties provide all the services required to maintain and operate the aircraft; they bear the primary risks of flight operations. These services are provided by an organization accredited by Transport Canada to operate aircraft in accordance with Transport Canada approved and audited operating procedures. The aircraft operator employs the required pilots, aircraft maintenance engineers and support personnel and ensures that they operate within their Transport Canada operating certificate. Our employees do not perform any airworthiness or flight safety operations.
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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 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.
We conduct operations in foreign countries, which exposes us to several risks that may have a material adverse effect on the Company.
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 with-holding taxes) on the repatriation back to Canada of our earnings in foreign countries in which we have operated, such as Colombia and Bolivia; 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 U.S. 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 and other global regions in accordance with these typical requirements.
With 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, 2022, cash balances in bank accounts placed with financial institutions with investment grade credit ratings. The Company manages this 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.
The Company may be a “passive foreign investment company” (“PFIC”), which may have adverse U.S. federal income tax consequences for U.S. investors
The Company believes that it was a PFIC for its most recently completed tax year and, based on current business plans and financial expectations, the Company believes that it may be a PFIC for its current tax year and may be a PFIC in future tax years. If the Company is a PFIC for any year during a U.S. taxpayer’s holding period of common shares of the Company, then such U.S. taxpayer generally will be required to treat any gain realized upon a disposition of the common shares of the Company or any so-called ‘‘excess distribution’’ received on its common shares of the Company as ordinary income, and to pay an interest charge on a portion of such gain or distribution. In certain circumstances, the sum of the tax and the interest charge may exceed the total amount of proceeds realized on the disposition, or the amount of excess distribution received, by the U.S. taxpayer. Subject to certain limitations, these tax consequences may be mitigated if a U.S. taxpayer makes a timely and effective QEF Election (as defined below) or a Mark-to-Market Election (as defined below). A U.S. taxpayer who makes a timely and effective QEF Election generally must report on a current basis its share of the Company’s net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts with respect to the common shares of the Company. However, U.S. taxpayers should be aware that there can be no assurance that the Company will satisfy the record keeping requirements that apply to a qualified electing fund, or that the Company will supply U.S. taxpayers with information that such U.S. taxpayers require to report under the QEF Election rules, in the event that the Company is a PFIC and a U.S. taxpayer wishes to make a QEF Election. Thus, U.S. Holders may not be able to make a QEF Election with respect to their common shares. A U.S. taxpayer who makes the Mark-to-Market Election generally must include as ordinary income each year the excess of the fair market value of the common shares of the Company over the taxpayer’s basis therein. This paragraph is qualified in its entirety by the discussion below under the heading ‘‘Certain United States Federal Income Tax Considerations — Passive Foreign Investment Company Rules.’’ Each potential investor who is a U.S. taxpayer should consult its own tax advisor regarding the tax consequences of the PFIC rules and the acquisition, ownership, and disposition of the common shares of the Company.
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 common shares of the Company. 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 of the Company. 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 of the Company is uncertain.
In addition, the Inflation Reduction Act of 2022 includes provisions that will impact the U.S. federal income taxation of corporations. Among other items, this legislation includes provisions that will impose a minimum tax on the book income of certain large corporations and an excise tax on certain corporate stock repurchases that would be imposed on the corporation repurchasing such stock. It is unclear how this legislation will be implemented 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 of the Company.
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Occurrence of Natural Disasters, Epidemics or Other Events
Our business could be materially and adversely affected by natural disasters, such as fires or floods, the outbreak of a widespread health epidemic or pandemic, separate from COVID-19, or other events, such as wars, including the military conflict between Russia and Ukraine, acts of terrorism, power shortages or communication interruptions. The occurrence of a disaster or similar event could materially disrupt our business and operations. These events could also cause us to close our operating facilities temporarily, which would severely disrupt our operations and have a material adverse effect on our business, financial condition, and results of operations. In addition, our net sales could be materially reduced to the extent that a natural disaster, health epidemic or other major event harms the economies of the countries in which we operate. As such, the outbreak of hostilities between Russia and Ukraine could result in more widespread conflict and could have a severe adverse effect on the surrounding regions and the related markets, and on our business, financial condition, and results of operations. The duration of the conflict and related events and whether it will escalate further cannot be predicted. Our operations could also be severely disrupted if our customers, partners and other third-party providers or other participants were affected by natural disasters, health epidemics, or other major events, such as wars and military conflicts.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk in relation to its holding of significant United States Dollar (“USD”) balances in cash and cash equivalents, short-term investments, accounts receivable, deposits, accounts payables, accrued liabilities, lease obligations and entering into USD revenue contracts. To mitigate exposure to fluctuations in foreign exchange, the Company does not currently enter into hedging contracts, but uses strategies to reduce the volatility of USD assets including converting excess USD to Canadian dollars. As at December 31, 2022, the Company held net U.S. dollar liabilities totaling US$231,161. Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2022 would have had an approximately $31,327 effect on the unrealized foreign exchange gain or loss for the year. Changes in currency exchange rates could have an adverse effect on the Company’s business, financial condition and results of operations.
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. |
| · | 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. |
| · | Prior to this reverse acquisition transaction, NXT was a corporate shell conducting no active business, and NXT Energy USA Inc. was a development stage RD enterprise holding the worldwide rights to use what is now our SFD® technology for hydrocarbon exploration purposes. |
| · | 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. |
| · | 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”). |
| · | On September 22, 2008 EETI changed its name to NXT Energy Solutions Inc. by way of Articles of Amendment filed pursuant to the ABCA. |
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 President and CEO, 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 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 2023 we do not anticipate further significant upgrades for the aircraft. For the last three fiscal years, the Company made capital expenditures for property and equipment of $nil (2022), $nil (2021) and $nil (2020).
The Company does not currently have any significant capital expenditures in progress, or planned for the short term, for Canada or international operations.
Given the passing on January 21, 2023 of Mr. George Liszicasz, NXT’s former CEO, the Board of Directors has formally empowered a committee of the Board to assume the CEO’s duties. The Committee, which meets several times weekly with NXT management, consists of Lead Director Charles Selby and Directors Gerry Sheehan and Bruce G. Wilcox, who collectively possess senior operating and management experience in the Energy and Capital Markets Industries. The Committee will undertake its executive role, until further notice, in close cooperation with NXT’s qualified management team that will continue to manufacture SFD® systems, perform SFD® surveys, and provide vital interpretation as contracts are finalized.
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.
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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 and patented SFD® survey system utilizes quantum-scale sensors to detect gravity field perturbations in an airborne survey method which can be used both onshore and offshore to remotely identify traps and reservoirs with hydrocarbon and geothermal exploration potential. The SFD® survey system enables NXT’s clients to focus their exploration decisions concerning land commitments, data acquisition expenditures and prospect prioritization on areas with the greatest potential. SFD® is environmentally friendly and unaffected by ground security issues or difficult terrain and is the registered trademark of NXT. NXT provides its clients with an effective and reliable method to reduce time, costs and risks related to exploration.
We utilize our proprietary, airborne SFD® survey system to provide a service for the geothermal and oil and gas exploration industry. NXT provides a rapid and cost-effective method for our clients to evaluate large land areas for their exploration potential. NXT’s principal markets have been in South America, Africa and Asia.
The underlying technology employed by our SFD® survey system was invented by Mr. 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 “Section 10.1” below.
SFD® technology for the purposes of the TTA is defined as the theories of quantum physics and engineering which are utilized in the operation of stress field detectors used by NXT for the reception, collection and recording of subsurface geological stresses for hydrocarbon exploration and geothermal resources.
SFD® sensors remotely respond to gravity perturbations and changes in subsurface stress regimes that are meaningful for oil and gas exploration and geothermal resources. These responses are captured as raw data that when interpreted, can provide an indirect method to detect the presence of geological features such as structures, faults, fractures and reefs that are often associated with traps and reservoir accumulations. SFD® is highly effective in frontier and under-explored areas, in offshore or onshore environments and over any terrain. The SFD® survey system has been demonstrated to quickly focus exploration resources, offering the benefit of reducing the risk, time and expense associated with frontier exploration.
Following completion of the aerial surveys, we deliver 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.
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In support of these sales efforts, NXT has also been effective in positioning the SFD® method as an established geophysical tool for oil gas exploration following the successful completion of projects in Latin America (Bolivia and Mexico) with the publication of technical papers and the creation of project case studies. In addition, NXT has now been granted patents or received patent allowance in 46 separate countries.
Our overall objective remains to continue to increase industry awareness and appreciation of the value of our SFD® survey system and our strategy to achieve this includes maximizing client endorsement opportunities (such as through joint case studies) and targeting the most appropriate markets (i.e., where SFD® provides the maximum benefits). Our specific tactics include:
1. | 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 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.
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.
We had 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. Revenues for the year ended December 31, 2020 were the result of the forfeiture of a non-refundable deposit.
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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| For the years ended December 31, |
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| 2022 |
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| 2021 |
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| 2020 |
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International |
| $ | - |
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| $ | 3,134,250 |
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| $ | - |
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Other |
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| - |
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| - |
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| 136,566 |
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| - |
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| 3,134,250 |
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| 136,566 |
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International Market
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.
Other
In February 2019, NXT entered into a co-operative agreement with one of its largest shareholders, Alberta Green Ventures Limited Partnership (“AGV”), to propose up to three SFD® surveys within two years (the “Co-operative Agreement”). The Co-operative Agreement was based on a cost plus formula and a gross overriding royalty interest in oil and gas production arising on lands subject to the surveys.
The fees payable by AGV were partially secured by a US$100,000 non-refundable deposit. As AGV did not complete at least one of three SFD® surveys by June 30, 2020, the non-refundable deposit was forfeited to NXT in 2020.
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. |
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.
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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).
The estate of Mr. Liszicasz retains all rights, title, and interest in and to the SFD® technologies for all other commercial applications, except for respect to hydrocarbons and geothermal resources.
As of December 31, 2022, the Company has recognized $275,610 for the Acquisition, 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 family. The objective of this project was to test, identify, and analyze the desired elements of the SFD® geothermal sensor response over known geothermal areas with the ultimate goal of providing a green upstream geophysical service for advancing renewable power initiatives in Canada and abroad. The agreed project work was completed in November 2021 with total funding of $50,000 from the National Research Council of Canada Industrial Research Assistance Program (“NRC IRAP”). During Q1-23, the Company submitted a proposal for up to approximately $200,000 to NRC IRAP for a funding and research plan for the next phase to support the research and development of the SFD® technology for geothermal applications.
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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. None of these expenses have been subject to significant price volatility.
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, a Calgary based air charter operator, to provide aircraft, crew, and maintenance services for our survey operations worldwide In December 2015, we acquired from Air Partners a jet aircraft which was previously charter hired to NXT. In April 2017, NXT completed a sale and leaseback agreement of its aircraft with a Calgary based international aircraft services organization. The terms of the agreement resulted in NXT selling its’ 1997 Cessna Citation Ultra 560 jet aircraft. We currently rely on Air Partners as the manager / operator of the aircraft which we use in SFD® survey operations. |
|
|
|
| · | SFD® sensors - All of the survey sensors are 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. |
|
|
|
| · | SFD® assembly - The units in which the sensors are incorporated 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. |
|
|
|
| · | Computer hardware and software - (Data Acquisition System, SFD® Signal Conditioning Unit, and data Interpretation software). During 2016, a new data acquisition system completed final testing. The software was developed by in-house personnel and will be utilized on future surveys. The hardware we use in our SFD® survey systems (other than the SFD® unit), and the balance of the computer software we use, are all readily available from retail or wholesale sources. |
We are not dependent upon any other third-party contract manufacturers or suppliers to satisfy our technology requirements.
Description of marketing channels
We largely use direct sales methods with use of independent commissioned sales representatives in international markets.
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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 patent on May 22, 2013, which was subsequently published on November 28, 2013. We intend to continue expanding the process with additional formal patent applications in the future. We understand that our right to patent the SFD® technology is not compromised by our ongoing commercial use of the technology, as the components of the SFD® technology have never been disclosed to third parties (except under very limited and confidential terms) or released in any manner into the public domain.
In 2017, our Initiatives to expand and protect our IP (including patenting and new RD initiatives) were very successful. Squire Patton Boggs LLP, a United States-based leader in IP protection, has been advising NXT on our IP strategy, including the prior filing of an initial United States provisional patent application in May 2012. As a result, NXT has now been granted SFD® patents in Brazil (February 2022), India (July 2021), Russia (January 2017), Japan (July 2017), Canada (August 2017), Mexico (September 2017), the United States (two patents were granted in November 2017 and September 2018, respectively), China (April 2018), and Europe (January 2020). In total, NXT has obtained SFD® patents in 46 countries. These patents protect our proprietary SFD® technology and serve as independent third-party recognition of our technological invention in terms of practical applicability, conceptual novelty, and knowledge advancement.
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 gas industry to image subsurface structures. It is our view that the SFD® survey system is highly complementary to seismic analysis. Our system may reduce the need for seismic in wide‑area reconnaissance but will not replace the role of seismic in verifying structure, closure and selecting drilling locations. The seismic industry is very competitive with many international and regional service providers.
The SFD® system can be used as a focusing tool for seismic. With an SFD® survey, a large tract (i.e., over 5,000 square kilometers) of land can be evaluated quickly to identify locations with indications of reservoir potential. Seismic surveys, although effective in identifying these locations, are much more expensive, require significantly more time and impose a much greater negative impact on local communities and the environment. An SFD® survey deployed first can provide necessary information to target a seismic program over a limited area of locations selected by SFD®. This approach can result in a more effective seismic program and reduce the overall cost, time, community resistance and environmental impact required to locate and qualify a prospect.
The industry uses other technologies for wide area oil and natural gas reconnaissance exploration, such as aeromagnetic and gravity surveys. These systems can provide regional geological information, such as basement depth, sedimentary thickness and major faulting and structural development; however, these other airborne techniques are not as suitable for identifying areas with reservoir potential as the SFD® system
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 and the U. S. 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 U.S.
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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, ii) obtaining permits from the local aviation authority, and 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 Nigeria, Canada, the U.S., 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 NXT to forfeiture of performance bonds.
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 | 100 common shares | Inactive | 100% | |
4,000 preferred shares | ||||||
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.
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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.
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. NXT is required to make monthly payments to the Lessor of approximately US$39,500 (CDN$50,340). In December 2021, the Company determined it was reasonably certain it would extend term of its Aircraft Leasing Agreement effective in the second quarter of 2022 for a period of 24 months with payments of approximately US$22,500 (CDN$28,675) per month, or US$270,000 (CDN$344,099) per year. Should NXT want to repurchase the aircraft at the end of the extended term, the purchase price will be US$1.21 million.
When the aircraft is not needed for use by NXT, we seek to earn charter hire reimbursements from the aircraft through a third party, Air Partners. Air Partners also has access to an alternate, similar model aircraft (certified for the use of our survey equipment) which could be charter hired for use by NXT if needed.
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 RD 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. |
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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 $24,574 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”.
A. Operating results.
Overall Operational Performance
Selected Annual Information
|
| For the year ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
SFD® related revenue |
| $ | - |
|
| $ | 3,134,250 |
|
| $ | 136,566 |
|
Net income (loss) and comprehensive income (loss) |
|
| (6,733,076 | ) |
|
| (3,123,799 | ) |
|
| (6,028,228 | ) |
Net income (loss) per common share - basic |
| $ | (0.10 | ) |
| $ | (0.05 | ) |
| $ | (0.09 | ) |
Net income (loss) per common share - diluted |
| $ | (0.10 | ) |
| $ | (0.05 | ) |
| $ | (0.09 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| (1,994,418 | ) |
|
| (432,291 | ) |
|
| (168,099 | ) |
Cash and short term investments |
|
| 263,437 |
|
|
| 2,807,855 |
|
|
| 3,031,407 |
|
Total assets |
|
| 15,575,295 |
|
|
| 21,584,371 |
|
|
| 23,484,748 |
|
Lease liabilities |
|
| 1,246,723 |
|
|
| 1,902,604 |
|
|
| 2,089,838 |
|
Long-term liabilities |
|
| 935,185 |
|
|
| 1,000,000 |
|
|
| - |
|
Summary financial highlights for the last three fiscal years are as follows:
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 Stock Based Compensation Expense (“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; |
| · | General and administrative expenses (“GA”) increased by $0.55 million (17%) in 2022 as compared to 2021; and |
| · | the Rights Offering and Private Placement (together the “Offerings”) 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 RD 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; |
| · | GA 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 (the “CERS”) offset by the ending of the CEWS (the “Canada Emergency Wage Subsidy”) and higher SBCE. |
Financial Highlights for 2020
| · | Cash and short-term investments at December 31, 2020 were $3.03 million; |
| · | SFD® related revenues 2020 were $0.14 million; |
| · | A net loss of $6.03 million was recorded for 2020, including stock based compensation and amortization expenses of $1.78 million; |
| · | Cash flow used in operating activities was $3.41 million 2020; |
| · | Net loss per Common Share for 2020 was ($0.09) basic and diluted; |
| · | GA for 2020 as compared to 2019 decreased by $0.33 million or 9%, due primarily to the CEWS, the CERS, the Scientific Research and Development Credit (“SRED”), and less travel than in 2019; and |
| · | The Employee Share Purchase Plan commenced in Q4-20 with approximately 75% employee participation. |
Net Income (Loss) |
| For the year ended December 31 |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
SFD® related revenue |
| $ | - |
|
| $ | 3,134,250 |
|
| $ | 136,566 |
|
SFD® related costs |
|
|
|
|
|
|
|
|
|
|
|
|
Survey costs |
|
| 1,178,183 |
|
|
| 1,224,168 |
|
|
| 1,111,070 |
|
General and administrative |
|
| 3,736,431 |
|
|
| 3,189,857 |
|
|
| 3,341,010 |
|
Amortization expense |
|
| 1,768,727 |
|
|
| 1,776,484 |
|
|
| 1,780,806 |
|
|
|
| 6,683,341 |
|
|
| 6,190,509 |
|
|
| 6,232,886 |
|
Other expense (income), net |
|
| 49,735 |
|
|
| 67,540 |
|
|
| (68,092 | ) |
Loss before income taxes |
|
| (6,733,076 | ) |
|
| (3,123,799 | ) |
|
| (6,028,228 | ) |
Income tax expense (recovery) |
|
| - |
|
|
| - |
|
|
| - |
|
Net loss for the year |
|
| (6,733,076 | ) |
|
| (3,123,799 | ) |
|
| (6,028,228 | ) |
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Revenue and expenses for the years ended December 31, 2022, 2021 and 2020
SFD® related revenues –There were no surveys in 2022 and 2020, but revenue was received from the forfeiture of a deposit from the Co-operation Agreement during 2020. 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 2022, 2021 and 2020, aircraft operations were incurred for aircraft handling and maintenance costs. 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 $118,441 lower due to the costs incurred for the Pre-existing Data Sale in 2021.
In 2021, SFD® related costs were higher compared to 2020 due to costs to deliver the Pre-existing SFD® Data, routine maintenance costs and lower charter hire reimbursements due to the COVID-19 pandemic. This was offset by lower aircraft lease costs, due to the favourable CDN$ 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.
In April 2017, NXT completed a sale and leaseback agreement of its aircraft with the Lessor. NXT has leased the aircraft over an initial term of 60 months and retains all existing operating rights and obligations. NXT is required to make monthly payments to the Lessor of approximately US$39,500. NXT has the option to extend the term of the lease by an additional two years for payments of approximately US$22,500 per month.
In Q4-21, the Company determined it was reasonably certain it would extend term of its Aircraft Leasing Agreement effective in the second quarter of 2022 for a period of 24 months with payments of approximately US$22,500 (CDN$28,675) per month, or US$270,000 (CDN$344,099) per year. The incremental borrowing rate is 11.2%. The Company recognized an additional $615,737 Aircraft Right of use assets and US$481,797 ($615,737) additional Lease obligations.
Should NXT want to repurchase the aircraft at the end of the extended term, the purchase price will be US$1.21 million.
GA - GA is a major component of NXT’s total expenses. The categories included in GA are as follows:
GA |
| For the year ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Salaries, benefits, and consulting charges |
| $ | 1,688,262 |
|
| $ | 1,485,952 |
|
| $ | 1,383,692 |
|
Board, professional fees, and public company costs |
|
| 818,087 |
|
|
| 720,269 |
|
|
| 920,666 |
|
Premises and administrative overhead |
|
| 818,987 |
|
|
| 647,943 |
|
|
| 728,036 |
|
Business development |
|
| 195,811 |
|
|
| 47,793 |
|
|
| 140,200 |
|
Total GA before Stock based compensation |
|
| 3,521,147 |
|
|
| 2,901,957 |
|
|
| 3,172,594 |
|
Stock based compensation |
|
| 215,284 |
|
|
| 287,900 |
|
|
| 168,416 |
|
Total GA |
|
| 3,736,431 |
|
|
| 3,189,857 |
|
|
| 3,341,010 |
|
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GA 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. |
GA before SBCE decreased $151,153, or 5%, in 2021 compared to 2020 for the following reasons:
| · | Salaries, benefits, and consulting charges increased $102,260, or 7%, due primarily due to decrease of the CEWS and the SRED rate offset by lower vacation expense; |
| · | Board and professional fees and public company costs decreased $200,397, or 22%, due primarily to lower legal fees; |
| · | Premises and administrative overhead costs decreased $80,093, or 11%, due to receipt of the CERS during 2021; |
| · | Business development costs decreased by $92,407, or 66%, as travel restrictions continue due to the COVID-19 epidemic: and |
| · | SBCE were higher in 2021 vs 2020 by $119,484, or 71% due to recognizing the Restricted Stock Unit (“RSU”) Plan expense and the ESP Plan for a full year. 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 2022 and 2021, the Company settled the 2021 RSU vesting with shares and cash, and intends to continue to settle the RSUs in 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 2022, 2021 and 2020 the Company has elected to issue Common Shares from treasury.
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| Table of Contents |
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 2022 and 2021.
SBCE in 2021 was higher compared to 2020 by $119,484 or 71%. Option expense in 2021 was higher as a director elected to take options, instead of cash payments for part of their fees. Option expense in 2020 was a grant of an award of 30,000 fully vested stock options. The ESP Plan expenses was higher in 2021 as the plan was in effect for the whole year, versus one month in 2020. The main driver was the RSU Plan recognized twelve months of RSU expense in 2021 versus 128 days in 2020.
Stock-based compensation expense |
| For the year ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Stock Option Expense |
| $ | 22,551 |
|
| $ | 26,250 |
|
| $ | 34,223 |
|
Deferred Share Units |
|
| - |
|
|
| - |
|
|
| 15,000 |
|
Restricted Stock Units |
|
| 153,343 |
|
|
| 154,715 |
|
|
| 111,060 |
|
Employee Share Purchase Plan |
|
| 39,390 |
|
|
| 106,935 |
|
|
| 8,133 |
|
Total SBCE Expenses |
|
| 215,284 |
|
|
| 287,900 |
|
|
| 168,416 |
|
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, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Property and equipment |
| $ | 70,213 |
|
| $ | 82,564 |
|
| $ | 96,073 |
|
Intellectual property |
|
| 1,698,514 |
|
|
| 1,693,920 |
|
|
| 1,684,733 |
|
Total Amortization Expense |
|
| 1,768,727 |
|
|
| 1,776,484 |
|
|
| 1,780,806 |
|
Property and equipment and related amortization expense. Property and equipment amortization was lower in 2022 compared to 2021, and 2021 compared to 2020, due to additional assets becoming fully amortized during the period and the Company not acquiring 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 2022, 2021, or 2020.
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| Table of Contents |
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, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Interest (income) expense , net |
| $ | 36,220 |
|
| $ | 37,955 |
|
| $ | (14,062 | ) |
Foreign exchange loss (gain) |
|
| (15,340 | ) |
|
| 8,597 |
|
|
| (64,432 | ) |
Intellectual property and other |
|
| 16,933 |
|
|
| 20,988 |
|
|
| 10,402 |
|
Loss on disposal of assets lease modifications |
|
| 11,922 |
|
|
| - |
|
|
| - |
|
Total Other Expense (Income) |
|
| 49,735 |
|
|
| 67,540 |
|
|
| (68,092 | ) |
Interest (income) expense, net. This category of other expenses includes interest income earned on short-term investments netted, by interest expense from the financial liability related to the aircraft lease (up to February 2022) and long-term debt. Interest expense decreased in 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. 2021 interest (income) expense net decreased $52,017 versus 2020 as interest rates have decreased, less cash was held in short-term investments and interest expense was incurred for the HASCAP Loan.
Foreign exchange loss (gain). This category of other expenses includes losses and gains caused by changes in the relative currency exchange values of US$ and CDN$. The Company held net US$ liability at December 31, 2022 and significant net assets in US$ at December 31, 2021 and December 31, 2020, including accounts receivable, cash and cash equivalents, short-term investments, US$ lease obligations and the security deposit for the aircraft, all of which have an effect on the unrealized foreign exchange gain and loss. At December 31, 2022, the CDN$ to US$ exchange rate was 6.3% lower as compared to the CDN$ to US$ exchange rate at December 31, 2021, resulting in the corresponding foreign exchange gain for 2022. At December 31, 2021, the CDN$ to US$ exchange rate was slightly lower as compared to the CDN$ to US$ exchange rate at December 31, 2020, resulting in the corresponding foreign exchange loss for 2021. At December 31, 2020, the CDN$ strengthened as compared to the US$ at September 30, 2020, resulting in the corresponding foreign exchange loss for Q4-20. For YE-20 the foreign exchange gain was the result of weakening of the CDN$ versus the US$ from December 31, 2019 to March 31, 2020 and large US$ balances. This foreign exchange gain was reduced in the following three quarters as the CDN$ strengthened. US$ balances were also slowly reduced during each period in 2020. 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 2022, 2021 and 2020, 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 2022, 2021 or 2020.
At the end of 2022, 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 2041) and other resource deductions totaling approximately $9.14 million.
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| Table of Contents |
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
Q4-22 |
|
| Q3-22 |
|
| Q2-22 |
|
| Q1-22 |
| ||||||
|
| Dec 31, 2022 |
|
| Sep 30, 2022 |
|
| Jun 30, 2022 |
|
| Mar 31, 2022 |
| ||||
SFD® related revenue |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Net income (loss) |
|
| (1,469,549 | ) |
|
| (1,647,988 | ) |
|
| (1,774,671 | ) |
|
| (1,840,868 | ) |
Income (loss) per share - basic |
|
| (0.02 | ) |
|
| (0.03 | ) |
|
| (0.03 | ) |
|
| (0.03 | ) |
Income (loss) per share – diluted |
|
| (0.02 | ) |
|
| (0.03 | ) |
|
| (0.03 | ) |
|
| (0.03 | ) |
Q4-21 |
|
| Q3-21 |
|
| Q2-21 |
|
| Q1-21 |
| ||||||
|
| Dec 31, 2021 |
|
| Sep 30, 2021 |
|
| Jun 30, 2021 |
|
| Mar 31, 2021 |
| ||||
SFD® related revenue |
| $ | (10,123 | ) |
| $ | - |
|
| $ | 3,144,373 |
|
| $ | - |
|
Net income (loss) |
|
| (1,573,587 | ) |
|
| (1,434,442 | ) |
|
| 1,531,522 |
|
|
| (1,647,292 | ) |
Income (loss) per share - basic |
|
| (0.02 | ) |
|
| (0.02 | ) |
|
| 0.02 |
|
|
| (0.03 | ) |
Income (loss) per share – diluted |
|
| (0.02 | ) |
|
| (0.02 | ) |
|
| 0.02 |
|
|
| (0.03 | ) |
Significant or Unusual Items Impacting Net Income (Loss):
During Q4-22 costs were reduced primarily due to lower vacation and SBCE. In Q3-22 the Company incurred lower SFD®-related costs as the aircraft had early completed its required maintenance. In Q2-22 the Company recorded unrealized foreign exchange gains as the CDN$ weakened versus the US$. In Q1-22, the Company incurred maintenance fees on its aircraft to have it available for up to 300 flight hours. In Q4-21, the CEWS and the CERS programs were ended therefore increasing GA. In Q3-21, the Company recorded favourable exchange gains due to the strengthening of the US$. In Q2-21, revenue was recognized for a Pre-existing SFD® Data Sale. In Q1-21, costs were lower due to lower aircraft costs, a reduction in RSU accruals, and less fluctuation of exchange rates. Excluding Q2-21, the Company incurred net losses primarily due to incurred SFD®-related costs related to aircraft lease and aircraft maintenance costs, GA, and non-cash items like SBCE, which can be a significant expense in any given quarter. More specific details are provided below:
| · | in Q4-22, costs were reduced primarily due to lower vacation and SBCE; |
| · | in Q3-22, costs were reduced primarily due to lower SFD®-related costs offset partially by higher business development costs; |
| · | in Q2-22, the Company recorded unrealized foreign exchange gains as the CDN$ weakened versus the US$; |
| · | in Q1-22, the Company incurred maintenance fees on the leased aircraft to have it available for up to 300 flight hours; |
| · | in Q4-21, the Company received grants from the CEWS and CERS for only one month due to the termination of these programs; |
| · | in Q3-21, the US$ strengthened vs the CDN$, which resulted in a $102,632 exchange gain; |
| · | in Q2-21, revenue was earned for the Pre-existing SFD® Data Sale and costs were lower due to receipt of the CEWS and the CERS. Additionally there was no business development travel due to restrictions from the COVID-19 pandemic; and |
| · | in Q1-21, costs were lower due to lower aircraft costs, a reduction in RSU accruals, and less fluctuation of exchange rates. |
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| Table of Contents |
B. Liquidity and capital resources.
Going Concern
The audited consolidated financial statements for 2022 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.
The Company continues to defer payment of operating costs, including payroll and other general and administrative costs. Subsequent to December 31, 2022, the Company completed a Private Placement which resulted in raising an additional net proceeds of $1,658,280. Further financing options that may or may not be available to the Company include issuance of new equity, debentures or bank credit facilities. The need for any of these options will be dependent on the timing of securing new SFD®-related revenues and obtaining financing on terms that are acceptable to both the Company and the financier.
NXT continues to develop its pipeline of opportunities to secure new revenue contracts. However, the Company’s longer-term success remains dependent upon its ability to convert these opportunities into successful contracts, to continue to attract new client projects, expand its revenue base to a level sufficient to exceed fixed operating costs, and generate consistent positive cash flow from operations. The occurrence and timing of these events cannot be predicted with sufficient certainty.
The audited consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for the audited consolidated financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. These adjustments could be material.
NXT’s cash and cash equivalents at December 31, 2022 totaled $0.263 million. Net working capital totaled $(1.691) million. See the information in the section “Liquidity and Capital Resources – Net Working Capital” for further information.
Risks related to having sufficient ongoing net working capital to execute survey project contracts are mitigated through our normal practice of obtaining advance payments and progress payments from customers throughout the course of the projects, which often span three to four months. In addition, where possible, risk of default on client billings has been mitigated through the use of export insurance programs offered by Export Development Canada.
The Company does not have provisions in its leases, contracts, or other arrangements that would trigger additional funding requirements or early payments except that if the Company were to default on its office lease, the current month rent, plus the next three months, become immediately due. If the Company were to default on the aircraft lease, the Company would be required to deliver the aircraft back to the Lessor.
Rights Offering
On December 2, 2022, NXT closed the Rights Offering that had been announced on October 31, 2022. The Company issued 2,149,180 common shares a price of $0.18 per common share, for aggregate gross proceeds of $386,852. Share issue costs of $170,790 were recorded as a reduction to share capital.
Shareholders of record on November 7, 2022 received one right (a “Right”) for each common share held. 2.95 Rights entitles the holder to purchase one common share of the Company at a price of $0.18 per Common Share.
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Private Placement
On December 22 the Company announced 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 shares, for additional aggregate gross proceeds of approximately $1,659,450, less issuance costs of $1,170.
The proceeds from both Offerings are being used to commence SFD® surveys, and for general and administrative costs.
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 $(1,681,003) as at December 31, 2022 as follows:
|
| December 31, |
|
| December 31, |
|
| net change |
| |||
|
| 2022 |
|
| 2021 |
|
| in 2022 |
| |||
Current assets (current liabilities): |
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
| $ | 263,437 |
|
| $ | 2,257,855 |
|
| $ | (1,994,418 | ) |
Short-term investments |
|
| - |
|
|
| 550,000 |
|
|
| (550,000 | ) |
|
|
| 263,437 |
|
|
| 2,807,855 |
|
|
| (2,544,418 | ) |
Accounts receivable |
|
| 57,065 |
|
|
| 841,567 |
|
|
| (784,502 | ) |
Prepaid expenses and deposits |
|
| 36,157 |
|
|
| 265,436 |
|
|
| (229,279 | ) |
Accounts payable and accrued liabilities |
|
| (1,276,236 | ) |
|
| (500,625 | ) |
|
| (775,611 | ) |
Current portion of long-term debt |
|
| (111,111 | ) |
|
| (64,815 | ) |
|
| (46,296 | ) |
Current portion of lease obligation |
|
| (650,315 | ) |
|
| (532,936 | ) |
|
| (117,379 | ) |
Total Net Working Capital |
|
| (1,681,003 | ) |
|
| 2,816,482 |
|
|
| (4,497,485 | ) |
Net working capital at December 31, 2022 compared to December 31, 2021 decreased by $4,497,485, or 160%, due to cash used in operating activities, offset by cash received from payments on accounts receivable. Accounts payable increased due to annual timing of professional fees, payroll accruals, and the deferral of payments of various GA.
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.
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| Table of Contents |
Repayment of long-term debt principal and interest: |
|
|
| |
2023 |
| $ | 146,481 |
|
2024 |
|
| 142,037 |
|
2025 |
|
| 137,593 |
|
2026 |
|
| 133,148 |
|
2027 |
|
| 128,704 |
|
2028 to 2031 |
|
| 406,204 |
|
Total principal and interest payments |
|
| 1,094,167 |
|
Less interest |
|
| (158,982 | ) |
Total principal remaining |
|
| 935,185 |
|
Current portion of long-term debt |
|
| 111,111 |
|
Non-current portion of long-term debt |
|
| 824,074 |
|
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 |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Cash provided by (used in): |
|
|
|
|
|
|
|
|
| |||
Operating activities |
| $ | (2,934,004 | ) |
| $ | (1,033,173 | ) |
| $ | (3,407,101 | ) |
Financing activities |
|
| 389,217 |
|
|
| 875,428 |
|
|
| (173,616 | ) |
Investing activities |
|
| 550,000 |
|
|
| (274,049 | ) |
|
| 3,436,691 |
|
Effect of foreign rate changes on cash |
|
| 369 |
|
|
| (497 | ) |
|
| (24,073 | ) |
Net cash inflow (outflow) |
|
| (1,994,418 | ) |
|
| (432,291 | ) |
|
| (168,099 | ) |
Cash cash equivalents, start of the year |
|
| 2,257,855 |
|
|
| 2,690,146 |
|
|
| 2,858,245 |
|
Cash cash equivalents, end of the year |
|
| 263,437 |
|
|
| 2,257,855 |
|
|
| 2,690,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash cash equivalents |
|
| 263,437 |
|
|
| 2,257,855 |
|
|
| 2,690,146 |
|
Short-term investments |
|
| - |
|
|
| 550,000 |
|
|
| 341,261 |
|
Total |
|
| 263,437 |
|
|
| 2,807,855 |
|
|
| 3,031,407 |
|
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, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Comprehensive loss for the year |
| $ | (6,733,076 | ) |
| $ | (3,123,799 | ) |
| $ | (6,028,228 | ) |
Total non-cash expense items and lease items |
|
| 2,043,965 |
|
|
| 2,076,909 |
|
|
| 1,995,359 |
|
|
|
| (4,689,111 | ) |
|
| (1,046,890 | ) |
|
| (4,032,869 | ) |
Change in non-cash working capital balances |
|
| 1,755,107 |
|
|
| 13,717 |
|
|
| 625,768 |
|
Total cash provided by (used in) in operations |
|
| (2,934,004 | ) |
|
| (1,033,173 | ) |
|
| (3,407,101 | ) |
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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 GA 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
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.
2020 – In 2020, the financing activity was for payments on the finance liability and finance lease offset by employee contributions under the ESP Plan. In Q2-20, the Company terminated the finance lease for office equipment with a final payment of approximately $20,000.
Investing Activities
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.
2020 – Short-term investments decreased in 2020 as the Company used investments in Guaranteed Investment Certificates to fund operations.
C. Research and development, patents, and licenses, etc.
RD 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 RD 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 family. The objective of this project was to test, identify, and analyze the desired elements of the SFD® geothermal sensor response over known geothermal areas with the ultimate goal of providing a green upstream geophysical service for advancing renewable power initiatives in Canada and abroad. The agreed project work was completed in November 2021 with total funding of $50,000 from 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.
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Patents
In Q1-22, NXT announced its patent application in Brazil has been allowed. As of the date of this MDA, NXT has been granted SFD® patents in Brazil (February 2022), India (July 2021), Russia (January 2017), Japan (July 2017), Canada (August 2017), Mexico (September 2017), the United States (two patents were granted in November 2017 and September 2018, respectively), China (April 2018), and Europe (January 2020). In total, NXT has obtained SFD® patents or received patent allowances in 46 countries. These patents protect our proprietary SFD® technology and serve as independent third-party recognition of our technological invention in terms of practical applicability, conceptual novelty, and knowledge advancement.
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. At the date of this 20-F current external trends such as in commodity prices and the Ukrainian Russian War 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 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 consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the Company’s significant accounting policies. The estimates and assumptions used are based upon management’s best estimate as at the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period when determined. Actual results may differ from those estimates.
Certain estimates and judgments have a material impact where the assumptions underlying these accounting estimates relate to matters that are highly uncertain at the time the estimate or judgment is made or are subjective. In 2022 and 2021, the estimates and judgments included the assessment of impairment indicators of intellectual property.
The Company reviews intellectual property for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company considers both internal and external factors when assessing for potential indicators of impairment of its intellectual property, including the consideration of historical and forecasted SFD® related revenues, market capitalization, control premiums, and the SFD® related revenue multiples compared to industry peers. When indicators of impairment exist, the Company first compares the total of the estimated undiscounted future cash flows or the estimated sale price to the carrying value of an asset. If the carrying value exceeds these amounts, an impairment loss is recognized for the excess of the carrying value over the estimated fair value of the intellectual property.
Other accounting estimates and judgments that may have a material impact on the financial statements include: the forward looking assumptions related to the going concern assumption, the estimated useful lives of intellectual property and property, plant and equipment, and the assumptions used to measure stock based compensation expense.
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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.
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 MANAGEMENTAND 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 May 11, 2023, for our directors, and executive officer:
CHARLES SELBY
Director since January 2006 | Mr. Selby obtained a Bachelor of Science (Hons.) degree in Chemical Engineering from Queen’s University, a Juris Doctorate degree from the University of Calgary, and is a registered Professional Engineer and lawyer in the Province of Alberta. He previously practiced law for two large Canadian law firms, specializing in securities and international transactions primarily in the energy business. Mr. Selby served as Vice President of Pengrowth Corporation for almost 20 years participating in the growth of that entity to an enterprise value of more than $4 billion. He also has served as a director and officer of a number of reporting issuers in the oil and natural gas industry including Arakis Energy Corp., with operations in the Sudan. Since 2017 he is President and Director of Caledonian Midstream Corporation, a company that has natural gas and oil production together with a sour natural gas plant and infrastructure in the Alberta foothills and is also the CEO and a director of Wildcat Royalty Corporation.
Mr. Selby is the Lead Director of NXT. He is also Chair of the Compensation Committee and a member of the Disclosure, Management, and the Strategic Planning Committees.
|
JOHN TILSON
Director since February 2015 | After obtaining his Master of Business Administration degree from the University of Southern California and his Chartered Financial Analyst designation, Mr. Tilson had a distinguished career as an analyst, portfolio manager, and advisor in the US investment and financial industry with firms such as Sutro Company and EF Hutton Company. Mr. Tilson joined Roger Engemann Associates, Inc. in 1983 when assets under management were roughly US$160 million. During his tenure there, the Pasadena Group of Mutual Funds was started, with Pasadena Capital Corporation formed as the holding company for the mutual funds and investment management business. After working as an Analyst and Portfolio Manager, Mr. Tilson later became Executive Vice President Managing Director of Pasadena Capital Corporation. Assets under management had grown to over US$5 billion by the time the firm was sold to Phoenix Companies in 1997. Mr. Tilson later retired in 2005. |
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| From 2006 to 2012, Mr. Tilson was a member of the Board of Trustees, including three years serving as VP and Chairman of the Long-Range Planning Committee for Lotusland, a Santa Barbara non-profit organization established by Madame Ganna Walska.
Mr. Tilson is the Chair of the Strategic Planning Committee and Audit Committee, and a member of the Compensation Committee and the Governance Committee.
|
THOMAS E. VALENTINE
Director since November 2007 Corporate Secretary since April 2014 | Mr. Valentine is a Partner with Norton Rose Fulbright Canada LLP, where he has practiced law, both as a barrister and a solicitor, since being admitted to the Law Society of Alberta in 1987. He is a member of the firm’s Energy and Infrastructure Practice Group and is involved in energy-related matters throughout the Middle East, North Africa, the Commonwealth of Independent States, Asia and South America.
Mr. Valentine is Corporate Secretary of Touchstone Exploration Inc., and formerly was a director of two other Canadian public companies, Calvalley Petroleum Inc. (to May 2015) and Veraz Petroleum Ltd. (to December 2012).
Mr. Valentine holds a Bachelor of Arts degree from the University of British Columbia, a Bachelor of Laws degree from Dalhousie University, and a Master of Laws degree from the London School of Economics.
Mr. Valentine is the Chair of the Governance Committee and a member of the Compensation and Audit Committees. |
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BRUCE G. WILCOX
Director since June 2015
| Mr. Wilcox has had a long career as an investment company CEO, analyst and portfolio manager. He spent most of his career with Cumberland Associates, LLC, a New York equity fund, from 1986 through retirement in 2010, progressing from analyst / portfolio manager to partner (1989), and Chairman of the Management Committee (1997). Mr. Wilcox specialized in Cumberland’s investments in the energy industry (exploration and production and service companies), with an emphasis on value and long-term holdings. During his tenure, the fund’s assets under management ranged from US$0.7 billion to $1.5 billion.
From 1984 to 1986, Mr. Wilcox was with Central National-Gottesman, Inc. as an analyst and portfolio manager on a team responsible for a $500 million listed equity portfolio.
Mr. Wilcox was CEO of E Street Management, LLC from 2016 through 2020 which managed a long/short equity fund of funds. The E Street Fund ceased operations on December 31, 2020 to allow the principals to pursue other opportunities.
From January 2011 to present he has also been one of three managing members of Xiling Fund III, LLC, part of a series of private equity funds (US$100+ million) which specialize in investing in museum-quality Imperial Chinese porcelains, archaic bronzes and ink paintings.
Mr. Wilcox obtained a Bachelor of Arts (Honors), in Modern Chinese from the University of California, Santa Barbara (1977), and a Master of International Management from the American Graduate School of International Management in Phoenix (1980).
Mr. Wilcox is a member of several Boards, including the Teachers College of Colombia University (2003 to date, including acting as the Chair of the Investment Committee), the University of California Santa Barbara Foundation (2003 to date, including as former Chair of the Board of Trustees, Investment and Finance Committees), and is a Trustee (2001 to date) of the Manhattan Institute For Policy Research, a leading urban, state, and national policy institution, which works on matters such as energy policy.
Mr. Wilcox is a member of the Audit, Disclosure, Governance, Strategic Planning and Management Committees.
|
GERRY SHEEHAN
Director since July 2021
| Mr. Sheehan has worked continuously in international oil and gas exploration, development, and production for over 38 years. He has broad technical and business development experience in Africa South Asia and Europe.
Mr. Sheehan began his career in 1982 as a geophysicist working with the British National Oil Corporation (BNOC), after privatization becoming Britoil plc. He evaluated acreage in the UK, Dutch, Danish, Irish and Norwegian sectors. In 1986 he transferred to the BNOC Houston office as a technical auditor. He was later seconded to the Global Basin Evaluation Team, focusing on Africa and Asia.
In 1987 Mr. Sheehan joined the fledgling oil company Tullow Oil plc. as part of the founding technical team. The company was successful in Senegal on a World Bank sponsored gas to power project. New acreage was secured in the UK onshore, Pakistan, Syria and Yemen, with follow-on successful exploration and field development projects. |
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| From 1992 to 1998, Mr. Sheehan held the position of Chief Geophysicist. The company enjoyed ongoing successes in South Asia culminating in the discovery and development of the 1 TCF-sized Bangora gas field in Bangladesh, operated on behalf of Texaco and Chevron. His project team also deployed on the successful re-development of the offshore Espoir field in Cote d’Ivoire, West Africa, with partners Canadian Natural Resources and Addax Petroleum.
From 1998 to 2006 he held the post of International Exploration Manager, this role also encompassed a business development responsibility. This was a time of rapid growth and expansion in the company with new assets acquired in West Africa, North Africa, Central and Eastern Europe and South Asia. In 2004, Mr. Sheehan led the technical due-diligence team on the corporate acquisition of Energy Africa plc. The enlarged company rapidly expanded its footprint in Africa with notable oil exploration successes in Ghana and Uganda, both countries now seen as significant oil provinces.
In 2007 Mr. Sheehan founded a private company, Blackstairs Energy. The company acquired oil field rehabilitation projects in Romania, and exploration acreage in Armenia and Senegal. The company also undertook technical and commercial asset evaluations on behalf of third parties.
In 2014 Mr. Sheehan was a founder of T5 Oil Gas, a private London-based oil and gas company. T5 is a license 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).
|
EUGENE WOYCHYSHYN
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.
Mr. Woychyshyn is a member of the Disclosure and Management Committees.
|
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None of the directors or executive officers is, or has been in the last ten years, a director, chief executive officer or chief financial officer of any company that: (i) was subject to a cease trade or similar 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 was acting in that capacity; (ii) was subject to such an order that was issued after the proposed director ceased to be a director, chief executive officer 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 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, other than as discussed below.
None of the directors or executive officers has, within the last ten years, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold their assets.
Messrs. Tilson and Valentine are considered “independent” within the meaning of Canadian securities law.
B. Compensation
Executive Compensation
The following table sets out certain information regarding the annual and long‑term compensation of the former Chief Executive Officer, the Chief Financial Officer at December 31, 2022, as well as any additional individuals for whom disclosure would have been provided pursuant to the above criteria except that the individual was not serving as an officer of the Company at the end of 2022. All officers of the Company are based in the Calgary, Canada head office and are paid in Canadian dollars.
Summary compensation table for the year ended December 31, 2022:
Name Principal Position |
| Salary (3) |
|
| Share-based rewards (1) |
|
| Other (2) |
|
| Total |
| ||||
George Liszicasz, President CEO |
| $ | 309,804 |
|
| $ | 2,272 |
|
| $ | 15,400 |
|
| $ | 327,476 |
|
Eugene Woychyshyn, VP of Finance CFO |
| $ | 180,000 |
|
| $ | 13,200 |
|
| $ | 1,786 |
|
| $ | 194,986 |
|
(1) Share-based rewards represents the Company match to the executive’s contribution to the ESP Plan. (2) “Other” consists of any vehicle allowance paid ($9,000 for Mr. Liszicasz) plus the taxable portion of company paid amounts for group health benefits. (3) Accrued salary. |
(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.
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.
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In 2022, the directors’ fees were not paid in cash. Mr. Tilson, Mr. Selby, Mr. Wilcox and Mr. Valentine elected to receive all or part of their compensation in stock options. Any compensation not received as stock options has been deferred as part of the Company’s cash retention strategy. The annual retainer was based on $30,000 ($35,000 in the case of the Chairman of the Audit Committee). Total compensation payable for 2022 is summarized as follows:
|
| 2022 |
| |
Charles Selby |
| $ | 30,000 |
|
Bruce G. Wilcox |
|
| 35,000 |
|
Tom Valentine |
|
| 30,000 |
|
John Tilson |
|
| 30,000 |
|
Frank Ingriselli(1) |
|
| 30,000 |
|
Gerry Sheehan |
|
| 30,000 |
|
(1) Mr. Ingriselli resigned from the Board effective January 20, 2023.
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.
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.
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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
Messrs. Valentine (Chair), Wilcox and Tilson are the current members of the Corporate Governance Committee. Messrs. Valentine and Tilson 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. Tilson (Chair), Wilcox and Selby are the current members of the Strategic Planning Committee. Mr. Tilson is independent within the meaning of Canadian National Instrument 58-101.
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.
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AUDIT COMMITTEE
Composition of the Audit Committee
The Audit Committee consists of Messrs. Tilson (Chair), Wilcox, and Valentine. Mr. Tilson and Mr. Valentine are independent within the meaning of Canadian National Instrument 58-101. Mr. Tilson and Mr. Wilcox are 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.
Bruce G. Wilcox
Mr. Wilcox holds a Master of International Management from the American Graduate School of International Management in Phoenix. His career as an investment company CEO, analyst and portfolio manager was spent primarily with Cumberland Associates, LLC, and a New York equity fund, where he was a partner, and served as Chairman of the Managing Committee. He has previously served as audit committee chair of a publicly traded company.
Thomas Valentine
Mr. Valentine is a lawyer. He has practiced law, both as a barrister and a solicitor, since being admitted to the Law Society of Alberta in 1987. He is a member of his firm’s Energy and Infrastructure Practice Group and is involved in energy-related matters throughout the Middle East, North Africa, the Commonwealth of Independent States, Asia and South America.
John Tilson
Mr. Tilson is retired, and after obtaining MBA and CFA designations, had a distinguished career as an analyst, portfolio manager, and advisor in the US investment and financial industry with such firms as Sutro Company and EF Hutton Company.
Mr. Tilson and Mr. Wilcox of the Audit Committee have the educational background and experience that provides them with the knowledge and ability to understand accounting policies and related financial reporting and disclosure issues, in order to fulfill their duties and responsibilities as an Audit Committee member. Mr. Valentine intends to meet the requirements to become financially literate.
Given the passing of Mr. Liszicasz and the establishment of the management committee, on a temporary basis and in exceptional circumstances, National Instrument 52-110 permits the conduct of business by an Audit Committee which does not meet the requirement that the Audit Committee be fully independent provided that a majority of the Committee satisfy the test of independence. With Mr. Tilson and Mr. Valentine being independent, the Audit Committee meets this requirement.
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.
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. |
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COMPENSATION COMMITTEE
Composition of the Compensation Committee
Messrs. Selby (Chair), and Tilson and Valentine are members of the Compensation Committee. Mr. Tilson and Mr. Valentine of the Compensation Committee are independent within the meaning of Canadian National Instrument 58-101. The charter or mandate of the Compensation Committee 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 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, 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.
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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.
Fiscal year ended December 31, 2020
As of the fiscal year ended December 31, 2020, we had a total of 11 employees. NXT had 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, 2020:
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.
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.
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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 25, 2020. 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 25, 2020. 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 2022, 2021 and 2020 the Company has elected to issue common shares from treasury.
The following stock options, RSUs, ESP Plan matches and DSUs were granted to NXT’s executive officers and directors in the three prior fiscal years ended December 31, 2022, 2021, and 2020 and to date to May 11, 2023.
To May 11, 2023:
| · | A total of 285,050 stock options with an average exercise price of $0.254 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; and |
| · | A total of 22,565 common shares were matched by the Company through the ESP Plan for executive officers for the year to date period ended May 11, 2023. |
| 48 |
| Table of Contents |
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. |
In 2020:
| · | A total of 16,000 stock options with and exercise price of $0.51 per common share were earned by a director of the Company in lieu of director fees; |
| · | A total of 280,000 RSUs were granted for the year ending December 31, 2020 to officers of the Company; |
| · | A total of 37,354 DSUs were earned by a director of the Company in lieu of director fees; and |
| · | A total of 8,330 common shares were matched by the Company through the ESP Plan for executive officers for the year ended December 31, 2020. |
The following table sets forth information regarding outstanding stock options which have been granted to our directors and officers as of May 11, 2023. 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.
| 49 |
| Table of Contents |
Issued and outstanding stock options held by directors and officers of the Company (as of May 11, 2023)
|
|
|
|
| Option |
| Option |
| # of |
|
| % of total |
| |||
Name and |
| Exercise |
|
| Grant |
| Expiry |
| options |
|
| outstanding |
| |||
Position |
| Price |
|
| Date |
| Date |
| held |
|
| options |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Charles Selby |
| $0.216 |
|
| 06-Jan-23 |
| 06-Jan-28 |
|
| 100,000 |
|
|
|
| ||
Lead Director |
| $0.264 |
|
| 11-Jan-23 |
| 11-Jan-28 |
|
| 177,200 |
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
| 277,200 |
|
|
| 10.3% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerry Sheehan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director |
| $0.216 |
|
| 06-Jan-23 |
| 06-Jan-28 |
|
| 100,000 |
|
|
| 3.7% | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| 336,520 |
|
|
| 12.5% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Valentine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director |
| $0.216 |
|
| 06-Jan-23 |
| 06-Jan-28 |
|
| 100,000 |
|
|
| 3.7% | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
| 5.7% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eugene Woychyshyn |
| $0.216 |
|
| 06-Jan-23 |
| 06-Jan-28 |
|
| 250,000 |
|
|
|
|
| |
VP Finance CFO |
| $0.59 |
|
| 01-Nov-18 |
| 01-Nov-23 |
|
| 150,000 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| 400,000 |
|
|
| 14.8% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of stock options held by officers and directors |
|
|
|
| 1,366,370 |
|
|
| 50.7% | |||||||
Issued and outstanding RSUs held by directors and officers of the Company (as of May 11, 2023)
|
| RSU |
| RSU |
|
|
| % of total |
| |||
Name and |
| Grant |
| Expiry |
| Outstanding |
|
| Outstanding |
| ||
Position |
| Date |
| Date |
| RSUs |
|
| RSUs |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Eugene Woychyshyn |
| 25-Aug-20 |
| 25-Aug-23 |
|
| 41,666 |
|
|
|
| |
VP Finance CFO |
|
|
|
|
|
| 41,666 |
|
|
| 14.0% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of RSUs held by officers |
|
|
|
|
| 41,666 |
|
|
| 14.0% | ||
Issued and outstanding DSUs held by directors of the Company (as of May 11, 2023)
Charles Selby has 37,354 DSUs at May 11, 2023.
F. Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation
Not applcable.
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 May 11, 2023 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 May 11, 2023 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 77,626,886 common shares issued and outstanding as of May 11, 2023. This total of 77,626,886 excludes all outstanding options that are exercisable within 60 days of May 11, 2023 (which is adjusted for each individual’s % purposes as noted in footnote 4 below).
Beneficial Ownership of Directors and Officers (“DO”) | Beneficially Owned as at May 11, 2023 |
|
| Percent of Common Shares 5 |
| |||
|
|
|
|
|
|
| ||
Directors and Officers: |
|
|
|
|
|
| ||
Charles Selby 1 |
|
| 585,361 |
|
| * 3 | ||
Gerry Sheehan1 |
|
| 77,000 |
|
| * 3 | ||
John Tilson1 |
|
| 7,124,010 |
|
|
| 8.85 | % |
Bruce G. Wilcox 1 |
|
| 552,655 |
|
| * 3 | ||
Eugene Woychyshyn2 |
|
| 718,723 |
|
| * 3 | ||
Total D O Common Shares |
|
| 9,057,749 |
|
|
| 10.84 | % |
Major Shareholders ( 5%): |
|
|
|
|
|
|
|
|
AGV |
|
| 6,764,945 |
|
|
| 8.71 | % |
Estate of George Liszicasz |
|
| 14,005,168 |
|
|
| 18.04 | % |
MCAPM, LP and Michael Mork4 |
| 14,921,233 |
|
| 19.22 | % | ||
| 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 that they hold which are or will become exercisable within 60 days of May 11, 2023 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 individual calculations as follows: |
| 50 |
| Table of Contents |
|
| common |
|
| vested |
|
|
|
| |||
|
| shares |
|
| exercisable |
|
| Pro forma |
| |||
|
| held |
|
| options |
|
| total |
| |||
Selby |
|
| 408,161 |
|
|
| 177,200 |
|
|
| 585,361 |
|
Sheehan |
|
| 77,000 |
|
|
| - |
|
|
| 77,000 |
|
Tilson |
|
| 6,887,490 |
|
|
| 236,520 |
|
|
| 7,124,010 |
|
Wilcox |
|
| 500,005 |
|
|
| 52,650 |
|
|
| 552,655 |
|
Woychyshyn |
|
| 568,723 |
|
|
| 150,000 |
|
|
| 718,723 |
|
|
|
| 8,441,379 |
|
|
| 616,370 |
|
|
| 9,057,749 |
|
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. | Mr. Michael P. Mork and MCAPM LP acquired 8,750,000 common shares through the Private Placement between December 23, 2022 and January 11, 2023. |
| 2. | John Tilson acquired 351,282 common shares through the Private Placement on December 23, 2022. |
| 3. | 300,000 common shares, which were issued in December 2021 to Mr. Liszicasz for the Acquisition. See Item 4.B; |
| 4. | Since December 2020, Mr. Liszicasz acquired 50,040 common shares through the ESP Plan. |
| 5. | Since August 2021, Mr. Liszicasz acquired 97,844 common shares through the RSU Plan. |
| 6. | 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. |
| 7. | Since May 22, 2020 Mr. Tilson has gifted 635,500 NXT common shares. |
| 8. | Since August 17, 2021 Mr. Tilson acquired common shares in acquisitions on the public markets. |
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 majority 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 five directors at May 11, 2023 of the Company are Canadian citizens. 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, 2022 through the current date, May 11, 2023:
| · | 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 this period; and |
|
|
|
| · | 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 2022, NXT incurred legal costs of $92,308 with this firm, for which a total of $76,843 is included in accounts payable as at December 31, 2022. Norton Rose Fulbright continues to provide legal services to NXT. In 2023, as of the report date, total fees incurred are approximately $42,000 for which $43,000 is still outstanding. |
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| Table of Contents |
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 KPMG LLP (“KPMG”) 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, 2022 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.
Dividend Policy
The Company does not pay dividends.
B. Significant Changes.
As of May 11, 2023, two subsequent events have occurred subsequent to the date of consolidated financial statements for the year ended December 31, 2022:
| · | On December 22, 2022 the Company announced 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 shares, for additional aggregate gross proceeds of approximately $1,659,450, less issuance costs of $1,170. |
|
|
|
| · | On January 6, 2023 the Company announced the grant of 2,050,000 incentive stock options at a price of $0.216 to employees, officers and directors. These incentive stock options will vest upon receipt of cash for SFD® services performed: 1/3 upon collection of US$6.5 million, 1/3 upon the collection of the next US$7.0 million and the final 1/3 upon collection of an additional US$7.5 million. |
NXT’s interim unaudited consolidated financial statements for the 3-month period ended March 31, 2023 are planned to be released on or about May 15, 2023.
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.
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| Table of Contents |
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”.
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.
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.
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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.
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
Preferred shares may be issued from time to time in one or more series. The Board of NXT is expressly authorized to provide by resolution duly adopted prior to issuance, for the creation of each such series and to fix the designation, rights, privileges, restrictions and conditions attached to the shares of each such series, including the rate or amount of dividends or the method of calculating dividends, the dates of payment of dividends, the redemption, purchase and/or conversion prices and terms and conditions of redemption, purchase and/or conversion, and any sinking fund or other provisions.
The preferred shares of each series shall, with respect to the payment of dividends and the distribution of assets or return of capital in the event of liquidation, dissolution or winding-up of NXT, whether voluntary or involuntary, or any other return of capital or distribution of the assets of NXT among its shareholders for the purpose of winding up its affairs, rank on a parity with the preferred shares of every other series and be entitled to preference over the common shares and over any other shares of NXT, if any, ranking junior to the preferred shares. The preferred shares of any series may also be given other preferences, not inconsistent with the articles of continuance of NXT (the “Articles”), over the common shares and any other shares of NXT ranking junior to the preferred shares of a series as may be fixed by the Board of NXT.
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If any cumulative dividends or amounts payable on the return of capital in respect of a series of preferred shares are not paid in full, all series of preferred shares shall participate rateably in respect of accumulated dividends and return of capital.
Unless the Board of NXT otherwise determine in the articles of amendment designating a series of preferred shares, the holder of each share of a series of preferred shares shall not, as such, be entitled to receive notice of or vote at any meeting of shareholders, except as otherwise specifically provided in the ABCA.
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. |
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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.
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.
D. Exchange controls.
There are no governmental laws, decrees or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends or other payments to non-residents. Dividends paid to U.S. residents, however, are subject to a 15% withholding tax or a 5% withholding tax for dividends if the shareholder is a corporation owning at least 10% of the outstanding voting shares of NXT pursuant to Article X of the reciprocal tax treaty between Canada and the U.S.
Except as provided in the ICA, which has provisions that restrict the holding of voting shares by non-Canadians, there are no limitations specific to the rights of non-Canadians to hold or vote the common shares under the laws of Canada or the Province of Alberta, or in the charter documents of NXT or its subsidiaries.
Management of NXT believes that the following summary fairly describes those provisions of the ICA pertinent to an investment in NXT by a person who is not a Canadian resident (a “non-Canadian”).
The ICA requires a non-Canadian making an investment which would result in the acquisition of control of a Canadian business (i.e. the gross value of the assets of which exceed a certain monetary threshold) to identify, notify, or file an application for review with the Investment Review Division of Industry Canada (“IRD”).
The notification procedure involves a brief statement of information about the investment on a prescribed form which is required to be filed with the IRD by the investor at any time up to 30 days following implementation of the investment. It is intended that investments requiring only notification will proceed without government intervention unless the investment is in a specific type of business activity related to Canada’s cultural heritage and national identity.
If an investment is reviewable under the ICA, an application for review in the form prescribed is normally required to be filed with the IRD prior to the investment taking place and the investment may not be implemented until the review has been completed and the Minister of Industry Canada (the “Minister”) (the Minister responsible for Investment Canada) is satisfied that the investment is likely to be of net benefit to Canada. The Minister has up to 75 days to make this determination. If the Minister is not satisfied that the investment is likely to be of net benefit to Canada, the non-Canadian must not implement the investment or, if the investment has been implemented, may be required to divest himself of control of the business that is the subject of the investment.
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The following investments by non-Canadians are subject to notification under the ICA:
| 1. | An investment to establish a new Canadian business; and |
| 2. | An investment to acquire control of a Canadian business that is not reviewable pursuant to the Act. |
The following investments by a non-Canadian are subject to review under the ICA:
1. | An investment is reviewable if there is an acquisition of a Canadian business and the asset value of the Canadian business being acquired equals or exceeds the following thresholds: |
| (a) | For non-World Trade Organization (“WTO”) investors, the threshold is $5 million for a direct acquisition and $50 million for an indirect acquisition; the $5 million threshold will apply however for an indirect acquisition if the asset value of the Canadian business being acquired exceeds 50% of the asset value of the global transaction; |
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| (b) | Except as specified in paragraph (c) below, a threshold is calculated annually for reviewable direct acquisitions by or from WTO investors. The threshold for 2012 was $330 million. Pursuant to Canada’s international commitments, indirect acquisitions by or from WTO investors are not reviewable; |
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| (c) | The limits set out in paragraph (a) apply to all investors for acquisitions of a Canadian business that: |
| (i) | engages in the production of uranium and owns an interest in a producing uranium property in Canada; |
| (ii) | provides any financial service; |
| (iii) | provides any transportation services; or |
| (iv) | is a cultural business. |
Notwithstanding the above, any investment which is usually only notifiable, including the establishment of a new Canadian business, and which falls within a specific business activity, including the publication and distribution of books, magazines, newspapers, film or video recordings, audio or video music recordings, or music in print or machine-readable form may be reviewed if an Order-in-Council directing a review is made and a notice is sent to the investor within 21 days following the receipt of a certified complete notification.
Generally speaking, an acquisition is direct if it involves the acquisition of control of the Canadian business or of its direct or indirect Canadian parent and an acquisition is indirect if it involves the acquisition of control of a non-Canadian direct or indirect parent of an entity carrying on the Canadian business. No change of voting control will be deemed to have occurred if less than one-third of the voting control of a Canadian corporation is acquired by an investor.
A WTO investor, as defined in the ICA, includes an individual who is a national of a member country of the WTO or who has the right of permanent residence in relation to that WTO member, a government or government agency of a WTO investor-controlled corporation, a limited partnership, trust or joint venture that is neither WTO-investor controlled or Canadian controlled of which two-thirds of its Board, general partners or trustees, as the case may be, are any combination of Canadians and WTO investors.
The ICA exempts certain transactions from the notification and review provisions of ICA, including, among others, (a) an acquisition of voting shares if the acquisition were made in the ordinary course of that person’s business as a trader or dealer in securities; (b) an acquisition of control of the Company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the ICA; (c) the acquisition of voting interests by any person in the ordinary course of a business carried on by that person that consists of providing, in Canada, venture capital on terms and conditions not inconsistent with such terms and conditions as may be fixed by the Minister; and (d) acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control in fact of the Company, through the ownership of voting interests, remains unchanged.
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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.
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.
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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.
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 a PFIC for its most recently completed tax year and, based on current business plans and financial expectations, the Company believes that it may be a PFIC for its current tax year and may be a PFIC in future tax years. 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.
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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. In addition to penalties, 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 from 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.
For purposes of the income test and asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, the Company will be treated as if the Company (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the income test and asset test described above, and assuming certain other requirements are met, “passive income” does not include certain interest, dividends, rents, or royalties that are received or accrued by the Company from certain “related persons” (as defined in Section 954(d)(3) of the Code) also organized in Canada, to the extent such items are properly allocable to the income of such related person that is not passive income.
Under certain attribution rules, if the Company is a PFIC, U.S. Holders will generally be deemed to own their proportionate share of the Company’s direct or indirect equity interest in any company that is also a PFIC (a “Subsidiary PFIC”), and will generally be subject to U.S. federal income tax on their proportionate share of (a) any “excess distributions,” as described below, on the stock of a Subsidiary PFIC and (b) a disposition or deemed disposition of the stock of a Subsidiary PFIC by the Company or another Subsidiary PFIC, both as if such U.S. Holders directly held the shares of such Subsidiary PFIC. In addition, U.S. Holders may be subject to U.S. federal income tax on any indirect gain realized on the stock of a Subsidiary PFIC on the sale or disposition of common shares. Accordingly, U.S. Holders should be aware that they could be subject to tax under the PFIC rules even if no distributions are received and no redemptions or other dispositions of common shares are made.
Default PFIC Rules under Section 1291 of the Code
If the Company is a PFIC for any tax year during which a U.S. Holder owns common shares, the U.S. federal income tax consequences to such U.S. Holder of the acquisition, ownership, and disposition of common shares will depend on whether and when such U.S. Holder makes an election to treat the Company and each Subsidiary PFIC, if any, as a “qualified electing fund” or “QEF” under Section 1295 of the Code (a “QEF Election”) or makes a mark-to-market election under Section 1296 of the Code (a “Mark-to-Market Election”). A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a “Non-Electing U.S. Holder”.
A Non-Electing U.S. Holder will be subject to the rules of Section 1291 of the Code (described below) with respect to: (a) any gain recognized on the sale or other taxable disposition of common shares; and (b) any “excess distribution” received on the common shares. A distribution generally will be an “excess distribution” to the extent that such distribution (together with all other distributions received in the current tax year) exceeds 125% of the average distributions received during the three preceding tax years (or during a U.S. Holder’s holding period for the common shares, if shorter).
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Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of common shares (including an indirect disposition of the stock of any Subsidiary PFIC), and any “excess distribution” received on common shares or with respect to the stock of a Subsidiary PFIC, must be ratably allocated to each day in a Non-Electing U.S. Holder’s holding period for the respective common shares. The amount of any such gain or excess distribution allocated to the tax year of disposition or distribution of the excess distribution and to years before the entity became a PFIC, if any, would be taxed as ordinary income (and not eligible for certain preferred rates). The amounts allocated to any other tax year would be subject to U.S. federal income tax at the highest tax rate applicable to ordinary income in each such year, and an interest charge would be imposed on the tax liability for each such year, calculated as if such tax liability had been due in each such year. A Non-Electing U.S. Holder that is not a corporation must treat any such interest paid as “personal interest,” which is not deductible.
If the Company is a PFIC for any tax year during which a Non-Electing U.S. Holder holds common shares, the Company will continue to be treated as a PFIC with respect to such Non-Electing U.S. Holder, regardless of whether the Company ceases to be a PFIC in one or more subsequent tax years. A Non-Electing U.S. Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules of Section 1291 of the Code discussed above), but not loss, as if such common shares were sold on the last day of the last tax year for which the Company was a PFIC.
QEF Election
A U.S. Holder that makes a timely and effective QEF Election for the first tax year in which the holding period of its common shares begins generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to its common shares. A U.S. Holder that makes a timely and effective QEF Election will be subject to U.S. federal income tax on such U.S. Holder’s pro rata share of (a) the net capital gain of the Company, which will be taxed as long-term capital gain to such U.S. Holder, and (b) the ordinary earnings of the Company, which will be taxed as ordinary income to such U.S. Holder. Generally, “net capital gain” is the excess of (a) net long-term capital gain over (b) net short-term capital loss, and “ordinary earnings” are the excess of (a) “earnings and profits” over (b) net capital gain. A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such amounts for each tax year in which the Company is a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by the Company. However, for any tax year in which the Company is a PFIC and has no net income or gain, U.S. Holders that have made a QEF Election would not have any income inclusions as a result of the QEF Election. If a U.S. Holder that made a QEF Election has an income inclusion, such a U.S. Holder may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge. If such U.S. Holder is not a corporation, any such interest paid will be treated as “personal interest,” which is not deductible.
A U.S. Holder that makes a timely and effective QEF Election with respect to the Company generally (a) may receive a tax-free distribution from the Company to the extent that such distribution represents “earnings and profits” of the Company that were previously included in income by the U.S. Holder because of such QEF Election and (b) will adjust such U.S. Holder’s tax basis in the common shares to reflect the amount included in income or allowed as a tax-free distribution because of such QEF Election. In addition, a U.S. Holder that makes a QEF Election generally will recognize capital gain or loss on the sale or other taxable disposition of common shares.
The procedure for making a QEF Election, and the U.S. federal income tax consequences of making a QEF Election, will depend on whether such QEF Election is timely. A QEF Election will be treated as “timely” if such QEF Election is made for the first year in the U.S. Holder’s holding period for the common shares in which the Company was a PFIC. A U.S. Holder may make a timely QEF Election by filing the appropriate QEF Election documents at the time such U.S. Holder files a U.S. federal income tax return for such year. If a U.S. Holder does not make a timely and effective QEF Election for the first year in the U.S. Holder’s holding period for the common shares, the U.S. Holder may still be able to make a timely and effective QEF Election in a subsequent year if such U.S. Holder meets certain requirements and makes a “purging” election to recognize gain (which will be taxed under the rules of Section 1291 of the Code discussed above) as if such common shares were sold for their fair market value on the day the QEF Election is effective. If a U.S. Holder makes a QEF Election but does not make a “purging” election to recognize gain as discussed in the preceding sentence, then such U.S. Holder shall be subject to the QEF Election rules and shall continue to be subject to tax under the rules of Section 1291 discussed above with respect to its common shares. If a U.S. Holder owns PFIC stock indirectly through another PFIC, separate QEF Elections must be made for the PFIC in which the U.S. Holder is a direct shareholder and the Subsidiary PFIC for the QEF rules to apply to both PFICs.
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A QEF Election will apply to the tax year for which such QEF Election is timely made and to all subsequent tax years, unless such QEF Election is invalidated or terminated or the IRS consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent tax year, the Company ceases to be a PFIC, the QEF Election will remain in effect (although it will not be applicable) during those tax years in which the Company is not a PFIC. Accordingly, if the Company becomes a PFIC in another subsequent tax year, the QEF Election will be effective and the U.S. Holder will be subject to the QEF rules described above during any subsequent tax year in which the Company qualifies as a PFIC.
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. Thus, U.S. Holders may not be able to make a QEF Election with respect to their common shares. Each U.S. Holder should consult its own tax advisors regarding the availability of, and procedure for making, a QEF Election.
A U.S. Holder makes a QEF Election by attaching a completed IRS Form 8621, including a PFIC Annual Information Statement, to a timely filed United States federal income tax return. However, if the Company does not provide the required information with regard to the Company or any of its Subsidiary PFICs, U.S. Holders will not be able to make a QEF Election for such entity and will continue to be subject to the rules of Section 1291 of the Code discussed above that apply to Non-Electing U.S. Holders with respect to the taxation of gains and excess distributions.
Mark-to-Market Election
A U.S. Holder may make a Mark-to-Market Election only if the common shares are marketable stock. The common shares generally will be “marketable stock” if the common shares are regularly traded on (a) a national securities exchange that is registered with the SEC, (b) the national market system established pursuant to section 11A of the U.S. Exchange Act, or (c) a foreign securities exchange that is regulated or supervised by a governmental authority of the country in which the market is located, provided that (i) such foreign exchange has trading volume, listing, financial disclosure, and surveillance requirements, and meets other requirements and the laws of the country in which such foreign exchange is located, together with the rules of such foreign exchange, ensure that such requirements are actually enforced and (ii) the rules of such foreign exchange effectively promote active trading of listed stocks. If such stock is traded on such a qualified exchange or other market, such stock generally will be “regularly traded” for any calendar year during which such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. Each U.S. Holder should consult its own tax advisor in this matter.
A U.S. Holder that makes a Mark-to-Market Election with respect to its common shares generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to such common shares. However, if a U.S. Holder does not make a Mark-to-Market Election beginning in the first tax year of such U.S. Holder’s holding period for the common shares for which the Company is a PFIC and such U.S. Holder has not made a timely QEF Election, the rules of Section 1291 of the Code discussed above will apply to certain dispositions of, and distributions on, the common shares.
A U.S. Holder that makes a Mark-to-Market Election will include in ordinary income, for each tax year in which the Company is a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the common shares, as of the close of such tax year over (b) such U.S. Holder’s adjusted tax basis in such common shares. A U.S. Holder that makes a Mark-to-Market Election will be allowed a deduction in an amount equal to the excess, if any, of (a) such U.S. Holder’s adjusted tax basis in the common shares, over (b) the fair market value of such common shares (but only to the extent of the net amount of previously included income as a result of the Mark-to-Market Election for prior tax years).
A U.S. Holder that makes a Mark-to-Market Election generally also will adjust such U.S. Holder’s tax basis in the common shares to reflect the amount included in gross income or allowed as a deduction because of such Mark-to-Market Election. In addition, upon a sale or other taxable disposition of common shares, a U.S. Holder that makes a Mark-to-Market Election will recognize ordinary income or ordinary loss (not to exceed the excess, if any, of (a) the amount included in ordinary income because of such Mark-to-Market Election for prior tax years over (b) the amount allowed as a deduction because of such Mark-to-Market Election for prior tax years). Losses that exceed this limitation are subject to the rules generally applicable to losses provided in the Code and Treasury Regulations.
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A U.S. Holder makes a Mark-to-Market Election by attaching a completed IRS Form 8621 to a timely filed United States federal income tax return. A Mark-to-Market Election applies to the tax year in which such Mark-to-Market Election is made and to each subsequent tax year, unless the common shares cease to be “marketable stock” or the IRS consents to revocation of such election. Each U.S. Holder should consult its own tax advisors regarding the availability of, and procedure for making, a Mark-to-Market Election.
Although a U.S. Holder may be eligible to make a Mark-to-Market Election with respect to the common shares, no such election may be made with respect to the stock of any Subsidiary PFIC that a U.S. Holder is treated as owning, because such stock is not marketable. Hence, the Mark-to-Market Election will not be effective to avoid the application of the default rules of Section 1291 of the Code described above with respect to deemed dispositions of Subsidiary PFIC stock or excess distributions from a Subsidiary PFIC to its shareholder.
Other PFIC Rules
Under Section 1291(f) of the Code, the IRS has issued proposed Treasury Regulations that, subject to certain exceptions, would cause a U.S. Holder that had not made a timely QEF Election to recognize gain (but not loss) upon certain transfers of common shares that would otherwise be tax-deferred (e.g., gifts and exchanges pursuant to corporate reorganizations). However, the specific U.S. federal income tax consequences to a U.S. Holder may vary based on the manner in which common shares are transferred.
If finalized in their current form, the proposed Treasury Regulations applicable to PFICs would be effective for transactions occurring on or after April 1, 1992. Because the proposed Treasury Regulations have not yet been adopted in final form, they are not currently effective, and there is no assurance that they will be adopted in the form and with the effective date proposed. Nevertheless, the IRS has announced that, in the absence of final Treasury Regulations, taxpayers may apply reasonable interpretations of the Code provisions applicable to PFICs and that it considers the rules set forth in the proposed Treasury Regulations to be reasonable interpretations of those Code provisions. The PFIC rules are complex, and the implementation of certain aspects of the PFIC rules requires the issuance of Treasury Regulations which in many instances have not been promulgated and which, when promulgated, may have retroactive effect. U.S. Holders should consult their own tax advisors about the potential applicability of the proposed Treasury Regulations.
Certain additional adverse rules may apply with respect to a U.S. Holder if the Company is a PFIC, regardless of whether such U.S. Holder makes a QEF Election. For example, under Section 1298(b)(6) of the Code, a U.S. Holder that uses common shares as security for a loan will, except as may be provided in Treasury Regulations, be treated as having made a taxable disposition of such common shares.
In addition, a U.S. Holder who acquires common shares from a decedent will not receive a “step up” in tax basis of such common shares to fair market value unless such decedent had a timely and effective QEF Election in place.
Special rules also apply to the amount of foreign tax credit that a U.S. Holder may claim on a distribution from a PFIC. Subject to such 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. The rules relating to distributions by a PFIC and their eligibility for the foreign tax credit are complicated, and a U.S. Holder should consult with its own tax advisors regarding the availability of the foreign tax credit with respect to distributions by a PFIC.
The PFIC rules are complex, and each U.S. Holder should consult its own tax advisors regarding the PFIC rules and how the PFIC rules may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares.
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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.
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.
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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. 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.
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.
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.
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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.sedar.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.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As at December 31, 2022 and to date in 2023, we do not have any interest bearing debt facilities (the only interest pearing debt facility we have is the HASCAP Loan. See item 5B). or 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, accounts receivable, deposits, accounts payables, accrued liabilities and lease obligations, and entering into United States dollar revenue contracts. The Company does not currently enter into hedging contracts, but to mitigate exposure to fluctuations in foreign exchange, the Company uses strategies to reduce the volatility of United States dollar assets including converting excess United States dollars to Canadian dollars. As at December 31, 2022, the Company held net U.S. dollar liabilities totaling US$231,161. Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2022 would have had an approximately $31,327 effect on the unrealized foreign exchange gain or loss for the 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. $nil was held at December 31, 2022.
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, 2022, its DCPs are not effective.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s members of the Management Committee of the Board of Directors 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, 2022, 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, 2022. 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, 2022 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 |
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| · | NXT does not have a sufficient level of staff with specialized expertise to adequately conduct separate preparation and a subsequent independent review of certain complex or highly judgmental accounting issues. NXT partially mitigates this deficiency by preparing financial statements with their best judgments and estimates of the complex accounting matters, and relies on reviews by management, external consultants, and the Audit Committee. |
From time to time to reduce these risks and to supplement a small corporate finance function, the Company engages various outside experts and advisors to assist with various accounting, controls and tax issues in the normal course. Given the small size of the Company’s finance team, management has established a practice of increased engagement of the Company’s Disclosure Committee and Audit Committee in reviewing the public disclosure and has increased the engagement of external consultants and legal counsel as well.
The Responsible Officers concluded that, as at December 31, 2022, its ICFR is not effective and as a result its DCPs are not 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 2022.
It should be noted that a control system, including the Company’s DCPs and ICFR, no matter how well conceived, can provide only reasonable, but not absolute assurance that the objectives of the control system will be met, and it should not be expected that the DCPs and ICFR will prevent all errors or fraud.
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, 2022.
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. Tilson (Chair), Wilcox and Valentine. Mr. Tilson and Mr. Wilcox of the NXT Audit Committee each 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 Mr. Tilson and Mr. Valentine are “independent” directors, as that term is defined under the listing standards of NASDAQ. Mr. Valentine intends to meet the requirements to become financially literate.
Given the passing of Mr. Liszicasz and the establishment of the management committee, on a temporary basis and in exceptional circumstances, Canadian National Instrument 52-110 permits the conduct of business by an Audit Committee which does not meet the requirement that the Audit Committee be fully independent provided that a majority of the Committee satisfy the test of independence. With Mr. Tilson and Mr. Valentine being independent, the Audit Committee meets this requirement.
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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 2022, 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.
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, 2022, 2021 and 2020.
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Audit fees |
| $ | 407,670 |
|
| $ | 234,330 |
|
| $ | 230,865 |
|
Audit-related fees |
|
| - |
|
|
| - |
|
|
| - |
|
Tax fees |
|
| 12,273 |
|
|
| 1,338 |
|
|
| 4,762 |
|
Total fees |
|
| 419,943 |
|
|
| 235,668 |
|
|
| 235,627 |
|
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 11, 2023, is filed herewith as Exhibit 15.1.
NXT will disclose its engagement of a new independent registered public accounting firm once the evaluation process has been completed and as required by, and in accordance with, the SEC’s rules and regulations.
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 – INSIPER TRADING POLICIES
Not applicable.
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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 have been prepared in accordance with U.S. generally accepted accounting principles.
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ITEM 19. EXHIBITS [note: remember that this need to be hyperlinked]
EXHIBIT INDEX
Exhibit No. |
| Description |
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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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| 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, 2022 | |
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15.4 |
| Management’s Discussion and Analysis for the year ended December 31, 2021 |
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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.
By:
"/s/ Charles Selby" |
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Charles Selby |
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Lead Director and member of the Management Committee of the Board of Directors
"/s/ Bruce G. Wilcox" |
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Bruce G. Wilcox |
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Director and member of the Management Committee of the Board of Directors
"/s/ Gerry Sheehan" |
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Gerry Sheehan |
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Director and member of the Management Committee of the Board of Directors
Dated: May 11, 2023
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