NSFDF NXT Energy Solutions Inc (QB)

Large accelerated filer	___		Accelerated filer	___		Non-accelerated filer	X
						Emerging growth Company	___

U.S. GAAP

X

International Financial Reporting Standards as issued by the International Accounting Standards Board

___

Other

___

PART I

 

ITEM 1. 

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. 

OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. 

KEY INFORMATION

 

 

 

4

 

 

A.            

Selected financial data.

 

The following historical financial information should be read in conjunction with the section entitled “Operating and Financial Review” (see Item 5 herein) and our audited consolidated financial statements and related notes, which are included elsewhere in this document. The consolidated statements of income (loss) data for the years ended December 31, 2018, 2017, and 2016 and selected consolidated balance sheet data as of December 31, 2018 and 2017 are derived from, and qualified by reference to, our audited consolidated financial statements that are included elsewhere in this Form 20-F. The selected consolidated balance sheet data as of December 31, 2016, 2015 and 2014, and the consolidated statements of income (loss) data for the years ended December 31, 2015 and 2014 are derived from our previously filed audited consolidated financial statements (which are not included in this Form 20-F).

 

INCOME (LOSS) & COMPREHENSIVE INCOME (LOSS)

 

(expressed in Canadian Dollars)	2018	2017	2016	2015	2014
Survey revenues	$ -	$ -	$ 1,447,269	$ 17,422,151	$ 3,913,367
Operating expenses
Survey costs	1,103,946	1,289,429	1,157,185	5,095,691	431,518
General and administrative	3,999,089	4,960,961	5,645,459	5,049,690	4,132,108
Stock based compensation expense	386,154	581,356	790,500	1,081,000	658,000
Amortization expense	1,790,267	1,897,576	2,104,864	704,943	67,162
	7,279,456	8,729,322	9,698,008	11,931,324	5,288,788
Other expense (income)
Interest expense (income), net	(62,004 )	4,485	(17,254 )	(13,910 )	(50,824 )
Foreign exchange (gain) loss	(19,852 )	69,676	272,713	(712,480 )	(158,817 )
Other expense (income)	(40,701 )	91,370	218,853	529,081	354,781
Gain on extinguishment of liability (Note 20)	(188,388 )	-	-	-	-
Increase (decrease) in fair value of US$ Warrants	-	-	-	-	42,800
	(310,945 )	165,531	474,312	(197,390 )	187,940
Income (loss) before income taxes	(6,968,511 )	(8,894,853 )	(8,725,051 )	5,688,136	(1,563,361 )
Income tax expense (recovery)	-	75,545	374,511	(4,852,092 )	-
Net income (loss) and comprehensive income (loss) for the year	(6,968,511 )	(8,970,398 )	(9,099,562 )	10,540,228	(1,563,361 )
Net income (loss) per share - Basic	$ (0.11 )	$ ( 0.16 )	$ (0.17 )	$ 0.22	$ (0.04 )
Diluted (1)	$ (0.11 )	$ ( 0.16 )	$ (0.17 )	$ 0.21	$ (0.04 )
Weighted average # of common shares outstanding
Basic	65,455,325	54,523,113	53,526,155	47,782,647	44,375,540
Diluted (1)	65,455,325	54,523,113	53,526,155	49,041,383	44,375,540
# of common shares outstanding	68,573,558	58,161,133	53,856,509	53,306,109	44,958,843

 

(1) In periods with a loss, the diluted total excludes the 8,000,000 convertible preferred shares which were outstanding until converted

on August 31, 2015, as their effect is anti-dilutive.

 

 

5

 

 

Balance Sheet Data

 

(expressed in Canadian Dollars)

 

	2018	2017	2016	2015	2014
Working capital (deficiency)	$ 3,823,832	$ (318,166 )	$ 1,703,510	$ 7,534,128	$ 5,029,013
Current assets	4,365,970	1,284,008	2,316,341	10,691,918	5,811,639
Deposits	560,341	518,765	-	-	-
Property and equipment, net	683,157	778,685	3,348,557	3,678,985	237,464
Intellectual property, net	19,654,800	21,339,533	23,024,268	24,709,000	-
Total assets	25,264,268	23,920,991	28,689,166	39,079,903	6,049,103
Current liabilities	542,138	1,602,174	612,831	3,157,790	782,626
Long-term liabilities	510,661	741,408	264,775	300,462	50,000
Total liabilities	1,052,799	2,343,582	877,606	3,458,252	832,626
Shareholders’ equity:
Common shares	96,656,248	88,121,286	85,966,393	85,051,553	65,792,307
Preferred shares	-	-	-	-	232,600
Contributed capital	9,262,684	8,195,075	7,613,719	7,239,089	6,400,789
Deficit	(82,418,397 )	(75,449,886 )	(66,479,487 )	(57,379,926 )	(67,920,154 )
Accumulated other comprehensive income	710,934	710,934	710,935	710,935	710,935
Total equity	24,211,469	21,577,409	27,811,560	35,621,651	5,216,477
Total liabilities and equity	25,264,268	23,920,991	28,689,166	39,079,903	6,839,993

 

Throughout the history of the Company there have been no dividends declared.

 

B.            

Capitalization and indebtedness.

 

Not applicable.

 

C.            

Reasons for the offer and use of proceeds.

 

Not applicable.

 

D.            

Risk factors.

 

Investing in our common shares involves a high degree of risk. In addition to the other information included in this document, you should carefully consider the risks described below before purchasing our common shares. If any of the following risks actually occur, our business, financial condition and results of operations could materially suffer. As a result, the trading price of our common shares could decline and you might lose all or part of your investment.

 

Our ability to continue operating is not certain.

 

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 this Form-20F has been issued.

 

6

 

 

As a result of the extended duration between revenue bearing contracts, NXT’s balance of Current Assets less Current Liabilities has been declining since the closing of the first tranche of the Private Placement on February 2018.  If payments on contracts not received in a timely manner, NXT will not have sufficient cash to meet its obligations for the 12 month period beyond the date of these financial statements.

 

While near term survey prospects are expected to translate into revenue bearing contacts and provide positive contribution to the liquidity position, there are no certainties that these prospects will convert into executed contracts prior to the full depletion of the Company’s cash resources.  In February 2019, the Company signed a Co-operation agreement for which it will receive a non-refundable deposit of $200,000 United States Dollars and in March 2019 signed a contract for the approximate revenue value of $8,900,000 United States Dollars. Advanced payments totaling $300,000 United States dollars have been received in the first quarter of 2019 on the contract and an additional $1,000,000 United States Dollars is contracted to be received upon performing of a pilot survey. The Company is also taken future steps to reduce costs which include evaluating alternatives to reduce aircraft and office costs. In addition, the Advisory Board has been suspended indefinitely and staffing costs are being reduced with new Human Resource policies. If required, 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 contracts and obtaining financing 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 convert these opportunities into successful contracts and to continue to attract new client projects and expand the revenue base to a level sufficient to exceed fixed operating costs and generate positive cash flow from operations.  The occurrence and timing of these events cannot be predicted with certainty. 

 

The consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate.  If the going concern basis was not appropriate for these consolidated financial statements, then significant adjustments would be necessary in the classification and carrying value of assets and liabilities and the reported revenues and expenses.

 

The financial statements rely upon estimates and assumptions that could be incorrect.

 

The preparation of financial statements requires our management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including the disclosure of contingent assets and liabilities as well as revenues and expenses recorded in our financial statements. Estimates made relate primarily to the measurement of accrued liabilities, stock-based compensation expense, valuation of future income tax assets, estimates for asset retirement obligations, the useful lives of capital assets and intellectual property.

 

The estimates and assumptions are reviewed periodically and are based upon the best information available to management; however, we cannot provide assurance that future events will not prove that these estimates and assumptions are inaccurate. Any revisions to our estimates and assumptions may have a material impact on our future reported net income or loss and assets and liabilities.

 

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 ongoing declines in oil and natural gas prices. The impact of price changes on our ability to enter into SFD ® survey contracts cannot be readily determined. However, in general, if commodity prices decline significantly, our opportunity to obtain and execute SFD ® survey contracts will also likely decline, at least in the short term.

 

 

 

7

 

 

Our financial position is affected by foreign currency fluctuations.

 

We currently conduct cash transactions and have holdings in Canadian dollars, U.S. dollars and periodically have holdings of local currency in other countries. We generally contract to earn revenues in U.S. dollars and potentially may earn revenues in Canadian dollars and other foreign currencies.

 

Our reporting currency is in Canadian dollars. We currently do not engage in currency hedging activities, but are reviewing opportunities to do so. Our cash positions and potential foreign currency revenue streams in currencies other than Canadian dollars exposes us to exchange rate fluctuations between the Canadian dollar and foreign currencies.

 

Our financial position will be affected by exchange rate fluctuations. We may earn revenue and incur expenses denominated in foreign currencies, yet report our financial results in Canadian dollars. Furthermore, we intend to enter into contracts to provide services in foreign countries and may periodically conduct business in other currencies such as the Euro. Changes in currency exchange rates could have an adverse effect on the Company's business, financial condition and results of operations.

 

Our net income or loss is impacted by interest rate fluctuations.

 

We periodically invest available cash in short term investments that generate interest income that will be affected by any change in interest rates. (See Item 11).

 

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 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. Should NXT want to repurchase the aircraft at the end of the initial lease term, the purchase price is US$1,450,000. When the aircraft is not needed for use by NXT, we seek to earn charter hire revenues from the aircraft through a 3 rd 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 us to potential misappropriation of funds, embezzlement and other forms of fraud and could have a material adverse effect on our business, financial condition and results of operations. (see also Item 15).

 

 

 

8

 

 

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 CEO, President and Chairman 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.

 

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 of directors (the “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.

 

For the period December 1, 2017 to January 31, 2018, Mr. Selby acted as the Interim CFO of the Company.

 

A single major shareholder who is also a Board member and an officer of the Company retains the ability to influence or control the Company, and this influence or control may result in a conflict of interest.

 

Mr. George Liszicasz, our CEO, is our largest shareholder and as of April 30, 2019 owns approximately 23% of our outstanding common shares and therefore has a substantial influence in all shareholder matters.

 

Controls do exist to mitigate any potential risks associated with this conflict of interest. Mr. Liszicasz adheres to a code of conduct which includes a fiduciary responsibility to the Company, its shareholders and this conduct is governed by the independent Board of directors who collectively represent a majority of the Board. Furthermore, all material related party transactions are disclosed publicly.

 

An additional mitigation is that Alberta Green Ventures Limited Partnership became a statutory control shareholder in 2018.

 

However, should these conflict of interest controls not be effective, decisions could be made by the Company that may advantage Mr. Liszicasz and negatively impact other 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, our rights to commercialize this intellectual property 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.

 

 

 

9

 

 

NXT seeks to mitigate this risk by researching new designs and constructing additional SFD ® sensor devices.

 

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.

 

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 cannot 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.

 

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 cannot 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 man” insurance on any of our personnel.

 

The Company put in place employment agreements with all of its executive officers, including George Liszicasz, its President and CEO.

 

We have a dependence on Mr. Liszicasz and three other staff members to be involved in the   SFD ® data interpretation process and to continue to enhance our technology. We are working to minimize dependency on key personnel. Mr. Liszicasz has trained and continues to train a team of signal interpreters to minimize our reliance on him to perform these functions. Currently, a total of four persons, two of which are highly experienced, are trained to interpret SFD ® signals.

 

 

 

10

 

 

Although we have engaged employees with suitable credentials to work with Mr. Liszicasz to enhance our interpretation process and further develop the SFD ® technology, if we are unable to reduce dependence on Mr. Liszicasz and he becomes incapable of performing or unwilling to perform these functions, then there may be an adverse effect on our ability to interpret the data from SFD ® surveys or to enhance our technology.

 

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.

 

In April 2019, we were the target of a ransomware attack that involved the infiltration and infection of our computer systems.  We made no payments relating to the ransomware and believe we lost no data.  Following the ransomware incident, we began undertaking remediation efforts and other steps to enhance our data security infrastructure. In connection with these efforts, we have incurred costs and expect to incur additional costs as we take further steps to prevent unauthorized access to our systems and the data we maintain.  We cannot provide any assurance that all potential causes of the incident have been identified and remediated and will not occur again.  While we have taken measures to minimize the impact of these problems, the proper functioning of these systems is critical to our business operations. 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 on the TSX Venture Exchange (the “TSX-V”), and 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. Effective March 22, 2016, the Company’s application to graduate from the TSX-V to the broader Toronto Stock Exchange (“TSX”), Canada’s premier stock exchange listing, was approved.

 

The market price for the common shares on the exchanges where our stock is listed has been and we anticipate will continue to be, extremely volatile and subject to significant price and volume fluctuations in response to a variety of external and internal factors. This is especially true with respect to emerging companies such as ours. Examples of external factors, which can generally be described as factors that are unrelated to the operating performance or financial condition of any particular Company, include changes in interest rates and worldwide economic and market conditions, as well as changes in industry conditions, such as changes in oil and natural gas prices, oil and natural gas inventory levels, regulatory and environment rules and announcements of technology innovations or new products by other companies. Examples of internal factors, which can generally be described as factors that are directly related to our consolidated financial condition or results of operations, would include release of reports by securities analysts and announcements we may make from time to time relative to our operating performance, clients exploration results, financing, advances in technology or other business developments.

 

Because we have a limited operating history and a limited history of profitability to date, the market price for the common shares is more volatile than that of a seasoned issuer. Changes in the market price of the common shares, for example, may have no connection with our operating results or the quality of services provided to clients. No predictions or projections can be made as to what the prevailing market price for the common shares will be at any time, or as to what effect, if any, that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price. Given the relatively low historic trading volumes, small trades of NXT’s common shares can adversely and potentially dramatically affect the market prices for those shares.

 

Accordingly, investors in our common stock should anticipate both volatile stock price and poor liquidity unless these conditions change.

 

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.

 

 

 

11

 

 

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 of directors and will be dependent upon our consolidated financial condition, results of operations, capital requirements and other factors as our Board of directors 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 of Directors 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.

 

We may not be able to protect our trade secrets and intellectual property 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 intellectual property (“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 R&D initiatives) have been very successful. Squire Patton Boggs LLP, a United States (“US”) based leader in IP protection, has been advising NXT on our IP strategy, including the prior filing of an initial US provisional patent application in May 2012. In November 2014, NXT filed a related patent amendment submission in the US and since that time has undertaken new patent applications in select strategic international markets.

 

So far, SFD ® patents applications have been filed in nine (9) jurisdictions worldwide.  Thus far seven (7) patents have been granted: two (2) in U.S.A., and one (1) in each of the following countries: Canada, Japan, China, Russia, and Mexico. In late January 2019, we received a positive feedback from the examiner of the European Patent Office (consisting of 38 country members), showing potential to be allowed in the near future. In addition, two (2) more applications are pending in Brazil and India. The SFD ® patents serve an important purpose beyond the protection they provide to the proprietary SFD ® technology. Our patents also serve as an independent third-party verification of the scientific principles that form the basis of the SFD ® process and its application.

 

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.

 

 

 

12

 

 

We do 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.

 

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.

 

 

 

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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 of directors 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.

 

In addition, 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.

 

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.

 

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.

 

 

 

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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.

 

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 (“FAA”) 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.

 

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.

 

NXT’s corporate history is summarized as follows:

 

● 

NXT was incorporated under the laws of the State of Nevada on September 27, 1994 as Auric Mining Corporation.

 

 

 

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● 

In January 1996, NXT acquired all of the common stock of NXT Energy USA, Inc. (which was then known as Pinnacle Oil Inc.) from its shareholders in exchange for common shares. As a consequence of this reverse acquisition, NXT Energy USA Inc. became a wholly owned subsidiary and its shareholders acquired a 92% controlling interest in NXT’s common shares.

 

● 

Prior to this reverse acquisition transaction, NXT was a corporate shell conducting no active business, and NXT Energy USA Inc. was a development stage research and development 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 – 17 th 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 in accordance with the Securities Exchange Act of 1934 , as amended (the “Exchange Act”).

 

The underlying technology employed by our SFD ® survey system was invented by George Liszicasz, our President and CEO, chairman and largest shareholder. 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.

 

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.

 

Our business does not normally rely on significant capital expenditures. For the last three fiscal years, the Company made capital expenditures for property and equipment of $10,006 (2018), $8,727 (2017), and $89,702 (2016). These annual expenditures normally relate largely to upgrades to office computer equipment and SFD ® survey equipment.

 

The Company does not currently have any significant capital expenditures in progress, or planned for the short term, for Canada or other international operations.

 

SEC maintains an internet site (http://www.sec.gov), which contains reports, proxy and information statements, and other information regarding us that file electronically with the SEC. Our website is http://www.nxtenergy.com.

 

B.            

Business overview.

 

Description of the nature of the Company’s operations and principal activities

 

We utilize our proprietary, airborne SFD ® survey system to provide a service for the 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.

 

 

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The underlying technology employed by our SFD ® survey system was invented by George Liszicasz, our President and Chief Executive Officer (“CEO”), Chairman and one of our largest shareholders. 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 a Technology Transfer Agreement (“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.

 

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.

 

SFD ® sensors remotely respond to gravity perturbations and changes in subsurface stress regimes that are meaningful for oil and gas exploration. These responses are captured as raw data that when interpreted, can provide an indirect method to detect the presence of geological features such as structures, faults, fractures and reefs that are often associated with traps and reservoir accumulations. SFD ® is highly effective in frontier and under-explored areas, in offshore or onshore environments and over any terrain. The SFD ® survey system has been demonstrated to quickly focus exploration resources, offering the benefit of reducing the risk, time and expense associated with frontier exploration.

 

Following completion of the aerial surveys, we deliver 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 us to cover larger areas and more clients with minimum fixed cost. Our sales representatives continue to pursue SFD ® opportunities in numerous regions including Latin America, the Middle-East and Southeast 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.

 

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 48 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:

 

 

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1.  

Focus the majority of sales resources on high profile primary markets which offer the maximum opportunity for success;

 

2.  

Build upon success in this initial market, and step out to other markets in Latin America, and in South Asia;

 

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;

 

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

 

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. We remain optimistic given our progress during the year coupled with the steadily improving oil & gas environment. Notwithstanding, NXT has concurrently sought the development of an alternative business line though the sale of “Multi-Client Datasets” focused on IOCs and the development of their global exploration strategies. The purpose of this strategy has been to integrate our SFD ® technology into the standard exploration process of such organizations. We believe this approach will be instrumental in helping us to build an independent and steady backlog of smaller scale data sales enabling us to enhance and smooth our revenue flow while we continue to execute on larger Fee for Survey Projects.

 

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.

 

A summary of revenues derived in our primary geographic market segments for the last 3 fiscal years, and highlights of global survey operations, follows:

 

Year ended December 31	2018	2017	2016
South and Central America	$ -	$ -	$ 1,447,269
North America	-	-	-
	-	-	1,447,269

 

North America Market

 

In February 2019, NXT entered into a Co-operative Agreement with one of its largest shareholders, Alberta Green Ventures (“AGV”), to propose up to three SFD ® surveys within two years. The Co-operative Agreement is based on a cost plus formula and a gross overriding royalty interest in oil and gas production arising on lands subject to the surveys.

 

Under the Agreement, NXT and AGV will consider at least two SFD ® Surveys in North America and an additional one internationally. The first SFD ® Survey is expected to be completed by August 31, 2019, AGV has committed to completing an exploration drilling program on each of the lands subject to the SFD ® surveys within two years of completion of the surveys.

 

 

 

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Latin America and Central America Markets

 

In 2008, exploration activity seriously diminished in Canada because of the world-wide credit crisis and falling natural gas commodity prices. In response, in late 2008 we looked to international markets for new revenue opportunities, especially where there were emerging, frontier-type exploration markets. Latin and Central America became a target market for us, with Colombia viewed as an attractive initial proving ground due to its many characteristics desirable for achieving market success for our SFD ® survey system.

 

Colombia’s business-friendly approach and practical resource policies allowed it to attract many exploration and production companies from around the world. In Colombia, there are obstacles to acquire geological and geophysical data as required to properly evaluate unexplored land. Obstacles include rain forests, environmental and community restrictions, security concerns and the high cost and time required to shoot seismic programs, particularly onshore. SFD ® can be a very effective tool to help overcome these obstacles. NXT earned survey revenue in Colombia of US$2.9 million in 2012.

 

Building on our initial Colombia success, NXT began to also pursue survey business in other South America countries as oil and gas exploration activity expanded in the region.

 

In 2014, we invested significant marketing efforts in the emerging Bolivia market. We were able to leverage our experience in Colombia and Mexico, and in 2015, we successfully secured our largest single survey project to date. The contract with Yacimientos Petrolíferos Fiscales Bolivianos (“YPFB”), the National Oil Company of Bolivia.

 

Our SFD ® data acquisition operations commenced in Bolivia in early June 2015 and the data acquisition phase was completed in August, with NXT’s related recommendations reports delivered to YPFB in late October 2015. During the data acquisition phase, YPFB chose to undertake an additional survey “expansion” project valued at approximately US$1.0 million. The decision for YPFB’s expansion was based on the rapid delivery of preliminary SFD ® results, which had excellent correlations noted between anomalies identified by SFD ® and the clients’ existing ones identified using seismic methods. A contract amendment was finalized in October 2015 for this project, the final results for which were delivered by NXT in January 2016.

 

NXT completed the data acquisition and interpretation of 37,596 line-km for the first ever SFD ® Multi-Client survey in the Gulf of Mexico in June 2017. The airborne survey was conducted over the area that was identified by Comision Nacional de Hidrocarburos (“CNH”) for the shallow water bid round 2.1 covering the Tampicao-Misantla, Veracruz and Cuencas del Sureste exploration areas. The survey data provides 100% grid coverage over the offshore blocks offered in Bid Round 2.1, an area of approximately 8,900 square kilometers and was completed ahead of time and budget. In addition, NXT acquired incidental data over many of the 35 blocks offered in the recently concluded Bid Round 3.1. Based on the Five-Year Tender Program for the Exploration and Extraction of Hydrocarbons 2015 - 2019 by the Mexican Secretary of Energy, much of the remaining data will also be applicable to future Bid Rounds. To date, there have been no sales of this proprietary data.

 

Asia Markets

 

In October 2018, we signed an MOU with BGP Inc., a subsidiary of China National Petroleum Corporation, to further explore opportunities for NXT and BGP Inc. to work together. NXT’s forward strategy is to secure SFD ® contracts with BGP and its affiliates.

 

The MOU entered into between Generation Resource Discoveries (“GRD”), NXT’s regional representative and the Government of Aceh, Indonesia on February 22, 2018, GRD has expired.

 

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As a result of recent constitutional crises which began in late 2018 with the government of Sri Lanka, our contract negotiations have been put on hold. We will assess when discussions can be renewed

 

African and Middle East Markets

 

In March 2019, the Company signed an $8.9 Million USD contract with PE Energy Limited (“PE”), a Nigerian oil and gas service company that has a contract with NNPC (National Nigerian Petroleum Company), to provide 5,000 line kms of SFD ® Surveys in Nigeria. Data acquisition operations for this contract commenced in April 2019 and NXT’s interpretations and recommendations are expected to be delivered during the third quarter of 2019.

 

NXT has entered into a three year exclusive sales representative agreement with AGV, in nine jurisdictions in the Middle East and Latin America.

 

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.

 

 

 

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● 

Computer hardware and software - ( Data Acquisition System, SFD ® Signal Conditioning Unit , and data Interpretation software). During 2016, a new data acquisition system completed final testing. The software was developed by in-house personnel and will be utilized on future surveys. The hardware we use in our SFD ® survey systems (other than the SFD ® unit), and the balance of the computer software we use, are all readily available from retail or wholesale sources.

 

We are not dependent upon any other third-party contract manufacturers or suppliers to satisfy our technology requirements.

 

Description of marketing channels

 

We largely use direct sales methods with some use of independent commissioned sales representatives in international markets.

 

Summary information on dependence on patents, licenses and contracts

 

Patents

 

In May 2012, we commenced a “provisional” patent application process in the U.S. 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.

 

Initiatives to expand and protect our IP (including patenting and new R&D initiatives) were very successful in 2017. Squire Patton Boggs LLP, a United States (“US”) based leader in IP protection, has been advising NXT on our IP strategy, including the prior filing of an initial US provisional patent application in May 2012. In November 2014, NXT filed a related patent amendment submission in the US and since that time has undertaken new patent applications in select strategic international markets.

 

NXT’s patent applications have been filed in nine (9) jurisdictions worldwide.  Thus far, seven (7) patents have been granted: two (2) in U.S.A., and one (1) in each of the following countries: Canada, Japan, China, Russia, and Mexico. In late January 2019, we received a positive feedback from the examiner of the European Patent Office (consisting of 38 country members), showing potential to be allowed in the near future. In addition, two (2) more applications are pending in Brazil and India. However, there can be no assurance that the patents will be granted by the European Patent Office, Brazil or India. SFD ® patents granted in the U.S.A. and many other countries serve an important purpose beyond protection of our proprietary SFD ® technology. They also provide multiple independent third-party recognitions of the technological invention in terms of the 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.

 

 

 

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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 United States with the exception of flight rules issued by Transport Canada and the Federal Aviation Authority governing the use of commercial aircraft, including rules relating to low altitude flights. The requirements in other countries vary greatly and may require permits and/or provide other restrictions to conducting flight operations in the country that may restrict our ability to perform SFD ® surveys as freely as in Canada and the United States.

 

For example, in Colombia, SFD ® surveys must comply with three requirements not encountered in Canada and the United States. These requirements are i) customs obligations and bonds related to the importation and exportation of the aircraft into Colombia, 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 Canada, the United States, Bolivia, Mexico, Colombia and other countries, we do not anticipate any unusual government controls or regulations that might significantly prevent timely completion of SFD ® surveys. However, we may encounter unforeseen government regulations or restrictions in other countries that may impair or restrict our ability to conduct surveys, which could limit our ability to earn revenue or potentially expose us to forfeiture of performance bonds.

 

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C.            

Organizational structure.

 

The following table provides a list of all subsidiaries and other companies controlled by NXT:

 

Subsidiaries	Date and Manner of Incorporation	Authorized Share Capital	Issued and Outstanding Shares	Nature of the Business	% of each Class of Shares owned by NXT
NXT Energy USA, Inc.	October 20, 1995 by Articles of Incorporation – State of Nevada	20,000,000 common	5,000,000 common	Inactive	100%
NXT Aero USA, Inc.	August 28, 2000 by Articles of Incorporation – State of Nevada	1,000 common	100 common	Inactive	100%
		4,000 preferred
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	Inactive	100%
NXT Energy Services (SFD) Inc.	December 2008 by Federal Articles of Incorporation – Canada	Unlimited number of common shares	100 common	Inactive	100%
PetroCaza Exploration Inc.	May 2015 by Articles of Incorporation Province of Alberta	Unlimited number of common and preferred shares	100 common	Inactive	100%
¹On January 16 th , 2017, the name of Survey Services International Inc. was changed to “Cascade Petroleum Inc.”

In February 2010, NXT registered a wholly owned “Branch” entity with the tax administration and Chamber of Commerce authorities in Colombia, (NXT Energy Solutions Inc. Sucursal Colombia). The formation of this branch became a Colombian legal requirement following the Company commencing permanent activity in Colombia in 2010 while conducting commercial survey operations. This branch was closed in 2017.

 

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 are in the process of closing the branch which should be completed in the second quarter of 2019.

 

 

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D.            

Property, plant and equipment.

 

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. Additionally, we may in the future become entitled to receive gross over-riding royalty (“GORR”) interests on production from portions of certain lands where we conducted past surveys for clients in Canada. There is no certainty that wells on these lands will become placed on production, or that future royalty revenues will be earned from these entitlements prior to the expiry of the landowners’ related mineral leases. No asset value has been recorded in the financial statements for these GORRs.

 

Facilities / Office Premises

 

In August 2015, NXT moved to a new office premises (11,333 square feet) at 3320 – 17 th Avenue SW in Calgary under a 10-year lease at an initial estimated minimum monthly lease payment of $48,243 (including building operating costs) commencing in October 2015. See also Item 5.F “Contractual Obligations”.

 

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 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 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. Should NXT want to repurchase the aircraft at the end of the initial lease term, the purchase price is US$1,450,000. When the aircraft is not needed for use by NXT, we seek to earn charter hire revenues 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, detailed 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. SFD ® sensors respond to changes in subsurface stress. These responses are transformed through a passive transducer into electronic digital signals. Airborne surveys are normally conducted utilizing an array of 22 SFD ® sensors, consisting of 6 primary, 8 secondary and 8 development sensors, allowing the acquisition of multiple independent SFD ® signals responses at all points of a survey.
●	Data Acquisition System - 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.
●	SFD ® Signal Conditioning Unit - this self-contained unit contains electronic circuits 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.
●	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.

 

 

24

 

 

We are not affected by any significant environmental concerns, nor is there any planned significant capital additions contemplated.

ITEM 4A. 

UNRESOLVED STAFF COMMENTS

 

None.

 

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 “Selected Financial Data” and 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
	2018	2017	2016
Survey revenue	$ -	$ -	$ 1,447,269
Net comprehensive income (loss)	(6,968,511 )	(8,970,398 )	(9,099,562 )
Net income (loss) per common share - basic	(0.11 )	$ (0.16 )	$ (0.17 )
Net income (loss) per common share - diluted	(0.11 )	$ (0.16 )	$ (0.17 )
Net cash generated by (used in) operating activities	(6,043,919 )	(5,464,679 )	(7,587,614 )
Cash and short term investments	4,239,532	1,116,618	1,943,587
Total assets	25,264,268	23,920,991	28,689,166
Long term liabilities	510,661	741,408	264,775

 

Summary financial highlights for the last three fiscal years are as follows:

 

Financial Highlights for 2018

 

● 

Following the Company’s participation at the Upstream West Africa Summit in Senegal in Q2, NXT management traveled twice to Africa to meet with representatives of the Nigerian National Petroleum Corporation (“NNPC”) and the Ghana National Petroleum Corporation (“GNPC”) to discuss the benefits SFD ® would bring to their current exploration programs.

● 

Discussions with NNPC continued in the fourth quarter of 2018 and have resulted in the signing of a contract in March 2019 with PE Energy Limited, a Nigerian oil and gas service company, for the value of approximately $US8.9 million. Details of the contract are provided below.

● 

In February 2019, NXT entered into a Co-operative Agreement with Alberta Green Ventures (“AGV”), for AGV to propose up to three SFD ® Surveys within two years. The Co-operative Agreement is based on a cost plus formula and a gross overriding royalty interest in oil and gas production arising on lands subject to the surveys. AGV now holds approximately 20.0% of the Company's 68,573,558 outstanding common shares including common shares issuable through the exercise of its warrants.

 

 

25

 

 

 

● 

NXT has entered into a three year exclusive sales representative agreement with AGV, in nine jurisdictions in the Middle East and Latin America. This includes an at-market subscription right to purchase treasury shares of NXT in a dollar amount equal to 25% of the contracts introduced by AGV to NXT in the first year of the Agreement, subject to approval from the TSX.

● 

NXT received notification of the granting of NXT's SFD ®  patent in China on April 13, 2018.

● 

In September 2018, NXT received a United States patent for its new sensor design we term the “Cascade” configuration.

o  

The Cascade sensor is the result of NXT’s continued research & development efforts and builds upon our existing US patent. Management believes the Company’s Cascade sensors will provide enhanced ability for identifying trapped fluid bodies indicative of potential hydrocarbon accumulations along with improved reliability and flexibility during SFD ® survey operations.

● 

In October 2018, we signed an MOU with BGP Inc., a subsidiary of China National Petroleum Corporation, to further explore opportunities for NXT and PGP Inc. to work together. NXT’s forward strategy is to secure SFD ® contracts with BGP and its affiliates.

● 

The MOU entered into between Generation Resource Discoveries (“GRD”), NXT’s regional representative, and the Government of Aceh, Indonesia on February 22, 2018, GRD has expired.

● 

As mentioned in the third quarter, as a result of recent political changes in the government of Sri Lanka, our contract negotiations have been put on hold. We will assess when discussions can be renewed.

● 

NXT completed a Private Placement financing on July 3, 2018 of $9,484,810 through the issuance of an aggregate of 10,264,946 units at $0.924 per unit (the "Private Placement"). Each unit consists of one common share and one-third of one common share purchase warrant (each whole warrant, a "Warrant"), and each Warrant entitles the holder to acquire one common share at an exercise price of $1.20 for twelve (12) months from closing of the first tranche of the Private Placement on February 16, 2018. As the result of the Co-operation Agreement between AGV and NXT, the Company has received conditional approval from the Toronto Stock Exchange to extend the Warrants for 12 months until February 16, 2020, subject to disinterested shareholder approval.

● 

No survey revenues were recorded in 2018.

● 

A net loss of $1.39 million was recorded for Q4-18, including amortization expense of $0.45 million and stock-based compensation expense recovery in Q4 of $(0.17) million.

● 

A net loss of $6.97 million was recorded for 2018 YTD, including amortization expense of $1.79 million and stock-based compensation expense of $0.39 million.

● 

Operating activities used $1.16 million of cash during Q4-18 and net cash used for financing activities was $0.01 million.

● 

Losses per common share were $0.02   for Q4-18 and $0.11 for 2018 YTD (basic and diluted).

● 

Operating activities used $6.04 million as at 2018 YTD and net cash from financing activities was $9.18 million.

● 

General and administrative costs for 2018 YTD as compared to 2017 YTD have been reduced by $0.96 million or 19% mostly due to a reduction in headcount, public company costs and partially offset by increased business development activity.

● 

Cash and short-term investments at the end of the Q4-18 were $4.24 million.

 

Financial Highlights for 2017

●  

No survey revenues were recorded for 2017.

●  

NXT completed its first ever SFD ® Multi-Client survey in the Gulf of Mexico.

o  

Acquired 37,596 line km of SFD ® data in June 2017 for the shallow water Bid Round 2.1 covering the Tampicao-Misantla, Veracruz and Cuencas del Sureste exploration areas. The SFD ® survey data provides 100% grid coverage over the offshore blocks, an area of approximately 8,900 km2. In addition, NXT acquired incidental data over many of the 35 blocks offered in the recently concluded Bid Round 3.1 and believe the remaining data will also be applicable to future bid rounds.

●  

Successfully tested the upgraded SFD ® Data Acquisition System during the Gulf of Mexico survey.

 

 

26

 

 

●  

Significantly expanded protection of IP through multiple patent grants globally.

o  

SFD ® patents granted in Russia (January 2017), Japan (July 2017), Mexico (July 2017), Canada (August 2017) and the United States (November 2017); and notices of allowance received from China (February 2018).

●  

A net loss of $8,970,398 for the year including amortization expense of $1,897,576.

●  

Operating activities used $5,464,679 of cash during the year and net cash utilization was $323,878 .

●  

Losses per common share were $0.16   (basic and diluted).

●  

Significant progress made in 2017 and the first quarter of 2018 to reduce corporate costs and execute on financing options significantly strengthening the Company’s liquidity and working capital position.

o  

$2.7 million sale and leaseback arrangement on our airplane completed in April 2017.

o  

Rights offering completed on November 3 rd for gross proceeds of $2,093,645.

o  

On February 16, 2018 announced a three-tranche Private Placement of 10,905,212 Units at a price of $0.924 per Unit for total gross proceeds of approximately $10,076,416.

o  

Cash and short-term investments at the end of 2017 were $1,116,618.  

 

Financial Highlights for 2016

 

● 

While conducting operations in Bolivia during the summer of 2015, NXT acquired additional proprietary SFD ® data flight lines requested by YPFB Andina and minor additional SFD ® data for YPFB Chaco. Additional YPFB Chaco data resulted in a total revenue amount of $1.45m CAD recognized in 2016. At present, we are uncertain as to the timing of the YPFB Andina data sale and receipt of the associated funds.

 

● 

Survey costs were $1,157,185, we experienced a net loss of $9,099,562 for 2016, compared to net income of $10,540,228 in 2015.

 

● 

Cash flow from operating activities was $(7,587,614) for 2016, compared to $6,984,922 for 2015.

 

● 

Capital expenditures in 2016 resulted in net cash use of $89,702 which is primarily associated with the purchase of computer hardware and software.

 

● 

We had cash and short-term investments of $1,943,587 at the end of 2016.

 

Net Income (Loss)
	2018	2017	2016
Survey revenue	$ -	$ -	1,447,269
Expenses
Survey costs	1,103,946	1,289,429	1,157,185
General and administrative	3,999,089	4,960,961	5,645,459
Stock based compensation expense	386,154	581,356	790,500
Amortization expense	1,790,267	1,897,576	2,104,864
	7,279,456	8,729,322	9,698,008
Other expense (income), net	(310,945 )	165,531	474,312
Income (loss) before income taxes	(6,968,511 )	(8,894,853 )	(8,725,051 )
Income tax expense (recovery)
Current	-	75,545	374,511
Deferred	-	-	-
	-	75,545	374,511
Net income (loss) for the year	(6,968,511 )	(8,970,398 )	(9,099,562 )

 

 

27

 

 

Expenses for the years ended December 31, 2018, 2017 and 2016

 

Survey costs – These costs depend on the number of survey projects conducted and completed in each fiscal year. We recognize revenue earned on SFD ® survey contracts (net of any related foreign sales taxes) over time by measuring the progress toward complete satisfaction of its performance obligations to the customer. This method of revenue recognition is currently deemed appropriate given the complex nature of the end product that is delivered to the client. While the quantity of data acquisition can be measured based on actual line kilometers flown, the acquired SFD ® data does not realize its full value until it is processed, interpreted in detail and a recommendations report is generated and reviewed with the client's geological and geophysical staff. Survey costs only represent the direct costs that were incurred during operations of this survey and exclude any indirect costs associated with the use of the technology. Survey costs may also periodically include expenses related to some R&D and equipment test flights (as was the case in 2016 and 2014) as well as aircraft maintenance charges, which are not necessarily directly related to projects undertaken. The aircraft is available for charter to third parties through our aircraft manager when it is not being used by NXT. Any charter fees received are used to offset aircraft costs.

 

In comparing 2018 with 2017, costs for aircraft operations are higher because of the Phase 5 major maintenance performed on the aircraft. This was offset by increased charter hours for all of 2018 which offset operating costs. Aircraft lease costs in 2018 are $202,085 higher than 2017 as the lease payments started in May 2017, which resulted in 4 months less of lease costs in 2017. Correspondingly, amortization costs are lower in 2018.

 

For most of 2017, the survey costs related entirely to the aircraft lease and maintenance costs, net of charter hire revenue. During Q2 2017, NXT completed its first ever SFD ® Multi-Client survey in the Gulf of Mexico. There have been no sales for the SFD ® data that was recorded and therefore the direct costs of the survey have been expensed. Survey costs only represent the direct costs that were incurred during operations of this survey and exclude any indirect costs associated with the use of the technology.

 

Survey expenses in 2016 include the net costs related to maintaining our survey aircraft, which was acquired in December 2015. The aircraft is available for charter to third parties through our aircraft manager when it is not being used by NXT.

 

General and administrative (“G&A”) expense - G&A is a major component of NXT's total expenses. All salaries and overhead costs related to SFD ® data interpretation staff (other than out of country per diem allowances) are included in G&A, and not included with direct survey expenses. The categories included in G&A expense are as follows:

 

For the year ended December 31	2018	2017	2016
Salaries, benefits and consulting charges	$ 2,046,886	$ 2,709,194	$ 3,192,304
Board, professional fees, and public company costs	781,330	873,864	908,086
Indirect financing costs	-	35,865	-
Premises and administrative overhead	753,380	842,994	886,795
Business development	382,146	257,465	589,300
Bolivia/Colombia overhead	35,347	241,579	68,973
Total G&A	3,999,089	4,960,961	5,645,459

 

G&A expenses decreased by 19% or $961,872 in 2018:

 

● 

The main reason for salaries, benefits and consulting charges being lower in 2018 than 2017 is due to a reduction in corporate headcount. In addition, focus was put on reducing vacation liabilities.

● 

Board, professional fees and public company costs, were 14% lower in 2018 compared to 2017 as the Advisory Board was indefinitely suspended and there was one less Director on the Board of Directors. Also, professional fees were higher in 2017 as there were two significant transactions, the Rights Offering and the Sale Leaseback transaction which required significant legal assistance. In 2018, the significant transaction was the Private Placement.

 

 

28

 

 

● 

Premises and administrative overhead was 11% lower in 2018 compared to the prior year, mostly due to lower property taxes and lower maintenance costs early in the year. In addition, there was significant cost reduction efforts in office overhead costs like supplies and subscriptions.

●  

Business development costs increased $124,681 as the Company increased marketing efforts for the SFD ® technology during 2018.

●  

2018 YTD Bolivian overhead costs of $35,347 are related to closing of the branch.

 

Total G&A for 2017 was 5.0 million which was 0.7 million lower than 2016. G&A within the six individual expense categories noted above reflect several factors:

 

● 

2017 salaries, benefits and consulting charges are lower than 2016 levels due to lower staffing levels.

● 

For 2017 the full year costs were slightly down due to 2 less board members and other cost controls.

● 

Indirect financing costs in 2017 were higher due to work focused on obtaining new financing and negotiating the aircraft leaseback.

● 

Premises and administrative overhead where lower in 2017 versus the 2016 due to cost reduction and deferred spending efforts.

●  

Business development costs were lower for the year as marketing costs were reduced.

 

● 

Before 2017, Bolivian overhead costs were classified as consolidated survey costs as the sole purpose of the office opening was to administer the YPFB survey. At the beginning of Q1 2017, Bolivian overhead costs were presented as G&A to reflect the fact the office has been maintained to facilitate periodic operating activities in Bolivia that are anticipated from time to time. In Q2 2017, a previously held “fiscal tax credit” of $127,798 was expensed as the recoverability of this receivable was no longer considered certain. The credit related to the Bolivian equivalent of input sales tax and is usually offset against output sales tax. It is not refundable if input tax exceeds output tax.

 

Stock-Based Compensation Expense (“SBCE”) -

 

This expense varies in any given quarter or year as it is a function of several factors including the number of stock options issued in the period and the period of amortization (based on the term of the contract and/or number of years for full vesting of the options, 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.

 

SBCE was lower in 2018 as significant unvested options were forfeited and almost all remaining options were fully vested early 2018.

 

There was a lower average number of options outstanding at the end of 2017 (total of 1,648,667 as compared to 3,321,001 at the end of 2016).

 

 

29

 

 

Amortization expense – consists of the following amounts:

 

	2018	2017	2016
Amortization of:
Property and equipment	$ 105,534	$ 212,841	$ 420,131
Intellectual property	1,684,733	1,684,735	1,684,733
	1,790,267	1,897,576	2,104,864

 

Most of our capital investment in property and equipment is in computer hardware, which is amortized on a 30% declining balance basis, such that amortization is high in the initial year of capital investment. Since 2016, annual capital spending has been minimal, resulting in declining levels of amortization expense.

 

Capital expenditure in 2018 was $10,006 and this related mainly to a new data acquisition system and other IT upgrades. The aircraft was sold in April 2017 in the sales leaseback transaction and therefore amortization expense of equipment is lower for 2017.

 

Amortization expense for 2017 also relates to intellectual property, which was acquired by NXT upon the August 31, 2015 conversion (the “Conversion”) of the final 8 million NXT preferred shares.

 

The Conversion gave rise to the application of “fair-value” accounting in Q3-15, whereby the 8 million common shares issued were assigned an estimated fair-value of $18.5 million. An intellectual property (“IP”) asset related to the technology acquired was recognized at approximately $25.3 million, which included a tax effect gross-up of $6.8 million (as the IP acquired has no corresponding deferred tax pool deduction for ongoing Canadian current income tax purposes).

 

The IP assets December 31, 2018 net book value of $19.7 million is amortized on a straight line basis over a 15-year period and will also be subject to ongoing tests of potential impairment of the recorded net book value.

 

Other Expense (Income)

 

	2018	2017	2016
Interest expense (income), net	$ (62,004 )	$ 4,485	$ (17,254 )
Foreign exchange (gain) loss	(19,852 )	69,676	272,713
Intellectual property, R&D and ARO	(43,428 )	91,370	218,853
Gain on extinguishment of liability	(185,661 )	-	-
	(310,945 )	165,531	474,312

 

Interest expense (income) - Interest income, generated by short term investments, is offset by interest expense incurred on such items as capital lease obligations for leasehold improvements and varies by year based on the level of cash available for investment. For 2018 net interest income was $62,004 and for 2017 net interest expense was $4,485. Proceeds from the Private Placement were placed in short-term investments when they were received and therefore interest income increased versus the prior periods. Short-term investments were minimal in and 2017. Interest expense as at the end of 2017 was $4,485 as compared to interest income in 2016.

 

Foreign exchange (gain) loss – this total is caused by changes in the relative exchange values of the US$ and CDN$. For example, when the CDN$ trades higher relative to the US$, cash held in US$ and monetary assets denominated in US$ will decline in value. This decline will be reflected as a foreign exchange loss in the period. NXT normally holds its cash and short-term investments in CDN$ to reduce the effect of market volatility. The security deposit for the aircraft is held in US$, which has a significant effect on the unrealized foreign exchange gain and loss each quarter.

 

The foreign exchange (gain) loss for the periods was primarily caused by the translation of assets and liabilities in the Canadian Company which were held in US$.

 

 

30

 

Intellectual property, R&D and ARO – this total includes costs incurred for the following:

 

	2018	2017	2016
Intellectual property, R&D and ARO	$ (43,428 )	$ 86,604	$ 60,143
TSX Listing	-	-	147,099
Other, net	-	4,766	11,611
	(43,428 )	91,370	218,853

 

This category includes primarily costs related to intellectual property ("IP") filings and R&D activity related to the SFD ® technology and costs for certain non-recurring, "project" activities.

 

For 2018, the Company's Intellectual property and R&D expenses were negative as it incurred less costs from a provider of services than originally estimated. The Company also updated estimates for several asset retirement obligations related to minor non-operated interests in oil and natural gas wells in which NXT has outstanding abandonment and reclamation obligations in accordance with government regulations were significantly reduced in Q4-18.

 

Gain on Extinguishment of Liability - In 2018 YTD, the Company determined that liabilities it had recorded before 2005 were no longer payable. As a result, a gain of $185,661 was recorded in other income on the extinguishment of the liability. No cash was paid to settle the liability. For 2017 YTD, other expenses consisted primarily of costs incurred to secure a patent for SFD ® in the United States and to continue to develop SFD ® technology.

 

For 2017, Intellectual property and R&D costs consisted primarily of costs incurred to secure a patent for SFD ® in the United States and to continue to develop SFD ® technology.

 

In March 2016, NXT graduated from the TSX Venture Exchange to the main TSX Exchange. There were certain costs incurred associated with this move which totaled $147,099.

 

Other expenses includes primarily discretionary costs related to intellectual property / patent filings and R&D activity related to the SFD ® technology.

 

We currently have no other outstanding derivative financial instruments, such as foreign currency hedges.

 

Income tax expense - NXT periodically earns revenues while operating outside of Canada as a non-resident within certain foreign jurisdictions and services rendered to clients in such countries may be subject to foreign withholding taxes, which are only recoverable in certain limited circumstances. Income tax expense for 2017 is a result of withholding taxes that were incurred on charges related to the Bolivia survey project. There was no income tax expense in Canada or Bolivia during 2018.

 

In 2017, NXT expensed foreign withholding tax of $75,545 (2016 - $159,990) which was incurred in connection with the Bolivia survey project.

 

A total net income tax was recognized as follows:

	2018	2017	2016
Foreign with-holding taxes incurred	$ -	$ 75,545	$ 159,990
	-	75,545	159,990
Foreign corporate taxes incurred	-	-	446,925
Less portion accrued at Dec 2015	-	-	(232,404 )
Corporate income tax expense – foreign	-	75,545	214,521
	-	75,545	374,511
Deferred tax recovery	-	-	-
Net tax expense (recovery)	-	75,545	374,511

 

 

31

 

 

At the end of 2018, 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 2039) and other resource deductions totaling approximately $44.5 million.

 

Summary of Quarterly Results (Unaudited)

 

A summary of operating results for each of the trailing 8 quarters (including a comparison to each respective prior quarter) follows. The extent of the profit or loss each quarter is mainly due to the timing and the number of survey contracts that are underway, and variances in such non-cash items as SBCE, which can occasionally be a significant expense in any given quarter

 

	Q4-18	Q3-18	Q2-18	Q1-18
	Dec 31, 2018	Sep 30, 2018	Jun 30, 2018	Mar 31, 2018
Survey revenue	$ -	$ -	$ -	$ -
Net income (loss)	(1,392,716 )	(1,660,031 )	(1,961,114 )	(1,954,650 )
Income (loss) per share - basic	(0.02 )	(0.02 )	(0.03 )	(0.03 )
Income (loss) per share - diluted	(0.02 )	(0.02 )	(0.03 )	(0.03 )

 

 

	Q4-17	Q3-17	Q2-17	Q1-17
	Dec 31, 2017	Sep 30, 2017	Jun 30, 2017	Mar 31, 2017
Survey revenue	$ -	$ -	$ -	$ -
Net income (loss)	(2,096,360 )	(1,935,356 )	(2,723,956 )	(2,214,726 )
Income (loss) per share - basic	(0.04 )	(0.04 )	(0.05 )	(0.04 )
Income (loss) per share - diluted	(0.04 )	(0.04 )	(0.05 )	(0.04 )

 

Significant or Unusual Items Impacting Net Loss:

 

There have been no revenues in the last eight quarters. The extent of the net loss in each quarter is mainly due to survey costs (related to aircraft lease and aircraft maintenance costs), G&A costs and non-cash items like stock-based compensation expense ("SBCE"). All of these costs can be a significant expense in any given quarter. In addition, net loss was affected by the following:

 

● 

In Q4-18, SBCE was lower by $283,811 as unvested options were forfeited. In addition, G&A costs decreased $156,271 for two reasons. Firstly, business development decreased as most of the business development work was centred in Calgary supporting Nigerian SFD ® survey negotiations. Secondly, there was a decrease in public company costs as the previous quarter had significant costs related to the Private Placement. Offsetting this was an increase of $44,010 in survey expenses as NXT’s aircraft incurred a scheduled major maintenance in December 2018.

● 

In Q3-18, a gain of $185,661 has been recognized on the extinguishment of a liability that was recorded before 2005 which is no longer payable. Also, interest income of $26,171 was earned on cash received from the Private Placement.

● 

In Q1-18, G&A costs were lower as NXT began to recognize the full extent of cost reductions started in the prior quarter.

● 

In Q4-17, G&A costs were higher due to severance and other costs incurred to implement cost reduction plans.

 

 

32

 

 

● 

In Q2-17, all costs related to an SFD ® multi-client survey conducted in the Gulf of Mexico were expensed. 

 

B.            

Liquidity and capital resources.

 

NXT's cash and cash equivalents plus short-term investments at December 31, 2018 was $4,239,532.

 

In order for NXT to continue to operate on a going concern basis, NXT must generate sufficient cash from successfully signing contracts and receiving advance payments . NXT's longer-term success remains dependent upon our ability to continue to attract new client projects and expand the revenue base to a level sufficient to exceed G&A expenses and generate excess net cash flow from operations . Proceeds from past equity financings have been and the proceeds from the Private Placement are expected to be used to provide NXT with funds to pursue, close and implement commercial transactions currently in negotiation, develop additional revenue streams including multi-client data sales, strategic partnerships, for general corporate and working capital purposes.

 

Going Concern:   The events described in the following paragraphs highlight that there is substantial doubt about NXT’s ability to continue as a going concern within one year after the date that these financial statements have been issued.

 

As a result of the extended duration between revenue bearing contracts, NXT’s balance of current assets less current liabilities has been declining since the closing of the first tranche of the Private Placement on February 2018.  As a result, the Company’s current and forecasted cash position is not expected to be sufficient to meet its obligations for the 12-month period beyond the date that these financial statements have been issued. 

 

While near term survey prospects are expected to translate into revenue bearing contacts and provide positive contribution to the liquidity position, there are no certainties that several of these prospects will convert into executed contracts prior to the full depletion of the Company’s cash resources.  As discussed below, in February 2019, the Company signed a Co-operation agreement for which it will receive a non-refundable deposit of $200,000 United States Dollars. In March 2019, NXT signed a SFD ® Survey contract for the approximate revenue value of $8,900,000 United States dollars. Advance payments totaling $300,000 United States Dollars for mobilization and demobilization costs have been received in March of 2019 and an additional $1,000,000 United States Dollars is to be received upon successful completion of a pilot survey. The Company has also taken further steps to reduce costs which include evaluating alternatives to reduce aircraft costs and office costs. In addition, the Advisory Board has been suspended indefinitely and staffing costs are being reduced with new human resource policies. If required, further financing options that may be available to the Company include issuance of new equity, debentures or bank credit facilities.  The need and availability of any of these options will be dependent on the timing of securing further new contracts and obtaining financing 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 and to continue to attract new client projects and expand the revenue base to a level sufficient to exceed fixed operating costs and generate positive cash flow from operations.  The occurrence and timing of these events cannot be predicted with certainty. 

 

Risks related to having sufficient ongoing working capital to execute survey project contracts are mitigated through our normal practice of obtaining progress payments from prospective clients 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.

 

During 2018, NXT continued to make progress in strengthening its liquidity and working capital position through a series of corporate actions described below.

 

Reduction in corporate costs: Following the completion of the Leaseback Transaction, NXT took further steps to reduce corporate costs. The most significant of these steps included a reduction in non-essential staff   and new Human Resource policies to reduce staffing costs.   Please see the discussion under " General and administrative (“G&A”) expense " for the results of these reductions.

 

 

33

 

 

Private Placement: NXT completed a Private Placement financing on July 3, 2018 of $9,484,810 through the issuance of an aggregate of 10,264,946 units at $0.924 per unit. Each unit consists of one common share and one-third of one common share purchase warrant (each whole warrant, a "Warrant") and each Warrant entitles the holder to acquire one common share at an exercise price of $1.20 for twelve (12) months from closing of the first tranche of the Private Placement on February 16, 2018. As the result of the Co-operation Agreement between AGV and NXT, the Company has received conditional approval from the Toronto Stock Exchange to extend the Warrants for 12 months until February 16, 2020, subject to disinterested shareholder approval.

 

Nigerian SFD ® Survey: With the signing of the Nigerian project with PE Energy including the receipt of $0.3 million US$ mobilization/demobilization fee, the expected receipt of the $1,000,000 advance payment after the completion of the pilot survey and maintaining current staffing and spending levels, NXT estimates it will have sufficient funds to meet its ongoing obligations for a period of approximately 5 months from the date of this MD&A. If as expected NXT receives timely receipt of milestone payments from the Nigerian SFD ® survey, NXT estimates it will have sufficient funds to meet its ongoing obligations for an additional 19 months. After this period NXT will require additional funds in order to continue to seek revenue contracts, pay salaries, suppliers and to maintain its aircraft obligations.

 

This discussion includes references to the term “net working capital”, which do 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 has minimal secured debt and had total “net working capital” of $3.8 million as at December 2018 as follows:

 

	December 31,	December 31,	net change
	2018	2017	in 2018
Current assets (current liabilities):
Cash and cash equivalents	$ 339,532	$ 166,618	$ 172,914
Short-term investments	3,900,000	950,000	2,950,000
	4,239,532	1,116,618	3,122,914
Accounts receivable	61,279	60,027	1,252
Prepaid expenses and deposits	65,159	107,363	(42,204 )
Accounts payable and accrued liabilities	(499,535 )	(1,562,394 )	1,062,859
Income taxes payable	-	(201 )	201
Current portion of capital lease obligation	(42,603 )	(39,579 )	(3,024 )
Net Working Capital	3,823,832	(318,166 )	4,141,998

 

The increase in working capital was due to the cash provided by the Private Placement, net of cash operating costs during 2018. In addition, liabilities are lower as the Company paid outstanding liabilities with funds received from the Private Placement.

 

 

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Sources and uses of cash

 

The following table, and the narrative below, summarizes NXT’s net cash flows, and the total cash plus short-term investments held at the end of the periods, for the last three fiscal years:

 

For the year ended December 31	2018	2017	2016
Cash provided by (used in):
Operating activities	$ (6,043,919 )	$ (5,464,679 )	$ (7,587,614 )
Financing activities	9,176,839	2,022,943	464,811
Investing activities	(2,960,006 )	3,117,858	527,496
Net cash inflow (outflow)	172,914	(323,878 )	(6,595,307 )
Cash & cash equivalents, start of the year	166,618	490,496	7,085,803
Cash & cash equivalents, end of the year	339,532	166,618	490,496
Cash & cash equivalents	339,532	166,618	490,496
Short-term investments	3,900,000	950,000	1,453,091
Total	4,239,532	1,116,618	1,943,587

 

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	2018	2017	2016
Comprehensive income (loss) for the year	$ (6,968,511 )	$ (8,970,398 )	$ (9,099,562 )
Add back net non-cash expense and income items	1,782,762	2,676,705	2,896,447
	(5,185,749 )	(6,293,693 )	(6,196,585 )
Change in non-cash working capital balances	(858,170 )	829,014	(1,384,499 )
Total cash provided by (used in) in operations	(6,043,919 )	(5,464,679 )	(7,587,614 )

 

For all periods, changes in operating cash flow was driven by the lack of revenue and incurred operating costs for the period. When comparing 2018 to 2017 cost reduction and cash deferral efforts reduced the operating cash by $1,107,944 but payments of deferred liabilities decreased non-cash working capital by $1,687,184 resulting in a total change of $579,240 (decrease) in operating cash flow.

 

 

 

35

 

Financing Activities

 

2018 – During 2018 NXT recorded a net inflow of $9,176,839 as a result of proceeds received from the closing of tranches in the Private Placement.

 

2017 - NXT recorded a cash inflow of $2,019,865 in 2017 related mostly from the Rights Offering.

 

2016 - The only financing activity was related to proceeds from exercise of NXT stock options. Q4-16 reflects a $34,159 cash use for repayments of the capital lease obligation and $498,970 proceeds from the exercise of NXT stock options.

 

Investing Activities

 

2018 –2018 short term investments increased as a result of the Private Placement funds.

 

2017 - The overall net cash source in investing activities of $3,117,858 for 2017 reflects these components:

 

● 

On April 28 th , 2017 NXT completed a sale and leaseback transaction on its’ Cessna Citation aircraft for $3,142,260 (US$2,300,000).

 

● 

A use of $518,765 for deposits on the aircraft and building leases.

 

● 

A source of $503,091 from a net decrease in cash invested in short-term investments.

 

2016 – The overall net cash source in investing activities of $527,496 for 2016 reflects these components:

 

● 

A use of $89,702 for net capital additions, which relate primarily to $45,725 for computer equipment, $16,178 for SFD ® Equipment – non computer, $15,141 for computer software, $8,102 for SFD ® computer hardware and $4,555 for leaseholds.

 

● 

A source of $602,387 from a net decrease in cash invested in short-term investments.

 

● 

A source of $75,000 related to a decrease in restricted cash balance.

 

● 

A use of $60,187 arising from a decrease in non – cash working capital balances related to investing activities.

 

C.            

Research and development, patents and licenses, etc.

 

There was no separate R&D expense reported in the financial statements in the years 2018, 2017 and 2016. In these three years, expenditures related to R&D were included within general and administrative expense (related to a portion of staff salaries and overhead) and in other expense (for patent filings and related costs).

 

 

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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 at April 30, 2019 we are in the first stage of the Nigerian SFD ® survey.

 

We are not aware of any current external trends (such as in commodity prices, etc.) which could affect our operations for the next fiscal year. 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.

 

E.            

Off-balance sheet arrangements.

 

The Company has no off-balance sheet arrangements as of the date of this Form 20-F other than operating leases as described in Contractual Commitments.

 

F.            

Tabular disclosure of contractual obligations.

 

The following table sets forth our outstanding contractual obligations as at December 31, 2018:

 

		less than	1 to 3	3 to 5	more than
	Total	1 year	years	years	5 years
Long-term debt	$ -	$ -	$ -	$ -	$ -
Capital (finance) lease obligations	85,118	42,603	42,515	-	-
Operating lease obligations:
Premises rent / operating lease	3,967,216	578,914	1,172,715	1,181,646	1,033,941
Aircraft Lease	2,101,550	646,631	1,293,262	161,657	-
Purchase obligations	-	-	-	-	-
Other long term liabilities:
Asset retirement obligation	26,778	-	26,778	-	-

 

ITEM 6. 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.            

Directors and senior management.

 

Our articles of incorporation provide for a minimum of one director and a maximum of 15 directors comprising our Board of directors. At present, our Board of directors 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 April 30, 2018, for our directors, executive officers and key employees:

 

 

 

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George Liszicasz Director, Chairman and Chief Executive Officer since January 1996; President since July 2002	Mr. Liszicasz is the inventor of the SFD ® Technology and has been Chairman and Chief Executive Officer since the Corporation's inception in 1996. Mr. Liszicasz’ primary responsibilities, as the President and CEO, are to oversee all operations and to further develop the SFD ® technology.   He holds an Electronics Engineer degree from the Landler Jeno Technitken in Hungary in 1973 and studied general sciences at the University of British Columbia between 1979 and 1983. Mr. Liszicasz has extensive R&D body of work with various technologies, and 52 inventions.
Charles Selby Director since January 2006	Mr. Selby holds a B.Sc. (Hons) in Chemical Engineering, a J.D. degree and is a registered Professional Engineer in the Province of Alberta. He previously practiced law for two large Canadian law firms specializing in securities and corporate finance matters. Since leaving the practice of law, Mr. Selby was a Vice President of Pengrowth corporation for almost 20 years. He also has served on the board and in management of a number of reporting issuers including Arakis Energy, which had operations in the Sudan, and other issuers in the oil and natural gas industry.   He is currently the Chairman and CEO of Montana Exploration Corp. (formerly AltaCanada Energy Corp.), an oil and gas company listed on the TSX-V, and is the president of Caledonian Royalty Corporation, Caledonian Global Corporation and Caledonian Midstream Corporation, private entities which are involved in oil & gas production and the midstream business.   Mr. Selby is the Lead Director of NXT.  He is also Chair of NXT’s Compensation Committee and a member of the Audit, Disclosure, and Strategic Planning Committees.    Mr. Selby also served as the Company’s interim CFO from December, 2017 to January, 2018.
John Tilson Director since February 2015	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 joined Roger Engemann and Associates 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, John later became Executive Vice President & Managing Director of Pasadena Capital Corporation. Assets under management had grown to over US$5 billion by the time the firm was sold to Phoenix Companies in 1997. Mr. Tilson later retired in 2005.   From 2006 to 2012 Mr. Tilson was a member of the Board of Trustees, including three years serving as VP and Chairman of the long-range planning committee, for Lotusland, a Santa Barbara non-profit organization established by Madame Ganna Walska. Mr. Tilson is the Chair of the Board’s Strategic Planning Committee, and a member of the Compensation, Governance and Audit Committees.

 

 

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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 his call to the Bar in 1987. He is a member of the firm’s Energy and Infrastructure Practice Group and is involved in energy and energy related matters throughout the Middle East, North Africa, the CIS, Asia and South America.   Mr. Valentine is a member of the Board of Directors 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.   Mr. Valentine holds a BA from the University of British Columbia, a LLB from Dalhousie University, and a LL.M. from the London School of Economics.   Mr. Valentine is the Chair of the Governance Committee and a member of the Compensation Committee.
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, and Chairman of the Management Committee. Mr. Wilcox specialized in Cumberland’s investments in the energy industry (E&P 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 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 is presently CEO of E Street Management, LLC which manages a long/short equity fund of funds. He is also one of the 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 Chinese art and collectibles.   Mr. Wilcox obtained a BA (Honors), in Modern Chinese from the University of California, Santa Barbara, and a Master of International Management from the American Graduate School of International Management in Phoenix.   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, 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 the chair of the Board’s Audit Committee and a member of the Disclosure, Governance and Strategic Planning Committees.
Eugene Woychyshyn Interim CFO and Corporate Controller since December 2018	Mr. Woychyshyn has been serving as a consultant to NXT since late November 2017 proving controllership services. He has extensive international experience in North America, Europe and Asia working in numerous industries and has previous experience in the CFO role of a TSX Venture listed company. Mr. Woychyshyn is a Chartered Professional Accountant who holds a Bachelor of Commerce from the University of Manitoba and a Masters of Business Administration from St. Joseph’s University, Philadelphia PA.   Mr. Woychyshyn is a member of the Disclosure Committee.

 

 

 

 

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None of our executive officers or directors have been involved in any bankruptcy proceedings within the last five years, been convicted of or have pending any criminal proceeding, been subject to any order, judgment or decree enjoining, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity or been found to have violated any federal, state or provincial securities or commodities laws.

 

A cease trade order was issued by the Alberta Securities Commission on May 4, 2018 against Montana Exploration Corp. (“ MEC ”) for failing to file its annual audited financial statements, annual management’s discussion and analysis and certification of annual filings within the required time period. Charles Selby is the Chief Executive Officer of MEC. The TSX Venture Exchange has announced that upon revocation of the Cease Trade Order, MEC’s shares will remain suspended until the company meets TSX Venture Exchange requirements. Charles Selby was previously a member of the board of directors of Wellpoint Systems Inc. (“Wellpoint”, a reporting issuer on the TSX-V), which in 2011 had a Receiver appointed by the Court of Queen’s Bench of the Province of Alberta on behalf of the holders of secured debts. Wellpoint was subsequently wound up following a restructuring and sale of its operating assets. Charles Selby was previously a member of the board of directors of Idaho Natural Resources Corp., which was cease-traded by the TSX Venture Exchange in December 2012 for failing to meet listing requirements.

 

Messrs. Tilson, Valentine, and Wilcox are considered "independent" within the meaning of Canadian National Instrument 58-101.

 

B.            

Compensation

 

Executive Compensation

 

The following table sets out certain information regarding the annual and long-term compensation of the Chief Executive Officer, the Chief Financial Officer at December 31, 2018, 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 2018. 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, 2018:

 

Name & Principal Position	Salary	Stock Options (1)	Vacation (2)	Other (3)	Total
George Liszicasz, President & CEO (4)	$ 274,800	$ -	$ 36,992	$ 11,602	$ 323,394
Charles Selby, Interim CFO (5)	22,671	-	-	27,500	50,171
Jakub Brogowski, Chief Financial Officer (5)	206,083	623,924	10,305	-	840,312
Eugene Woychyshyn, Interim Chief Financial Officer (6)	28,334	48,937	-	197	77,468

 

(1) Mr. Brogowski’s options were forfeited as of December 30, 2018. (2) “vacation” represents a cash payout in the year of a portion of unused vacation entitlements carried forward. (3) “other” consists of any vehicle allowance paid ($9,000 for Mr. Liszicasz) plus the taxable portion of company paid amounts for group health benefits and parking. In addition Mr. Selby was paid $27,500 as a member of the Advisory Board. (4) salary and other totals exclude the cash portion of fees earned as Board Members, $35,000 for Mr. Liszicasz and $30,000 for Mr. Selby. (5) Mr. Jakub Brogowski resigned as CFO on November 30, 2018. Mr. Selby was the interim CFO from December 1, 2017 until January 31, 2018. (6) Mr. Eugene Woychyshyn became the Corporate Controller as of November 1, 2018 and is also the Interim Chief Financial Officer from December 1, 2018 to current. Mr. Woychyshyn was employed by a consulting company from December 2017 to October 2018; $203,555 was paid to this consulting company from January 2018 to October 2018 for Mr. Woychyshyn's services and is not included in the table above.

(See Item 6.E “Share Ownership” for details regarding stock options granted to officers).

 

 

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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. New members who join the Board receive a separate grant of stock options (with entitlement to exercise vesting over a 3 year period) in the year of joining the Board. There were no new Board members in 2018 and no options were granted to Board members.

 

In 2018, the directors each individually elected to receive cash as payment of Board fees earned for the year. The annual cash retainer was based on $30,000 ($35,000 in the case of each of the Chairman of the Board and the Audit Committee.) Compensation payable (including pro-rated amounts for periods of partial service in the year) for 2018 is summarized as follows:

 

	2018
George Liszicasz	$ 35,000
Charles Selby	30,000
Bruce Wilcox	35,000
Tom Valentine	30,000
John Tilson	30,000

 

The amount and terms of any stock options granted as compensation for Board member services is determined by the Board. We do not provide additional compensation for committee participation (other than as noted previously re the minor additional amount for service as the Chairman of the Board and of the Audit Committee) or for special assignments of the Board. (See Item 6.E “Share ownership” for details regarding stock options granted to directors.)

 

During 2018, Mr. Charles Selby was paid $22,671 in respect of his being the Interim Chief Financial Officer and $27,500 as a member of the Advisory Board.

 

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 (other than an employment contract for the CEO, Mr. Liszicasz) have service contracts with the Company or any of its subsidiaries that provide benefits upon termination of employment.

 

 

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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 of directors 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.

 

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. All members of the Corporate Governance Committee are independent within the meaning of Canadian National Instrument 58-101.

 

Responsibilities of the Corporate Governance Committee

 

The Corporate Governance Committee’s duties, as outlined in its charter, are to deal with the Company’s approach to corporate governance and the promotion of compliance with industry and regulatory standards. The committee is responsible for overseeing and assessing the functioning of the Board and the committees of the Board and for the development, recommendation to the Board, implementation and assessment of effective corporate governance principles and guidelines. The Committee’s responsibilities also include identifying new candidates for director and recommending that the Board select qualified director candidates for election at the next annual meeting of shareholders.

 

DISCLOSURE COMMITTEE

 

Composition of the Disclosure Committee

 

The Disclosure Committee currently consists of Mr. Selby, Mr. Wilcox (Chair) and Mr. Woychyshyn (the Corporate Controller and Interim CFO of the Company).

 

Responsibilities of the Disclosure Committee

 

The Disclosure Committee 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 Committee is responsible for ensuring public disclosure through filing these news releases on SEDAR and EDGAR as well as the Company’s website.

 

 

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STRATEGIC PLANNING COMMITTEE

 

Composition of the Strategic Planning Committee

 

Messrs. Tilson (Chair), Wilcox and Selby are the current members of the Strategic Planning Committee. Messrs. Tilson (Chair) and Wilcox are independent.

 

  Responsibilities of the Strategic Planning Committee

 

The Strategic Planning Committee's duties are to set out the long-term goals of the Company and to take an active role in the development and execution of plans to achieve those goals. The Committee participates in establishing priority areas of Company business, assessment of strategic initiatives from Company senior executives with regard to development and implementation control of the Company Strategy and business area specific strategies of the Company. The Committee also makes recommendations regarding the overall organization and management structure including areas where management needs to be strengthened, reviewing the organizational job descriptions, requirements and also procedures for coordination of organizational management and board resources. The Committee is actively involved in the Company’s strategic planning process and reviews all materials relating to the strategic plan with management. The Board is responsible for reviewing and approving the strategic plan. At least one board meeting each year is centered on discussing and considering the strategic plan, which takes into account the risks and opportunities of the business. Management must seek the Board’s approval for any transaction that would have a significant impact on the strategic plan.

 

AUDIT COMMITTEE

 

Composition of the Audit Committee

 

The Audit Committee consists of Messrs. Wilcox (Chair), Selby and Tilson. Messrs. Wilcox (Chair) and Tilson are independent and each member is financially literate. The Company’s Audit Committee Charter is posted on our website and may be viewed at www.nxtenergy.com or you may request a copy be mailed to you by writing to our offices at Suite 302, 3320 – 17 th Avenue SW, Calgary, Alberta, Canada, T3E 0B4.

 

Bruce Wilcox

 

Mr. Wilcox holds a Master of International Management from the American Graduate School of International Management, and has extensive experience in financial statement analysis, through his career serving as an analyst, fund manager and CEO in the investment management industry. He has previously served as audit committee chair of a publicly traded company.

 

Charles Selby

 

Mr. Selby is both a lawyer and Professional Engineer, holding B.Sc. (Hons) and JD degrees. He previously practiced law for two large Canadian law firms specializing in securities and corporate finance matters and remains a member of good standing with the Bar. He has served on the board and in management of a number of reporting issuers including Arakis Energy, which had operations in the Sudan, and other issuers in the oil and natural gas industry. He is currently the CEO of Montana Exploration Corp. (formerly AltaCanada Energy Corp.), an oil and gas company listed on the TSX, and is the president of Caledonian Royalty Corporation and Caledonian Global Corporation, both private entities.

 

Mr. Selby was also formerly the Chairman and CEO of Canadian Star Energy Limited, and was formerly the Chief Financial Officer of AltaCanada Energy Corp. He also formerly served as the Vice President and Corporate Secretary of Pengrowth Corporation, the administrator of Pengrowth Energy Trust. Mr. Selby has previously served on the audit committee and as audit chairman of several reporting issuers.

 

John Tilson

 

Mr. Tilson has both MBA and CFA designations, He previously served as an analyst, portfolio manager, and advisor in the US investment and financial industry with such firms as Sutro & Company and EF Hutton & Company, and Roger Engemann. After working as an analyst and portfolio manager, Mr. Tilson later became Executive Vice President & Managing Director of Pasadena Capital Company.

 

 

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All members 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.

 

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 $350,000 (annual aggregate total), the entire Audit Committee must approve this service, generally at its next scheduled meeting.

 

COMPENSATION COMMITTEE

 

Composition of the Compensation Committee

 

Messrs. Selby (Chair), and Tilson and Valentine are members of the Compensation Committee. Messrs. Tilson and Valentine are independent. 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 – 17 th 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.

   

 

44

 

 

D.            

Employees

 

Fiscal year ended December 31, 2018

 

As of the fiscal year ended December 31, 2018, we had a total of 11 employees. NXT has no employees that are members of a labor union. The following summarizes the number of employees and independent contractors by main job function as at December 31, 2018 :

 

Function	employees	contractors	total
Senior management team	2	-	2
Finance, administration and sales	3	-	3
Operations and technical development	6	-	6
Total	11	-	11

 

All of the above noted staff are based in Calgary, Canada. The 6 operations and technical development staff includes one research scientist holding a Ph.D. and 3 geoscientists. We periodically engage other technical and administrative contract personnel as required on a project basis.

 

Fiscal year ended December 31, 2017

 

As at December 31, 2017, we had a staff of 9 and one contractor, all based in Calgary, as follows:

 

Function	employees	contractors	total
Senior management team	1	-	1
Finance, administration and sales	3	1	4
Operations and technical development	5	-	5
Total	9	1	10

 

All of the above noted staff are based in Calgary, Canada. The 5 operations and technical development staff includes one research scientist holding a Ph.D. and 4 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, as was re-approved and ratified at the Company’s AGM held on June 4, 2016. Pursuant to this Plan, all stock option grants must be approved by the Board of directors of the Company. 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 Corporation, 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.

 

45

 

 

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 Restricted Share Unit Plan (the”RSU”) was approved and ratified by the shareholders at the Company’s annual meeting on June 21, 2017. Pursuant to the RSU, all grants must be approved by the Board of directors 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 Corporation, 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 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.

 

The following stock options were granted to NXT’s executive officers and directors in the three prior fiscal years ended December 31, 2018, 2017, and 2016 and to date to April 30, 2018. No RSU’s have been granted to date.

 

In 2018 and to date in 2019:

 

● 

A total of 1,000,000 stock options with an exercise price of $1.13 per common share were granted in February 2018 to the new Chief Financial Officer. These options were forfeited on December 30, 2018.

 

● 

A total of 150,000 stock options with an exercise price of $0.59 per common share were granted in November 2018 to the new Corporate Controller.

 

In 2017 :

 

● 

No options were granted in 2017.

 

In 2016:

 

● 

A total of 150,000 stock options with an exercise price of $1.49 per common share were granted in May 2016 to the new Chief Financial Officer.

 

● 

A total of 37,500 stock options with an exercise price of $1.48 per common share were granted in July 2016 to three directors as part of their elected form of payment of the Board of director fees earned for 2016. All of these options had immediate vesting at the grant date.

 

● 

A total of 50,000 stock options with an exercise price of $1.50 per common share were granted in July 2016 to a directors as part of their Advisory Board of director fees earned for 2016.

 

● 

A total of 37,500 stock options with an exercise price of $1.45 per common share were granted in December 2016 to three directors as part of their elected form of payment of the Board of director fees earned for 2016. All of these options had immediate vesting at the grant date.

 

The following table sets forth information regarding outstanding stock options which have been granted to our directors and officers as of April 30, 2019. All options are issued at an exercise price set at the closing trade price on the trading date prior to the grant. Each option entitles the option holder to acquire one common share of the Company.

 

 

46

 

Issued and outstanding stock options held by directors and officers of the Company (as of April 30, 2019)

 

Name and Position	Exercise Price	Option Grant Date	Option Expiry Date	# of options held	% of total outstanding options
George Liszicasz	$ 1.39	9-Jul-2014	9-Jul-2019	7,500
CEO & Director	$ 1.35	9-Jan-2015	9-Jan-2020	7,500
				15,000	1.2 %
Eugene Woychyshyn	$ 0.59	01-Nov-2018	01-Nov-2023	150,000
Corporate Controller & Interim CFO
				150,000	11.8 %
Charles Selby	$ 1.39	9-Jul-2014	9-Jul-2019	7,500
Director	$ 1.35	9-Jan-2015	9-Jan-2020	7,500
	$ 1.50	22-Jul-2016	22-Jul-2021	50,000
				65,000	5.1 %
John Tilson	$ 2.10	16-Sep-2015	16-Sep-2020	150,000
Director	$ 1.73	10-Dec-2015	10-Dec-2020	25,600
	$ 1.48	14-Jul-2016	14-Jul-2021	15,000
	$ 1.45	22-Dec-2016	22-Dec-2021	15,000
				205,600	16.2 %
Thomas Valentine	$ 1.39	9-Jul-2014	9-Jul-2019	7,500
Director	$ 1.35	9-Jan-2015	9-Jan-2020	7,500
	$ 1.48	14-Jul-2016	14-Jul-2021	7,500
	$ 1.45	21-Dec-2016	21-Dec-2021	7,500
				30,000	2.4 %
Bruce Wilcox	$ 2.10	16-Sep-2015	16-Sep-2020	150,000
Director	$ 1.73	10-Dec-2015	10-Dec-2020	17,000
	$ 1.48	14-Jul-2016	14-Jul-2021	15,000
	$ 1.45	22-Dec-2016	22-Dec-2021	15,000
				197,000	15.5 %
Total number of stock options held by officers and directors				662,600	52.1 %

 

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 April 30, 2019 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 within 60 days of April 30, 2019 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.

 

 

47

 

 

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 68,573,558 common shares issued and outstanding as of April 30, 2019. This total of 68,573,558 excludes all outstanding options and warrants that are exercisable within 60 days of April 30, 2019 (which is adjusted for each individuals’ % purposes as noted in footnote 5 below).

 

Beneficial Ownership of Directors and Officers (“D&O”)	Beneficially Owned as at April 30, 2019	Percent of Common Shares 6
Directors and Officers:
George Liszicasz 1 & 2	15,835,617	23.09 %
Charles Selby 1	473,161	* 3
John Tilson 1	3,017,348	4.40 %
Thomas E. Valentine 1	30,000	* 3
Bruce Wilcox 1	412,253	* 3
Eugene Woychyshyn 2	76,200	* 3
Total D & O Common Shares	19,844,579	28.94 %
Major Shareholders (> 5%):
Alberta Green Ventures Limited Partnership 5	13,686,592	19.96 %
Mork Capital Management, LLC., and Michael Mork 4	5,717,420	8.34 %

 

1 Director of NXT

2 Officer of NXT

3 Beneficially owns less than one percent of the total outstanding common shares.

4 based on i nformation provided to the Company as at April 23, 2019 by Mork Capital Management, LLC. and its principal, Mr. Michael Mork.

5 Alberta Green Ventures Limited partnership includes shares and warrants. Please see below for more information on the warrants.

 

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 April 30, 2018 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:

 

	common	vested &
	shares	exercisable	Pro forma
	held	options	total
Liszicasz	15,820,617	15,000	15,835,617
Selby	408,161	65,000	473,161
Tilson	2,811,748	205,600	3,017,348
Valentine	-	30,000	30,000
Wilcox	215,253	197,000	412,253
Woychyshyn	26,200	50,000	76,200
	19,281,979	652,600	19,844,579

 

 

48

 

 

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.  

In July 2018, the company completed the Private Placement with AGV . In total, AGV purchased 10,264,946   Units at a price of $0.924 per Unit for total gross proceeds of approximately $9,484,810. As a result of the Private Placement, a total of 10,264,946 common shares and a total of 3,421,648 warrants were issued to the Subscriber. As of the date of this Form 20-F the Company has received conditional approval from the TSX to extend the warrants to February 16, 2020, subject to disinterested shareholder approval. NXT intends to table a resolution for the approval of disinterested shareholders at the 2019 Annual Shareholder Meeting of the NXT to ratify a twelve (12) month extension of AGV’s 3,421,648 warrants (“Warrants”) to February 16, 2020. If approved, each Warrant entitles the holder to acquire one Common Share at an exercise price of $1.20 for an additional twelve months to February 16, 2020 . The date of the Annual Shareholder Meeting is June 25, 2019. Until the extension is approved by shareholders at the meeting, the warrants will not be exercisable by AGV. If the extension is not approved, then the warrants will terminate.

 

The following information is taken from the records of Computershare Trust Company of Canada, located in Calgary, Alberta, Canada, the Company's transfer agent for its common shares. As of April 30, 2019, there were 142 registered holders of record of the Company's common shares, including 81 in the United States who collectively held 22,958,367 common shares, representing 33.48% of NXT’s 68,573,558 total issued and outstanding common shares.

 

NXT is a foreign private issuer for its current fiscal year. As of the last business day of the Company’s first fiscal quarter, the majority of the Company’s executive officers and directors 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. 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, 2018 through the current date, April 30, 2019:

 

● 

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.

 

● 

One of the members of NXT’s Board of directors is a partner in a law firm which provides legal advice to NXT. In 2018, NXT incurred legal expenses of $249,218 with this firm, for which a total of $5,999 is included in accounts payable as at December 31, 2018. In 2019 as of the report date total fees incurred are $39,861 for which $40,761 is still outstanding.

 

● 

In 2017, one board member received $22,671 in compensation for services provided as the Interim CFO during 2018. He also received $27,500 as compensation as a member of the Advisory Board.

 

● 

Accounts payable and accrued liabilities at December 31, 2018 includes a total of $7,461 related to re-imbursement of expenses owing to persons who are directors and officers of NXT. As of the report date $NIL was outstanding to persons who are directors and officers of NXT.

 

C. 

Interests of experts and counsel.

 

Not applicable.

 

 

49

 

 

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 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, 2018 consolidated financial statements, except as otherwise disclosed therein.

 

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. 

Consolidated statements and other financial information.

 

As of April 30, 2018, there have not been any significant subsequent events which have occurred subsequent to the date of consolidated financial statements for the year ended December 31, 2018. NXT’s interim, unaudited consolidated financial statements for the 3-month period ended March 31, 2018 will be released in mid-May, 2018.

 

ITEM 9. 

THE OFFER AND LISTING

 

A.             

Offer and listing details.

 

Our common shares are currently quoted in the United States on the OTC Markets QB Exchange under the symbol “NSFDF”, in Canada on the TSX under the symbol “SFD”. There have been no trading suspensions over the last three years.

 

B.             

Plan of distribution.

 

Not applicable.

 

C.             

Markets.

 

Our common shares are currently quoted in the United States on the OTC Markets QB Exchange under the symbol “NSFDF”, in Canada on the TSX-V under the symbol “SFD.V” (to March 21, 2016) and 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”.

 

The Company’s common shares commenced trading on the US Over-The-Counter Bulletin Board pursuant to a reverse takeover transaction in 1996, and were approved for listing on the Frankfurt and Berlin Exchanges in January 2004, and on the TSX-V in December 2007. Effective March 22, 2016, NXT upgraded its Canadian listing from the TSX-V to the TSX.

 

 

 

50

 

 

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 directors 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 of directors to vote on matters of their remuneration as a director, officer, employee or agent of NXT or of an affiliate of NXT.

 

Borrowing Powers

 

The Board of directors 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 directors 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.

 

 

51

 

 

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 directors 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 directors 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 directors of NXT.

 

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 directors 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.

 

 

52

 

 

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 of directors 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 of directors 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 of directors 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 directors of NXT;

(c) 

the external auditor of NXT; and

(d) 

any others who, although not entitled or required under the provisions of the ABCA, any unanimous shareholder agreement, or the Articles or the By-Laws, are allowed to be present at the meeting.

 

Any other person may be admitted only on the invitation of the Chairperson of the meeting or with the consent of the meeting.

 

There are no restrictions in NXT’s Articles or By-Laws as to the number of shares that may be held by non-residents other than restrictions set out in the Investment Canada Act (the “ICA”) (Canada), as further described under Item 10.D – “Exchange Controls” below.

 

 

 

53

 

 

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 of directors, under the general powers conferred to it under NXT’s By-Laws, have the authority to approve and invoke a shareholders rights plan that will protect shareholders from unfair, abusive or coercive take-over strategies, including the acquisition or control of NXT by a bidder in a transaction or series of transactions that does not treat all shareholders equally or fairly or that does not afford all shareholders an equal opportunity to share in any premium paid upon an acquisition of control. 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 Item 4. B for description of the AGV Co-operative Agreement, The AGV Sales Representative Agreement and the Nigerian SFD ® survey with PE Energy. 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.

 

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.

 

 

 

54

 

 

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;

 

(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;

 

(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 of directors, 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 U.S. Holder. This summary does not address the 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 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.

 

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, and 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 Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations (whether final, temporary, or proposed), 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 retroactively. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation.

 

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.

 

 

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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 arrangement involving more than one position; (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 required to accelerate the recognition of any item of gross income with respect to common shares as a result of such income being recognized on an applicable financial statement; or (i) 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. This summary also does not address the U.S. federal income tax considerations applicable to U.S. Holders who are: (a) U.S. expatriates or former long-term residents of the U.S.; (b) persons that have been, are, or will be a resident or deemed to be a resident in Canada for purposes of the Income Tax Act (Canada) (the “Tax Act”); (c) persons that use or hold, will use or hold, or that are or will be deemed to use or hold common shares in connection with carrying on a business in Canada; (d) persons whose common shares constitute “taxable Canadian property” under the Tax Act; or (e) persons that have a permanent establishment in Canada for the purposes of the Canada-U.S. Tax Convention. 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 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

 

PFIC Status of the Company

 

If the Company were to constitute a “passive foreign investment company” under the meaning of Section 1297 of the Code (a “PFIC”, as defined below) for any year during a U.S. Holder’s holding period, then certain potentially adverse rules may affect the U.S. federal income tax consequences to a U.S. Holder as a result of the acquisition, ownership and disposition of common shares. The Company believes that it was classified as a PFIC for the tax year ended December 31, 2018, but based on current business plans and financial expectations, the Company does not anticipate that it will be a PFIC for its current tax year. No opinion of legal counsel or ruling from the IRS concerning the status of the Company as a PFIC has been obtained or is currently planned to be requested. The determination of whether any corporation was, or will be, a PFIC for a tax year 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 such tax year and, as a result, cannot be predicted with certainty as of the date of this document. Accordingly, there can be no assurance that the IRS will not challenge any determination made by the Company (or any subsidiary of the Company) concerning its PFIC status. Each U.S. Holder should consult its own tax advisors regarding the PFIC status of the Company and each subsidiary of the Company.

 

In 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.

 

The Company generally will be a PFIC if, for a tax year, (a) 75% or more of the gross income of the Company is passive income (the “PFIC 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, based on the quarterly average of the fair market value of such assets (the “PFIC asset test”). “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.

 

 

 

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For purposes of the PFIC income test and PFIC 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 it (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 PFIC income test and PFIC 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).

 

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.

 

 

 

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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.

 

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 there can be no assurances that the Company will satisfy the record keeping requirements that apply to a QEF, or that the Company will supply U.S. Holders with information that such U.S. Holders are required to report under the QEF rules, in the event that the Company is a PFIC including a PFIC Annual Information Statement. 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.

 

 

 

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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 Securities and Exchange Commission, (b) the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, 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. Provided that the common shares are “regularly traded” as described in the preceding sentence, the common shares are expected to be marketable stock. However, each U.S. Holder should consult its own tax advisor in this regard.

 

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.

 

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.

 

 

 

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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.

 

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.

 

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.

 

General Rules Applicable to the Ownership and Disposition of Common Shares

 

The following discussion describes the general rules applicable to the ownership and disposition of the common shares but is subject in its entirety to the special rules described above under the heading “Passive Foreign Investment Company Rules.”

 

Distributions on Common Shares

 

A U.S. Holder that receives a distribution, including a constructive distribution, with respect to a common share will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of the current and accumulated “earnings and profits” of the Company, as computed for U.S. federal income tax purposes. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates if the Company is a PFIC for the tax year of such distribution or the preceding tax year. To the extent that a distribution exceeds the current and accumulated “earnings and profits” of the Company, such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder's tax basis in the common shares and thereafter as gain from the sale or exchange of such common shares. (See “Sale or Other Taxable Disposition of Common Shares” below). However, the Company may not maintain the calculations of its earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder may have to assume that any distribution by the Company with respect to the common shares will constitute ordinary dividend income. Dividends received on common shares by corporate U.S. Holders generally will not be eligible for the “dividends received deduction.” Subject to applicable limitations and provided the Company is eligible for the benefits of the Canada-U.S. Tax Convention, dividends paid by the Company to non-corporate U.S. Holders, including individuals, generally will be eligible for the preferential tax rates applicable to long-term capital gains for dividends, provided certain holding period and other conditions are satisfied, including that the Company not be classified as a PFIC in the tax year of distribution or in the preceding tax year. The dividend rules are complex, and each U.S. Holder should consult its own tax advisors regarding the application of such rules.

 

Sale or Other Taxable Disposition of Common Shares

 

Upon the sale or other taxable disposition of common shares, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the U.S. dollar value of cash received plus the fair market value of any property received and such U.S. Holder's tax basis in such common shares sold or otherwise disposed of. A U.S. Holder’s tax basis in common shares generally will be such holder’s U.S. dollar cost for such common shares. Gain or loss recognized on such sale or other disposition generally will be long-term capital gain or loss if, at the time of the sale or other disposition, the common shares have been held for more than one year.

 

 

 

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Preferential tax rates currently apply to long-term capital gain of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gain of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.

 

Additional Considerations

 

Additional Tax on Passive Income

 

Certain U.S. Holders that are individuals, estates or trusts (other than trusts that are exempt from tax) will be subject to a 3.8% tax on all or a portion of their “net investment income,” which includes dividends on the common shares and net gains from the disposition of the common shares. Further, excess distributions treated as dividends, gains treated as excess distributions under the PFIC rules discussed above, and mark-to-market inclusions and deductions are all included in the calculation of net investment income.

 

Treasury Regulations provide, subject to the election described in the following paragraph, that solely for purposes of this additional tax, that distributions of previously taxed income will be treated as dividends and included in net investment income subject to the additional 3.8% tax. Additionally, to determine the amount of any capital gain from the sale or other taxable disposition of common shares that will be subject to the additional tax on net investment income, a U.S. Holder who has made a QEF Election will be required to recalculate its basis in the common shares excluding QEF basis adjustments.

 

Alternatively, a U.S. Holder may make an election which will be effective with respect to all interests in a PFIC for which a QEF Election has been made and which is held in that year or acquired in future years. Under this election, a U.S. Holder pays the additional 3.8% tax on QEF income inclusions and on gains calculated after giving effect to related tax basis adjustments. U.S. Holders that are individuals, estates or trusts should consult their own tax advisors regarding the applicability of this tax to any of their income or gains in respect of the common shares.

 

Receipt of Foreign Currency

 

The amount of any distribution paid to a U.S. Holder in foreign currency, or 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). 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 converts or otherwise disposes of the foreign currency after the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Different rules apply to U.S. Holders who use the accrual method of tax accounting. Each U.S. Holder should consult its own U.S. tax advisors regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.

 

Foreign Tax Credit

 

Subject to the PFIC rules 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. 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 that is subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a year.

 

Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source.” Generally, dividends paid by a foreign corporation should be treated as foreign source for this purpose, and gains recognized on the sale of stock of a foreign corporation by a U.S. Holder should be treated as U.S. source for this purpose, except as otherwise provided in an applicable income tax treaty, and if an election is properly made under the Code. However, the amount of a distribution with respect to the common shares that is treated as a “dividend” may be lower for U.S. federal income tax purposes than it is for Canadian federal income tax purposes, resulting in a reduced foreign tax credit allowance to a U.S. Holder. In addition, this limitation is calculated separately with respect to specific categories of income. The foreign tax credit rules are complex, and each U.S. Holder should consult its own U.S. tax advisors regarding the foreign tax credit rules.

 

 

 

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Backup Withholding and Information Reporting

 

Under U.S. federal income tax law, 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 thresholds. 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 foreign 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, 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 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 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 THEIR OWN PARTICULAR CIRCUMSTANCES

 

F.            

Dividends and paying agents.

 

Not applicable – The Company is filing this Form 20-F as an annual report.

 

G.            

Statement by experts.

 

Not applicable – The Company is filing this Form 20-F as an annual report.

 

 

 

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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://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.

 

ITEM 11.0 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As at December 31, 2018 and to date in 2019, we do not have any interest bearing debt facilities or any forward / futures hedging contracts in place to manage risks related to foreign currency or interest rate fluctuations.

 

Currency Fluctuations

 

We currently hold our cash in both Canadian and United States of America currency, as we generally bill revenues in U.S. currency, and periodically hold certain short-term monetary assets and liabilities in other foreign currencies. Any transaction in a currency other than the Canadian dollar exposes us to the impact of exchange rate fluctuations between the Canadian and the foreign currencies. We do not currently engage in hedging activities to mitigate the effects of foreign currency fluctuation, and are reviewing opportunities to do so.

 

As at December 31, 2018, we held U.S $ cash and short term investments totaling US$13,309. Accordingly, a hypothetical 10% change in the value of one U.S. $ expressed in Canadian dollars as at December 31, 2018 would have had a $1,331 effect on the unrealized foreign exchange gain or loss for the year.

 

Interest Fluctuations

 

Aa at December 31, 2018, we held a total of $4,239,532 in cash, cash equivalents and short term investments. If all this cash was held in an interest bearing account for a full year, an actual 1% change in interest rates during the year ended December 31, 2018 would have resulted in approximately an $42,395 change in interest income for the year.

 

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

 

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.

 

The Company's Chief Executive Officer (“CEO”) and Chief Financial Officer (“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 financial statements, Form 20-F and Canadian MD&A are being prepared.

 

As of December 31, 2018, 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, 2018. 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 (“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, 2018 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.

 

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 mitigates this deficiency by adding management and Audit Committee review procedures over the areas where inadequate segregation of duties are of the greatest concern, and

 

● 

NXT does not have a sufficient level of staff with specialized expertise to adequately conduct separate preparation and a subsequent independent review of certain complex or highly judgmental accounting issues. These complex areas have historically included accounting for income taxes and equity related transactions. NXT 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 for quality assurance.

 

 

 

65

 

 

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. In addition the Company has retained a full time controller to assist in these matters.

 

Notwithstanding NXT’s efforts to mitigate the risks associated with the above-mentioned deficiencies, the CEO and CFO concluded that the Company's ICFR are not effective and as a result its DCP are not effective as at December 31, 2018. NXT reached this conclusion based upon their assessment that there is more than a remote likelihood that its ICFR will not prevent or detect material misstatements if they should exist in our consolidated financial statements. NXT has therefore further taken on a process of continuous improvement in financial reporting and disclosure policies and responsibilities from which we expect to see benefits over the course of 2019.

 

It should be noted that a control system, including the Company’s DCP and ICFR procedures, 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 DCP and ICFR will prevent all errors or fraud.

 

Changes in Internal Controls

 

The small size of the Company's finance team has resulted in control deficiencies in maintaining DCP and ICFR that in turn have led to a recurrence of previously identified deficient disclosure and the requirement for refiling of certain disclosure documents.  To address this issue and improve ICFR moving forward, 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 engagement of external consultants and legal counsel as well.  

 

NXT's efforts to mitigate the risks associated with the above-mentioned deficiencies has resulted in an improvement in its DCP. The CEO and CFO concluded that, as at December 31, 2018, the Company's ICFR have improved, but are still not effective and as a result its DCP are still 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. NXT continues a process of continuous improvement in financial reporting and disclosure policies and responsibilities from which the Company expects to see benefits during 2019. The Responsible Officers continue to take certain actions to remediate these material weaknesses including: (i) the implementation of new controls with regards to the review procedures surrounding its disclosure; and (ii) engagement of third-party specialists. In addition, even though the previous CFO left the Corporation in November 2018, the Company continues to take actions to remediate these material weaknesses. To ensure continuity of the Chief Financial Officer role the Corporate Controller is serving the as the Interim CFO and subject matter consultants have been engaged to assist the Interim CFO as the need arises.

 

The new controls over financial reporting and disclosure policies and responsibilities have been performed over three quarterly periods and are being tested. Material weaknesses cannot be considered remediated until the remedial controls operate for a sufficient period of time and Responsible Officers have concluded through testing that these controls are operating effectively.

 

It should be noted that a control system, including the Company's DCP and ICFR procedures, 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 DCP 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, 2018.

 

 

 

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ITEM 16A. 

AUDIT COMMITTEE FINANCIAL EXPERT

 

Our Board of Directors 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. Wilcox (Chair), Selby and Tilson. Each member of the NXT Audit Committee has relevant experience in understanding and evaluating financial information, generally accepted accounting principles, control systems and audit committee functions. Each member of NXT’s Audit Committee is considered a financial expert, and each is an “independent” director, as that term is defined under the listing standards of NASDAQ.

 

ITEM 16B. 

CODE OF ETHICS

 

NXT has in place a Code of Conduct & Business Ethics (the “Code of Conduct”) that applies to all of our directors, officers, employees, and consultants. This Code of Conduct is incorporated in our Employee Handbook, is an integral part of our employee contracts and our Employee Handbook and contains Company policies on Business Ethics, Employee Practices and Conflicts of Interest.

 

During 2018, 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 – 17 th 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, 2018 and 2017.

 

	2018	2017
Audit fees	$ 87,250	$ 103,860
Audit related fees – Colombia branch	-	-
Audit related fees – Bolivian branch	-	9,800
	87,250	113,660
Tax fees	5,510	-
Other Audit Related Fees	39,560	56,280
Total fees	132,320	169,940

 

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

 

The Company did not directly, or through an affiliate purchaser, purchase shares or other units of any class of the issuer’s equity securities that is registered by the issuer pursuant to section 12 of the Exchange Act (15 U.S.C. 781).

 

ITEM 16F. 

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable.

 

 

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ITEM 16G. 

CORPORATE GOVERNANCE

 

Not applicable.

 

ITEM 16H. 

MINE SAFETY DISCLOSURE

 

Not applicable.

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 8 to this annual report.

 

ITEM 18. 

FINANCIAL STATEMENTS

 

Not applicable as the Company has filed its consolidated financial statements and related notes in accordance with U.S. generally accepted accounting principles.

 

 

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ITEM 19. 

EXHIBITS

EXHIBIT INDEX

 

Exhibit No.	Description
1.1	Articles of Incorporation of Auric Mining Corporation as filed with the Nevada Secretary of State on September 27, 1994 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form 10 filed on June 29, 1998)
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)
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)
1.4	Certificate of Amendment to Articles of Incorporation of Pinnacle Oil International, Inc. as filed with the Nevada Secretary of State on June 13, 2000 (incorporated by reference to Exhibit 3.4 to our Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 31, 1999 as filed on July 28, 2000)
1.5	Articles of Amendment of Energy Exploration Technologies Inc. as filed with the province of Alberta, Canada on September 22, 2008 (incorporated by reference to Exhibit 1.8 to our Annual Report on Form 20-F for the year ended December 31, 2008 as filed on June 29, 2009)
1.6	Amendment to the Articles of NXT Energy Solutions Inc. (incorporated by reference to Item V of Exhibit 99.1 to Form 6-K as filed on September 20, 2013)
1.7	NXT Energy Solutions Inc. By-Law No. 1 (incorporated by reference to Schedule “D” to Exhibit 99.2 to Form 6-K as filed on September 20, 2013)
4.1	Form of Indemnification Agreement between NXT Energy Solutions Inc. and each of its Directors and Executive Officers (incorporated by reference to Exhibit 4.6 to our Annual Report on Form 20-F for the year ended December 31, 2013 as filed on April 30, 2014)
4.2	SFD ® Technology Ownership Agreement dated December 31, 2006 (incorporated by reference to Exhibit 99.4 to Form 6-K as filed on January 12, 2007)
4.3	Technology Transfer Agreement dated December 31, 2006 (incorporated by reference to Exhibit 99.6 to Form 6-K as filed on January 12, 2007)
8.1	List of Subsidiaries (incorporated by reference to Exhibit 8.1 to our Annual Report on Form 20-F for the year ended December 31, 2013 as filed on April 30, 2014)
11.1	Code of Conduct and Business Ethics (incorporated by reference to Exhibit 11.1 to our Annual Report on Form 20-F for the year ended December 31, 2013 as filed on April 30, 2014)
12.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and President
12.2	Rule 13a-14(a)/15d-14(a) Certification of VP Finance and Chief Financial Officer
13.1	Section 1350 Certification of Chief Executive Officer and President
13.2	Section 1350 Certification of VP Finance and Chief Financial Officer
15.1	Consolidated Financial Statements and Audit report of KPMG LLP for the year ended December 31, 2018
15.2	Consent of KPMG LLP
15.3	Management’s Discussion and Analysis for the year ended December 31, 2018

 

 

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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/ George Liszicasz

       George Liszicasz

       Director, Chairman, Chief Executive Officer and President

 

Dated: April 30, 2019

 

 

 

 

 

 

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