ANNUAL REPORT
As at and for the year ended
December 31, 2019
April 13, 2020
Message from the President & CEO
First, I want to convey my sincere hope that everyone is well and continues to stay healthy at
this difficult time.
2019 was a successful year for NXT. Our financial results included $4.1 million of operating cash
flow and net income of $3.77 million or 6 cents per share derived primarily from the successful
completion of the US$8.9 million Nigerian SFD® survey of which 94% has been paid. The survey
was both a financial and a technical success defined by successful drilling results on SFD®
recommendations in multiple locations, the recent endorsement of the SFD® technology by
respected agencies in Nigeria, and completion of additional R&D milestones.
NXT completed the Nigerian 5,000 line km SFD® survey in record time and we were able to
recommend eight primary anomalies in April 2019. Soon after, drilling commenced at a location
where a recommended SFD® anomaly coincided with one of the top seismic prospects and a
well was successfully completed in late 2019. Preliminary results demonstrate that when two
independent tools (seismic and SFD®), operating on different physical principles, recommend
the same areas as prospective, the chance of success increases considerably. As a result of this,
the Department of Petroleum Resources ("DPR"), a department under the Federal Republic of
Nigeria's Ministry of Petroleum Resources responsible for the sustainable development of
Nigeria's oil and gas resources, provided a written recommendation of NXT's SFD® technology,
noting specifically; "in line with Federal Government aspiration to increase its Oil and Gas
reserves base at a considerable reduced cost, risk and optimize exploration cycle, the Stress Field
Detection SFD® technology is hereby adopted and recommended to be deployed as an
independent data exploration tool for hydrocarbon exploration to identify and rank prospect-
level leads to focus exploration efforts in the Nigerian Oil and Gas industry". The DPR
recommendation of our SFD® survey method is a significant milestone for NXT reflecting the
superior value delivered in Nigeria by NXT and its partner, PE Energy, at a low cost and on an
expedited time line. We expect that the recommendation from the Federal Republic of Nigeria,
a regional leader in technological innovation, to resonate broadly throughout the African oil and
gas industry. The adaptation of SFD® in the Nigerian exploration programs will expose the
technology to multiple international oil companies which can be a game changer for NXT.
With respect to our 2017 SFD® Gulf of Mexico survey over the 2.1 bid-round offshore blocks,
one of the areas indicated by SFD® as prospective has now been drilled by third parties. A
commercial discovery resulted with early estimates of in place reserves greater than 200 million
barrels of oil equivalent (MMBOE). Additionally, and perhaps just as important, from a capital
expenditure allocation perspective, another seismic prospect, considered non-prospective by
NXT, was drilled as part of the same campaign and was declared unsuccessful. Both positive and
negative recommendations for prospects are important elements of the SFD methodology. The
announcements concerning these drilling activities were reported by internationally recognized
upstream data providers starting late 2019. The SFD® data for the 2.1 bid-round offshore blocks
was submitted to, and has been available from, the National Hydrocarbon Commission of
Mexico since mid-2018. These results highlight the value of adding SFD® to an upstream work
program and evidences the efficacy of our geophysical method in recommending prospects with
potential for hydrocarbon traps in conjunction with best available accumulated data. Under
page | 2
NXT’s Business Plan, effective integration of data and interpretive analysis will be important
aspects of NXT’s value equation. Drilling activities over SFD® recommendations are ongoing in
numerous countries and NXT shall provide further updates as warranted.
On the R&D front, NXT received confirmation of a patent granted from the European Patent
Office. This brings the total number of countries granting the patent to 44. A final step is for
validation of the SFD® technology patent in select European countries. In addition, the
Company is designing and building a new fleet of sensor systems for improved efficiency, better
resolution and increased capacity.
In the first quarter of 2020, NXT finalized the first phase of its survey over the Queen Charlotte
Fault (“QCF”) located offshore British Columbia. The purpose of the continuing QCF study is to
identify seismically active areas and to differentiate subsurface stress states in deep water
settings. The Company is in the process of evaluating the acquired SFD® data.
In the month before travel restrictions were brought on by the novel coronavirus (2019-
nCoV/COVID-19), my team and I completed a broad scale international market business
development effort which
included a signed memorandum of understanding with an
independent oil company with interests in East-Central Africa. Though currently there are
several challenges facing our world and industry, NXT is focused on minimizing risks and
continues to advance discussions for SFD® survey opportunities within Nigeria, East-Central
Africa, Mexico, and selected Asian countries primarily via video conferences. Our clients are still
working and there are continuous discussions regarding the projects.
I also want to explain where the Company is positioned in the oil and gas sector today and what
impact the current upstream value crisis is having on our business development. NXT has
focused most of its business development on National Oil Companies (“NOCs”) given their
longer strategic planning time horizon, large fiscal resources, general stability, available land
base and their relative insulation from the day to day happenings of the hydrocarbon markets.
Our contract history to date, while slow and measured, has demonstrated the success of this
effort. In many countries, the NOCs contribute significantly to the nation’s economic well-being
over the long term which means they have multiple reasons to continue with their exploration
and production activities. Given the current fiscal state of the industry, they have to find ways
to explore and produce more effectively and at lower costs. NXT provides the NOCs with a
proven and patented upstream geophysical method that can be rapidly deployed at a highly
competitive cost with the potential of significantly enhancing success while fitting effectively
within the established exploration cycle.
In conclusion, notwithstanding COVID-19 and the unstable state of the hydrocarbon sector, we
are advancing our initiatives in Africa, Asia and Latin America to secure SFD® surveys. We will
continue delivering results and growth for our shareholders.
On behalf of our Board of Directors and the entire team at NXT, I want to thank all of our
shareholders for their continued support in these trying times. We wish the best of health to
you and your families.
Best regards,
George Liszicasz
President & CEO
NXT Energy Solutions Inc.
page | 3
NXT ENERGY SOLUTIONS INC.
Management's Discussion and Analysis
For the year ended
December 31, 2019
page | 4
Management's Discussion and Analysis
This discussion and analysis ("MD&A") was prepared by management of NXT Energy Solutions Inc. ("NXT",
"we", "us", "our" or the "Company") based on information available as at April 13, 2020 unless otherwise
stated, has been approved by the Board of Directors of the Company (the "Board"), and should be
reviewed in conjunction with the audited consolidated financial statements and related notes for the year
ended December 31, 2019. This MD&A covers the unaudited three month and twelve month periods
ended December 31, 2019, with comparative totals for the unaudited three month and twelve month
periods ended December 31, 2018.
Our functional and reporting currency is the Canadian dollar. All references to "dollars", "$", "CDN dollars"
and "CDN$" in this MD&A are to Canadian dollars unless specific reference is made to United States dollars
("US dollars" or "US$").
NXT® and SFD® are registered trademarks of NXT in Canada and the United States.
Forward-looking Information
Advisories
Certain statements in this MD&A constitute forward-looking information under applicable securities laws.
These statements typically contain words such as "intends", "plans", "anticipates", "expects",
"scheduled", "estimates", "believes", "forecasts" or other variations (including negative variations) of such
words and phrases, or state that certain actions, events or results "may", "could", "would", "might" or
"will" be taken, occur or be achieved and relate primarily to:
(cid:120)
the Nigerian SFD® Survey (as defined below), the Co-operation Agreement (as defined below) and
the Loan Arrangement (as defined below), and the performance and satisfaction of the obligations
thereunder (including with respect to amounts payable to NXT);
(cid:120) estimates related to our future financial position and liquidity; and
(cid:120) general business strategies and objectives.
This forward-looking information is based on a number of assumptions which may prove to be incorrect.
Assumptions have been made with respect to the following matters, in addition to any other assumptions
identified in this document:
(cid:120) our ability to market our SFD® technology and services to current and new customers;
(cid:120) our ability to source personnel and equipment in a timely manner and at an acceptable cost;
(cid:120) our ability to obtain all permits and approvals required;
(cid:120) our ability to obtain financing on acceptable terms;
(cid:120) our ability to obtain insurance to mitigate the risk of default on client billings;
(cid:120)
(cid:120) general business, economic and market conditions (including global commodity prices).
foreign currency exchange and interest rates; and
These forward-looking statements are based on current expectations and are subject to a wide range of
known and unknown risks, uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future results, performance or
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 5
achievements expressed or implied by such forward-looking statements. Known risks include, but are not
limited to, risks related to:
the ability of management to execute its business plan;
the emergence of alternative competitive technologies;
(cid:120)
(cid:120) health, safety and the environment (including risks related the novel coronavirus);
(cid:120)
(cid:120) our ability to protect and maintain our intellectual property and rights to our SFD® technology;
(cid:120) our reliance on a limited number of key personnel;
(cid:120) our reliance on a limited number of aircraft ;
(cid:120) our reliance on a limited number of clients;
(cid:120)
(cid:120)
(cid:120)
(cid:120) general business, economic and market conditions (including global commodity prices).
counterparty credit risk;
foreign currency and interest rate fluctuations;
changes in, or in the interpretation of, laws, regulations or policies; and
Although the Company has attempted to identify important factors and risks that could cause actual
actions, events or results to differ materially from those described in the forward-looking statements,
there may be other factors that cause actions, events or results to differ from those anticipated, estimated
or intended. Financial outlooks are provided for the purpose of understanding the Company’s accounting
practices and liquidity position, and the information may not be appropriate for other purposes.
For more information relating to risks, see the section titled "Summary of Operating Results – Risks and
Uncertainties" in this MD&A and the section titled "Risk Factors" in NXT's most recently filed Annual
Information Form. Except as required by law, NXT assumes no obligation to update forward-looking
information should circumstances or the Company's estimates or opinions change. Accordingly, the
reader is cautioned not to place undue reliance on forward-looking statements.
Non-GAAP Measures
NXT's accompanying consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("US GAAP"). This MD&A includes
references to net working capital which does not have a standardized meanings prescribed by US GAAP
and may not be comparable to similar measures be presented by other entities. Net working capital is
the net result of the difference between current assets and current liabilities. Management of NXT uses
this non-GAAP measure to improve its ability to assess liquidity at a point in time.
Other Calculations
Fair market values and market capitalizations referenced herein have been calculated in accordance with
section 1.11(1) of National Instrument 62-104 Take-over Bids and Issuer Bids and section 1.1 of
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions,
respectively.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 6
Description of the Business
NXT Energy Solutions Inc. is a Calgary-based technology company whose proprietary and patented Stress
Field Detection ("SFD®") survey system utilizes quantum-scale sensors to detect gravity field perturbations
in an airborne survey method which can be used both onshore and offshore to remotely identify traps
and reservoirs with exploration potential. The SFD® survey system enables NXT’s clients to focus their
hydrocarbon exploration decisions concerning land commitments, data acquisition expenditures and
prospect prioritization on areas with the greatest potential. SFD® is environmentally friendly and
unaffected by ground security issues or difficult terrain and is the registered trademark of NXT Energy
Solutions Inc. NXT Energy Solutions Inc. provides its clients with an effective and reliable method to
reduce time, costs and risks related to exploration.
Financial and Operational Highlights
Key financial and operational highlights for Q4-19 and YE-19 include are summarized below.
(cid:120)
In Q3-19 the Company completed its Nigerian SFD® survey for approximately US$8.9 Million with
PE Energy Limited (“PE”), a Nigerian oil and gas service company. PE had a contract with the
Nigerian National Petroleum Company (“NNPC”), to provide 5,000-line kilometers of SFD® surveys
in Nigeria.
(cid:120) As of the date of this MD&A, the Company has received a total of US$8.4 million payments in cash
from PE for the SFD® survey in Nigeria, including US$1.9 million in the Q4-19 and an additional
US$0.47 million in the first quarter of 2020. The final payment for contracted holdbacks amount
to approximately $0.5 million USD.
(cid:120)
(cid:120)
(cid:120) NXT received confirmation of a patent granted from the European Patent Office. This brings the
total number of countries granting the patent to 44. The final step is for the validation process of
the SFD® technology patent in select European countries.
In Q4-19 the Company completed the C$1,250,000 targeted issuer bid, purchasing for cancellation
4,166,667 common shares in the capital of the Company representing approximately 6.08% of the
total outstanding Common Shares as of November 14, 2019, at a price of C$0.30 per Common
Share.
In February 2019, NXT entered into a Co-operative Agreement with Alberta Green Ventures
Limited Partnership (“AGV”), for AGV to bring to proposal up to three SFD® surveys for
cooperation with the Company 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. The Company received a US$100,000 non-refundable deposit paid in
connection with the Co-operative Agreement in Q2-19. Pursuant to the Co-operation Agreement,
the deadline to complete at least one of three SFD® surveys is June 30, 2020.
In Q3-2019, the Company advanced US$250,000 (the "Principal Amount") to AGV for the purpose
of furthering the shared objectives of NXT and AGV under the Co-operation Agreement (the "Loan
Arrangement"). On April 13, 2020, NXT elected to receive and directed AGV to deliver US$250,000
as repayment of the Principal Amount (the "Principal Repayment).
(cid:120)
(cid:120) Common share purchase warrants held by AGV have expired as of October 31, 2019.
(cid:120) Cash and short-term investments at the end of the YE-19 were $6.64 million.
(cid:120) There was $11.98 million of survey revenues recorded in YE-19.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 7
(cid:120) Net income of $3.77 million was recorded for YE-19, including amortization expense of $1.78
million.
(cid:120) A net loss of $1.78 million was recorded for Q4-19, including amortization expense of $0.49
million.
(cid:120) Operating activities provided $4.08 million of cash during YE-19 and net cash used for financing
activities was $1.39 million.
(cid:120) Operating activities provided $1.29 million of cash during Q4-19 and net cash used for financing
activities was $1.35 million.
(cid:120) Net income per common share for YE-19 was $0.06 basic and $0.06 fully diluted.
(cid:120) Net loss per common share for Q4-19 was ($0.03) basic and (0.03) fully diluted.
(cid:120) General and administrative costs for YE-19 as compared to YE-18 have been reduced by $0.50
million or 13% mostly due a reduction in business development costs, lower headcount and costs
and certain expenditures being recognized as direct survey costs, offset by higher professional
fees and information technology costs.
(cid:120) General and administrative costs for Q4-19 as compared to Q4-18 have increased by $0.05 million
or 6%, mostly due to an increase in business development offset by a reduction in headcount.
Selected Annual Information
($M except per share)
YE-19
YE-18
YE-17
Total Assets
Long-term debt
Sales
Net earnings
Net earnings per share
Basic
Diluted
$ 30,692,941
2,691,217
11,976,149
3,772,908
$ 25,264,268
510,661
-
(6,968,511)
$ 23,920,991
741,408
-
(8,970,398)
$0.06
$0.06
$(0.11)
$(0.11)
$(0.16)
$(0.16)
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 8
Co-operation Agreement
Discussion of Operations
In February 2019, NXT entered into the Co-operation Agreement with AGV, one of NXT's largest
shareholders, to complete up to three SFD® surveys within two years. The compensation to be received
by NXT for services rendered under the Co-operation Agreement is based on a cost plus formula and a
gross overriding royalty interest in oil and gas production arising on lands surveyed, with US$100,000 paid
in advance as a non-refundable deposit.
Under the Co-operation Agreement, AGV committed to completing at least two SFD® surveys in North
America and an additional SFD® survey internationally. The first SFD® survey was to be completed by
August 31, 2019, with NXT and AGV agreeing to extend such deadline to December 31, 2019, and to
further extend such deadline to June 30, 2020 (such further extension provided under the terms of the
Targeted Issuer Bid). If the first SFD® survey is not completed by June 30, 2020, the US$100,000 non-
refundable deposit will be forfeited to NXT. AGV has also 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.
Nigerian SFD® Survey
In March 2019, the Company signed an US$8.9 million contract with PE to provide 5,000 line kilometers
of SFD® surveys in Nigeria. As the Nigerian SFD® Survey was the Company's first project in Africa, the
Company was required to deliver more than 10,000 pages of documents to NNPC and the Department of
Petroleum Resources, a department under Nigeria's Ministry of Petroleum Resources, and complete a test
flight as part of the qualification process which took seven months. Data acquisition operations were
completed on May 1, 2019 and NXT's recommendations were delivered in Q3-19.
Prior to entering into the Nigerian SFD® Survey contract with PE, the Company conducted significant due
diligence to ensure it understood the business environment in Nigeria and was in compliance with
applicable laws in each of Canada, the United States of America and Nigeria. The Company also engaged
Norton Rose Fulbright Canada LLP and Kreller Group as advisors to provide guidance and to ensure the
integrity of its contract with PE, as well as PE's contract with NNPC.
The Company has received payments of US$8.4 million for the Nigerian SFD® Survey as at the date hereof.
The contracted holdback amount of approximately US$0.5 million is expected to be paid to the Company
upon the conclusion of negotiations for additional work under the current contract framework.
The Department of Petroleum Resources (the "DPR"), a department under the Federal Republic of
Nigeria's Ministry of Petroleum Resources responsible for the sustainable development of Nigeria's oil
and gas resources, provided written confirmation of their recommendation in favour of NXT's SFD®
technology based on the recent survey results, noting specifically "in line with federal government
aspiration to increase its Oil and Gas reserves base at a considerable reduced cost, risk and optimize
exploration cycle, the Stress Field Detection SFD® technology is hereby adopted and recommended to be
deployed as an independent data exploration tool for hydrocarbon exploration to identify and rank
prospect-level leads to focus exploration efforts in the Nigerian Oil and Gas industry".
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 9
Patents
As of the date of this MD&A, SFD® patents have been granted in Russia (January 2017), Japan (July 2017),
Canada (August 2017), Europe (September 2017) and the United States (November 2017), and notices of
allowance have been also received from Mexico (July 2017) and China (March 2018), which are areas of
prime commercial focus for the Company. NXT has recently received confirmation of a patent granted
from the European Patent Office. This brings the total number of countries granting the patent to 44. The
final step is for the validation process of the SFD® technology patent in select European countries. This is
expected to take several month to complete. 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.
Notes Receivable
In September 2019, NXT entered into the Loan Arrangement with AGV and advanced to AGV the
US$250,000 Principal Amount, as evidenced by, and governed in accordance with the terms of, a
promissory note dated September 6, 2019 (the "Notes Receivable"), for the purpose of providing AGV
with additional funds necessary to continue advancing the common objectives of NXT and AGV under the
Co-operation Agreement. Pursuant to the Notes Receivable, it was agreed and acknowledged, among
other things, that:
a) AGV was indebted to the Company and unconditionally promised to pay to, or to the order of, the
Company on or before December 15, 2019 (the "Repayment Date"), the Principal Amount together
with all interest payable at a rate of the greater of 2% and the rate prescribed under the Income Tax
Act (Canada) from time to time in monthly arrears on the first day of each month commencing
October 1, 2019 until the repayment of the Principal Amount in full (the "Interest");
b) AGV had the right and privilege of prepaying the whole or any portion of the Principal Amount
together with the Interest at any time or times without notice, bonus or penalty; and
c) NXT, in its sole and absolute discretion, was entitled to elect to receive any payment made by AGV in
accordance with the Notes Receivable by way of, in whole or in combination: (i) wire transfer or other
immediately available funds ("Cash"), or (ii) delivery for cancellation to the Company of the
equivalent number of Common Shares having a fair market value equal to the aggregate of such
amounts, calculated using the volume weighted average price of the Common Shares as reported
and traded on the Toronto Stock Exchange for the five trading days immediately preceding the
repayment date (the "5-day VWAP").
On December 13, 2019, the last business and trading day before the Repayment Date, the Company
elected to receive and directed AGV to:
a)
in respect of the Principal Amount, deliver to the Company for cancellation 543,673 Common Shares,
calculated as the product of US$250,000 being the Principal Amount owing on the last business day
before the Repayment Date, and 1.3183, being the daily average US$/CDN$ exchange rate as quoted
on the Bank of Canada's website for December 13, 2019, the last business day for which a daily
average exchange rate was published before the Repayment Date, divided by $0.6062, being the 5-
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 10
day VWAP, the delivery of such Common Shares to occur subject to and only upon receipt of
confirmation from the Company that all necessary regulatory approvals had been received; and
b) in respect of the Interest, pay US$1,366.12 by way of Cash. AGV paid this amount.
On April 13, 2020, NXT issued a Direction to Pay to AGV in which NXT has revoked the previous Direction
to Pay dated December 13, 2019, and has now directed AGV to deliver US$250,000 as repayment on the
Principle Amount. Interest will begin to accrue until the date on which payment in full of all amounts
owing pursuant to the Principle Amount are received by NXT.
The Company may change its election if it so decides, in its sole and absolute discretion to receive the
Principal Repayment by way of Common Shares by application to the Alberta Securities Commission.
Targeted Issuer Bid
Between November 15, 2019 (the "TIB Commencement Date") and December 9, 2019 (the "TIB
Completion Date"), NXT purchased for cancellation an aggregate of 4,166,667 Common Shares,
representing approximately 6.08% of the 68,573,558 Common Shares outstanding as at the TIB
Commencement Date. The purchase price of $0.30 per Common Share represented a discount of
approximately 22.9% relative to the market price of $0.389 per Common Share as at the TIB
Commencement Date. Gross proceeds received by AGV totaled approximately $1,250,000.00,
representing approximately 6.1% of the Company's market capitalization of approximately
$26,675,114.062 as at the TIB Commencement Date.
The terms of the Targeted Issuer Bid also provided that the 3,421,648 Warrants expired effective October
31, 2019, and that certain deadlines under the Co-operation Agreement be extended. AGV's registered
ownership in the Company was reduced from 10,264,946 Common Shares and 3,421,648 Warrants,
representing, on a fully diluted basis, approximately 20.0% of the 68,573,558 issued and outstanding
Common Shares as at the TIB Commencement Date, to 6,098,279 Common Shares and nil Warrants,
representing approximately 9.5% of the 64,406,891 issued and outstanding Common Shares as at the TIB
Completion Date.
By strategically acquiring its Common Shares for cancellation in a private transaction at a discount to the
then current market price, the Company improved the equity position of its other shareholders and
provided AGV with additional funds necessary to continue advancing the common objectives of the
parties under the Co-operation Agreement, while also avoiding a substantial decrease in the market price
and liquidity of the Common Shares reasonably expected if AGV were to sell a substantial portion of its
equity position into the open market.
The Targeted Issuer Bid was exempt from the formal valuation and disinterested shareholder approval
requirements typically applicable to related party transactions under applicable securities laws as neither
the fair market value of the Common Shares (approximately $1,620,833.46) nor the consideration
received by AGV for the Common Shares (approximately $1,250,000.00) exceeded 25% of the Company's
market capitalization at the TIB Commencement Date (approximately $26,675,114.06).
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 11
Summary of Operating Results
Survey revenue
Expenses:
Survey
General and administrative
Stock-based compensation
Amortization of property and equipment
Q4-19
$ -
Q4-18
YE-19
$ - $ 11,976,149
YE-18
$ -
308,374
926,919
(28,724)
449,015
1,655,584
315,175
875,705
(173,367)
447,942
1,465,455
2,611,086
3,497,785
43,809
1,781,181
7,933,861
1,103,946
3,999,089
386,154
1,790,267
7,279,456
Other Expenses (income):
Interest income, net
Foreign exchange (gain) loss
Other expense (recovery)
Income (loss) before income taxes
(18,452)
99,136
39,019
119,703
(1,775,287)
(21,626)
(20,330)
(30,783)
(72,739)
(1,392,716)
(20,684)
233,231
56,833
269,380
3,772,908
(62,004)
(19,852)
(229,089)
(310,945)
(6,968,511)
Income tax expense
-
-
-
-
Net Income (loss) for the period
$ (1,775,287)
$ (1,392,716)
3,772,908
(6,968,511)
Net Income (loss) per share – basic
Net Income (loss) per share – diluted
$ (0.03)
$ (0.03)
$ (0.02)
$ (0.02)
$ 0.06
$ 0.06
$ (0.11)
$ (0.11)
Annual operating results. Net income for YE-19 compared to YE-18 increased by $10,741,419, or $0.17
per share basic. $11,976,149 of revenue was recorded in YE-19 for the Nigerian SFD® Survey. Survey
costs were higher by $1,507,140 due to the Nigerian SFD® Survey. G&A expenses were reduced by
$501,304, or 13%, in YE-19 compared to YE-18 due primarily to a reduction in business development costs,
lower headcount and costs and certain expenditures being recognized as direct survey costs. This was
offset by higher professional fees and information technology costs. SBCE were lower in YE-19 as most
outstanding options were vested before 2019 and therefore were fully expensed. Foreign exchange rates
were unfavorable in YE-19 compared to YE-18 resulting in a $253,084 loss as the Company held significant
balances in US$ in YE-19 and US$ increased in value compared to CDN$. US$ balances held by NXT were
significantly lower in YE-18. In YE-18, the Company determined that liabilities it had recorded before 2005
were no longer payable and, as a result, a gain of $185,661 was recorded in other income on the
extinguishment of the liability.
Quarterly operating results. Net loss for Q4-19 compared to Q4-18 increased by $382,571 or $0.01 per
share-basic. No revenue was recorded in Q4-19. Survey costs were lower by $6,801 due to the major
phase 5 maintenance in Q4-18. G&A expenses were increased by $51,214, or 6%, as compared to Q4-18,
due primarily to increased business development travel offset by a reduction in headcount and favorable
headcount cost mix. Stock-based compensation expense ("SBCE") was negative in both Q4-19 and Q4-18.
In Q4-19, restricted stock unit ("RSU") expense from the previous quarter was derecognized as the
expected granting of RSUs to employees was not formalized. In Q4-18, 333,333 vested options were
forfeited resulting in the negative expense. Amortization expense was $1,073 higher in Q4-19 because
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 12
the Company acquired transponder technology known as Automatic Dependent Surveillance – Broadcast
("ADS-B") during the year. Foreign exchange rates were unfavorable in Q4-19 compared to Q4-18
resulting in a $119,467 loss as the Company held significant balances in US$ in Q4-19 and US$ increased
in value compared to CDN$. US$ balances held by NXT were lower in Q4-18. For Q4-19 and YE-19, the
Company's intellectual property ("IP"), research and development ("R&D") and asset retirement
obligation ("ARO") expenses were mostly for costs to begin the validation process for certain European
SFD® patents. In YE-18, R&D expenses were negative as the Company incurred less costs from a provider
of R&D services than originally estimated.
Survey Expenses
Survey Expenses
Aircraft lease costs
Amortization of deferred gain
Aircraft operations
Survey projects
Total survey expenses, net
Survey Expenses
Aircraft lease costs
Amortization of deferred gain
Aircraft operations
Survey projects
Total survey expenses, net
Q4-19
$ 101,860
-
154,527
51,987
308,374
YE-19
$ 400,847
-
846,498
1,363,741
2,611,086
Q4-18
$ 154,397
(38,826)
199,342
262
315,175
Net change
$ (52,537)
38,826
(44,815)
51,725
(6,801)
YE-18
$ 610,029
(155,301)
648,783
435
Net change
$ (209,182)
155,301
197,715
1,363,306
1,103,946
1,507,140
Survey expenses relate entirely to the direct survey costs and aircraft handling and maintenance costs,
net of charter hire revenue. In Q4-19, survey expenses included incremental travel related costs to
present results for the Nigerian SFD® Survey. Fixed aircraft costs were lower in Q4-19 versus Q4-18 as
scheduled maintenance was performed on the aircraft in Q4-18.
In YE-19, survey expenses included direct incremental survey costs for the Nigerian SFD® Survey incurred
which
include aircraft and hanger operating costs, staff costs to support the survey, and
mobilization/demobilization costs. Also these costs include staff costs to interpret and integrate the
survey, and their travel costs. Aircraft operations costs in YE-19 were higher than YE-18 as additional
scheduled maintenance was required after the Nigerian SFD® Survey, net of charter hire revenue.
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 April 2017, NXT completed a sale and leaseback agreement of its aircraft with a Calgary-based
international aircraft services organization (the "Lessor"). NXT has leased the aircraft over an initial term
of 60 months and retains all existing operating rights and obligations. NXT is required to make monthly
payments to the Lessor of approximately US$39,500. NXT has the option to extend the term of the lease
by an additional two years. Should NXT want to repurchase the aircraft at the end of the initial lease term,
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 13
the purchase price will be US$1.45 million. Under the new lease accounting standard, the amortization
of the deferred gain is now classified within "lease and lease interest costs".
General and Administrative Expenses
G&A Expenses
Salaries, benefits and consulting charges
Board and professional fees, public company costs
Premises and administrative overhead
Business development
Bolivian overhead
Total G&A Expenses
Q4-19
$ 406,300
205,942
193,661
121,016
-
926,919
Q4-18
$ 510,491
139,039
191,277
38,463
(3,565)
875,705
Net change
$(104,191)
66,903
2,384
82,553
3,565
51,214
G&A Expenses
Salaries, benefits and consulting charges
Board and professional fees, public company costs
Premises and administrative overhead
Business development
Bolivian overhead
Total G&A Expenses
YE-19
YE-18
$ 1,599,247 $2,046,886
781,330
753,380
382,146
35,347
3,999,089
857,556
800,626
240,356
-
3,497,785
Net change
$(447,639)
76,226
47,246
(141,790)
(35,347)
(501,304)
%
(20)
48
1
215
(100)
6
%
(22)
10
6
(37)
(100)
(13)
G&A expenses increased $51,214, or 6%, in Q4-19 compared to Q4-18 for the following reasons:
(cid:120)
salaries, benefits and consulting charges decreased $104,191, or 20%, due primarily to a change
to a lower cost mix in corporate staff and two less headcount;
(cid:120) board and professional fees and public company costs increased $66,903, or 48%, due primarily
to higher professional fees given the increase in business activity and the addition of one board
member;
(cid:120) premises and administrative overhead costs increased $2,384, or 1%, due primarily to increased
costs related to the improvement of the Company's information systems security (partially offset
by the lower headcount and the related overhead costs);
(cid:120) business development costs increased by $82,553, or 215%, as the Company's resources were
again focused on business development activities in Q4-19 vs Q4-18 where resources were
focused on closing the Nigerian SFD® Survey; and
(cid:120) Bolivian overhead costs decreased by $3,565, or 100%, as the Company officially closed its offices
and ceased operations in that country in Q4-18.
G&A expenses decreased by $501,304, or 13%, in YE-19 compared to YE-18 for the following reasons:
(cid:120)
salaries, benefits and consulting charges decreased $447,639, or 22%, due primarily to a change
to a lower cost mix in corporate staff, two less headcount and allocation of direct salary costs to
survey costs;
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 14
(cid:120) board and professional fees and public company costs increased $76,226, or 10%, due primarily
to higher professional fees paid in connection with the Nigerian SFD® Survey and higher insurance
costs given the increased business activity (partially offset by termination costs to suspend the
Advisory Board in YE-18);
(cid:120) premises and administrative overhead increased $47,246, or 6%, due primarily to increased costs
related to the improvement of the Company's information systems security;
(cid:120) business development costs decreased $141,790, or 37%, due primarily to increased costs related
to the negotiation and implementation of the Nigerian SFD® Survey; and
(cid:120) Bolivian overhead costs decreased by $35,347, or 100%, as the Company officially closed its
offices and ceased operations in that country in Q4-18.
Stock-based Compensation Expenses
SBCE 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 in Q4-19 was higher compared to Q4-18 by $144,643. In Q4-18, significant unvested stock options
were forfeited by a former employee which resulted in a credit to the expense. In Q4-19, the Company's
SBCE represented costs for the part of the remaining unvested options and a reversal of the RSU expense
in Q3-19 as the expected granting of RSUs to employees was not formalized.
SBCE in YE-19 was lower compared to YE-18 by $342,345. In Q1-18, 333,333 options vested resulting in
substantial SBCE. In YE-19, most options previously issued by the Company had vested resulting in
minimal SBCE, partially offset by 100,000 options awarded to a consultant.
Other Expenses
Other Expenses
Interest (income) expense, net
Foreign exchange loss (gain)
IP and other
Total Other Expenses, net
Other Expenses
Interest (income) expense, net
Foreign exchange loss (gain)
IP, and other
Gain on extinguishment of liability
Total Other Expenses, net
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
Q4-19
$ (18,452)
99,137
39,019
119,704
Q4-18
$ (21,626)
(20,330)
(30,783)
(72,739)
Net change
$ 3,174
119,467
69,802
192,443
%
(15)
(588)
(216)
(265)
YE-19
$ (20,684)
233,232
56,833
-
269,381
YE-18
$ (62,004)
(19,852)
(43,428)
(185,661)
(310,945)
Net change
$ 41,320
253,084
100,261
185,661
580,326
%
(67)
(1275)
(231)
(100)
(187)
page | 15
Interest (income) expense, net. This category of other expenses includes interest income earned on short-
term investments netted by interest expense from financial lease obligations. Since January 1, 2019
interest on finance leases is included in this account under the new lease accounting standard. Q4-19
interest (income) expense net was $3,174 less than Q4-18, and YE-19 interest (income) expense net was
$41,320 less than YE-18, as lease interest expense has offset income earned on guaranteed investment
certificates.
Foreign exchange loss (gain). This category of other expenses includes losses and gains caused by changes
in the relative currency exchange values of US dollars and CDN dollars. The Company held significant
assets in US dollars at December 31, 2019, including accounts receivable, cash and cash equivalents, short-
term investments and the security deposit for the aircraft, all of which have an effect on the unrealized
foreign exchange gain and loss. At December 31, 2019, the CDN dollar strengthened as compared to the
US dollar and as compared to the end of Q3-19 resulting in an unrealized foreign exchange loss for the
quarter. At December 31, 2019, the Company had a significant foreign exchange loss which was the result
of the CDN dollar strengthening compared to May 2019 when several of the US dollar assets were initially
recorded. The Company does not currently have the ability to enter hedging contracts, but uses strategies
to reduce the volatility of US dollar assets including converting excess US dollars to CDN dollars.
IP and other. This category of other expenses primarily includes costs related to IP filings, R&D activity
related to the SFD® technology and ARO costs for certain non-recurring "project" activities.
In Q4-19 and YE-19, the Company's IP, R&D and ARO expenses related mostly to costs associated with the
validation process for certain European SFD® patents. In YE-18, these costs were negative as the Company
renegotiated fees from a provider of R&D services.
Gain on extinguishment of liability. In Q3-18, 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.
Amortization Expenses
Property and equipment
Intellectual property
Total Amortization Expenses
Amortization Expenses
Property and equipment
Intellectual property
Total Amortization Expenses
Q4-19
$ 27,832
421,183
449,015
Q4-18
$ 26,759
421,183
447,942
Net change
$ 1,073
-
1,073
YE-19
$ 96,448
1,684,733
1,781,181
YE-18
$ 105,534
1,684,733
1,790,267
Net change
$ (9,086)
-
(9,086)
%
4
-
-
%
(9)
-
(1)
Intellectual property and related amortization expense. NXT acquired specific rights to utilize the
proprietary SFD® technology in global hydrocarbon exploration applications from the inventor of the SFD®
technology, NXT's Chairman, President and Chief Executive Officer, on August 31, 2015. The value
attributed to the acquired IP assets was $25.3 million. The IP assets are being amortized on a straight-line
basis over a 15-year period (future amortization expense of $1,685,000 per year) and are also being
subject to ongoing tests of potential impairment of the recorded net book value. No impairments were
recognized in Q4-19 or Q4-18.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 16
Property and equipment and related amortization expense. Property and equipment amortization was
higher in YE-19 compared to YE-18 due to the Company acquiring and installing in its aircraft a new
transponder technology known as ADS-B. The U.S. Federal Aviation Administration (the "FAA") and
European Aviation Safety Agency have mandated that all aircraft flying in designated controlled airspaces
must be equipped with ADS-B by January 1, 2020 (US airspace) and June 7, 2020 (European airspace).
Total costs for installing the ADS-B was approximately $208,000. This amortization was partially offset as
the Company uses the declining balance method of depreciation, thereby having the effect of lowering
amortization each year on existing assets.
Income tax expense. There was no income tax expense in YE-19 or YE-18.
Competition
Our SFD® airborne survey service is based upon a proprietary technology, which is capable of remotely
identifying, from a survey aircraft, subsurface anomalies associated with potential hydrocarbon traps with
a resolution that we believe is technically superior to other airborne survey systems. To our knowledge
there is no other company employing technology comparable to our SFD® survey system for oil and
natural gas exploration.
Seismic is the standard technology used by the oil & gas industry to image subsurface structures. It is our
view that the SFD® survey system is highly complementary to seismic analysis. Our system may reduce
the need for seismic in wide-area reconnaissance but will not replace the role of seismic in verifying
structure, closure and selecting drilling locations. The seismic industry is very competitive with many
international and regional service providers.
The SFD® system can be used as a focusing tool for seismic. With a SFD® survey, a large tract (i.e. over
5,000 square kilometers) of land can be evaluated quickly to identify locations with indications of reservoir
potential. Seismic surveys, although effective in identifying these locations, are much more expensive,
require significantly more time and impose a much greater negative impact on local communities and the
environment. A SFD® survey deployed first can provide necessary information to target a seismic program
over a limited area of locations selected by SFD®. This approach can result in a more effective seismic
program and reduce the overall cost, time, community resistance and environmental impact required to
locate and qualify a prospect.
The industry uses other technologies for wide area oil and natural gas reconnaissance exploration, such
as aeromagnetic and gravity surveys. These systems can provide regional geological information, such as
basement depth, sedimentary thickness and major faulting and structural development.
Risk and Uncertainties
Hydrocarbon exploration operations involve a number of risks and uncertainties that have affected our
financial statements and are reasonably likely to affect them in the future. These risks and uncertainties
are discussed further below.
Exchange Rates. Revenues and costs incurred in currencies other than Canadian dollars expose us to
exchange rate fluctuations between the Canadian dollar and foreign currencies. In addition, exchange rate
changes impact the Canadian equivalent carrying balances for our assets and liabilities, and for foreign
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 17
currency denominated monetary assets (such as cash and cash equivalents), the impact of changes in
exchange rates is recorded in net earnings as a foreign exchange gain or loss.
Interest Rates. We periodically invest available cash in short term investments that generate interest
income that will be affected by any change in interest rates.
Tax Rates. Changes in tax rates in the jurisdictions that we operate in would impact the amount of current
taxes that we pay. In addition, changes to substantively enacted tax rates would impact the carrying
balance of deferred tax assets and liabilities, potentially resulting in a deferred tax recovery or incremental
deferred tax expense.
In addition to the above, we are exposed to risk factors that may impact the Company and our business.
For further information on these risk factors, please refer to our Annual Information Form, available on
NXT's website at www.nxtenergy.com and on SEDAR at www.sedar.com
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 18
Summary of Quarterly Results
A summary of operating results for each of the trailing eight quarters (including a comparison of certain
key categories to each respective prior quarter) follows.
Survey revenue
Net income (loss)
Q4-19
$ -
(1,775,287)
Q3-19
Q2-19
$ 1,021,532 $10,954,617
8,085,888
(774,373)
Q1-19
$ -
(1,763,320)
Income (loss) per share – basic
Income (loss) per share – diluted
$ (0.03)
$ (0.03)
$ (0.01)
$ (0.01)
$ 0.12
$ 0.11
$ (0.03)
$ (0.03)
Survey revenue
Net income (loss)
Q4-18
$ -
(1,392,716)
Q3-18
$ -
(1,660,031)
Q2-18
$ -
(1,961,114)
Q1-18
$ -
(1,954,650)
Income (loss) per share – basic
Income (loss) per share – diluted
$ (0.02)
$ (0.02)
$ (0.02)
$ (0.02)
$ (0.03)
$ (0.03)
$ (0.03)
$ (0.03)
In Q4-19, survey costs were higher as final integration costs from the Nigerian SFD® Survey were incurred.
SBCE was lower as most outstanding options were fully vested. In Q3-19, NXT recognized $1,021,532 of
revenue for services rendered in connection with the Nigerian SFD® Survey, compared to $10,954,617 in
Q2-19. There were no revenues in the previous five quarters, rather, the Company incurred net losses in
each due primarily to survey costs (related to aircraft lease and aircraft maintenance costs), G&A expenses
and non-cash items like SBCE, which can be a significant expense in any given quarter, as detailed more
specifically below:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
in Q1-19, survey costs were higher due to scheduled maintenance on the aircraft and significant
legal and contract negation costs in preparing for the Nigerian SFD® Survey;
in Q4-18, SBCE was lower by $283,811 as unvested options were forfeited. In addition, G&A
expenses decreased $156,271 for two reasons: (i) business development decreased as most of
the business development work was centered in Calgary supporting the Nigerian SFD® Survey
negotiations; and (ii) there was a decrease in public company costs as the previous quarter had
significant costs related to reviewing equity financing options (offsetting the decreases in SBCE
and G&A expenses 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 was recognized on the extinguishment of a liability from 2005 that
was no longer payable, and interest income of $26,171 was earned on cash received from equity
financings; and
in Q1-18, G&A expenses were lower as NXT began to recognize the full extent of cost reductions
started in the prior quarter.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 19
Going Concern
Liquidity and Capital Resources
The consolidated financial statements for YE-19 have been prepared on a going concern basis. The going
concern basis of presentation assumes that NXT will continue in operation for the foreseeable future and
will be able to realize its assets and discharge its liabilities and commitments in the normal course of
business.
NXT's financial statements for YE-18 included disclosure related to the use of the "going concern" basis of
presentation. In YE-19, NXT has had positive cash flow from operations which has resulted in a significant
strengthening of the Company's liquidity and working capital position. As a consequence, management is
of the view that removal of the "going concern" disclosure in respect of its YE-19 disclosure is warranted
on the basis than the Company currently has sufficient funds to maintain operations for the next 12
months as of the date of these financial statements.
In the preparation of the YE-19 financial statements, management determined that there are no existing
conditions or reasonably foreseeable events that raise substantial doubt about the Company's ability to
continue as a going concern. However, NXT's future financial results and its longer term success remains
dependent upon the ability to continue to attract and execute client projects to build its revenue base.
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 continue to generate positive cash flow from
operations. The occurrence and timing of these events cannot be predicted with certainty.
NXT's cash and cash equivalents plus short-term investments at December 31, 2019 totaled $6.64 million.
Net working capital totaled $7.13 million.
As NXT is operating on a going concern basis, NXT's short-term ability to generate sufficient cash depends
on the success of signing contracts and receiving advance payments pursuant to the terms of such
agreements. 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 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 and strategic partnerships and for general
corporate and net working capital purposes.
Risks related to having sufficient ongoing net working capital to execute survey project contracts are
mitigated through our normal practice of obtaining advance payments and progress payments from
customers throughout the course of the projects, which often span three to four months. In addition,
where possible, risk of default on client billings has been mitigated through the use of export insurance
programs offered by Export Development Canada.
In YE-19, NXT continued to make progress in strengthening its liquidity and net working capital by
completing the Nigerian SFD® Survey and reducing corporate costs by reducing the number of staff and
by implementing new human resource policies to reduce staffing costs. Please see the discussion under
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 20
"Summary of Operating Results – General and Administrative Expenses" for the results of these cost
reductions.
As of the date of this MD&A, NXT has sufficient funds to maintain its operations for more than 12 months.
The Company does not have provisions in its leases, contracts, or other arrangements that would trigger
additional funding requirements or early payments.
If the Company were to default on its office lease, the current month rent plus the next three months
become immediately due. If the Company were to default on the aircraft lease, the Company would be
required to deliver the aircraft back to the Lessor.
Net Working Capital
Net Working Capital
Current assets (current liabilities)
Cash, cash equivalents and short-term investments
Accounts receivable
Note receivable
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Contract obligations
Current portion of lease obligation
Total Net Working Capital
YE-19
YE-18 Net Change
%
$6,639,757
1,384,315
324,700
97,132
(448,928)
(131,386)
(736,408)
7,129,182
$ 4,239,532
61,279
-
65,159
(499,535)
-
(42,603)
3,823,832
$2,400,225
1,323,036
324,700
31,973
50,607
(131,386)
(693,805)
3,305,350
57
2,159
100
49
(10)
(100)
1,629
86
NXT had no secured debt and had net working capital of $7,129,182 as at December 31, 2019.
The increase in net working capital in YE-19 was due to recognizing accounts receivable, cash from the
Nigerian SFD® Survey and the note receivable in respect of the Loan Arrangement. This increase was
offset due to the recognition of the current portion of lease obligations under ASC Topic 842 ("Topic 842")
and contract obligations (deposit) received from AGV for the Co-operation Agreement.
Accounts Payable
Accounts Payable
Trade accounts payable
Deferred gain on sale of aircraft
Deferred director and advisor payable
Accrued liabilities
Vacation pay accrued
Total Accounts Payable
YE-19
$ (181,790)
-
(24,352)
(136,257)
(106,529)
(448,928)
YE-18 Net Change
$ (43,281)
155,301
23,727
(25,882)
(59,258)
50,607
$ (138,509)
(155,301)
(48,079)
(110,375)
(47,271)
(499,535)
%
31
(100)
(49)
23
125
(10)
Accounts payable increased by $50,607, or 10%, in YE-19 compared to YE-18 for the following reasons:
(cid:120)
trade accounts payable increased by $43,281, or 31%, due primarily to increased professional fees
payable in connection with the Targeted Issuer Bid (payables are considered current at December
31, 2019 other than minor disputed items);
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 21
(cid:120)
the deferred gain on sale of aircraft was reclassified under current lease obligations;
(cid:120) deferred director and advisor fees decreased by $23,727, or 49%, as director fees have been fully
paid (the remaining payable is for advisor fees from prior to YE-18 which are in the process of
being settled);
(cid:120) accrued liabilities increased by $25,882, or 23%, due to timing of invoice receipts, which is
consistent with the decrease in accounts payable; and
(cid:120) vacation pay accrued increased by $59,258, or 125%, as employees vacations were deferred to
complete the Nigerian SFD® Survey.
The overall net changes in cash balances in each of the periods noted above is a function of several factors
including any inflows (outflows) due to changes in net working capital balances and net of any cash
transferred into/out of short-term investments. Further information on the net changes in cash, by each
of the operating, financing and investing activities, is as follows:
Cash Flow
Cash Flow - from / (used in)
Operating activities
Financing activities
Investing activities
Net source (use) of cash
Cash and cash equivalents, start of period
Cash and cash equivalents, end of period
Q4-19
Q4-18
$1,289,465 $(1,162,392)
(12,187)
(1,354,121)
1,100,000
257,236
(74,579)
192,580
414,111
2,665,665
339,532
2,858,245
YE-19
YE-18
$ 4,078,427 $(6,043,919)
9,176,839
(1,385,787)
(2,960,006)
(173,927)
172,914
2,518,713
166,618
339,532
339,532
2,858,245
Cash and cash equivalents
Short-term investments
Total Cash and Short-Term Investments
2,858,245
3,781,512
6,639,757
339,532
3,900,000
4,239,532
2,858,245
3,781,512
6,639,757
339,532
3,900,000
4,239,532
Operating Activities
Net income (loss) for the period
Total non-cash expense items
Change in non-cash working capital balances
Total Cash from (used in) Operating Activities
Q4-19
Q4-18
$(1,775,287) $(1,392,716)
184,362
(1,208,354)
45,962
(1,162,392)
383,794
(1,391,493)
2,680,958
1,289,465
YE-19
YE-18
$ 3,772,908 $(6,968,511)
1,782,762
1,777,580
(5,185,749)
5,550,488
(858,170)
(1,472,061)
(6,043,919)
4,078,427
Operating cash flow increased by $2,451,858 in Q4-19 as compared to Q4-18 and by $10,122,347 in YE-
19 as compared to YE-18 because of payments received from the Nigerian SFD® Survey net of payments
for survey costs.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 22
Financing Activities
Net funds used-in targeted issuer bid
Proceeds from exercise of stock options
Net proceeds from equity financings
Repayment of capital lease obligation
Total Cash from (used in) Financing Activities
Q4-19
$(1,343,184)
-
-
(10,937)
(1,354,121)
Q4-18
YE-19
$ - $(1,343,184)
-
-
(42,603)
(1,385,787)
-
(2,033)
(10,154)
(12,187)
YE-18
$ -
5,067
9,211,351
(39,579)
9,176,839
During Q4-19 the Company completed the TIB for $1,250,000 plus costs of $93,184 to repurchase
4,166,667 TIB Common Shares, at a price of $0.30 per.
NXT recorded a net cash financing outflow of $10,937 in Q4-19 and $42,603 in YE-19 on payments for its
finance leases. The YE-18 inflows were received in connection with equity financings.
Investing Activities
Purchase of property and equipment
Decrease (increase) in short-term investments
Total Cash from (used in) Investing Activities
Q4-19
$ -
257,236
257,236
YE-19
Q4-18
YE-18
$ - $ (216,691) $ (10,006)
(2,950,000)
1,100,000
(2,960,006)
1,100,000
42,764
(173,927)
Short-term investments in Q4-19 and YE-19 increased as the Company invested excess funds from
operations into Guaranteed Investment Certificates. The decrease in short-term investments in Q4-18
was for cash to finance operating costs. The increase in short-term investments in YE-18 was from the
cash received from equity financings.
Contractual Commitments
Associated with the adoption of Topic 842, all operating leases were recognized on the Consolidated
Balance Sheet. Accordingly, operating leases are not included in the commitments table below. The table
below is the non-lease operating cost components associated with the building lease.
The estimated minimum annual commitments for these leases are as follows, as at December 31, 2019:
For the period ended December 31
2020
2021
2022
2023
2024
2025
Office Premises
$ 222,069
222,501
222,501
222,501
222,501
1,112,073
166,876
1,278,949
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 23
Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements as of the date of this MD&A other than office
premise non-lease operating costs with Interloq Capital (the "Landlord"). If the Company were to default
on its office lease the current month rent including operation costs plus the next three months become
immediately due. Operating cost amounts are disclosed under the heading "Liquidity and Capital
Resources – Contractual Commitments". NXT pays an estimated operating cost during the current year,
but has the obligation to pay the actual operating costs incurred as defined in the office lease with the
Landlord early in the first quarter of the preceding year if the estimate was low, or will receive a refund if
the estimate was too high. Currently, the Company believes that the current operating cost estimate is
reasonable and is constant with discussions with the Landlord.
Transactions with Related Parties
In addition to the related party transactions discussed elsewhere herein (i.e. the Co-operation Agreement,
the Loan Arrangement and the Targeted Issuer Bid), one of the members of NXT's Board, Thomas
Valentine, is a partner in the law firm Norton Rose Fulbright Canada LLP which provides legal advice to
NXT. Legal fees incurred with Norton Rose Fulbright Canada LLP were as follows:
Legal Fees
Q4-19
$ 111,562
Q4-18
YE-18
$ 7,796 $ 276,261 $ 249,218
YE-19
Accounts payable and accrued liabilities includes a total of $146,197 ($5,999 as at December 31, 2018)
payable to Norton Rose Fulbright Canada LLP. Interest of $1,809 was received from AGV during the year.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 24
Critical Accounting Estimates
The key elements and assumptions are substantially unchanged from those described in NXT's annual
audited consolidated financial statements as at and for the year-ended December 31, 2018 other than as
described below.
Revenue
The performance obligation for NXT is the acquisition, processing, interpretation and integration of SFD®
data. Revenue from the sale of SFD® survey contracts (net of any related foreign sales taxes) is recognized
over time by measuring the progress toward satisfaction of its performance obligation to the customer.
All funds received or invoiced in advance of recognition of revenue are reflected as contract obligations
and classified as a current liability on our balance sheet.
The Company uses direct survey costs as the input measure to recognize revenue in any fiscal period. The
percentage of direct survey costs incurred to date over the total expected survey costs to be incurred,
provides an appropriate measure of the stage of the performance obligation being satisfied over time.
IP Assets
The value attributed to the IP assets acquired in 2015 was $25.3 million. The IP assets are being amortized
on a straight-line basis over a 15-year period (future amortization expense of $1,685,000 per year) and
are also subject to ongoing tests of potential impairment of the recorded net book value. No impairments
were recognized in Q4-19 and Q4-18. Any adverse change in competition, patent protection and the oil
and gas market could substantially change the useful life of the IP asset.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 25
Leases
Changes in Accounting Policies
On January 1, 2019, NXT adopted Topic 842, Leases and related amendments, using the modified
retrospective approach recognizing a cumulative effect adjustment at the beginning of the reporting
period in which Topic 842 was applied. Results for reporting periods beginning after January 1, 2019, are
presented in accordance with Topic 842, while prior periods have not been restated and are reported in
accordance with Topic 840. On transition, NXT elected certain practical expedients permitted under Topic
842 which include:
a) no reassessment of the classification of leases previously assessed under Topic 840; and
b) the use of hindsight in determining the lease term where the contract contains terms to extend or
terminate the lease.
In accordance with Topic 842, NXT recognized a Right Of Use ("ROU") asset and corresponding lease
liability for all operating leases on the Consolidated Balance Sheet. Prior to the adoption of Topic 842,
operating leases were not recognized on the Consolidated Balance Sheet. There was no impact to finance
leases on transition to Topic 842. The impact from recognizing operating leases on NXT's Consolidated
Balance Sheet is as follows:
Account
Property and equipment
Right of Use
Total Assets
Notes
i
ii
As reported
December 31, 2018
$683,157
-
$25,264,268
Adjustments
$(139,725)
3,535,919
$3,396,194
Balance on Adoption
as at January 1, 2019
$543,432
3,535,919
$28,660,462
Accounts payable and accrued
liabilities
Current portion of capital lease
obligations
Current portion of lease
obligations
Capital lease obligations
Long-term lease obligations
Other liabilities
Deferred charges
Total Liabilities and Shareholders'
Equity
iii
i
iv
i
ii
iv
v
$499,535
$(155,301)
$344,234
42,603
(42,603)
-
-
672,087
672,087
42,515
-
362,368
79,000
$25,264,268
(42,515)
3,405,894
(362,368)
(79,000)
$3,396,194
-
3,405,894
-
-
$28,660,462
Notes:
i)
Reclassify previously recognized finance leases: Leases accounted for as finance leases were reclassified to ROU assets and
lease liabilities from property, plant and equipment and capital lease obligations, respectively.
ii) Right of use: Right of use assets have been recognized for the building lease, aircraft lease and office equipment. Upon
transition the building and aircraft right of use assets were calculated on the net present value of future lease payments less
deferred charges for the building. The office equipment lease was previously recorded as a finance lease. The unamortized
portion of the leased asset was reclassified to right of use assets.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 26
iii) Lease liabilities: The Company recognized lease liabilities in relation to leases which had previously been classified as
operating. Under the principles of the new standard these leases have been measured at the present value of the remaining
lease payments, discounted using the Company's estimated incremental borrowing rates or implied interest rate in the lease
contract. Rates varied between 7.4% and 15.7%. Total lease liabilities of $4,077,981 were recorded as at January 1, 2019,
of which $672,087 was the current portion.
iv) Account payable and other accrued liabilities, Other liabilities: The deferred gain on sale of the aircraft was reclassified from
Accounts payable and other accrued liabilities, and Other liabilities to Current portion of lease obligations and Long-term
lease obligations.
v) Deferred charges: The Deferred charges for the office lease have been reclassified to ROU assets and are being amortized
on a straight line basis over the remaining period of the lease.
Although Topic 842 does not have a material impact on the Consolidated Statements of Income (loss) and
Comprehensive Income (Loss) or Cash Flows, the change in the accounting of the aircraft lease now has
interest expense of $15,095 and $69,776 for the three and twelve months ended December 31, 2019
being recorded, whereas under Topic 840 that amount was recorded under survey costs. In the
Consolidated Statements of Cash Flows under Operating Activities, amortization of deferred gain on sale
of aircraft and deferred charges are now presented as Non-cash lease and interest expense, under Topic
842.
Leases entered into for the use of an asset are classified as either operating or finance, which is
determined at contract inception. Upon commencement of the lease, a ROU asset and corresponding
lease liability are recognized on the Consolidated Balance Sheet for all operating and finance leases. NXT
has elected the short-term lease exemption, which does not require a ROU asset or lease liability to be
recognized on the Consolidated Balance Sheet when the lease term is 12 months or less and does not
include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
Upon commencement of the lease, ROU assets are measured at the initial measurement of the lease
liability adjusted for any lease payments made before commencement date of the lease, less any lease
incentives received and include any initial direct costs incurred. Lease liabilities are initially measured at
the present value of future minimum lease payments over the lease term. The discount rate used to
determine the present value is the rate implicit in the lease unless that rate cannot be determined, in
which case NXT's incremental borrowing rate is used.
Operating lease ROU assets and liabilities are subsequently measured at the present value of the lease
payments not yet paid and discounted at the initial discount rate at commencement of the lease, less any
impairments to the ROU asset. Operating lease expense and revenue from any subleases are recognized
in the Consolidated Statement of Income (Loss) and Comprehensive Income (Loss) on a straight line basis
over the lease term. Finance lease ROU assets are amortized over the estimated useful life of the asset if
the lessee is reasonably certain to exercise a purchase option or ownership of the leased asset transfers
at the end of the lease term, otherwise the leased assets are amortized over the lease term. Operating
leases include office building, aircraft and printer. Finance leases include office equipment. Currently,
there are no subleases.
NXT's lease contracts include rights to extend leases after the initial term. Rights to extend or terminate
a lease are included in the lease term when there is reasonable certainty the right will be exercised.
Factors used to assess reasonable certainty of rights to extend or terminate a lease include current and
forecasted survey plans, anticipated changes in strategies, historical practice in extending similar
contracts and current market conditions.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 27
Financial Instruments
The Company's non-derivative financial instruments consist of cash and cash equivalents, short-term
investments, accounts receivable, notes receivable, accounts payable and accrued liabilities and leases.
The carrying value of these financial instruments approximates their fair values due to their short terms
to maturity. NXT is not exposed to significant interest arising from these financial instruments, but is
exposed to significant credit risk with accounts receivable and notes receivable. For accounts receivable,
where possible, NXT requests advance payments and utilizes risk mitigation products offered by entities
such as Export Development Canada including, for example, insurance coverage of contract accounts
receivable, guarantee support for contract performance bonds and wrongful call insurance for such
bonds. For the notes receivable, NXT has secured the note receivable against assets of AGV’s affiliates.
NXT is exposed to foreign exchange risk as a result of holding foreign denominated financial instruments.
Any unrealized foreign exchange gains and losses arising on such holdings are reflected in earnings at the
end of each period.
As at December 31, 2019 and December 31, 2018, the Company held no derivate financial instruments.
For more information relating to risks, see the section titled "Liquidity and Capital Resources – Net
Working Capital".
Outstanding Share Capital
Common Shares
Stock options
Warrants
Total Share Capital and Dilutive Securities
April 13,
2020
64,406,891
932,600
-
65,339,491
December 31,
2019
64,406,891
1,169,500
-
65,576,391
December 31,
2018
68,573,558
1,297,000
3,421,646
73,292,204
All 3,421,648 Warrants issued in 2018 expired as of October 31, 2019, pursuant to the terms of the
Targeted Issuer Bid.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 28
Disclosure Controls and Procedures ("DCPs") and
Internal Controls over Financial Reporting ("ICFR")
NXT's Chief Executive Officer and Chief Financial Officer (together the "Responsible Officers") are
responsible for establishing and maintaining DCPs, or causing them to be designed under their
supervision, for NXT to provide reasonable assurance that material information relating to the Company
is made known to the Responsible Officers by others within the organization, particularly during the
period in which the Company's quarterly and year-end consolidated financial statements and MD&A are
being prepared.
DCPs and other procedures are designed to ensure that information required to be disclosed in reports
that are filed is recorded, summarized and reported within the time periods specified by the relevant
security authority in either Canada or the United States of America. DCPs include controls and procedures
designed to ensure that information required to be disclosed in our reports is communicated to
management, including our Responsible Officers, to allow timely decisions regarding required disclosure.
The Company has established and maintains ICFR using the criteria that were set forth by the Committee
of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework
(2013). The control framework was designed or caused to be designed under the supervision of the
Responsible Officers to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with US GAAP.
In an evaluation of the effectiveness of the Company's DCPs as defined under the rules adopted by the
Canadian securities regulatory authorities and by the United States Securities and Exchange Commission,
the Company's Responsible Officers concluded that there are material weaknesses in the Company's ICFR
that have a direct impact on the Company's DCPs:
(cid:120) 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
(cid:120) NXT does not have a sufficient level of staff with specialized expertise to adequately conduct
separate preparation and a subsequent independent review of certain complex or highly
judgmental accounting issues – NXT 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.
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.
The small size of the Company's finance team has resulted in control deficiencies in maintaining DCPs and
ICFR that in turn have led to a recurrence of previously identified deficient disclosure. Given the small
size of the Companies finance team and in order to 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 Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 29
NXT's efforts to mitigate the risks associated with the above-mentioned deficiencies has resulted in
continuous improvements in its DCPs. The Responsible Officers concluded that, as at December 31, 2019,
the Company's ICFR have improved, but are still not effective and as a result its DCPs 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
continued benefits in 2020. 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, the
Company has appointed its Corporate Controller as the new Chief Financial Officer as of August 1, 2019.
The Chief Financial Officer engages subject matter consultants as the need arises.
The new controls over financial reporting and disclosure policies and responsibilities have been performed
over seven quarterly periods. 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 DCPs 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 DCPs and ICFR will prevent all errors or
fraud.
Additional Information
Additional information related to the Company, including the Company's Annual Information Form, is
available on NXT's website at www.nxtenergy.com and on SEDAR at www.sedar.com.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2019
page | 30
NXT ENERGY SOLUTIONS INC.
Consolidated Financial Statements
For the year ended
December 31, 2019
page | 31
KPMG LLP
205 5th Avenue SW
Suite 3100
Calgary AB T2P 4B9
Telephone (403) 691-8000
Fax (403) 691-8008
www.kpmg.ca
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Shareholders and Board of Directors NXT Energy Solutions Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NXT Energy Solutions
Inc. (the “Company”) as of December 31, 2019 and 2018, the related consolidated
statements of income (loss) and comprehensive income (loss), changes in shareholders’
equity and cash flows for each of the years in the three year period ended December 31,
2019, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2019 and 2018,
and the results of operations and its cash flows for each of the years in the three year period
ended December 31, 2019, in conformity with U.S. generally accepted accounting
principles.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed
its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting
Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG
LLP.
We conducted our audits in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of
the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Chartered Professional Accountants
We have served as the Company’s auditor since 2006.
Calgary, Canada
April 13, 2020
NXT ENERGY SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
Assets
Current assets
Cash and cash equivalents
Short-term investments (Note 3)
Accounts receivable (Note 4)
Note receivable (Note 5)
Prepaid expenses
Long term assets
Deposits (Note 6)
Property and equipment (Note 7)
Right of use of assets (Note 8)
Intellectual property (Note 9)
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities (Note 10)
Contract obligations (Note 11)
Current portion of lease obligation (Note 13)
Long-term liabilities
Long-term lease obligation (Note 13)
Other liabilities
Asset retirement obligation (Note 12)
Deferred charges
Commitments (Note 14)
Shareholders' equity
Common shares (Note 15): - authorized unlimited
Issued: 64,406,891 (2018 - 68,573,558) common shares
Contributed capital
Deficit
Accumulated other comprehensive income
December 31,
December 31,
2019
2018
$
2,858,245
3,781,512
1,384,315
324,700
97,132
8,445,904
$
339,532
3,900,000
61,279
-
65,159
4,365,970
535,554
677,647
3,063,769
17,970,067
30,692,941
$
560,341
683,157
-
19,654,800
25,264,268
$
$
$
448,928
131,386
736,408
1,316,722
2,669,736
-
21,481
-
2,691,217
499,535
-
42,603
542,138
42,515
362,368
26,778
79,000
510,661
4,007,939
1,052,799
95,313,064
9,306,493
(78,645,489)
710,934
96,656,248
9,262,684
(82,418,397)
710,934
26,685,002
24,211,469
$
30,692,941
$
25,264,268
Signed "George Liszicasz"
Director
Signed "Bruce G. Wilcox"
Director
The accompanying notes are an integral part of these consolidated financial statements.
page | 34
NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Expressed in Canadian dollars)
Revenue
Survey revenue (Note 21)
Expenses
Survey costs, net (Note 22)
General and administrative expenses
Stock based compensation expense (Note 17)
Amortization expense (Notes 7 & 8)
Other expenses (income)
Interest (income) expense, net
Foreign exchange loss (gain)
Intellectual property and other
Gain on extingishment of liability (Note 24)
For the Year ended December 31
2019
2018
2017
$
11,976,149
$
-
$
-
2,611,086
3,497,785
43,809
1,781,181
1,103,946
3,999,089
386,154
1,790,267
7,933,861
7,279,456
(20,684)
233,231
56,833
-
(62,004)
(19,852)
(43,428)
(185,661)
1,289,429
4,960,961
581,356
1,897,576
8,729,322
4,485
69,676
91,370
-
269,380
(310,945)
165,531
Income (loss) before income taxes
3,772,908
(6,968,511)
(8,894,853)
Income tax expense (Note 18)
Current
-
-
-
-
75,545
75,545
Net income (loss) and comprehensive income (loss)
$
3,772,908
$
(6,968,511)
$
(8,970,398)
Net income (loss) per share (Note 16)
Basic
Diluted
$
$
0.06
0.06
$
$
(0.11)
(0.11)
$
$
(0.16)
(0.16)
The accompanying notes are an integral part of these consolidated financial statements.
page | 35
NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
For the Year ended December 31
2019
2018
2017
Cash provided by (used in):
Operating activities
Comprehensive income (loss) for the period
Items not affecting cash:
Stock based compensation expense (Note 17)
Amortization expense (Notes 8 & 9)
Settlement of payable with shares
Non-cash changes to asset retirement obligation
Non-cash lease and interest expense
Valuation allowance of Bolivian Tax Credits
Unrealized Foreign Exchange
Amortization of deferred gain on sale of aircraft
Deferred rent
Gain on settlement of liabilities
Change in non-cash working capital balances (Note 20)
ARO liabilities settled
$
3,772,908
$
(6,968,511)
$
(8,970,398)
43,809
1,781,181
-
2,068
(171,056)
-
121,578
-
-
-
386,154
1,790,267
-
(29,925)
-
-
(19,853)
(155,301)
(2,919)
(185,661)
(1,464,695) (858,170)
-
924,592
(7,366)
305,519
581,356
1,897,576
95,181
1,462
-
207,682
-
(103,534)
(3,018)
-
829,014
-
3,505,719
Net cash from (used in) operating activities
4,078,427
(6,043,919)
(5,464,679)
Financing activities
Net funds used in targeted issuer bid (Note 15)
Proceeds from exercise of stock options
Net Proceeds from Rights Offering
Cost of equity-based transaction with non-employee
Net Proceeds from Private Placement
Repayment of lease obligation
(1,343,184)
-
-
-
-
(42,603)
-
5,067
-
-
9,211,351
(39,579)
-
35,995
2,029,867
(6,149)
-
(36,769)
Net cash from (used in) financing activities
(1,385,787)
9,176,839
2,022,944
Investing activities
Proceeds/(use) from sale/purchase of equipment, net
(Increase) in Deposits
Decrease (Increase) in short-term investments
(216,691)
-
42,764
(10,006)
-
(2,950,000)
3,133,531
(518,765)
503,091
Net cash from (used in) investing activities
(173,927)
(2,960,006)
3,117,857
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the period
2,518,713
339,532
172,914
166,618
(323,878)
490,496
Cash and cash equivalents, end of the period
$
2,858,245
$
339,532
$
166,618
Supplemental information
Cash interest (received)
Cash taxes paid
(16,724)
-
(58,889)
-
4,487
72,587
The accompanying notes are an integral part of these consolidated financial statements.
page | 36
NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Shareholders' Equity
(Expressed in Canadian dollars)
Common Shares
Balance at beginning of the period (Note 15)
$
96,656,248
$
88,121,286
$
85,966,393
For the Year ended December 31
2019
2018
2017
Shares purchased and retired during the year (Note 15)
Issuance of Common Stock on Private Placement (Note 15)
Rights Offering (Note 15)
Issued upon exercise of stock options
Transfer from contributed capital upon exercise of stock options
Equity-based transaction with non-employee
Finder's fee (Note 15)
Balance at end of the period
Contributed Capital
Balance at beginning of the period
Issuance of warrants on Private Placement (Note 15)
Recognition of stock based compensation expense
Contributed capital transferred to common shares
upon exercise of stock options
Balance at end of the period
Deficit
(1,343,184)
-
- 8,387,451
-
-
-
-
-
5,067
6,441
-
136,003
-
-
- 2,029,867
35,995
-
89,031
-
95,313,064
96,656,248
88,121,286
9,262,684
-
43,809
8,195,075
687,896
386,154
7,613,719
-
581,356
-
(6,441)
-
9,306,493
9,262,684
8,195,075
Balance at beginning of the period
Net income (loss) and comprehensive income (loss) for the period
(82,418,397)
3,772,908
(75,449,886)
(6,968,511)
(66,479,488)
(8,970,398)
Balance at end of the period
(78,645,489)
(82,418,397)
(75,449,886)
Accumulated Other Comprehensive Income
Balance at beginning and end of the period
710,934
710,934
710,934
Total Shareholders' Equity at end of the period
$
26,685,002
$
24,211,469
$
21,577,409
page | 37
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
1. The Company and future operations
NXT Energy Solutions Inc. (the "Company" or "NXT") is a publicly traded company based in Calgary, Alberta
Canada.
NXT's proprietary Stress Field Detection ("SFD®") technology is an airborne survey system that is used in
the oil and natural gas exploration industry to identify subsurface trapped fluid accumulations.
These consolidated financial statements have been prepared on a going concern basis. The going concern
basis of presentation assumes that NXT will continue in operation for the foreseeable future and will be
able to realize its assets and discharge its liabilities and commitments in the normal course of
business. However, NXT's future financial results and its longer term success remains dependent upon
the ability to continue to attract and execute client projects to build its revenue base. NXT continues to
develop its pipeline of opportunities to secure new revenue contracts. 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 continue to generate positive cash flow from operations. The occurrence and timing
of these events cannot be predicted with certainty.
2. Significant Accounting Policies
Basis of Presentation
These consolidated financial statements for the year ended December 31, 2019 have been prepared by
management in accordance with generally accepted accounting principles of the United States of America
("US GAAP”).
Consolidation
These consolidated financial statements reflect the accounts of the Company and its wholly owned
subsidiaries (all of which are inactive). All significant inter-company balances and transactions among NXT
and its subsidiaries have been eliminated and are therefore not reflected in these consolidated financial
statements.
Estimates and Judgements
Estimates made relate primarily to the use of the going concern assumption, estimated useful lives, and
the valuation of intellectual property and property and equipment, the measurement of stock-based
compensation expense, valuation of deferred income tax assets, and estimates for asset retirement
obligations. The estimates and assumptions used are based upon management's best estimate. Estimates
and assumptions are reviewed periodically and the effects of revisions are reflected in the period when
determined. Actual results may differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and short term GICs with an original maturity less than
90 days from the date of acquisition.
page | 38
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
Short Term Investments
Short term investments consist of short term GICs, with original maturity dates greater than 90 days and
up to one year.
Fair Value of Derivative Instruments
Derivative Instruments
Derivative instruments are recognized on the balance sheet at fair value with any changes in fair value
between periods recognized in the determination of net income (loss) for the period. NXT does not apply
hedge accounting to any of its derivatives. As at December 31, 2019 and 2018, NXT had no outstanding
derivative instruments.
Fair Value Measures
For any balance sheet items recorded at fair value on a recurring basis or non-recurring basis, the
Company is required to classify the fair value measure into one of three categories based on the fair value
hierarchy noted below.
In Level I, the fair value of assets and liabilities is determined by reference to quoted prices in active
markets for identical assets and liabilities that the Company has the ability to assess at the measurement
date.
In Level II, determination of the fair value of assets and liabilities is based on the extrapolation of inputs,
other than quoted prices included within Level I, for which all significant inputs are observable directly or
indirectly. Such inputs include published exchange rates, interest rates, yield curves and stock quotes from
external data service providers. Transfers between Level I and Level II would occur when there is a change
in market circumstances.
In Level III, the fair value of assets and liabilities measured on a recurring basis is determined using a
market approach based on inputs that are unobservable and significant to the overall fair value
measurement. Assets and liabilities measured at fair value can fluctuate between Level II and Level III
depending on the proportion of the value of the contract that extends beyond the time frame for which
inputs are considered to be observable. As contracts near maturity and observable market data becomes
available, the contracts are transferred out of Level III and into Level II.
Deposits
Deposits consist of security payments made to lessors for the Company’s office and aircraft lease. They
are classified as long term if the lease end date is greater than one year.
Property and Equipment
Property and equipment is recorded at cost, less accumulated amortization, which is recorded over the
estimated service lives of the assets using the following annual rates and methods:
Computer hardware (including survey equipment)
30% declining balance
page | 39
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
Aircraft
Furniture and other equipment
Leasehold improvements
10% declining balance
20% declining balance
10% declining balance
Impairment of Long-Lived Assets
The Company reviews long-lived assets, which includes property, equipment and intellectual property for
impairment whenever events or changes in circumstances indicate the carrying value may not be
recoverable. When indictors of impairment exist, the Company first compares the total of the estimated
undiscounted future cash flows or the estimated sale price to the carrying value of an asset. If the carrying
value exceeds these amounts, an impairment loss is recognized for the excess of the carrying value over
the estimated fair value of the asset.
Intellectual Property
Intellectual property acquired is recorded at cost, less accumulated amortization, which is recorded over
the estimated minimum useful life of the assets. Intellectual property is also subject to ongoing tests of
potential impairment of the recorded net book value.
Research and Development Expenditure
Research and development ("R&D") expenditures incurred to develop, improve and test the SFD® survey
system and related components are expensed as incurred. Any intellectual property that is acquired for
the purpose of enhancing research and development projects, if there is no alternative use for the
intellectual property, is expensed in the period acquired. No significant external R&D was incurred in the
years ended 2019, 2018 and 2017.
Foreign Currency Translation
The Company's functional currency is the Canadian dollar. Revenues and expenses denominated in
foreign currencies are translated into Canadian dollars at the average exchange rate for the applicable
period. Shareholders' equity accounts are translated into Canadian dollars using the exchange rates in
effect at the time of the transaction. Monetary assets and liabilities are translated into Canadian dollars
at the exchange rate in effect at the end of the applicable period. Non-monetary assets and liabilities are
recorded at the relevant exchange rates for the period in which the balances arose. Any related foreign
exchange gains and losses resulting from these translations are included in the determination of net
income (loss) for the period.
Income Taxes
NXT follows the asset and liability method of accounting for income taxes. This method recognizes
deferred income tax assets and liabilities based on temporary differences in reported amounts for
financial statement and income tax purposes, at the income tax rates expected to apply in the future
periods when the temporary differences are expected to be reversed or realized. The effect of a change
in income tax rates on deferred income tax assets and deferred income tax liabilities is recognized in
income in the period when the tax rate change is enacted. Valuation allowances are provided when
necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.
page | 40
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
Stock Based Compensation Expense
NXT follows the fair value method of accounting for stock options that are granted to acquire common
shares under NXT's stock option plan. Under this method, an estimate of the fair value of the cost of stock
options that are granted to employees, directors and consultants is calculated using the Black-Scholes
option pricing model and charged to income over the future vesting period of the stock options, with a
corresponding increase recorded in contributed capital. Upon exercise of the stock options, the
consideration received by NXT, and the related amount which was previously recorded in contributed
capital, is recognized as an increase in the recorded value of the common shares of the Company.
Income (Loss) Per Share
Basic income (loss) per share amounts are calculated by dividing net income (loss) by the weighted
average number of common shares that are outstanding for the fiscal period. Shares issued during the
period are weighted for the portion of the period that the shares were outstanding. Diluted income per
share, in periods when NXT has net income, is computed using the treasury stock method, whereby the
weighted average number of shares outstanding is increased to include any additional shares that would
be issued from the assumed exercise of stock options and common share purchase warrants. The
incremental number of shares added under the treasury stock method assumes that outstanding stock
options and warrants that are exercisable at exercise prices below the Company's average market price
(i.e. they were “in-the-money”) for the applicable fiscal period are exercised and then that number of
incremental shares is reduced by the number of shares that could have been repurchased by the Company
from the issuance proceeds, using the average market price of the Company’s shares for the applicable
fiscal period.
No addition to the basic number of shares is made when calculating the diluted number of shares if the
diluted per share amounts become anti-dilutive (such as occurs in the case where there is a net loss for
the period).
Revenue
The performance obligation for NXT is the acquisition, processing, interpretation and integration of Stress
Field Detection (SFD®) data. Revenue from the sale of SFD® survey contracts (net of any related foreign
value added taxes) is recognized over time by measuring the progress toward satisfaction of its
performance obligation to the customer. All funds received or invoiced in advance of recognition of
revenue are reflected as contract obligations and classified as a current liability on our balance
sheet.
The Company uses direct survey costs as the input measure to recognize revenue in any fiscal period. The
percentage of direct survey costs incurred to date over the total expected survey costs to be incurred,
provides an appropriate measure of the stage of the performance obligation being satisfied over time.
Leases
On January 1, 2019, NXT adopted ASC Topic 842, Leases (“Topic 842”) and related amendments, using the
modified retrospective approach recognizing a cumulative effect adjustment at the beginning of the
page | 41
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
reporting period in which Topic 842 was applied. Results for reporting periods beginning after January 1,
2019, are presented in accordance with Topic 842, while prior periods have not been restated and are
reported in accordance with ASC Topic 840, Leases (“Topic 840”). On transition, NXT elected certain
practical expedients permitted under Topic 842 which include:
a) No reassessment of the classification of leases previously assessed under Topic 840.
b) The use of hindsight in determining the lease term where the contract contains terms to extend or
terminate the lease.
The policy and disclosures required under Topic 842 are included in Note 13, Leases.
In accordance with Topic 842, NXT recognized a ROU asset and corresponding lease liability for all
operating leases on the Consolidated Balance Sheet. Prior to the adoption of Topic 842, operating leases
were not recognized on the Consolidated Balance Sheet. There was no impact to finance leases on
transition to Topic 842. The impact from recognizing operating leases on NXT’s Consolidated Balance
Sheet is as follows:
Account
Notes
Property and equipment
Right of Use
Total Assets
lease
Accounts payable and accrued
liabilities
Current portion of capital
lease obligations
Current portion of
obligations
Capital lease obligations
Long-term lease obligations
Other liabilities
Deferred charges
Total Liabilities and
Shareholders’ Equity
i
ii
iii
i
iv
i
iii
iv
v
As reported
December 31,
2018
$683,157
-
$25,264,268
Adjustments
$(139,725)
3,535,919
$3,396,194
Balance on
Adoption as at
January 1, 2019
$543,432
3,535,919
$28,660,462
$499,535
$(155,301)
$344,234
42,603
(42,603)
-
-
672,087
672,087
42,515
-
362,368
79,000
$25,264,268
(42,515)
3,405,894
(362,368)
(79,000)
$3,396,194
-
3,405,894
-
-
$28,660,462
Notes:
i)
Reclassify previously recognized finance leases:
Leases accounted for as finance leases were reclassified to Right of Use Assets and lease
liabilities from property, plant and equipment and capital leases, respectively.
ii)
Right of use:
Right of use assets have been recognized for the building lease, aircraft lease and office
equipment. Upon transition the building and aircraft right of use assets were calculated
on the net present value of future lease payments less deferred charges for the building.
page | 42
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
The office equipment lease was previously recorded as a finance lease. The unamortized
portion of the leased asset was reclassified to right of use assets.
iii)
Lease liabilities:
The Company recognized lease liabilities in relation to leases which had previously been
classified as operating. Under the principles of the new standard these leases have been
measured at the present value of the remaining lease payments, discounted using the
Company’s estimated incremental borrowing rates or implied interest rate in the lease
contract. Rates varied between 7.4% and 15.7%. Total lease liabilities of $4,077,981 were
recorded as at January 1, 2019, of which $672,087 was the current portion.
iv)
Account payable and other accrued liabilities, Other liabilities:
The deferred gain on sale of the aircraft was reclassified from Accounts payable and other
accrued liabilities and Other liabilities to Current portion of lease obligations and Long-
term Lease Obligations.
v)
Deferred charges:
The Deferred charges for the office lease have been reclassified to Right of use assets and
are being amortized on a straight line basis over the remaining period of the lease.
Although Topic 842 does not have a material impact on the Consolidated Statements of Income (loss) and
Comprehensive Income (Loss) or Cash Flows, the change in the accounting of the aircraft lease now has
interest expense of $69,776 for the year ended December 31, 2019 being recorded, whereas under Topic
840 that amount was recorded under survey costs. In the Consolidated Statements of Cash Flows under
Operating Activities, amortization of deferred gain on sale of aircraft and deferred charges are now
presented as Non-cash lease and interest expense, under Topic 842.
page | 43
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
3. Short-term investments
Short-term investments consist of Guaranteed Investment Certificates (“GIC’s”) with originally maturity
dates of 90 days to one year from the date of purchase. As at December 31, 2019 all GIC’s had less than
one year left before maturity. For December 31, 2019, interest rates ranged from 1.70% to 2.15%. For
December 31, 2018, interest rates ranged from 2.10% to 2.15%.
Days to maturity
Less than 90 days
91 to 183 days
183 days to one year
4. Accounts Receivable
Accounts receivable are all current as at December 31, 2019.
Trade receivables
Other receivables
Allowance for doubtful accounts
Net accounts receivable
For the year ended
December 31,
2019
$ 1,754,302
1,218,724
808,486
3,781,512
$
December 31,
2018
-
-
3,900,000
3,900,000
For the year ended
December 31, December 31,
2018
-
61,279
2019
$1,297,792
86,523
$
1,384,315
-
1,384,315
61,279
-
61,279
The entire Trade receivable is with one client. In March 2020, US$466,000 (CAD$619,128) was received
on the outstanding trade receivable as at December 31, 2019.
5. Notes Receivable
NXT advanced $250,000 USD (the “Note Receivable”) to Alberta Green Ventures Limited Partnership
(“AGV”) on a secured basis in September 2019. The interest rate on the Notes Receivable is the greater
of 2% and the rate prescribed under the Income Tax Act (Canada) from time to time, payable monthly in
arrears. All interest was collected as at December 31, 2019. AGV secured the Notes Receivable with
common shares previously held by AGV.
As per the terms of the Note Receivable, NXT, in its sole and absolute discretion, was entitled to elect to
receive any payment made by AGV by way of cash payment, or delivery for cancellation to NXT of the
equivalent number of Common Shares having a fair market value equal to the aggregate of such amounts,
page | 44
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
calculated using the volume weighted average price of the Common Shares as reported and traded on the
Toronto Stock Exchange for the five trading days immediately preceding the repayment date.
On December 13, 2019 NXT issued a Direction to Pay to AGV, in which the principle of the Note Receivable
would be settled in shares of NXT, however, this did not occur. On April 13, 2020, NXT has cancelled the
previous Direction to Pay and has issued a new Direction to Pay to AGV. The April 13, 2020 Direction to
Pay has now directed AGV to deliver US$250,000 in cash proceeds as repayment on the principle amount
of US$250,000. Interest will begin to accrue until the date on which payment in full of all amounts owing
pursuant to the Notes Receivable are received by NXT. NXT may change its Direction to Pay, if NXT so
decides, at its sole and absolute discretion to receive the principal repayment by way of Common Shares
by application to the Alberta Securities Commission.
Based on the fair market value of the common shares held as collateral the Note Receivable is fully
collateralized.
page | 45
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
6. Deposits
Security deposits have been made to the lessors of the office building and the aircraft. The aircraft
deposit is held in United States Dollars.
Building
Aircraft
7. Property and equipment
For the period ended December 31, 2019
Survey equipment
Computers and software
Furniture and other equipment
Leasehold improvements
For the period ended December 31, 2018
Survey equipment
Computers and software
Furniture and other equipment
Leasehold improvements
8. Right of use assets
For the period ended December 31, 2019
Aircraft
Office Building
Printer
Office equipment
For the year ended
December 31, December 31,
2018
$43,310
517,031
560,341
2019
$43,309
492,245
535,554
Cost
Base
$892,637
1,265,045
528,419
965,108
3,651,209
Accumulated
amortization
$646,953
1,219,045
509,146
598,418
2,973,562
Net book
value
$245,684
46,000
19,273
366,690
677,647
Cost
Base
$684,890
1,256,101
528,420
1,165,108
3,634,519
Accumulated
amortization
$628,037
1,201,047
504,328
617,950
2,951,362
Net book
value
$56,853
55,054
24,092
547,158
683,157
Cost
Base
$1,578,774
1,799,626
17,794
139,725
3,535,919
Accumulated
Amortization
$256,778
197,426
3,973
13,973
472,150
Right of
Use
$1,321,996
1,602,200
13,821
125,752
3,063,769
page | 46
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
9. Intellectual property
During 2015, NXT acquired the permanent rights to the SFD® technology for use in the exploration of
hydrocarbons from Mr. George Liszicasz and recorded the acquisition as an intellectual property asset on
the balance sheet. The asset was recorded at the fair value of the consideration transferred, including
the related tax effect of approximately $25.3 million.
The asset is being amortized on a straight line basis over its estimated useful life of 15 years. The annual
amortization expense expected to be recognized in each of the next five years is approximately $1.7
million per year for a 5 year aggregate total of $8.5 million.
Intellectual property acquired
Accumulated amortization
10. Accounts payable and accrued liabilities
Accrued liabilities related to:
Consultants and professional fees
Board of Directors' fees
Deferred gain on sale of aircraft (current)
Payroll (wages payable and vacation pay)
Trade payables and other
December 31,
2019
$ 25,271,000
(7,300,933)
17,970,067
For the year ended
December 31,
2018
$ 25,271,000
(5,616,200)
19,654,800
For the year ended
December 31,
2019
December 31,
2018
$311,635
-
-
106,529
418,164
30,764
448,928
$151,427
22,500
155,301
47,271
376,499
123,036
499,535
page | 47
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
11. Contract Obligations
The Company has received a deposit of $100,000USD from Alberta Green Ventures Limited Partnership
(“AGV’) to be applied to an SFD® survey which is scheduled to be completed by June 30, 2020.
Contract obligations
12. Asset Retirement Obligation
For the year ended
December 31, December 31,
2018
$ -
2019
$131,386
Asset retirement obligations ("ARO") relate to minor non-operated interests in oil and natural gas wells in
which NXT has outstanding abandonment and reclamation obligations in accordance with government
regulations. The estimated future abandonment liability is approximately $22,000 which is based on
estimates of the future timing and costs to abandon, remediate and reclaim the well sites within the next
five years. The net present value of the ARO is as noted below, and has been calculated using an inflation
rate of 2.0% and discounted using a credit-adjusted risk-free interest rate of 2.5%.
ARO balance, beginning of the year
Accretion expense
Costs incurred
Change in ARO estimates
ARO balance, end of the year
2019
$ 26,778
2,068
(7,365)
-
21,481
2018
$ 56,702
2,069
-
(31,993)
26,778
page | 48
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
13. Lease obligation
Aircraft
Office Building
Printer
Office equipment
Current Portion of lease obligations
Long-term lease obligations
Maturity of lease liabilities:
2020
2021
2022
2023
2024
After 2024
Total lease payments
Less imputed lease payments
Total discounted lease payments
Current portion of lease obligations
Non-current portion of lease obligations
December 31,
2019
$1,680,103
1,669,953
13,573
42,515
3,406,144
(736,408)
2,669,736
$
December 31,
2018
-
-
-
85,118
85,118
(42,603)
42,515
$1,057,776
1,018,789
587,536
367,185
367,185
799,333
4,197,804
(791,660)
3,406,144
(736,408)
2,669,736
Leases entered into for the use of an asset are classified as either operating or finance, which is
determined at contract inception. Upon commencement of the lease, a ROU asset and corresponding
lease liability are recognized on the Consolidated Balance Sheet for all operating and finance leases. NXT
has elected the short-term lease exemption, which does not require a ROU asset or lease liability to be
recognized on the Consolidated Balance Sheet when the lease term is 12 months or less and does not
include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
Upon commencement of the lease, ROU assets are measured at the initial measurement of the lease
liability adjusted for any lease payments made before commencement date of the lease, less any lease
incentives received and include any initial direct costs incurred. Lease liabilities are initially measured at
the present value of future minimum lease payments over the lease term. The discount rate used to
determine the present value is the rate implicit in the lease unless that rate cannot be determined, in
which case NXT’s incremental borrowing rate is used.
Operating lease ROU assets and liabilities are subsequently measured at the present value of the lease
payments not yet paid and discounted at the initial discount rate at commencement of the lease, less any
impairments to the ROU asset. Operating lease expense and revenue from any subleases are recognized
in the Consolidated Statement of Income (Loss) and Comprehensive Income (Loss) on a straight line basis
over the lease term. Finance lease ROU assets are amortized over the estimated useful life of the asset if
the lessee is reasonably certain to exercise a purchase option or ownership of the leased asset transfers
page | 49
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
at the end of the lease term, otherwise the leased assets are amortized over the lease term. Operating
leases include office building, aircraft and printer. Finance leases include office equipment. Currently
there are no subleases.
NXT’s lease contracts include rights to extend leases after the initial term. Rights to extend or terminate
a lease are included in the lease term when there is reasonable certainty the right will be exercised.
Factors used to assess reasonable certainty of rights to extend or terminate a lease include current and
forecasted survey plans, anticipated changes in strategies, historical practice in extending similar
contracts and current market conditions.
14. Commitments
Associated with the adoption of Topic 842, all operating leases were recognized on the Consolidated
Balance Sheet. Accordingly, operating leases are not included in the commitments table below. The table
below is the non-lease operating cost components associated with the costs of the building lease. See
Notes 2 and 13 for additional disclosures on leases.
For the fiscal period ending
December 31,
2020
2021
2022
2023
2024
2025
Office
Premises
$ 222,069
222,501
222,501
222,501
222,501
1,112,073
166,876
1,278,949
page | 50
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
15. Common shares
The Company is authorized to issue an unlimited number of common shares, of which the following are
issued and outstanding:
For the Year Ended
31-Dec-19
31-Dec-18
As at the beginning of the year
Shares retired during the year
Shares issued during the year:
Issuance of Common Stock
on the Private Placement
Exercise of stock options
Transfer from contributed capital
on the exercise of stock options
Finder’s fee
As at the end of the period
# of shares
# of shares
$ amount
68,573,558 $96,656,248 58,161,133
-
(1,343,184)
(4,166,667)
$ amount
$88,121,286
-
-
-
- 10,264,946
6,667
-
8,387,451
5,067
-
-
64,406,891
-
140,812
95,313,064 68,573,558
-
-
6,441
136,003
96,656,248
31-Dec-17
For the Year Ended
As at the beginning of the year
Shares issued during the year:
Exercise of stock options
Rights Offering, net of issue costs
Stock options proceeds receivable
Shares for Debt
As at the end of the period
# of shares
53,856,509 $85,966,393
$ amount
7,334
4,187,290
-
110,000
58,161,133
5,710
2,029,867
30,285
89,031
88,121,286
During the fourth quarter of 2019 the Company purchased 4,166,667 common shares in the capital of the
Company at a price of $0.30 per common share for total gross costs of $1.25 million plus related costs of
$93,184 from AGV. The 4,166,667 shares were cancelled immediately after they were purchased. This
transaction was approved by the Toronto Stock Exchange and the Alberta Securities Commission. AGV’s
3,421,648 warrants expired as of October 31, 2019.
In July 2018, the company completed a private placement. 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.
A finder’s fee of 3% of the total amount of the Private Placement, which was paid one half in shares and
one half in cash during the third quarter of 2018.
page | 51
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
On November 3, 2017, NXT closed the Rights Offering that had been announced to existing shareholders
on September 26, 2017. The Company issued 4,187,290 common shares a price of $0.50 per common
share, for aggregate gross proceeds of $2,093,645. Share issue costs of $63,778 were recorded as a
reduction to share capital.
During 2017, the Company settled certain accounts payable to a consultant totaling $78,980 by way of
issuing 110,000 common shares at a price per share of $0.718. The cost of issuing these shares of
$6,149 were recorded as a reduction to share capital.
16. Earnings (Loss) per share
Comprehensive income (loss) for the year
Weighted average number of shares
outstanding for the year:
Basic
Diluted
Net Income (loss) per share – Basic
Net Income (loss) per share – Diluted
2019
$3,772,908
2018
$(6,968,511)
2017
$(8,970,398)
68,156,059
68,156,059
$0.06
$0.06
65,455,325
65,455,325
$(0.11)
$(0.11)
54,523,113
54,523,113
$(0.16)
$(0.16)
In periods in which a loss results, all outstanding stock options are excluded from the diluted loss per share
calculations as their effect is anti-dilutive. During 2019 all stock options were out of the money and are
not included in the Diluted weighted average number of shares.
page | 52
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
17. Share based compensation
Stock Options:
The following is a summary of stock options which are outstanding as at December 31, 2019.
Exercise
price
per share
$0.52
$0.59
$1.35
$1.45
$1.48
$1.50
$1.57
$1.73
$1.82
$2.10
# of options
outstanding
100,000
150,000
236,900
37,500
37,500
50,000
30,000
92,600
135,000
300,000
1,169,500
Average
remaining
#of options
contractual
exercisable
100,000
100,000
236,900
37,500
37,500
50,000
30,000
92,600
135,000
300,000
1,119,500
life (in years)
4.5
3.8
0.0
2.0
1.5
1.6
0.1
0.9
0.8
0.7
1.4
A continuity of the number of stock options which are outstanding at the end of the current period and
as at the prior fiscal year ended December 31, 2019 is as follows:
For the year ended
# of stock
options
December 31, 2019
weighted
average
exercise
price
$1.58
$0.52
-
1,297,000
100,000
-
(47,500)
(180,000)
1,169,500
1,119,500
$(1.51)
$(1.70)
$1.48
$1.52
For the year ended
December 31, 2018
# of stock
options
1,648,667
1,150,000
(6,667)
(65,000)
(1,430,000)
1,297,000
1,197,000
weighted
average
exercise
price
$1.60
$1.06
$0.76
$1.17
$1.21
$1.58
$1.67
Options outstanding, start of the period
Granted
Exercised
Expired
Forfeited
Options outstanding, end of the period
Options exercisable, end of the period
Stock options granted generally expire, if unexercised, five years from the date granted and entitlement
to exercise them generally vests at a rate of one-third at the end of each of the first three years following
the date of grant.
page | 53
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
Stock based compensation expense (“SBCE”) is calculated based on the fair value attributed to grants of
stock options using the Black-Scholes valuation model and utilizing the following weighted average
assumptions:
For the period ended
Expected dividends paid per common share
Expected life in years
Expected volatility in the price of common shares
Risk free interest rate
Weighted average fair market value per share at grant date
Intrinsic (or “in-the-money”) value per share of options
exercised
2019
Nil
5.0
65%
1.68%
$0.52
$ -
2018
Nil
5.0
65%
1.75%
$1.06
2017
Nil
-
-
-
$ -
$0.59
$ -
The unamortized portion of SBCE related to the non-vested portion of stock options, which will be
recognized in 2020, is approximately $12,582.
18. Income Tax Expense
NXT periodically earns revenues while operating outside of Canada in foreign jurisdictions. Payments
made to NXT for services rendered to clients and branch offices in certain countries may be subject to
foreign income and withholding taxes. Such taxes incurred are only recoverable in certain limited
circumstances, including potential utilization in Canada as a foreign tax credit, or against future taxable
earnings from the foreign jurisdictions.
Income tax expense is different from the expected amount that would be computed by applying the
statutory Canadian federal and provincial income tax rates to NXT's income (loss) before income taxes as
follows:
2019
2018
2017
Net loss before income taxes
Canadian statutory income tax rate
$3,772,908 $(6,968,551) $(8,894,853)
27.0 %
27.0 %
26.5 %
Income tax (recovery) at statutory income tax rate
999,821 (1,881,509)
(2,401,610)
Effect of non- deductible expenses and other items:
Stock-based compensation and other expenses
Change in statutory tax rates
Foreign exchange adjustments
Foreign tax credit benefit
Non-taxable portion of capital gain
Other
Change in valuation allowance
Income taxes in foreign jurisdictions
Income tax expense (recovery)
11,609
918,821
82,433
-
-
43,592
99,919
-
(131,555)
-
-
(221,978)
156,966
962,486
110,121
-
(50,525)
91,668
2,056,276
(2,056,276)
-
-
(2,135,123)
2,135,123
-
-
(1,130,894)
1,130,894
-
75,545
-
-
75,545
page | 54
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
Effective July 1, 2019 the Province of Alberta decreased its corporate tax rate to 11%, with a further
reductions to 10% on January 1, 2020, 9% on January 1, 2021 and 8% on January 1, 2022. On December
22, 2017, The Tax Cuts and Jobs Act (the “Act”) was enacted in the United States. This has resulted in a
decrease in the US Federal tax rate from 35% to 21%.
A valuation allowance has been provided for the potential financial statement value of the Company’s
deferred income tax assets, due to uncertainty regarding the amount and timing of their potential future
utilization, as follows:
Net operating losses carried forward:
Canada (expiration dates 2027 to 2039)
USA (expiration dates 2020 to 2026)
Timing differences on property & equipment
and financing costs
SRED Expenditures
Foreign Tax Credit
Intellectual property
Less valuation allowance
19. Financial instruments
1) Non-derivative financial instruments:
2019
2018
2017
$ 6,840,817
1,494,711
$ 9,563,701
1,569,976
$ 8,180,209
1,443,729
1,810,789
348,341
285,772
10,780,430
(4,133,115)
6,647,315
(6,647,315)
2,109,557
396,020
371,133
14,010,387
(5,306,796)
8,703,591
(8,703,591)
2,012,709
215,303
371,133
12,223,083
(5,761,674)
6,461,409
(6,461,409)
-
-
-
The Company's non-derivative financial instruments consist of cash and cash equivalents, short-term
investments, accounts receivable, note receivable, accounts payables and accrued liabilities and leases.
The carrying value of these financial instruments, excluding leases, approximates their fair values due to
their short terms to maturity. NXT is exposed to significant interest or credit risks arising from accounts
receivable and notes receivable. For accounts receivable NXT has received advance payments and does
not release results of surveys until a substantial portion of the accounts receivable has been paid. For the
notes receivable, NXT has secured the note receivable.
NXT is exposed to foreign exchange risk as a result of periodically holding foreign denominated financial
instruments. Any unrealized foreign exchange gains and losses arising on such holdings are reflected in
earnings at the end of each period.
2) Derivative financial instruments
As at December 31, 2019 and 2018, the Company held no derivative financial instruments.
page | 55
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
20. Change in non-cash working capital
The changes in non-cash working capital balances are comprised of:
Accounts receivable
Note receivable
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Deferred gain
Contractual obligations
Portion attributable to:
Operating activities
Financing activities
Investing activities
2019
$(1,339,408)
(332,175)
(31,973)
104,745
-
134,116
For the year ended December 31
2017
$ (61,657)
-
59,439
986,533
(155,301)
-
2018
$ (1,252)
-
42,204
(899,122)
-
-
(1,464,695)
(858,170)
829,014
(1,464,695)
-
-
(1,464,695)
(858,170)
-
-
(858,170)
829,014
-
-
829,014
page | 56
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
21. Geographic information
The Company generates revenue from its SFD® survey system that enables the clients to focus their
hydrocarbon exploration decisions concerning land commitments, data acquisition expenditures and
prospect prioritization on areas with the greatest potential. NXT conducts all of its survey operations from
its head office in Canada, and occasionally maintains administrative offices in foreign locations if and when
needed. Revenue fluctuations are a normal part of SFD® survey system sales and can vary significantly
year-over-year.
Revenues by geographic area were generated solely in Nigeria in 2019, entirely from a single client. There
were no revenues in 2018 and 2017.
Nigeria
22. Survey Expenses
Survey Expenses include the following:
Aircraft Operations
Charter Hire Revenue Earned
Lease payments
Operating Expenses
Survey Projects
23. Other related party transactions
2019
2018
2017
$ 11,976,149
$ -
$ -
11,976,149
-
-
2019
2018
2017
$ (613,038) $ (698,211) $ (470,982)
304,410
1,084,432
917,860
371,569
1,289,429
454,729
1,347,428
1,103,946
-
1,103,946
400,847
1,459,536
1,247,345
1,363,741
2,611,086
One of the members of NXT’s Board of Directors is a partner in a law firm which provides legal advice to
NXT. Legal fees (including costs related to share issuance) incurred with this firm were as follows:
Legal Fees
2019
2018
2017
$276,261
$249,218
$172,199
Accounts payable and accrued liabilities includes a total of $146,197 ($5,999 as at December 31, 2018)
payable to this law firm. Interest of $1,809 was received from AGV during the year.
page | 57
NXT ENERGY SOLUTIONS INC.
Notes to the Audited Consolidated Financial Statements
As at and for the years ended December 31, 2019, 2018 and 2017
(Expressed in Canadian dollars unless otherwise stated)
In addition, accounts payable and accrued liabilities includes $NIL ($7,461 as at December 31, 2018)
related to re-imbursement of expenses owing to an Officer of NXT.
24. Gain on extinguishment of liability
In 2018 NXT determined that liabilities it had recorded before 2005 were no longer payable. As a result a
gain of $185,661 has been recognized on the extinguishment of the liability. No cash was paid.
25. Subsequent events
Covid-19
As of the report date of these consolidated financial statements the Covid-19 pandemic has not had a
material effect on the operations of the Company. The Company has made provisions so employees can
work from home, suspended all travel, international travelers are to self-isolate for 14 days after return
to Canada, and hygiene and social distancing policies are in effect if present in the office. NXT continues
to communicate with employees and customers via available communication methods such as tele-
conferences and on-line video conferencing.
Demand for our services and prospective revenues may become adversely impacted the longer the Covid-
19 Pandemic continues. The impact of the continuation of the Covid-19 Pandemic may hamper our ability
to deliver SFD® surveys contracts in the following ways. If restrictions on international travel continue,
our aircraft and personal will not be able to perform surveys. An outbreak of the virus among our staff or
our customers’ personnel would delay any survey in progress. Business development may be delayed
when in-person meetings and technical presentations may be a superior delivery method.
page | 58
THIS PAGE INTENTIONALLY LEFT BLANK