ANNUAL REPORT
As at and for the year ended
December 31, 2020
March 30, 2021
Message from the President & CEO
First, I want to convey my sincere hope that everyone is well and continues to stay healthy at
this time. 2020 was a year that started with high hopes for many of us at NXT. We had just
reported one of the best financial performances in our Company’s history, having successfully
completed the 2019 Nigerian SFD® survey. Unfortunately, given the oil price war and the global
pandemic, exploration activity fell internationally and business development progress became
challenging. Nonetheless, we maintained focus in our core areas of interest and have actively
pursued new opportunities that should result in contracts for the Company as commodity prices
increase in response to increased economic activity.
We took advantage of the slowness in the industry to improve our capabilities. In May 2020,
NXT started development of a new interpretation work-flow process that includes mathematical
transformations and mapping of SFD® data with the aim of presenting our results in a manner
that will enable seamless interpretation in conjunction with the review of conventional
geological and geophysical data and interpretations. Our analysis has enabled us to increase the
quantitative component of our SFD interpretation This work continues as we review data that
verifies and validated our enhanced approach that will allow us to introduce new protocols in
the field for the benefit of our clients. In conjunction with our research and development
efforts, we are pleased to report that we were also granted 38 additional patents by the
European Union, which brought the total number of NXT patents to 44.
Another technical achievement in 2020 was construction and successful testing of an additional
SFD® acquisition system consisting of eight new sensors including four “cascade” type devices.
NXT now has four SFD® systems which increases our operational readiness and reliability.
On the global E&P front, commodity prices appear to have stabilized and there are signs that a
worldwide economic recovery is underway. In addition, promising news comes in the form of
increased vaccination levels which enables the relaxation of travel restrictions that impeded our
ability to get and perform contracts. As a result, NXT has had a very busy start to 2021 pursuing
a number of strategic commercial opportunities. This gives me great confidence that
our collective efforts will result in future success.
Commercial discussions progressed throughout the winter in our core areas of focus in Nigeria,
East-Central Africa, Mexico, Asia and South America. We remain highly confident in the
strategy we have taken to realize near term opportunities with national oil companies, which
have a long term approach to the development of reserves.
In conclusion, we are advancing our initiatives to secure SFD® surveys. NXT’s non-intrusive SFD®
airborne technology not only increases drilling success rates for our customers but drastically
reduces the negative environmental impact of traditional large-scale ground surveys. The
reduction of costs and the impact upon the environment are two of the most important areas of
current focus by the O&G industry.
page | 2
We remain steadfast in our efforts to deliver strong results and growth in 2021 for all 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.
Best regards,
"/s/ George Liszicasz"
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, 2020
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
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 March 30, 2021 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, 2020 (the "consolidated financial statements"). This MD&A covers the unaudited
three month and twelve month periods ended December 31, 2020, with comparative totals for the
unaudited three month and twelve month periods ended December 31, 2019.
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 contained in this MD&A constitute "forward-looking information" within the meaning
of applicable securities laws. These statements typically contain words such as "anticipate", "believe",
"could", "estimate", "expect", "intend", "may", "plan", "predict", "will" and similar words and phrases
suggesting future outcomes or an outlook. Forward-looking statements in this document includes, but is
not limited to:
(cid:120) estimates related to our future financial position and liquidity; and
(cid:120) general business strategies and objectives.
Such forward-looking information is based on a number of assumptions which may prove to be incorrect.
Assumptions have been made with respect to the following matters, in addition to any other assumptions
identified in this document:
(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
Although NXT believes that the expectations reflected in such forward-looking information are
reasonable, undue reliance should not be placed on them as NXT can give no assurance that such
expectations will prove to be correct. Forward-looking information is based on expectations, estimates
and projections that involve a number of risks and uncertainties which could cause actual results to differ
materially from those anticipated by NXT and are described in the forward-looking information. Material
risks and uncertainties include, but are not limited to:
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 5
the ability of management to execute its business plan;
(cid:120)
(cid:120) health, safety and the environment (including risks related to COVID-19);
(cid:120)
(cid:120) our ability to protect and maintain our intellectual property ("IP") and rights to our SFD®
the emergence of alternative competitive technologies;
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
For more information relating to risks, see the section titled "Discussion of Operations – 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 applicable securities law, NXT undertakes no obligation to
update publicly or revise any forward-looking statements or information, whether as a result of new
information, future events or otherwise. Accordingly, the reader is cautioned not to place undue reliance
on forward-looking statements.
Financial outlooks are provided for the purpose of understanding the Company's accounting practices and
liquidity position, and the information may not be appropriate for other purposes.
Non-GAAP Measures
NXT's accompanying consolidated financial statements are prepared in accordance with accounting
principles generally accepted ("GAAP") 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 assess liquidity at a point in time.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
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 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 Q4-20 and YE-20 include are summarized below.
(cid:120) Cash and short-term investments at December 31, 2020 were $3.03 million;
(cid:120) Survey revenues in Q4-20 were $nil and YE-20 were $0.14 million;
(cid:120) A net loss of $1.69 million was recorded for Q4-20, including stock based compensation and
amortization expenses of $0.45 million;
(cid:120) A net loss of $6.00 million was recorded for YE-20, including stock based compensation and
amortization expenses of $1.78 million;
(cid:120) Cash flow used in operating activities was $0.93 million during Q4-20 and $3.45 million YE-20;
(cid:120) Net loss per Common Share (defined below) for Q4-20 was ($0.03) basic and diluted;
(cid:120) Net loss per Common Share for YE-20 was ($0.09) basic and diluted;
(cid:120) General and administrative ("G&A") expenses for Q4-20 as compared to Q4-19 decreased by
$0.24 million or 26%, mostly due to the Canada Emergency Wage Subsidy ("CEWS"), the Canada
Emergency Rent Subsidy ("CERS"), lower legal costs and less travel; and
(cid:120) G&A expenses for YE-20 as compared to YE-19 decreased by $0.33 million or 9%, due primarily to
the CEWS and CERS, the Scientific Research and Development Credit ("SR&ED"), and less travel
than in YE-19;
(cid:120) The Employee Share Purchase Plan commenced in Q4-20 with approximately 75% employee
participation.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 7
Selected Annual Information
($M except per share)
YE-20
YE-19
YE-18
Total Assets
Lease liabilities
Revenue
Net earnings (loss)
Net earnings (loss) per share
Basic
Diluted
$ 24,009,137
1,919,018
136,566
(5,999,675)
$ 30,692,941
2,691,217
11,976,149
3,772,908
$ 25,264,268
510,661
-
(6,968,511)
$(0.09)
$(0.09)
$0.06
$0.06
$(0.11)
$(0.11)
Sales in YE-19 increased due to the execution of an SFD® survey in 2019. There were no SFD® surveys in
YE-18 or YE-20. Long-term debt increased in YE-19 vs YE-18 as the Company adopted ASC topic 842, Leases
(“Topic 842”) and therefore recognized Long-term lease obligations related to its leases. Total assets
increased because of recognizing Topic 842 and working capital increases from Survey revenues in 2019.
Total Assets decreased between YE-20 and YE-19 as Short-term investments were used for operating
activities. Long-term debt deceased between YE-20 and YE-19 as lease payments reduced Long-term lease
obligations. The adoption of Topic 842 resulted in the initial recognition of right-of-use assets of
approximately $3.5 million, current lease liabilities of approximately $0.7 million, and non-current lease
liabilities of approximately $3.4 million as at January 1, 2019.
COVID-19 (2019-nCoV/COVID-19) Pandemic
Discussion of Operations
As of the date of the consolidated financial statements the Covid-19 pandemic continues to be a risk to
the operations of the Company. The Company has made provisions so employees can work safely in the
office or if necessary from home, suspended all travel, followed all Alberta Services and Health Canada
recommendations, and implemented hygiene and physical distancing policies. 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 could delay any survey in
progress. Business development may be delayed when in-person meetings and technical presentations
may be a superior delivery method to tele-conferences or on-line video conferencing.
The situation is dynamic and the ultimate duration and magnitude of the impact on the economy and the
financial effect to the Company is not known at this time. Estimates and judgments made by management
in the preparation of the consolidated financial statements are subject to a higher degree of measurement
uncertainty during this volatile period.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 8
The Company began receiving the CEWS beginning with the April period and the CERS beginning with the
October period. For the YE-20 period the Company has recognized $0.29 million in CEWS subsidy and
$0.06 million in the CERS. Funds from the CEWS and the CERS are being used to ensure staffing levels are
maintained to continue to progress SFD® project discussions and marketing.
Pre-existing SFD® Data Sale
In December 2020, the Company received a deposit of US$100,000 to sell pre-existing SFD® data. The
pre-existing SFD® data is expected to be delivered to the customer in the second quarter of 2021.
Patents
As of the date of this MD&A, NXT has been granted SFD® patents in Russia (January 2017), Japan (July
2017), Canada (August 2017), Mexico (September 2017), the United States (two patents were granted in
November 2017 and September 2018, respectively), China (April 2018), and Europe (January 2020). In
total, we have obtained SFD® patents in 44 countries. In addition, two more SFD® patent applications in
Brazil and India are pending. These patents protect our proprietary SFD® technology and serve as
independent third-party recognition of our technological invention in terms of practical applicability,
conceptual novelty, and knowledge advancement.
Note Receivable
On September 6, 2019, NXT and Alberta Green Ventures Limited Partnership ("AGV") entered into a loan
arrangement (the "Loan Arrangement") whereby NXT loaned to AGV US$250,000 by way of note
receivable for the purpose of providing AGV with additional funds necessary to continue advancing the
common objectives of the parties under the existing co-operation agreement (the "Co-operation
Agreement") and sales representative agreement (the "Sales Representative Agreement"). The loaned
amounts were fully recovered in 2020.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 9
Summary of Operating Results
Survey revenue
Expenses:
Survey
General and administrative
Stock-based compensation
Amortization of property and equipment
Q4-20
$ -
Q4-19
$ -
YE-20
YE-19
$ 136,566 $ 11,976,149
304,553
687,974
103,842
445,122
1,541,491
308,374
926,919
(28,724)
449,015
1,655,584
1,091,587
3,172,594
168,416
1,780,806
6,213,403
2,611,086
3,497,785
43,809
1,781,181
7,933,861
Other Expenses (income):
Interest expense (income), net
Foreign exchange (gain) loss
Other expense
Income (loss) before income taxes
5,510
137,081
1,128
143,719
(1,685,210)
(18,452)
99,136
39,019
119,703
(1,775,287)
(11,535)
(76,029)
10,402
(77,162)
(5,999,675)
(20,684)
233,231
56,833
269,380
3,772,908
Income tax expense
-
-
-
-
Net Income (loss) for the period
$(1,685,210) $(1,775,287)
(5,999,675)
3,772,908
Net Income (loss) per share – basic
Net Income (loss) per share – diluted
$ (0.03)
$ (0.03)
$ (0.03) $ (0.09)
$ (0.03) $ (0.09)
$ 0.06
$ 0.06
Annual operating results. Net loss for YE-20 compared to YE-19 changed by $9,772,583 or $(0.15) per
share-basic. YE-19 revenue was obtained from surveys conducted in Nigeria (the "Nigerian SFD® Survey").
In YE-20 revenue of $136,566 was earned on the recognition of the forfeited deposit from the Co-
Operation Agreement with AGV. In YE-20, aircraft costs were lower in YE-20 versus YE-19 as maintenance
was performed on the aircraft before and after the Nigerian SFD® Survey during YE-19. In YE-20, less
scheduled maintenance was required as less hours were flown on the aircraft. Survey project costs in YE-
19 were the direct costs of the Nigerian SFD® Survey. G&A expenses decreased $325,191, or 9%, in YE-20
compared to YE-19 as the Company participated in the CEWS, CERS and SR&ED programs and ceased all
travel after Q1-20. Stock-based compensation expense ("SBCE") in YE-20 was higher compared to YE-19
by $124,607 as the restricted share unit plan ("RSU"), ESP plan (defined below) and deferred share unit
("DSU") plan were implemented during YE-20. YE-20 net interest expense (income) decreased $9,149
versus YE-19 as the Company had less short-term investments over comparative periods and locked in
guaranteed investment certificates had overall lower average interest rates. For YE-20 the foreign
exchange gain was the result of weakening of the CDN$ versus the US$ during Q1-20. This foreign
exchange gain was reduced in the following 3 quarters as the CDN$ strengthened. At June 30, 2019, the
Company had a significant foreign exchange loss which was the result of the CDN dollar strengthening
compared with May 2019 when several of the US dollar assets were initially recorded.
Quarterly operating results. Net loss for Q4-20 compared to Q4-19 decreased by $90,077, or $0.00 per
share-basic. Survey costs were $3,821 lower due to no direct survey costs in Q4-20, offset by higher
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 10
maintenance costs incurred due to major maintenance to prepare the aircraft for future SFD® surveys.
G&A expenses decreased by $238,945, or 26%, as compared to Q4-19, due primarily to decreased
business development travel and the recognition of the CEWS and the CERS. SBCE in Q4-20 was higher
compared to Q4-19 by $132,566. In Q4-20 with the market price of the Company shares at $0.79, the
Company recognized additional RSU expense on liability classified awards. In addition the ESP
commenced in Q4-20. Interest (income) expense decreased $23,962 in Q4-20 versus Q4-19 as interest
rates have decreased versus the prior year quarter as well as less cash was held in short-term investments.
With respect to foreign exchange, the Company held significant assets in US$ at December 31, 2020. At
December 31, 2020, the CDN$ strengthened as compared to the US$ at September 30, 2020, resulting in
the corresponding foreign exchange loss for Q4-20. Other expenses in Q4-19 related mostly to costs
associated with the validation process for certain European SFD® patents.
Effective for the year ended December 31, 2020, the Company has presented stock based compensation
expense of $168,416 within general and administrative expenses and has recorded an immaterial
correction to classify the stock based compensation expense for the 2019 and 2018 comparative years of
$43,809 and $386,154, respectively, to be presented within general and administrative expenses. While
ASC 718 does not identify a specific line item in the income statement for presentation of the expense
related to share based compensation arrangements, the SEC has released guidance under SAB Topic 14.F
that the expense related to share-based payment arrangements should be presented in the same line or
lines as cash compensation paid to the same employees. The Company’s presentation conforms to this
guidance.
During 2020 the Company determined that the full amount previously presented in accumulated other
comprehensive income of $710,934 related to cumulative translation adjustment associated with foreign
subsidiaries that were substantially liquidated prior to fiscal year 2018. Thus the Company has recorded
an immaterial correction to reflect the release of the cumulative translation adjustment to earnings prior
to the opening balance sheet by eliminating the accumulated other comprehensive income balance of
$710,934 and decreasing the deficit by the same amount.
Survey Expenses
Survey Expenses
Aircraft lease costs
Aircraft operations
Survey projects
Total survey expenses, net
Survey Expenses
Aircraft lease costs
Aircraft operations
Survey projects
Total survey expenses, net
Q4-20
$ 107,930
196,623
-
304,553
YE-20
$ 433,618
657,969
-
1,091,587
Q4-19
$ 101,860
154,527
51,987
308,374
Net change
$ 6,070
42,096
(51,987)
(3,821)
YE-19
$ 400,847
846,498
1,363,741
Net change
$ 32,771
(188,529)
(1,363,741)
2,611,086
(1,519,499)
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 11
Survey expenses relate entirely to direct survey costs, lease expenses and aircraft handling and
maintenance costs (net of charter hire reimbursements). In Q4-19, survey expenses included incremental
travel related costs to present results for the Nigerian SFD® Survey. Fixed aircraft costs were higher in
Q4-20 versus Q4-19 as scheduled maintenance was performed on the aircraft in Q4-20.
In YE-20, aircraft operations were incurred for aircraft handling and maintenance costs. Fixed aircraft
costs were lower in YE-20 versus YE-19 as maintenance was performed on the aircraft before and after
the Nigerian SFD® Survey during YE-19. In YE-20, less scheduled maintenance was required as less hours
were flown on the aircraft. Survey project costs in YE-19 were the direct costs of the Nigerian SFD® Survey.
The aircraft is available for charter to third parties through our aircraft manager when it is not being used
by NXT. Any charter hire reimbursements received are used to offset aircraft costs.
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 for payments of approximately US$22,500 per month. Should NXT want to
repurchase the aircraft at the end of the initial lease term, the purchase price will be US$1.45 million.
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
Total G&A Expenses
Q4-20
$ 369,390
168,186
146,432
3,966
687,974
Q4-19
$ 406,300
205,942
193,661
121,016
926,919
Net change
$(36,910)
(37,756)
(47,229)
(117,050)
(238,945)
G&A Expenses
Salaries, benefits and consulting charges
Board and professional fees, public company costs
Premises and administrative overhead
Business development
Total G&A Expenses
YE-20
YE-19
$ 1,383,692 $1,599,247
857,556
800,626
240,356
3,497,785
920,666
728,036
140,200
3,172,594
Net change
$(215,555)
63,110
(72,590)
(100,156)
(325,191)
%
(9)
(18)
(24)
(97)
(26)
%
(13)
7
(9)
(42)
(9)
G&A expenses decreased $238,945, or 26%, in Q4-20 compared to Q4-19 for the following reasons:
(cid:120)
salaries, benefits and consulting charges decreased $36,910, or 9%, due primarily to recording the
CEWS;
(cid:120) board and professional fees and public company costs decreased $37,756, or 18%, due primarily
to decreased legal fees. During Q4-19 legal fees were incurred for the Targeted Issuer Bid (as
defined below);
(cid:120) premises and administrative overhead costs decreased $47,229, or 24%, due to the CERS; and
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 12
(cid:120) business development costs decreased by $117,050, or 97%, due primarily to the restrictions on
travel from COVID-19 and therefore switching discussion to tele-conferences and on-line video
conferencing.
G&A expenses decreased $325,191, or 9%, in YE-20 compared to YE-19 for the following reasons:
(cid:120)
salaries, benefits and consulting charges decreased $215,555, or 13%, due primarily to recording
the CEWS, SR&ED and one less permanent headcount;
(cid:120) board and professional fees and public company costs increased $63,110, or 7%, due primarily to
increased audit fees and consultant fees to process the SR&ED;
(cid:120) premises and administrative overhead costs decreased $72,590, or 9%, due primarily to recording
of the CERS and decreased costs related to reduced office expenses; and
(cid:120) business development costs decreased by $100,156, or 42%, due primarily to the restrictions on
travel from COVID-19 and therefore switching discussion to tele-conferences and on-line video
conferencing.
Stock-based Compensation Expenses
Stock-based Compensation Expenses
Stock Option Expense
Deferred Share Units
Restricted Stock Units
Employee Share Purchase Plan
Total SBCE
Q4-20
$ 1,258
3,750
90,701
8,133
103,842
Q4-19
$ 3,775
-
(32,499)
-
(28,724)
net change % change
(67%)
100%
(379%)
100%
(462%)
$ (2,517)
3,750
123,200
8,133
132,566
Stock-based Compensation Expenses
Stock Option Expense
Deferred Share Units
Restricted Stock Units
Employee Share Purchase Plan
YE-20
$ 34,223
15,000
111,060
8,133
YE-19
$ 43,809
-
-
-
net change % change
(22%)
$ (9,586)
100%
15,000
100%
111,060
100%
8,133
Total SBCE
168,416
43,809
124,607
284%
SBCE varies in any given quarter or year as it is a function of several factors including the number of units
of each type of stock based compensation plan issued in the period and the amortization term (based on
the term of the contract and/or number of years for full vesting of the units, which is normally three years)
of the resultant expense. Also, SBCE is a function of periodic changes in the inputs used in the Black-
Scholes option valuation model, such as volatility in NXT's trailing share price and for cash-settled stock-
based compensation awards variability will occur based on changes to observable prices.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 13
On August 25, 2020, shareholders of the Company and subsequently the Toronto Stock Exchange (the
"TSX") approved, a new Employee Share Purchase Plan (the "ESP"). The ESP allows employees and other
individuals determined by the Board to be eligible to contribute a minimum of 1% and a maximum of 10%
of their earnings to the ESP for the purchase of common shares of NXT ("Common Shares"), of which the
Company will make an equal contribution. Common Shares contributed by the Company may be issued
from treasury or acquired through the facilities of the TSX. The Company began to issue Common Shares
under the ESP during Q4-20. The Company will also match 100% of the employee contributions of up to
10% of their earnings in the first year of the plan if the employee does not withdrawal common shares
from the ESP Plan in the first year of their participation, up to $15,000 per employee. Further details on
the ESP can be found in the 2020 Management Information Circular, available on NXT's website at
www.nxtenergy.com and on SEDAR at www.sedar.com.
SBCE in Q4-20 was higher compared to Q4-19 by $132,566. In Q4-20 with the market price of the Common
Shares at $0.79, the Company recognized additional RSU expense. In addition, the ESP commenced in Q4-
20. In Q4-19, the Company's SBCE included a reversal of the RSU expense from Q3-19 as the expected
granting of RSUs to employees was not formalized until Q3-20.
SBCE in YE-20 was higher compared to YE-19 by $124,607 as the RSU, ESP and DSU were implemented
during YE-20.
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
Total Other Expenses, net
Q4-20
$ 5,510
137,081
1,128
143,719
YE-20
$ (11,535)
(76,029)
10,402
(77,162)
Q4-19
$ (18,452)
99,137
39,019
119,704
YE-19
$ (20,684)
233,231
56,833
269,380
Net change
$ 23,962
37,944
(37,891)
24,015
Net change
$ 9,149
(309,260)
(46,431)
(346,542)
%
(130)
38
(97)
20
%
(44)
(133)
(82)
(129)
Interest (income) expense, net. This category of other expenses includes interest income earned on short-
term investments netted by interest expense from lease obligations. Q4-20 interest (income) expense
decreased $23,962 versus Q4-19 as interest rates have decreased since the prior year quarter and less
cash was held in short-term investments. YE-20 interest (income) expense net decreased $9,149 versus
YE-19 as the Company had less short-term investments over comparative periods and the Company's
locked in guaranteed investment certificates had overall lower average interest rates. In addition, interest
from lease obligations has been reduced in both Q4-20 and YE-20, as the outstanding lease obligations
continues to decrease.
Foreign exchange loss (gain). This category of other expenses includes losses and gains caused by changes
in the relative currency exchange values of US$ and CDN$. The Company held significant assets in US$ at
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 14
December 31, 2020, 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, 2020, the CDN$ strengthened as compared to the US$ at September 30,
2020, resulting in the corresponding foreign exchange loss for Q4-20.
For YE-20 the foreign exchange gain was the result of weakening of the CDN$ versus the US$ from
December 31, 2019 to March 31, 2020 and large US$ balances. This foreign exchange gain was reduced
in the following three quarters as the CDN$ strengthened. US$ balances were also slowly reduced during
each period in YE-20. At June 30, 2019, the Company had a significant foreign exchange loss which was
the result of the CDN$ strengthening compared with May 2019 when several of the US$ assets were
initially recorded.
The Company does not currently enter into hedging contracts, but uses strategies to reduce the volatility
of US$ assets including converting excess US$ to CDN$.
IP and other. This category of other expenses primarily includes costs related to IP filings, R&D activity
related to the SFD® technology.
In all periods, the Company incurs periodic expenses to file patents and to maintain them. In addition, in
Q4-19 and YE-19, these expenses related mostly to costs associated with the validation process for certain
European SFD® patents.
Amortization Expenses
Property and equipment
Intellectual property
Total Amortization Expenses
Amortization Expenses
Property and equipment
Intellectual property
Total Amortization Expenses
Q4-20
$ 23,939
421,183
445,122
Q4-19
$ 27,832
421,183
449,015
Net change
$ (3,893)
-
(3,893)
YE-20
$ 96,073
1,684,733
1,780,806
YE-19
$ 96,448
1,684,733
1,781,181
Net change
$ (375)
-
(375)
%
(14)
-
(1)
%
0
-
0
Property and equipment and related amortization expense. Property and equipment amortization was
higher in YE-19 compared to YE-20 due to additional assets becoming fully amortized during the period
and the Company not acquiring new assets. Amortization also decreases each year as the Company uses
the declining balance method of depreciation, thereby having the effect of lowering amortization each
year on existing assets.
Intellectual property and related amortization expense. NXT acquired specific rights to utilize the
proprietary SFD® technology in global hydrocarbon exploration applications from the inventor of the SFD®
technology, NXT's Chairman, President and Chief Executive Officer, on August 31, 2015. The value
attributed to the acquired IP assets was $25.3 million. The IP assets are amortized on a straight-line basis
over a 15-year period (future amortization expense of $1,685,000 per year) and are also being subject to
an ongoing assessment of potential indicators of impairment of the recorded net book value. No
impairments were recognized in Q4-20, Q4-19, YE-20 or YE-19.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 15
Income tax expense. There was no income tax expense in YE-20 or YE-19.
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 an SFD® survey, a large tract (i.e. over
5,000 square kilometers) of land can be evaluated quickly to identify locations with indications of reservoir
potential. Seismic surveys, although effective in identifying these locations, are much more expensive,
require significantly more time and impose a much greater negative impact on local communities and the
environment than more traditional methods. An SFD® survey deployed first can provide necessary
information to target a seismic program over a limited area of locations selected by SFD®. This approach
can result in a more effective seismic program and reduce the overall cost, time, community resistance
and environmental impact required to locate and qualify a prospect.
The industry uses other technologies for wide area oil and natural gas reconnaissance exploration, such
as aeromagnetic and gravity surveys. These systems can provide regional geological information, such as
basement depth, sedimentary thickness and major faulting and structural development.
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.
Credit Risk. Credit risk arises from the potential that the Company may incur a loss if counterparty to a
financial instrument fails to meet its obligation in accordance with agreed terms. The Company’s financial
instruments that are exposed to concentrations of credit risk consist primarily of cash and cash
equivalents, short-term investments and accounts receivable. The carrying value of cash and cash
equivalents, short-term investments, and accounts receivable reflects management’s assessment of
credit risk. At December 31, 2020, cash and cash equivalents and short-term investments included
balances in bank accounts, term deposits and guaranteed investment certificates, placed with financial
institutions with investment grade credit ratings. The majority of the Company’s accounts receivable
relate to sales to one customer in Nigeria and is exposed to foreign country credit risks. The Company
manages this credit risk by requiring advance payments before entering into certain contract milestones
and when possible accounts receivable insurance.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 16
Foreign Exchange Risk. The Company is exposed to foreign exchange risk in relation to its holding of
significant US$ balances in cash and cash equivalents, short-term investments, accounts receivable, note
receivable, deposits, accounts payables and accrued liabilities and entering into United States dollar
revenue contracts. To mitigate exposure to fluctuations in foreign exchange, the Company does not
currently enter into hedging contracts, but uses strategies to reduce the volatility of United States dollar
assets including converting excess United States dollars to Canadian dollars. As at December 31, 2020,
the Company held net U.S dollar assets totaling US$2,164,285. Accordingly, a hypothetical 10% change
in the value of one United States dollar expressed in Canadian dollars as at December 31, 2020 would
have had an approximately $276,000 effect on the unrealized foreign exchange gain or loss for the year.
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, 2020
page | 17
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)
Q4-20
$ -
(1,685,210)
Q3-20
$ -
(1,502,456)
Q2-20
$ 136,566
(1,479,709)
Q1-20
$ -
(1,332,301)
Income (loss) per share – basic
Income (loss) per share – diluted
$ (0.03)
$ (0.03)
$ (0.02)
$ (0.02)
$ (0.02)
$ (0.02)
$ (0.02)
$ (0.02)
Survey revenue
Net income (loss)
Q4-19
$ -
(1,775,287)
Q3-19
Q2-19
$ 1,021,532 $10,954,618
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)
During Q4-20 the Company received the CEWS and the CERS which reduced costs. In Q3-20 the Company
received the CEWS and the SR&ED which also reduced costs. During Q2-20, revenue was earned on the
recognition of the forfeited deposit from AGV, payable pursuant to the Co-operation Agreement. In Q2-
19 and Q3-19, revenues were earned from the Nigerian SFD® Survey. There were no revenues in the other
five quarters. Excluding Q2-19 and Q3-19, the Company incurred net losses in each of the other quarters
primarily due to incurred 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. More
specific details are provided below:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
in Q4-20, costs were reduced primarily due to receiving the CEWS and the CERS, and reduced
travel;
in Q3-20, costs were reduced primarily due to receiving the CEWS and the SR&ED, and reduced
travel;
in Q2-20, revenue was earned on the recognition of the forfeited deposit from AGV, payable
pursuant to the Co-Operation Agreement, and the Company incurred a $135,991 foreign exchange
loss partially offsetting the Q1-20 foreign exchange gain described below;
in Q1-20, the Company incurred a $409,517 foreign exchange gain as it held significant monetary
assets in US dollars at March 31, 2020, including accounts receivable, cash and cash equivalents,
short-term investments and the security deposit for the aircraft, and the CDN$ devalued by
approximately 9%;
(cid:120)
in Q4-19, survey costs were higher as final integration costs from the Nigerian SFD® Survey were
incurred;
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 18
(cid:120)
(cid:120)
in Q3-19, NXT recognized $1,021,532 of revenue for services rendered in connection with the
Nigerian SFD® Survey, compared to $10,954,618 in Q2-19; and
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.
Going Concern
Liquidity and Capital Resources
The consolidated financial statements for YE-20 have been prepared on a going concern basis. The going
concern basis of presentation assumes that NXT will continue in operation for the foreseeable future and
will be able to realize its assets and discharge its liabilities and commitments in the normal course of
business.
The events described in the following paragraphs highlight that there is substantial doubt about NXT's
ability to continue as a going concern within one year after the date that these financial statements have
been issued.
The Company's current cash position is not expected to be sufficient to meet the Company's obligations
and planned operations for the 12 month period beyond the date that these financial statements have
been issued.
The Company is taking further steps to reduce operating costs including payroll and other G&A costs and
is evaluating alternatives to reduce other costs. If required, further financing options that may or may not
be available to the Company include issuance of new equity, debentures or bank credit facilities. The
need for any of these options will be dependent on the timing of securing new SFD® survey contracts and
obtaining financing on terms that are acceptable to both the Company and the financier.
NXT continues to develop its pipeline of opportunities to secure new revenue contracts. However, the
Company's longer-term success remains dependent upon its ability convert these opportunities into
successful SFD® survey contracts to continue to attract new client projects ultimately to expand the
revenue base to a level sufficient to exceed fixed operating costs and generate positive cash flow from
operations. The occurrence and timing of these events cannot be predicted with certainty.
The consolidated financial statements do not reflect adjustments that would be necessary if the going
concern basis was not appropriate. If the going concern basis were not appropriate for these consolidated
financial statements, then adjustments would be necessary in the carrying value of the assets and
liabilities, the reported revenues and expenses and the balance sheet classifications used. These
adjustments could be material.
NXT's cash and cash equivalents plus short-term investments at December 31, 2020 totaled $3.03 million.
Net working capital (see Non-GAAP Measures) totaled $2.73 million.
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
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 19
customers throughout the course of the projects, which often span three to four months. In addition,
where possible, risk of default on client billings has been mitigated through the use of export insurance
programs offered by Export Development Canada.
The Company does not have provisions in its leases, contracts, or other arrangements that would trigger
additional funding requirements or early payments except that if the Company were to default on its
office lease, the current month rent plus the next three months become immediately due. If the Company
were to default on the aircraft lease, the Company would be required to deliver the aircraft back to the
Lessor.
Net Working Capital
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
Dec 31,
2020
Dec 31,
2019 Net Change
%
$3,031,407
965,548
-
77,532
(440,538)
(127,507)
(773,465)
2,732,977
$ 6,639,757 $(3,608,350)
(418,767)
1,384,315
324,700
(324,700)
(19,600)
97,132
8,390
(448,928)
3,879
(131,386)
(37,057)
(736,408)
(4,396,205)
7,129,182
(54)
(30)
(100)
(20)
(2)
3
5
(62)
NXT had no secured debt and had net working capital of $2,732,977 as at December 31, 2020.
The decrease in net working capital at December 31, 2020 versus December 31, 2019 was due to cash
used in operating activities.
Accounts Payable
Accounts Payable
Trade accounts payable
Deferred director and advisor payable
Accrued liabilities
Vacation pay accrued
Payroll W/H Payable
Total Accounts Payable
Dec 31,
2020
$ (62,872)
(23,908)
(161,742)
(71,699)
(120,317)
(440,538)
Dec 31,
2019 Net Change
$ 118,918
444
(25,485)
34,830
(120,317)
8,390
$ (181,790)
(24,352)
(136,257)
(106,529)
-
(448,928)
%
(65)
(2)
19
(33)
(100)
(2)
Accounts payable decreased by $8,390, or 2%, in December 31, 2020 compared to December 31, 2019 for
the following reasons:
(cid:120)
trade accounts payable decreased by $118,918, or 65%, due primarily to the reduced legal fees;
(cid:120) deferred director and advisor fees decreased by $444, or 2%, as director fees have been fully paid
(the remaining payable is for advisor board fees incurred prior to 2019;
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 20
(cid:120) accrued liabilities increased by $25,485, or 19%, due to timing of invoice receipts, which is in line
with the decrease in accounts payable;
(cid:120) vacation pay accrued decreased by $34,830, or 33%, as employees vacations were taken and paid
during the year; and
(cid:120) payroll related accruals increased by $120,317 as accruals were made for the liability classified
equity compensation plan.
Cash Flow
Cash Flow - from / (used in)
Operating activities
Financing activities
Investing activities
Effect of foreign exchange on cash
Net source (use) of cash
Cash and cash equivalents, start of period
Cash and cash equivalents, end of period
Q4-20
$(926,996)
7,592
1,049,241
(87,066)
42,771
2,647,375
2,690,146
Q4-19
YE-20
$1,206,437 $(3,452,925)
(34,923)
(1,354,121)
3,436,691
257,236
(116,942)
83,028
(168,099)
192,580
2,858,245
2,665,665
2,690,146
2,858,245
YE-19
$4,052,406
(1,385,787)
(173,927)
26,021
2,518,713
339,532
2,858,245
Cash and cash equivalents
Short-term investments
Total Cash and Short-Term Investments
2,690,146
341,261
3,031,407
2,858,245
3,781,512
6,639,757
2,690,146
341,261
3,031,407
2,858,245
3,781,512
6,639,757
The overall net changes in cash balances in each of the years noted above is a function of several factors
including any inflows (outflows) due to changes in net working capital balances and net of any cash
transferred into/out of short-term investments. Further information on the net changes in cash, by each
of the operating, financing and investing activities, is as follows:
Operating Activities
Net income (loss) for the period
Total non-cash expense items and ARO
liabilities settled
Change in non-cash working capital balances
Total Cash from (used in) Operating Activities
Q4-20
YE-20
$(1,685,210) $(1,775,287) $(5,999,675)
Q4-19
YE-19
$3,772,908
669,125
300,766
1,920,981
1,751,559
(1,016,085)
89,089
(926,996)
(1,474,521)
2,680,958
1,206,437
(4,078,694)
625,769
(3,452,925)
5,524,467
(1,472,061)
4,052,406
Operating cash flow decreased by $2,133,433 in Q4-20 as compared to Q4-19 and decreased by
$7,505,331 in YE-20 as compared to YE-19 because of the milestone payments received from the Nigerian
SFD® Survey during Q4-19 and in YE-19.
Financing Activities
Net funds used-in Targeted Issuer Bid
Repayment of capital lease obligation
Employee stock purchase plan
Total Cash from (used in) Financing Activities
Q4-20
$ -
-
7,592
7,592
Q4-19
$(1,343,184)
(10,937)
-
(1,354,121)
YE-20
$ -
(42,515)
7,592
(34,923)
YE-19
$(1,343,184)
(42,603)
-
(1,385,787)
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 21
In Q4-20, the financing activity was for employee contributions under the ESP. Financing payments in
both YE-20 and YE-19 were for payments on the finance lease for office equipment. In Q2-20, the
Company terminated the finance lease for office equipment with a final payment of approximately
$20,000. During Q4-19 the Company completed its targeted issuer bid for $1,250,000 plus costs of
$93,184 to repurchase 4,166,667 Common Shares, at a price of $0.30 per Common Share (the "Targeted
Issuer Bid").
Investing Activities
Purchase of property and equipment
Decrease (increase) in short-term investments
Total Cash from (used in) Investing Activities
Q4-20
$ -
1,049,241
1,049,241
Q4-19
$ -
257,236
257,236
YE-20
$ -
3,436,691
3,436,691
YE-19
$ (216,691)
42,764
(173,927)
Short-term investments decreased in Q4-20 and YE-20 as the Company used investments held in
guaranteed investment certificates to fund operations.
Contractual Commitments
The estimated minimum annual commitments for these leases are as follows, as at December 31, 2020:
For the period ended December 31
2021
2022
2023
2024
2025
Office Premises
$ 228,091
228,091
228,091
228,091
171,069
1,083,433
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.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 22
Transactions with Related Parties
In addition to the related party transactions discussed elsewhere herein (i.e. the Co-operation Agreement,
the Sales Representative 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
Q4-20
$ 3,100
Q4-19
YE-19
$ 111,562 $ 224,479 $ 276,261
YE-20
Accounts payable and accrued liabilities include a total of $1,570 ($146,197 as at December 31, 2019)
payable to Norton Rose Fulbright Canada LLP. A company owned by a family member of an executive
officer was contracted to provide design services to the Company for a total cost of US$3,000.
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, 2019 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
Intellectual property acquired is recorded at cost, less accumulated amortization, which is recorded over
the estimated minimum useful life of the assets. The Company incurs periodic expenses to file patents
and to maintain them.
The Company reviews long-lived assets, which includes property, equipment and intellectual property for
impairment whenever events or changes in circumstances indicate the carrying value may not be
recoverable. The Company considers both internal and external factors when assessing for potential
indicators of impairment, and with respect to intellectual property, the Company’s assessment includes
consideration of historical and forecasted project survey revenues, market capitalization, market
capitalization control premiums, and the project survey revenue multiples compared to industry peers.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 23
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.
Measurement of Credit Losses on Financial Instruments
Changes in Accounting Policies
In June 2016, the FASB issued new guidance that changes how entities measure credit losses for most
financial assets and certain other financial instruments that are not measured at fair value through net
income. The new guidance amends the impairment model of financial instruments, basing it on expected
losses rather than incurred losses. These expected credit losses will be recognized as an allowance rather
than as a direct write-down of the amortized cost basis. The new guidance was effective January 1, 2020
and was applied using a modified retrospective approach. The adoption of this new guidance did not have
a material impact on the Company's consolidated financial statements.
Government Grants
Government grants are recognized when there is reasonable assurance that the grant will be received,
and all attached conditions will be complied with. When the grant relates to an expense item, it is
recognized as an expense reduction in the period in which the costs are incurred. Where the grant relates
to an asset, it is recognized as a reduction to the net book value of the related asset and then subsequently
in net loss over the expected useful life of the related asset through lower charges to depreciation and
impairment. During period ended December 31, 2020, the Company received government grants through
the CEWS and the CERS. The CEWS and CERS were recognized as a reduction to G&A expenses.
CEWS
CERS
Q4-20
Q4-19
YE-20
YE-19
$ 64,579
$ -
$ 292,160
$ -
58,526
58,526
Government grants recognized
123,105
-
350,686
-
Financial Instruments
The Company's non-derivative financial instruments consist of cash and cash equivalents, short-term
investments, accounts 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. For accounts receivable, where possible, NXT requests advance
payments and utilizes risk mitigation products offered by entities such as Export Development Canada
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 24
including, for example, insurance coverage of contract accounts receivable, guarantee support for
contract performance bonds and wrongful call insurance for such bonds.
NXT is exposed to foreign exchange risk as a result of holding foreign denominated financial instruments.
Any unrealized foreign exchange gains and losses arising on such holdings are reflected in earnings at the
end of each period.
As at December 31, 2020 and December 31, 2019, 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
Deferred Share Units
Restricted Stock Units
ESP Plan Bonus Shares
Total Share Capital and Dilutive Securities
March 30,
2021
64,494,356
421,000
37,354
1,200,000
39,796
66,192,506
December 31,
2020
64,437,790
421,000
37,354
1,200,000
23,532
66,119,676
December 31,
2019
64,406,891
1,169,500
-
-
-
65,576,391
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 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 evaluating the effectiveness of the Company's DCPs as defined under the rules adopted by the Canadian
securities regulatory authorities and by the United States Securities and Exchange Commission, the
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 25
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 partially mitigates this deficiency by adding management and Audit Committee review
procedures over the areas where inadequate segregation of duties are of the greatest concern; and
(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 partially mitigates this deficiency by preparing financial
statements with their best judgments and estimates of the complex accounting matters and relies
on reviews by management, external consultants and the Audit Committee 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.
Given the small size of the Company's finance team, management has established a practice of increased
engagement of the Company's Disclosure Committee and Audit Committee in reviewing the public
disclosure and has increased engagement of external consultants and legal counsel as well.
The Responsible Officers concluded that, as at December 31, 2020, its ICFR are not effective and as a result
its DCPs are not sufficiently effective. NXT reached this conclusion based upon its assessment that there
is a more than remote likelihood that its ICFR will not prevent or detect material misstatements if they
should exist in the Company's consolidated financial statements. The Responsible Officers continue to
take certain actions to mitigate these material weaknesses including: (i) the implementation of controls
with regards to the review procedures surrounding its disclosure; and (ii) engagement of third-party
specialists. In addition, the Chief Financial Officer engages subject matter consultants as the need arises.
It should be noted that a control system, including the Company's DCPs and ICFR, no matter how well
conceived, can provide only reasonable, but not absolute assurance that the objectives of the control
system will be met, and it should not be expected that the DCPs and ICFR will prevent all errors or fraud.
Additional Information
Additional information related to the Company, including the Company's Annual Information Form, is
available on NXT's website at www.nxtenergy.com and on SEDAR at www.sedar.com.
NXT Energy Solutions Inc.
MD&A for the year ended December 31, 2020
page | 26
NXT ENERGY SOLUTIONS INC.
Consolidated Financial Statements
For the years ended
December 31, 2020, 2019 and 2018
page | 27
KPMG LLP
205 5th Avenue SW
Suite 3100
Calgary AB T2P 4B9
Tel (403) 691-8000
Fax (403) 691-8008
www.kpmg.ca
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Shareholders and Board of Directors NXT Energy Solutions Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NXT Energy Solutions
Inc. (the “Company”) as of December 31, 2020 and 2019, 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,
2020, 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, 2020 and 2019,
and the results of operations and its cash flows for each of the years in the three year period
ended December 31, 2020, in conformity with U.S. generally accepted accounting
principles.
Going Concern
The accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company’s current and forecasted cash and cash equivalents and
short-term investments position is not expected to be sufficient to meet its obligations that
raises substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of this
uncertainty.
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
© 2020 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms
affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of
the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period
audit of the financial statements that were communicated or required to be communicated
to the audit committee and that: (1) relate to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical
audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Indicators of impairment for the intellectual property
As discussed in Note 9 to the consolidated financial statements, the Company has
$16,285,333 of intellectual property as of December 31, 2020. As discussed in Note 2 to the
consolidated financial statements, the Company assesses the recoverability of the
intellectual property whenever events or changes in circumstances indicate that its carrying
amount may not be recoverable. Since the inception of the Company’s operations, there has
been inconsistency in both the amount and timing of survey project revenue. The Company’s
assessment of indicators of impairment for the intellectual property includes the
consideration of the carrying amount of the Company’s net assets to a range of indicative
fair values determined using the following inputs and significant assumptions:
–
–
the Company’s market capitalization and applying publicly available control premiums
for comparable entities, and
the Company’s historical and forecasted survey project revenue and applying publicly
available trading revenue multiples for comparable entities.
2
We identified the assessment of indicators of impairment for the intellectual property as a
critical audit matter. The inconsistency in survey project revenue indicated a higher risk that
the intellectual property may not be recoverable, and therefore involved challenging auditor
judgment. The market capitalization control premiums, forecasted survey project revenue
and trading revenue multiples assumptions used to determine a range of indicative fair
values of the Company net assets were challenging to test as they represented subjective
determinations of conditions that were also sensitive to variations. Minor changes to those
assumptions could have had a significant effect on the Company’s assessment of indicators
of impairment. Additionally, the evaluation of the Company’s determination of market
capitalization control premiums and trading revenue multiples required specialized skills and
knowledge.
The following are the primary procedures we performed to address the critical matter. We
evaluated the Company’s forecasted survey project revenue by comparing to contracted
and noncontracted future survey project revenue and related documentation, including
Company press releases and board minutes. We involved a valuation professional with
specialized skills and knowledge, who assisted in:
– evaluating the Company’s determination of the control premiums by comparing
management selected control premiums to a range that was independently developed
using publicly available market data for comparable entities.
– evaluating the Company’s determination of the trading revenue multiples applied to
historical and forecasted survey project revenue by comparing management selected
trading revenue multiples to a range that was independently developed using publicly
available market data from comparable entities.
We have served as the Company’s auditor since 2006.
Chartered Professional Accountants
Calgary, Canada
March 30, 2021
3
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 Assets (Note 8)
Intellectual property (Note 9)
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities (Note 10, 24)
Contract obligations (Note 11)
Current portion of lease obligations (Note 13)
Long-term liabilities
Long-term lease obligation (Note 13)
Asset retirement obligation (Note 12)
Shareholders' equity
Common shares (Note 15): - authorized unlimited
Issued: 64,437,790 (2019 - 64,406,891) common shares
Contributed capital
Deficit (Note 2)
Going Concern (Note 1)
Commitments (Note 14)
December 31,
December 31,
2020
2019
$
2,690,146
341,261
965,548
-
77,532
$
2,858,245
3,781,512
1,384,315
324,700
97,132
4,074,487
8,445,904
526,561
707,326
2,415,430
16,285,333
535,554
677,647
3,063,769
17,970,067
$
24,009,137
$
30,692,941
$
440,538
127,507
773,465
$
448,928
131,386
736,408
1,341,510
1,316,722
1,896,277
22,741
1,919,018
2,669,736
21,481
2,691,217
3,260,528
4,007,939
95,327,123
9,355,716
(83,934,230)
95,313,064
9,306,493
(77,934,555)
20,748,609
26,685,002
$
24,009,137
$
30,692,941
Signed "George Liszicasz"
Director
Signed "Bruce G. Wilcox"
Director
The accompanying notes are an integral part of these consolidated financial statements.
page | 31
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 (Note 22)
General and administrative expenses (Note 17, 23 & 24)
Amortization
Other expenses (income)
Interest (income) expense, net
Foreign exchange loss (gain)
Intellectual property and other (Note 9)
Gain on extinguishment of liability (Note 25)
Income (loss) before income taxes
Income tax expense (Note 18)
For the Year ended December 31
2020
2019
2018
$
136,566
$
11,976,149
-
1,091,587
3,341,010
1,780,806
6,213,403
(11,535)
(76,029)
10,402
-
(77,162)
2,611,086
3,541,594
1,781,181
1,103,946
4,385,243
1,790,267
7,933,861
7,279,456
(20,684)
233,231
56,833
-
269,380
(62,004)
(19,852)
(43,428)
(185,661)
(310,945)
(5,999,675)
3,772,908
(6,968,511)
-
-
-
Net income (loss) and comprehensive income (loss)
$
(5,999,675)
$
3,772,908
$
(6,968,511)
Net income (loss) per share (Note 16)
Basic
Diluted
$
$
(0.09)
(0.09)
$
$
0.06
0.06
$
$
(0.11)
(0.11)
The accompanying notes are an integral part of these consolidated financial statements.
page | 32
NXT ENERGY SOLUTIONS INC.
Condensed Consolidated Interim Statements of Cash Flows
(Expressed in Canadian dollars)
Cash provided by (used in):
Operating activities
Net income (loss)
Items not affecting cash:
Stock based compensation expense (Note 17)
Amortization
Non-cash changes to asset retirement obligation
Non-cash lease and interest (Note 25)
Unrealized foreign exchange (gain) loss
Deferred rent
Gain on extinguishment of liability (Note 25)
Change in non-cash working capital balances (Note 20)
ARO liabilities settled (Note 12)
For the Year ended December 31
2020
2019
2018
$
(5,999,675)
$
3,772,908
$
(6,968,511)
168,416
1,780,806
2,069
(171,300)
141,799
-
-
625,769
(809)
2,546,750
43,809
1,781,181
2,068
(171,056)
95,557
-
-
(1,464,695)
(7,366)
279,498
386,154
1,790,267
(29,925)
(155,301)
(44,765)
(2,919)
(185,661)
(858,170)
-
899,680
Net cash from (used in) operating activities
(3,452,925)
4,052,406
(6,068,831)
Financing activities
Proceeds from the Employee Share Purchase plan
Net funds used in targeted issuer bid (Note 15)
Proceeds from exercise of stock options
Net proceeds from Private Placement
Repayment of lease obligation
Net cash from (used in) financing activities
Investing activities
Purchase of property and equipment, net
Decrease (increase) in short-term investments
Net cash from (used in) investing activities
7,592
-
-
-
(42,515)
(34,923)
- -
-
(1,343,184)
-
-
(42,603)
(1,385,787)
5,067
9,211,351
(39,579)
9,176,839
-
3,436,691
3,436,691
(216,691)
42,764
(10,006)
(2,950,000)
(173,927)
(2,960,006)
Effect of foreign exchange rate changes on cash and cash equivalents
(116,942)
26,021
24,912
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the year
(168,099)
2,858,245
2,518,713
339,532
172,914
166,618
Cash and cash equivalents, end of the year
$
2,690,146
$
2,858,245
$
339,532
Supplemental information
Cash interest (received)
Cash taxes paid
(21,422)
-
(16,724)
-
(58,889)
-
The accompanying notes are an integral part of these consolidated financial statements.
page | 33
NXT ENERGY SOLUTIONS INC.
Condensed Consolidated Interim Statements of Shareholders' Equity
(Unaudited-expressed in Canadian dollars)
Common Shares (Note 15)
Balance at beginning of the year
Shares purchased and retired during the year
Issuance of common stock on the Employee Share Purchase Plan
Issuance of common stock on Private Placement
Finder's fee
Issued upon exercise of stock options
Transfer from contributed capital upon exercise of stock options
Balance at end of the year
Contributed Capital
Balance at beginning of the year
Issuance of warrants on Private Placement (Note 15)
Recognition of stock based compensation expense (Note 17)
Contributed capital transferred to common shares
upon exercise of stock options
Balance at end of the year
Deficit
Balance at beginning of the year
Net (loss) income
Balance at end of the year
For the Year ended December 31
2020
2019
2018
$
95,313,064
$
96,656,248
$
88,121,286
-
14,059
-
-
-
-
(1,343,184)
-
-
-
-
-
-
-
8,387,451
136,003
5,067
6,441
95,327,123
95,313,064
96,656,248
9,306,493
-
49,223
9,262,684
-
43,809
8,195,075
687,896
386,154
-
-
(6,441)
9,355,716
9,306,493
9,262,684
(77,934,555)
(5,999,675)
(81,707,463)
3,772,908
(74,738,952)
(6,968,511)
(83,934,230)
(77,934,555)
(81,707,463)
Total Shareholders' Equity at end of the year
$
20,748,609
$
26,685,002
$
24,211,469
The accompanying notes are an integral part of these consolidated financial statements.
page | 34
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
1. The Company and Going Concern
NXT Energy Solutions Inc. (the "Company" or "NXT") is a publicly traded company based in Calgary, Alberta
Canada.
NXT's proprietary Stress Field Detection ("SFD®") technology is an airborne survey system that is used in
the oil and natural gas exploration industry to identify subsurface trapped fluid accumulations.
These consolidated financial statements of NXT have been prepared by management in accordance with
U.S. GAAP.
These consolidated financial statements reflect adjustments, all of which are normal recurring
adjustments that are, in the opinion of management, necessary to reflect fairly the financial position and
results of operations for the respective periods.
These consolidated financial statements have been prepared on a going concern basis. The going concern
basis of presentation assumes that NXT will continue in operation for the foreseeable future and will be
able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The events described in the following paragraphs highlight that there is substantial doubt about NXT’s
ability to continue as a going concern within one year after the date that these financial statements have
been issued.
The Company’s current cash position is not expected to be sufficient to meet the Company’s obligations
and planned operations for a year beyond the date that these financial statements have been issued.
The Company is taking further steps to reduce operating costs including payroll and other general and
administrative costs, and is evaluating alternatives to reduce other costs. If required, further financing
options that may or may not be available to the Company include issuance of new equity, debentures or
bank credit facilities. The need for any of these options will be dependent on the timing of securing new
SFD® survey contracts and obtaining financing on terms that are acceptable to both the Company and the
financier.
NXT continues to develop its pipeline of opportunities to secure new revenue contracts. However, the
Company’s longer-term success remains dependent upon its ability to convert these opportunities into
successful contracts, to continue to attract new client projects, ultimately to expand the revenue base to
a level sufficient to exceed fixed operating costs and generate positive cash flow from operations. The
occurrence and timing of these events cannot be predicted with sufficient certainty.
The consolidated financial statements do not reflect adjustments that would be necessary if the going
concern basis was not appropriate. If the going concern basis were not appropriate for these consolidated
financial statements, then adjustments would be necessary in the carrying value of the assets and
liabilities, the reported revenues and expenses and the balance sheet classifications used. These
adjustments could be material.
page | 35
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
Covid-19 (2019-nCoV/COVID-19) Pandemic
As of the date of these consolidated financial statements the Covid-19 pandemic continues to be a risk to
the operations of the Company. The Company has made provisions so employees can work safely in the
office or if necessary from home, suspended all travel, followed all Alberta Services and Health Canada
recommendations, and implemented hygiene and physical distancing policies. 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 could delay any survey in
progress. Business development may be delayed when in-person meetings and technical presentations
may be a superior delivery method to tele-conferences or on-line video conferencing.
The situation is dynamic and the ultimate duration and magnitude of the impact on the economy and the
financial effect to the Company is not known at this time. Estimates and judgments made by management
in the preparation of these consolidated financial statements are subject to a higher degree of
measurement uncertainty during this volatile period.
2. Significant Accounting Policies and Changes
Basis of Presentation
These consolidated financial statements 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 as at the
date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and
the effects of revisions are reflected in the period when determined. Actual results may differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and short term Guaranteed Investment Certificates
(“GIC’s”) with an original maturity less than 90 days from the date of acquisition.
page | 36
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(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.
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, 2020 and 2019, NXT had no outstanding
derivative instruments.
Fair Value Measures
For any balance sheet items recorded at fair value on a recurring basis or non-recurring basis, the
Company is required to classify the fair value measure into one of three categories based on the fair value
hierarchy noted below.
In Level I, the fair value of assets and liabilities is determined by reference to quoted prices in active
markets for identical assets and liabilities that the Company has the ability to assess at the measurement
date.
At December 31, 2020, the fair value of the RSU liability was determined using Level 1 inputs.
In Level II, determination of the fair value of assets and liabilities is based on the extrapolation of inputs,
other than quoted prices included within Level I, for which all significant inputs are observable directly or
indirectly. Such inputs include published exchange rates, interest rates, yield curves and stock quotes from
external data service providers. Transfers between Level I and Level II would occur when there is a change
in market circumstances.
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.
Measurement of credit losses on financial instruments
In June 2016, the FASB issued new guidance that changes how entities measure credit losses for most
financial assets and certain other financial instruments that are not measured at fair value through net
income. The new guidance amends the impairment model of financial instruments, basing it on expected
losses rather than incurred losses. These expected credit losses are recognized as an allowance rather
than as a direct write-down of the amortized cost basis. The new guidance was effective January 1, 2020
and was applied using a modified retrospective approach. The adoption of this new guidance did not have
a material impact on the Company's consolidated financial statements.
page | 37
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
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)
Aircraft
Furniture and other equipment
Leasehold improvements
30% declining balance
10% declining balance
20% declining balance
10% declining balance
Intellectual Property
Intellectual property acquired is recorded at cost, less accumulated amortization, which is recorded over
the estimated minimum useful life of the assets. The Company incurs periodic expenses to file patents
and to maintain them.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, which includes property, equipment and intellectual property for
impairment whenever events or changes in circumstances indicate the carrying value may not be
recoverable. The Company considers both internal and external factors when assessing for potential
indicators of impairment, and with respect to intellectual property, the Company’s assessment includes
consideration of historical and forecasted project survey revenues, market capitalization, market
capitalization control premiums, and the project survey revenue multiples compared to industry peers.
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.
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 2020, 2019 and 2018.
Foreign Currency Translation
The Company's functional currency is the Canadian dollar. Revenues and expenses denominated in
foreign currencies are translated into Canadian dollars at the average exchange rate for the applicable
period. Monetary assets and liabilities are translated into Canadian dollars at the exchange rate in effect
page | 38
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
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.
During 2020 the Company determined that the full amount previously presented in accumulated other
comprehensive income of $710,934 related to cumulative translation adjustment associated with foreign
subsidiaries that were substantially liquidated prior to fiscal year 2018. Thus the Company has recorded
an immaterial correction to reflect the release of the cumulative translation adjustment to earnings prior
to the opening balance sheet by eliminating the accumulated other comprehensive income balance of
$710,934 and decreasing the deficit by the same amount.
Income Taxes
NXT follows the asset and liability method of accounting for income taxes. This method recognizes
deferred income tax assets and liabilities based on temporary differences in reported amounts for
financial statement and income tax purposes, at the income tax rates expected to apply in the future
periods when the temporary differences are expected to be reversed or realized. The effect of a change
in income tax rates on deferred income tax assets and deferred income tax liabilities is recognized in
income in the period when the tax rate change is enacted. Valuation allowances are provided when
necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.
Stock Based Compensation
NXT follows the fair value method of accounting for stock options, restricted stock units, deferred stock
units, and the employee share purchase plan (the “Share Compensation Plans”) that are granted to
acquire common shares under NXT's Share Compensation Plans. For equity-settled stock-based
compensation awards, fair values are determined at the grant date and the expense, net of estimated
forfeitures, is recognized over the requisite service period with a corresponding increase recorded in
contributed capital. An adjustment is made to compensation expense for any difference between the
estimated forfeitures and the actual forfeitures. For cash-settled stock-based compensation awards, fair
values, based on observable prices, are determined at each reporting date and periodic changes are
recognized as compensation costs, with a corresponding change to liabilities.
Upon exercise or realization of the Share Compensation Plans, 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
page | 39
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
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 (excluding 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
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 adoption of Topic 842 resulted in the initial recognition of right-of-use assets of approximately $3.5
million, current lease liabilities of approximately $0.7 million, and non-current lease liabilities of
approximately $3.4 million as at January 1, 2019.
The policy and disclosures required under Topic 842 are included in Note 13, Leases.
Government grants
Government grants are recognized when there is reasonable assurance that the grant will be received,
and all attached conditions will be complied with. When the grant relates to an expense item, it is
recognized as an expense reduction in the period in which the costs are incurred. Where the grant relates
to an asset, it is recognized as a reduction to the net book value of the related asset and then subsequently
in net loss over the expected useful life of the related asset through lower charges to depreciation and
page | 40
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
impairment. During the year ended December 31, 2020, the Company received government grants
through the Canada Emergency Wage Subsidy (“CEWS”) for $292,161 and Canada Emergency Rent
Subsidy (“CERS”) for $58,526.
3. Short-term investments
Short-term investments consist of GIC’s with originally maturity dates of 90 days to one year from the
date of purchase. As at December 31, 2020 and 2019 all GIC’s had less than one year left before
maturity. For December 31, 2020, interest rates ranged from 0.50% to 1.75%. For December 31, 2019,
interest rates ranged from 1.70% to 2.15%.
Days to maturity
Less than 90 days
91 to 183 days
184 days to one year
4. Accounts Receivable
Accounts receivable are all current as at December 31, 2020.
Trade receivables
Other receivables
Allowance for doubtful accounts
Net accounts receivable
The entire trade receivable is with one client.
5. Note Receivable
December 31,
2020
$ 191,261
-
150,000
341,261
December 31,
2019
$ 1,754,302
1,218,724
808,486
3,781,512
December 31,
2020
$ 804,059
161,489
December 31,
2019
$1,297,792
86,523
965,548
-
965,548
1,384,315
-
1,384,315
On September 6, 2019, NXT and Alberta Green Ventures Limited Partnership (“AGV”) entered into a loan
arrangement whereby NXT loaned to AGV US$250,000 for the purpose of providing AGV with additional
funds necessary to continue advancing the common objectives of the parties under the Co-operation
Agreement and the Sales Representative Agreement. The note receivable was fully collected in the year.
page | 41
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(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
Survey equipment
Computers and software
Furniture and other equipment
Leasehold improvements
Survey equipment
Computers and software
Furniture and other equipment
Leasehold improvements
December 31,
2020
$ 43,309
483,252
526,561
December 31,
2019
$ 43,309
492,245
535,554
December 31, 2020
Cost
Base
Accumulated
amortization
$892,637
1,265,045
528,419
1,084,573
3,770,674
$676,442
1,232,844
513,001
641,061
3,063,348
Net book
value
$216,195
32,200
15,419
443,512
707,326
December 31, 2019
Cost
Base
Accumulated
amortization
$892,637
1,265,045
528,419
965,108
3,651,209
$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
page | 42
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
8. Right of use assets
Aircraft
Office Building
Printer
Office equipment
Aircraft
Office Building
Printer
Office equipment
9. Intellectual property
Cost
Base
$1,578,774
1,799,626
17,794
-
3,396,194
December 31, 2020
Accumulated
Amortization
$556,891
415,559
8,314
-
Right of
Use
$1,021,883
1,384,067
9,480
-
980,794
2,415,430
December 31, 2019
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
During 2015, NXT acquired the rights to the SFD® technology for use in the exploration of hydrocarbons
from Mr. George Liszicasz, the Chief Executive Officer of the Company and Director, 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
December 31,
2020
$ 25,271,000
(8,985,667)
16,285,333
December 31,
2019
$ 25,271,000
(7,300,933)
17,970,067
page | 43
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
10. Accounts payable and accrued liabilities
Accrued liabilities related to:
Consultants and professional fees
Payroll
Vacation Accrued
Trade payables and other
11. Contract Obligations
December 31,
2020
December 31,
2019
$183,920
120,318
71,699
375,937
64,601
440,538
$311,635
-
106,529
418,164
30,764
448,928
In December, 2020 the Company received a deposit of US$100,000 to sell pre-existing SFD® data. The
SFD® data is expected to be delivered to the customer in the second quarter of 2021.
In 2019, the Company received a non-refundable deposit of $100,000USD from AGV to be applied to an
SFD® survey which was to be completed by June 30, 2020. The deposit was forfeited by AGV on June 30,
2020 as AGV did not complete a SFD® survey prior to this date. The amount was recognized as other
revenue within the year (Note 21).
Contract obligations
December 31,
2020
$ 127,507
December 31,
2019
$ 131,386
page | 44
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
12. Asset Retirement Obligation
Asset retirement obligations ("ARO") relate to minor non-operated interests in oil and natural gas wells in
which NXT has outstanding abandonment and reclamation obligations in accordance with government
regulations. The estimated future abandonment liability is based on estimates of the future timing and
costs to abandon, remediate and reclaim the well sites within the next five years. The net present value
of the ARO is as noted below, and has been calculated using an inflation rate of 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
13. Lease obligation
Aircraft
Office Building
Printer
Office equipment
Current Portion of lease obligations
Long-term lease obligations
Maturity of lease liabilities:
2021
2022
2023
2024
2025
Total lease payments
Less imputed interest
Total discounted lease payments
Current portion of lease obligations
Non-current portion of lease obligations
2020
2019
$ 21,481
2,069
(809)
-
22,741
$ 26,778
2,069
(7,366)
-
21,481
2018
$56,702
2,069
-
(31,993)
26,778
December 31,
2020
$1,220,425
1,440,085
9,232
-
2,669,742
(773,465)
1,896,277
December 31,
2019
$ 1,680,103
1,669,953
13,573
42,515
3,406,144
(736,408)
2,669,736
$1,018,789
1,135,510
367,185
367,185
275,389
3,164,058
(494,316)
2,669,742
(773,465)
1,896,277
In June 2020, the Company exercised an option for an early buy-out option on its office equipment lease
for $20,000.
page | 45
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
14. Commitments
The table below is the non-lease operating cost components associated with the costs of the building
lease.
For the fiscal year ending
December 31,
2021
2022
2023
2024
2025
Office
Premises
$ 228,091
228,091
228,091
228,091
171,069
1,083,433
In April 2017, NXT completed a sale and leaseback agreement of its aircraft with a Calgary based
international aircraft services organization. The terms of the agreement resulted in NXT selling its Cessna
Citation aircraft that was purchased in 2015 for US$2,000,000 for the sum of US$2,300,000. NXT has
leased the aircraft over an initial term of 60 months and retains all existing operating rights and
obligations. Net proceeds to NXT from the sale were approximately $2.7 million, after payment of all
commissions and fees. The net book value of the asset of $2.4 million was derecognized and the resulting
gain on disposition of $776,504 was deferred. In 2017 and 2018 the amortized gain of $155,301 was
recognized as a reduction to the Company’s lease expense in the Consolidated Statement of Income and
Comprehensive Income (Loss).
page | 46
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(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:
As at the beginning of the year
Issuance for Employee Stock Purchase
Plan
Shares retired during the year
December 31, 2020
For the years ended
December 31, 2019
# of shares
$ amount
# of shares
$ amount
64,406,891 $95,313,064 68,573,558 $96,656,248
30,899
14,059
-
-
-
-
(4,166,667)
(1,343,184)
As at the end of the year
64,437,790
95,327,123 64,406,891
95,313,064
As at the beginning of the year
Shares issued during the year:
Issuance of Common Stock
from the Private Placement
Finder’s fee
Exercise of stock options
Transfer from contributed capital
on the exercise of stock options
As at the end of the year
For the Year Ended
December 31, 2018
# of shares
$ amount
58,161,133
$88,121,286
10,264,946
140,812
6,667
8,387,451
136,003
5,067
-
68,573,558
6,441
96,656,248
In 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 through a
targeted issuer bid. The 4,166,667 shares were cancelled immediately after they were purchased.
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 comprising one share and
a third of a warrant. All of AGV’s 3,421,648 warrants expired as of October 31, 2019. 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 in
2018.
page | 47
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
16. Earnings (Loss) per share
For the years ended December 31,
2020
2019
2018
Net income (loss) for the year
$(5,999,675)
$3,772,908
$(6,968,511)
Weighted average number of shares
outstanding for the year:
Basic
Diluted
64,409,170
68,156,059
65,455,325
64,409,170
68,156,059
65,455,325
Net Income (loss) per share – Basic
Net Income (loss) per share – Diluted
$(0.09)
$(0.09)
$0.06
$0.06
$(0.11)
$(0.11)
In years in which a loss results, all outstanding stock options are excluded from the diluted loss per share
calculations as their effect is anti-dilutive.
17. Share based compensation
The Company has an equity compensation program in place for its executives, employees and directors.
Executives and employees are given equity compensation grants that vest based on a recipient's
continued employment. The Company’s stock-based compensation awards outstanding as at December
31, 2020, include stock-options, restricted stock units (“RSUs”) and deferred share units (“DSUs”). The
following tables provide information about stock option, RSU and DSU activity.
For the years ended December 31,
2020
2019
2018
Stock Option Expense
$ 34,223
$ 43,809
$ 386,154
Deferred Share Units
Restricted Stock Units
Employee Share Purchase Plan
Total Stock Based Compensation Expense
15,000
111,060
8,133
168,416
-
-
-
-
-
-
43,809
386,154
page | 48
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
Stock Options:
The following is a summary of stock options which are outstanding as at December 31, 2020.
Exercise price
per share
$0.51
$0.52
$0.55
$0.59
$1.45
$1.48
$1.50
# of options
outstanding
16,000
100,000
30,000
150,000
37,500
37,500
50,000
421,000
#of options
exercisable
16,000
100,000
30,000
150,000
37,500
37,500
50,000
421,000
Average remaining
contractual
life (in years)
4.7
3.5
4.1
2.8
1.0
0.5
0.6
2.5
A continuity of the number of stock options which are outstanding at the end of the current year and as
at the prior fiscal years ended December 31, 2019 and 2018 is as follows:
For the year ended,
December 31, 2020
# of stock
options
1,169,500
46,000
(794,500)
-
421,000
421,000
weighted
average
exercise
price
$1.48
$0.54
$(1.77)
-
$0.83
$0.83
Options outstanding, start of the year
Granted
Expired
Forfeited
Options outstanding, end of the year
Options exercisable, end of the year
# of stock
options
For the year ended,
December 31, 2019
weighted
average
exercise
price
$1.58
$0.52
$(1.51)
$(1.70)
$1.48
$1.52
1,297,000
100,000
(47,500)
(180,000)
1,169,500
1,119,500
page | 49
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
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 year
Granted
Exercised
Expired
Forfeited
Options outstanding, end of the year
Options exercisable, end of the year
Stock options granted generally expire, if unexercised, five years from the date granted and entitlement
to exercise them generally vests at a rate of one-third at the end of each of the first three years following
the date of grant.
Stock based compensation expense (“SBCE”) is calculated based on the fair value attributed to grants of
stock options using the Black-Scholes valuation model and utilizing the following weighted average
assumptions:
For the year ended
Expected dividends paid per common share
Expected life in years
Weighted average expected volatility in the price of common shares
Weighted average risk free interest rate
Weighted average fair market value per share at grant date
Intrinsic (or “in-the-money”) value per share of options exercised
2018
2019
2020
Nil
Nil
Nil
5.0
5.0
5.0
65%
65%
138%
1.12% 1.68% 1.75%
$0.54 $0.52 $1.06
$ - $0.59
$ -
Deferred Stock Units (“DSUs”):
The Company’s first grant of DSU’s began in 2020. A continuity of the number of DSUs which are
outstanding at the end of the current year is as follows:
DSUs outstanding, start of the year
Granted
Closing balance
2020
-
37,354
37,354
The DSUs plan is a long-term incentive plan that permits the grant of DSUs to qualified directors. DSUs
entitle the holder to receive the underlying number of shares of the Company's Common Stock upon
page | 50
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
vesting of such units. DSUs granted under the DSUs plan are to be settled at the retirement, resignation
or death of the Board member holding the DSUs.
Restricted Stock Units (“RSUs”):
The Company’s first grant of RSU’s began in 2020. RSUs entitle the holder to receive, at the option of the
Company, either the underlying number of shares of the Company's Common Stock upon vesting of such
units or a cash payment equal to the value of the underlying shares. The RSUs vest at a rate of one-third
at the end of each of the first three years following the date of grant. The Company intends to settle the
RSUs in cash. In the year ended December 31, 2020, the Company granted 1,200,000 RSU’s to employees
and officers.
A continuity of the number of RSUs, including fair value (“FV”) which are outstanding at the end of the
current year is as follows:
RSUs outstanding, start of the year
Granted
Converted
Forfeited
RSUs outstanding, end of the year
Employee Share Purchase Plan (“ESP Plan”):
2020
# of RSUs
-
1,200,000
-
-
1,200,000
FV/Unit
$ -
$ 0.45
$ -
$ -
$ 0.79
On August 25, 2020, shareholders of the Company and subsequently the Toronto Stock Exchange (the
"TSX") approved, the ESP Plan. The ESP Plan allows employees and other individuals determined by the
Board to be eligible to contribute a minimum of 1% and a maximum of 10% of their earnings to the plan
for the purchase of common shares in the capital of the Company, of which the Company will make an
equal contribution. Common shares contributed by the Company may be issued from treasury or acquired
through the facilities of the TSX. During 2020 the Company elected to issue common shares from
treasury.
Purchased by employees
Matched by the Company
Total Common Shares issued
2020
# of shares
16,686
14,213
30,899
$ amount
$ 7,592
6,467
14,059
The Company will also match 100% of the employee contributions of up to 10% of their earnings in the
first year of the plan if the employee does not withdrawal common shares from the ESP Plan in the first
year of their participation, up to $15,000 per employee (the “Bonus Match”). As at December 31, 2020
the Company has accrued $1,666 for the Bonus Match.
page | 51
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
Effective for the year ended December 31, 2020, the Company has presented stock based compensation
expense of $168,416 within general and administrative expenses and has recorded an immaterial
correction to classify the stock based compensation expense for the 2019 and 2018 comparative years of
$43,809 and $386,154, respectively, to be presented within general and administrative expenses. While
ASC 718 does not identify a specific line item in the income statement for presentation of the expense
related to share based compensation arrangements, the SEC has released guidance under SAB Topic 14.F
that the expense related to share-based payment arrangements should be presented in the same line or
lines as cash compensation paid to the same employees. The Company’s presentation conforms to this
guidance.
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:
For the years ended December 31,
2020
2019
2018
Income (loss) before income taxes
Canadian statutory income tax rate
$(5,999,675) $3,772,908 $(6,968,551)
27.0 %
26.5 %
24.0 %
Income tax (recovery) at statutory income tax rate
(1,439,922) 999,821 (1,881,509)
Effect of non- deductible expenses and other items:
Stock-based compensation and other expenses
Change in statutory tax rates
Foreign exchange adjustments
Other (expired losses)
Change in valuation allowance
Income tax expense (recovery)
44,225
(131,242)
29,910
258,091
11,609
918,821
82,433
43,592
99,919
-
(131,555)
(221,978)
(1,238,938)
1,238,938
-
2,056,276
(2,056,276)
-
(2,135,123)
2,135,123
-
Effective July 1, 2020, the Province of Alberta decreased its corporate tax rate from 10% to 8%.
page | 52
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
A valuation allowance has been provided for the Company’s deferred income tax assets due to uncertainty
regarding the amount and timing of their potential future utilization, as follows:
Net operating losses carried forward:
Canada (expiration dates 2027 to 2040)
USA (expiration dates 2021 to 2026)
Timing differences on property & equipment, Right of
Use Assets, Lease obligations and financing costs
SRED Expenditures
Foreign Tax Credit
Intellectual property
Less valuation allowance
19. Financial instruments
1) Non-derivative financial instruments:
2020
2019
2018
$ 7,809,363
1,223,212
$ 6,840,817
1,494,711
$ 9,563,701
1,569,976
1,944,011
369,522
285,772
11,631,880
(3,745,627)
7,886,253
(7,886,253)
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)
-
-
-
The Company's non-derivative financial instruments consist of cash and cash equivalents, short-term
investments, accounts receivable, note receivable, deposits, accounts payables and accrued liabilities and
lease obligations. The carrying value of these financial instruments, excluding leases, approximates their
fair values due to their short terms to maturity.
Credit Risk
Credit risk arises from the potential that the Company may incur a loss if counterparty to a financial
instrument fails to meet its obligation in accordance with agreed terms. The Company’s financial
instruments that are exposed to concentrations of credit risk consist primarily of cash and cash
equivalents, short-term investments and accounts receivable. The carrying value of cash and cash
equivalents, short-term investments, and accounts receivable reflects management’s assessment of
credit risk. At December 31, 2020, cash and cash equivalents and short-term investments included
balances in bank accounts, term deposits and guaranteed investment certificates, placed with financial
institutions with investment grade credit ratings. The majority of the Company’s accounts receivable
relate to sales to one customer in Nigeria and is exposed to foreign country credit risks. The Company
manages this credit risk by requiring advance payments before entering into certain contract milestones
and when possible accounts receivable insurance.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk in relation to its holding of significant US$ balances in
cash and cash equivalents, short-term investments, accounts receivable, note receivable, deposits,
accounts payables and accrued liabilities and entering into United States dollar revenue contracts. To
mitigate exposure to fluctuations in foreign exchange, the Company does not currently enter into hedging
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NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
contracts, but uses strategies to reduce the volatility of United States Dollar assets including converting
excess United States dollars to Canadian dollars. As at December 31, 2020, the Company held net U.S
dollar assets totaling US$2,164,285. Accordingly, a hypothetical 10% change in the value of one United
States dollar expressed in Canadian dollars as at December 31, 2020 would have had an approximately
$276,000 effect on the unrealized foreign exchange gain or loss for the year.
2) Derivative financial instruments
As at December 31, 2020 and December 31, 2019, the Company held no derivative financial instruments.
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
Contractual obligations
Portion attributable to:
Operating activities
Financing activities
Investing activities
21. Geographic information
For the years ended December 31,
2018
($1,252)
-
42,204
(899,122)
-
2019
($1,339,408)
(332,175)
(31,973)
104,745
134,116
2020
$406,114
324,700
19,600
(120,767)
(3,878)
625,769
(1,464,695)
(858,170)
625,769
-
-
625,769
(1,464,695)
-
-
(1,464,695)
(858,170)
-
-
(858,170)
The Company generates revenue from its SFD® survey projects that assists the Company’s clients in the
determination of where 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 for the year ended December 31, 2020 were the result of the forfeiture of the non-refundable
deposit from AGV. See Note 11.
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NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
Revenues by geographic area were generated solely in Nigeria during 2019, entirely from a single client.
For the years ended December 31,
2018
2019
2020
Nigeria
Other
$ -
136,566
$11,976,149
-
$ -
-
136,566
11,976,149
-
22. Survey Expenses
Survey Expenses include the following:
Aircraft Operations
Charter hire reimbursements
Lease payments
Operating expenses
Survey Projects
23. Government Grants
2020
2019
2018
$ (662,383)
433,618
1,320,352
1,091,587
-
1,091,587
$ (613,038)
400,847
1,459,536
1,247,345
1,363,741
2,611,086
$ (698,211)
454,729
1,347,428
1,103,946
-
1,103,946
During the year ended December 31, 2020, the Company received government grants through CEWS and
the CERS. The CEWS and CERS were recognized as a reduction to general and administrative expenses.
CEWS
CERS
Government grants recognized
December 31,
2020
$ 292,161
58,526
$ 350,687
For the years ended
December 31,
2019
$ -
-
$ -
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NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2020, 2019 and 2018
(Expressed in Canadian dollars unless otherwise stated)
24. Other related party transactions
One of the members of NXT’s Board of Directors is a partner in a law firm which provides legal advice to
NXT. Legal fees (including costs related to share issuances) incurred with this firm were as follows:
Legal Fees
2020
2019
2018
$ 224,479 $ 276,261
$249,218
Accounts payable and accrued liabilities includes a total of $1,570 ($146,197 as at December 31, 2019)
payable to this law firm. A company owned by a family member of an executive officer was contracted
to provide design services to the Company for a total cost of US$3,000.
25. 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.
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