(Name,
Telephone, E-mail and/or Facsimile number and address of Company
Contact Person)
PART I
ITEM
1.
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
applicable.
ITEM
2.
OFFER
STATISTICS AND EXPECTED TIMETABLE
Not
applicable.
A.
Selected
financial data.
The
following historical financial information should be read in
conjunction with the section entitled “Operating and
Financial Review” (see Item 5 herein) and our audited
consolidated financial statements and related notes, which are
included elsewhere in this document. The consolidated statements of
income (loss) data for the years ended December 31, 2018,
2017, and 2016 and selected consolidated balance sheet data as of
December 31, 2018 and 2017 are derived from, and qualified by
reference to, our audited consolidated financial statements that
are included elsewhere in this Form 20-F. The selected consolidated
balance sheet data as of December 31, 2016, 2015 and 2014, and
the consolidated statements of income (loss) data for the years
ended December 31, 2015 and 2014 are derived from our
previously filed audited consolidated financial statements (which
are not included in this Form 20-F).
INCOME (LOSS) & COMPREHENSIVE INCOME (LOSS)
(expressed in Canadian Dollars)
|
|
|
|
|
|
Survey
revenues
|
$
-
|
$
-
|
$
1,447,269
|
$
17,422,151
|
$
3,913,367
|
Operating
expenses
|
|
|
|
|
|
Survey
costs
|
1,103,946
|
1,289,429
|
1,157,185
|
5,095,691
|
431,518
|
General
and administrative
|
3,999,089
|
4,960,961
|
5,645,459
|
5,049,690
|
4,132,108
|
Stock
based compensation expense
|
386,154
|
581,356
|
790,500
|
1,081,000
|
658,000
|
Amortization
expense
|
1,790,267
|
1,897,576
|
2,104,864
|
704,943
|
67,162
|
|
7,279,456
|
8,729,322
|
9,698,008
|
11,931,324
|
5,288,788
|
Other
expense (income)
|
|
|
|
|
|
Interest
expense (income), net
|
(62,004
)
|
4,485
|
(17,254
)
|
(13,910
)
|
(50,824
)
|
Foreign
exchange (gain) loss
|
(19,852
)
|
69,676
|
272,713
|
(712,480
)
|
(158,817
)
|
Other
expense (income)
|
(40,701
)
|
91,370
|
218,853
|
529,081
|
354,781
|
Gain
on extinguishment of liability (Note 20)
|
(188,388
)
|
-
|
-
|
-
|
-
|
Increase
(decrease) in fair value of US$ Warrants
|
-
|
-
|
-
|
-
|
42,800
|
|
(310,945
)
|
165,531
|
474,312
|
(197,390
)
|
187,940
|
Income
(loss) before income taxes
|
(6,968,511
)
|
(8,894,853
)
|
(8,725,051
)
|
5,688,136
|
(1,563,361
)
|
Income
tax expense (recovery)
|
-
|
75,545
|
374,511
|
(4,852,092
)
|
-
|
Net
income (loss) and comprehensive income (loss) for the
year
|
(6,968,511
)
|
(8,970,398
)
|
(9,099,562
)
|
10,540,228
|
(1,563,361
)
|
Net
income (loss) per share - Basic
|
$
(0.11
)
|
$
( 0.16
)
|
$
(0.17
)
|
$
0.22
|
$
(0.04
)
|
Diluted
(1)
|
$
(0.11
)
|
$
( 0.16
)
|
$
(0.17
)
|
$
0.21
|
$
(0.04
)
|
Weighted
average # of common shares outstanding
|
|
|
|
|
|
Basic
|
65,455,325
|
54,523,113
|
53,526,155
|
47,782,647
|
44,375,540
|
Diluted
(1)
|
65,455,325
|
54,523,113
|
53,526,155
|
49,041,383
|
44,375,540
|
|
|
|
|
|
|
#
of common shares outstanding
|
68,573,558
|
58,161,133
|
53,856,509
|
53,306,109
|
44,958,843
|
(1)
In periods with a loss, the diluted total excludes the 8,000,000
convertible preferred shares which were outstanding until
converted
on
August 31, 2015, as their effect is anti-dilutive.
Balance Sheet Data
(expressed in Canadian Dollars)
|
|
|
|
|
|
Working
capital (deficiency)
|
$
3,823,832
|
$
(318,166
)
|
$
1,703,510
|
$
7,534,128
|
$
5,029,013
|
|
|
|
|
|
|
Current
assets
|
4,365,970
|
1,284,008
|
2,316,341
|
10,691,918
|
5,811,639
|
Deposits
|
560,341
|
518,765
|
-
|
-
|
-
|
Property
and equipment, net
|
683,157
|
778,685
|
3,348,557
|
3,678,985
|
237,464
|
Intellectual
property, net
|
19,654,800
|
21,339,533
|
23,024,268
|
24,709,000
|
-
|
Total
assets
|
25,264,268
|
23,920,991
|
28,689,166
|
39,079,903
|
6,049,103
|
|
|
|
|
|
|
Current
liabilities
|
542,138
|
1,602,174
|
612,831
|
3,157,790
|
782,626
|
Long-term
liabilities
|
510,661
|
741,408
|
264,775
|
300,462
|
50,000
|
Total
liabilities
|
1,052,799
|
2,343,582
|
877,606
|
3,458,252
|
832,626
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
Common
shares
|
96,656,248
|
88,121,286
|
85,966,393
|
85,051,553
|
65,792,307
|
Preferred
shares
|
-
|
-
|
-
|
-
|
232,600
|
Contributed
capital
|
9,262,684
|
8,195,075
|
7,613,719
|
7,239,089
|
6,400,789
|
Deficit
|
(82,418,397
)
|
(75,449,886
)
|
(66,479,487
)
|
(57,379,926
)
|
(67,920,154
)
|
Accumulated
other comprehensive income
|
710,934
|
710,934
|
710,935
|
710,935
|
710,935
|
Total
equity
|
24,211,469
|
21,577,409
|
27,811,560
|
35,621,651
|
5,216,477
|
Total
liabilities and equity
|
25,264,268
|
23,920,991
|
28,689,166
|
39,079,903
|
6,839,993
|
Throughout
the history of the Company there have been no dividends
declared.
B.
Capitalization
and indebtedness.
Not
applicable.
C.
Reasons
for the offer and use of proceeds.
Not
applicable.
Investing
in our common shares involves a high degree of risk. In addition to
the other information included in this document, you should
carefully consider the risks described below before purchasing our
common shares. If any of the following risks actually occur, our
business, financial condition and results of operations could
materially suffer. As a result, the trading price of our common
shares could decline and you might lose all or part of your
investment.
Our ability to continue operating is not certain.
The
events described in the following paragraphs highlight that there
is substantial doubt about NXT’s ability to continue as a
going concern within one year after the date that this Form-20F has
been issued.
As a
result of the extended duration between revenue bearing contracts,
NXT’s balance of Current Assets less Current Liabilities has
been declining since the closing of the first tranche of the
Private Placement on February 2018. If payments on contracts
not received in a timely manner, NXT will not have sufficient cash
to meet its obligations for the 12 month period beyond the date of
these financial statements.
While
near term survey prospects are expected to translate into revenue
bearing contacts and provide positive contribution to the liquidity
position, there are no certainties that these prospects will
convert into executed contracts prior to the full depletion of the
Company’s cash resources. In February 2019, the Company
signed a Co-operation agreement for which it will receive a
non-refundable deposit of $200,000 United States Dollars and in
March 2019 signed a contract for the approximate revenue value of
$8,900,000 United States Dollars. Advanced payments totaling
$300,000 United States dollars have been received in the first
quarter of 2019 on the contract and an additional $1,000,000 United
States Dollars is contracted to be received upon performing of a
pilot survey. The Company is also taken future steps to reduce
costs which include evaluating alternatives to reduce aircraft and
office costs. In addition, the Advisory Board has been suspended
indefinitely and staffing costs are being reduced with new Human
Resource policies. If required, further financing options that may
or may not be available to the Company include issuance of new
equity, debentures or bank credit facilities. The need for
any of these options will be dependent on the timing of securing
new contracts and obtaining financing terms that are acceptable to
both the Company and the financier.
NXT
continues to develop its pipeline of opportunities to secure new
revenue contracts. However, the Company’s longer-term success
remains dependent upon its ability convert these opportunities into
successful contracts and to continue to attract new client projects
and expand the revenue base to a level sufficient to exceed fixed
operating costs and generate positive cash flow from
operations. The occurrence and timing of these events cannot
be predicted with certainty.
The
consolidated financial statements do not reflect adjustments that
would be necessary if the going concern basis was not
appropriate. If the going concern basis was not appropriate
for these consolidated financial statements, then significant
adjustments would be necessary in the classification and carrying
value of assets and liabilities and the reported revenues and
expenses.
The financial statements rely upon estimates and assumptions that
could be incorrect.
The
preparation of financial statements requires our management to make
estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets and liabilities including the
disclosure of contingent assets and liabilities as well as revenues
and expenses recorded in our financial statements. Estimates made
relate primarily to the measurement of accrued liabilities,
stock-based compensation expense, valuation of future income tax
assets, estimates for asset retirement obligations, the useful
lives of capital assets and intellectual property.
The
estimates and assumptions are reviewed periodically and are based
upon the best information available to management; however, we
cannot provide assurance that future events will not prove that
these estimates and assumptions are inaccurate. Any revisions to
our estimates and assumptions may have a material impact on our
future reported net income or loss and assets and
liabilities.
Volatility in oil and natural gas commodity prices may affect
demand for our services.
NXT's
customer base is in the oil and natural gas exploration industry,
which is exposed to risks of volatility in oil and natural gas
commodity prices. As such, demand for our services and prospective
revenues may become adversely impacted by ongoing declines in oil
and natural gas prices. The impact of price changes on our ability
to enter into SFD
®
survey
contracts cannot be readily determined. However, in general, if
commodity prices decline significantly, our opportunity to obtain
and execute SFD
®
survey
contracts will also likely decline, at least in the short
term.
Our financial position is affected by foreign currency
fluctuations.
We
currently conduct cash transactions and have holdings in Canadian
dollars, U.S. dollars and periodically have holdings of local
currency in other countries. We generally contract to earn revenues
in U.S. dollars and potentially may earn revenues in Canadian
dollars and other foreign currencies.
Our
reporting currency is in Canadian dollars. We currently do not
engage in currency hedging activities, but are reviewing
opportunities to do so. Our cash positions and potential foreign
currency revenue streams in currencies other than Canadian dollars
exposes us to exchange rate fluctuations between the Canadian
dollar and foreign currencies.
Our
financial position will be affected by exchange rate fluctuations.
We may earn revenue and incur expenses denominated in foreign
currencies, yet report our financial results in Canadian dollars.
Furthermore, we intend to enter into contracts to provide services
in foreign countries and may periodically conduct business in other
currencies such as the Euro. Changes in currency exchange rates
could have an adverse effect on the Company's business, financial
condition and results of operations.
Our net income or loss is impacted by interest rate
fluctuations.
We periodically invest available cash in short term investments
that generate interest income that will be affected by any change
in interest rates.
(See Item 11).
In
April 2017, NXT completed a sale and leaseback agreement of its
aircraft with a Calgary based international aircraft services
organization (the “Lessor”). The terms of the agreement
resulted in NXT selling its 1997 Cessna Citation Ultra 560 jet
aircraft that was purchased in 2015. NXT has leased the aircraft
over an initial term of 60 months and retains all existing
operating rights and obligations. NXT is required to make monthly
payments to the Lessor of approximately US$39,500. NXT has the
option to extend the term of the lease by an additional two years.
Should NXT want to repurchase the aircraft at the end of the
initial lease term, the purchase price is US$1,450,000. When the
aircraft is not needed for use by NXT, we seek to earn charter hire
revenues from the aircraft through a 3
rd
party, Air
Partners.
Air
Partners also has access to an alternate, similar model aircraft
(certified for the use of our survey equipment) which could be
charter hired for use by NXT if needed.
In the
event that NXT’s aircraft is not available (due to damage, a
need for extensive repairs, or other unforeseen events) to conduct
survey projects, there is a risk that suitable alternative aircraft
may not be available on a timely basis from other charter operators
when needed. This inability to conduct survey operations could have
a material adverse effect on the Company's business, financial
condition and results of operations.
We are a small business with limited personnel and our inability to
segregate duties between administrative staff is an internal
control weakness.
Certain
duties that are most appropriately segregated between different
employees are due to our current limited staff, assigned to one or
two individuals depending on the task.
Standard
internal control methodology involves the separation of
incompatible functions by assigning these functions to separate
individuals and in larger organizations to separate departments. We
often cannot allocate these functions to separate individuals
because our administrative staff is limited.
Although we have adopted alternative control methods designed to
compensate for the reduced ability to separate incompatible
functions, these alternative controls are not effective and there
is more than a remote likelihood that our internal control over
financial reporting will not prevent or detect material
misstatements if they should exist in our financial statements.
This lack of separation of duties exposes us to potential
misappropriation of funds, embezzlement and other forms of fraud
and could have a material adverse effect on our business, financial
condition and results of operations.
(see also Item
15).
We may periodically engage in transactions with related
parties.
We may
periodically enter into related party transactions with our
officers and directors. The most significant transaction was a
“Technology Transfer Agreement” (the “TTA”)
that was executed on December 31, 2006 between NXT and Mr. George
Liszicasz, our CEO, President and Chairman wherein we issued
10,000,000 convertible preferred shares to him in exchange for the
rights to the SFD
®
technology for
use in hydrocarbon exploration. In 2013, a total of 2,000,000 of
these preferred shares were converted (on a one-to-one basis) into
common shares, and the remaining 8,000,000 preferred shares were
converted in August 2015.
For a
full history of the TTA see also Item 4. part A, “Information
on the Company - History and development of the Company”, and
Item 4. part B. “Information on the Company - Business
Overview – Technology Transfer Agreement”.
Although
we manage this potential conflict of interest risk through
maintenance of a strong independent board of directors (the
“Board”), all related party transactions have the
potential for conflicts of interest that may compromise the ability
of Board members to exercise their fiduciary responsibility to NXT
shareholders.
For the
period December 1, 2017 to January 31, 2018, Mr. Selby acted as the
Interim CFO of the Company.
A single major shareholder who is also a Board member and an
officer of the Company retains the ability to influence or control
the Company, and this influence or control may result in a conflict
of interest.
Mr.
George Liszicasz, our CEO, is our largest shareholder and as of
April 30, 2019 owns approximately 23% of our outstanding common
shares and therefore has a substantial influence in all shareholder
matters.
Controls
do exist to mitigate any potential risks associated with this
conflict of interest. Mr. Liszicasz adheres to a code of conduct
which includes a fiduciary responsibility to the Company, its
shareholders and this conduct is governed by the independent Board
of directors who collectively represent a majority of the Board.
Furthermore, all material related party transactions are disclosed
publicly.
An
additional mitigation is that Alberta Green Ventures Limited
Partnership became a statutory control shareholder in
2018.
However,
should these conflict of interest controls not be effective,
decisions could be made by the Company that may advantage Mr.
Liszicasz and negatively impact other shareholders.
Our rights to SFD
®
technology may
be challenged and we may need to defend our rights to the
technology in the courts.
Our
rights to ownership and use of SFD
®
technology
depended on Mr. Liszicasz having the lawful right to sell to NXT
the exclusive rights to exploit the SFD
®
technology for
the exploration of hydrocarbons as agreed to in the
TTA.
A risk
exists that an unknown party may claim some legal entitlement to
our intellectual property, our rights to commercialize this
intellectual property or our right to create SFD
®
devices and
processes. However, we believe that such a claim would be without
merit.
The
SFD
®
technology is an essential component of our business plan. If a
third party challenged our lawful entitlement to this technology,
the legal defense of our right to the technology may be expensive
and could cause a loss of our right to the SFD
®
technology, or
a protracted legal process to assert our right to the technology
would have a material adverse effect on the Company's business,
financial condition and results of operations.
We rely on specialized equipment, including a limited number of
SFD
®
sensors and this limitation may affect our ability to conduct
business.
We rely
on specialized data acquisition equipment, including a limited
number of SFD
®
sensor devices,
to conduct our aerial SFD
®
survey
operations. We would
be at risk if these survey sensors were to become damaged,
destroyed, worn out, stolen or in any way became unavailable for
use in operations prior to us creating and testing additional
sensors. Should the sensors become unavailable for any reason, our
ability to conduct surveys could be delayed for several months as
we built new sensors. During this period we may become unable to
satisfy contractual obligations, which may jeopardize future
revenue opportunities and may potentially result in a client
drawing on a contract performance bond posted by the Company or
otherwise making claims against the Company for breach of contract.
In addition, an inability to satisfy contractual obligations may
have an adverse effect on our developing reputation within the oil
and gas community.
NXT
seeks to mitigate this risk by researching new designs and
constructing additional SFD
®
sensor
devices.
As the Company is in the early
commercialization phase, SFD
®
surveys have not been tested over all potential geological
conditions. Some geological conditions may subsequently be proven
to be unsuited for SFD
®
surveys thereby creating unforeseen limitations to the application
of SFD
®
surveys.
Any
limitation to the application of SFD
®
surveys has the
potential of restricting future revenue opportunities and if not
properly disclosed to industry clients, such limitations may impact
the reputation of the Company with these clients.
Unless we pursue ongoing technological improvement and development,
we may be unable to respond to changes in customer requirements or
new competitive technologies.
We must
continue to refine and develop our SFD
®
survey system
to make it scalable for growth and to respond to potential future
competitive pressures. These improvements require substantial time
and resources. Furthermore, even if resources are available, there
can be no assurance that the Company will be commercially or
technically successful in enhancing the technology. Our inability
to keep pace with new technologies and evolving industry standards
and demands could have a material adverse effect on our business,
financial condition and results of operations.
We rely on a limited number of key personnel who collectively
possess the knowledge and skills to conduct SFD
®
surveys and
interpret SFD
®
data as
required to meet contract obligations. Additional or replacement
personnel cannot be found and trained quickly. The loss of any of
these key persons or increased demand for our services from clients
could impair our ability to meet contract obligations, thereby
adversely impacting our reputation and our ability to earn future
revenue from clients.
We rely
on a limited number of key personnel who collectively possess the
knowledge and skills to conduct SFD
®
surveys and
interpret SFD
®
data as
required to meet contract obligations. Additional or replacement
personnel cannot be found and trained quickly. The loss of any of
these key persons or increased demand for our services from clients
could impair our ability to meet contract obligations, thereby
adversely impacting our reputation and our ability to earn future
revenue from clients.
The
Company's future success depends, to a significant extent, on the
continued service of its key technical and management personnel and
on our ability to continue to attract and retain qualified
employees. The loss of the services of our employees or a failure
to attract, retain and motivate qualified personnel could have a
material adverse effect on our business, financial condition and
results of operations. We do not have “key man”
insurance on any of our personnel.
The
Company put in place employment agreements with all of its
executive officers, including George Liszicasz, its President and
CEO.
We have
a dependence on Mr. Liszicasz and three other staff members to be
involved in the
SFD
®
data
interpretation process and to continue to enhance our technology.
We are working to minimize dependency on key personnel. Mr.
Liszicasz has trained and continues to train a team of signal
interpreters to minimize our reliance on him to perform these
functions. Currently, a total of four persons, two of which are
highly experienced, are trained to interpret SFD
®
signals.
Although
we have engaged employees with suitable credentials to work with
Mr. Liszicasz to enhance our interpretation process and further
develop the SFD
®
technology, if
we are unable to reduce dependence on Mr. Liszicasz and he becomes
incapable of performing or unwilling to perform these functions,
then there may be an adverse effect on our ability to interpret the
data from SFD
®
surveys or to
enhance our technology.
Within
the province of Alberta, the skilled personnel that we require may
periodically be in short supply and there is specialized training
required that can take several months in order for a new employee
to become effective. If we cannot hire these key personnel, we have
inadequate time to train them or should we lose current personnel,
then our ability to accept contracts or meet contract commitments
may be adversely affected, thereby restricting our ability to earn
revenue.
Cyberattacks or other breaches of our
technology hardware and software, as well as risks associated with
compliance and data privacy could have an adverse effect on our
systems, our service to our customers, our reputation, our
competitive position and financial
results.
Our
ability to manage our operations successfully is critical to our
success. Our business relies on our ability to electronically
gather, compile, process, store and distribute data and other
information. Unintended interruptions or failures resulting from
computer and telecommunications failures, equipment or software
malfunction, power outages, catastrophic events, security breaches
(such as unauthorized access by hackers), social engineering
schemes, unauthorized access, errors in usage by our employees,
computer viruses, ransomware or malware and other events could harm
our business.
In
April 2019, we were the target of a ransomware attack that involved
the infiltration and infection of our computer systems. We
made no payments relating to the ransomware and believe we lost no
data. Following the ransomware incident, we began undertaking
remediation efforts and other steps to enhance our data security
infrastructure. In connection with these efforts, we have incurred
costs and expect to incur additional costs as we take further steps
to prevent unauthorized access to our systems and the data we
maintain. We cannot provide any assurance that all potential
causes of the incident have been identified and remediated and will
not occur again. While we have taken measures to minimize the
impact of these problems, the proper functioning of these systems
is critical to our business operations. Any security breach or
failure in our computer equipment, systems or data could result in
the interruption of our business operations and adversely impact
our financial results.
There is no certainty that an investor can trade our common shares
on public markets at a stable market price.
The
Company has historically had a limited public market for our common
shares on the TSX Venture Exchange (the “TSX-V”), and
the United States (“U.S.”) OTC Markets Group’s
Venture Stage Marketplace (the “OTCQB”) and there is a
risk that a broader or more active public trading market for our
common shares will not develop or be sustained, or that current
trading levels will not be sustained. Effective March 22, 2016, the
Company’s application to graduate from the TSX-V to the
broader Toronto Stock Exchange (“TSX”), Canada’s
premier stock exchange listing, was approved.
The
market price for the common shares on the exchanges where our stock
is listed has been and we anticipate will continue to be, extremely
volatile and subject to significant price and volume fluctuations
in response to a variety of external and internal factors. This is
especially true with respect to emerging companies such as ours.
Examples of external factors, which can generally be described as
factors that are unrelated to the operating performance or
financial condition of any particular Company, include changes in
interest rates and worldwide economic and market conditions, as
well as changes in industry conditions, such as changes in oil and
natural gas prices, oil and natural gas inventory levels,
regulatory and environment rules and announcements of technology
innovations or new products by other companies. Examples of
internal factors, which can generally be described as factors that
are directly related to our consolidated financial condition or
results of operations, would include release of reports by
securities analysts and announcements we may make from time to time
relative to our operating performance, clients exploration results,
financing, advances in technology or other business
developments.
Because
we have a limited operating history and a limited history of
profitability to date, the market price for the common shares is
more volatile than that of a seasoned issuer. Changes in the market
price of the common shares, for example, may have no connection
with our operating results or the quality of services provided to
clients. No predictions or projections can be made as to what the
prevailing market price for the common shares will be at any time,
or as to what effect, if any, that the sale of shares or the
availability of common shares for sale at any time will have on the
prevailing market price. Given the relatively low historic trading
volumes, small trades of NXT’s common shares can adversely
and potentially dramatically affect the market prices for those
shares.
Accordingly,
investors in our common stock should anticipate both volatile stock
price and poor liquidity unless these conditions
change.
You will be subject to the penny stock rules to the extent our
stock price on the OTCQB is less than $5.00.
Since
the common shares are not listed on a national stock exchange
within the United States, trading in the common shares on the OTCQB
is subject, to the extent the market price for the common shares is
less than $5.00 per share, to a number of regulations known as the
"penny stock rules". The penny stock rules, subject to certain
exemptions, require a broker-dealer to deliver a standardized risk
disclosure, the form of which is developed by the U.S. Securities
and Exchange Commission (the “SEC”) to provide the
customer with additional information, including current bid and
offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, monthly
account statements showing the market value of each penny stock
held in the customer's account, make a special written
determination that the penny stock is a suitable investment for the
purchaser and to receive the purchaser's written agreement to the
transaction. To the extent these requirements may be applicable,
they will reduce the level of trading activity in the secondary
market for the common shares and may severely and adversely affect
the ability of broker-dealers to sell the common
shares.
You should not expect to receive dividends in the foreseeable
future.
We have
never paid any cash dividends on our common shares and we do not
anticipate that we will pay any dividends in the foreseeable
future. Our current business plan is to retain any future earnings
to finance the expansion of our business. Any future determination
to pay cash dividends will be at the discretion of our Board of
directors and will be dependent upon our consolidated financial
condition, results of operations, capital requirements and other
factors as our Board of directors may deem relevant at that
time.
Our right to issue additional capital stock at any time could have
an adverse effect on your proportionate ownership and voting
rights.
We are
authorized under our Articles of Incorporation to issue an
unlimited number of common shares and an unlimited number of
preferred shares. We may issue these shares under such
circumstances and in such manner and at such times, prices, amounts
and purposes as our Board of Directors may, in its discretion,
determine to be necessary and appropriate, subject to compliance
with all applicable exchange regulations and corporate and
securities laws. Proportionate ownership and voting rights of
common shareholders could be adversely affected by the issuance of
additional common shares which may result in common share value
dilution.
We may not be able to protect our trade secrets and intellectual
property from competitors who would use this knowledge to eliminate
or reduce our technological advantage.
Our
success and future revenue growth will depend, in part, on our
ability to protect our intellectual property (“IP”). We
have commenced an IP strategy process to obtain patents related to
the SFD
®
technology,
while also utilizing “trade secrets” protection of the
proprietary nature of our technology as applicable.
Initiatives
to expand and protect our IP (including patenting and new R&D
initiatives) have been very successful. Squire Patton Boggs LLP, a
United States (“US”) based leader in IP protection, has
been advising NXT on our IP strategy, including the prior filing of
an initial US provisional patent application in May 2012. In
November 2014, NXT filed a related patent amendment submission in
the US and since that time has undertaken new patent applications
in select strategic international markets.
So far,
SFD
®
patents applications have been filed in nine (9) jurisdictions
worldwide. Thus far seven (7) patents have been granted: two
(2) in U.S.A., and one (1) in each of the following countries:
Canada, Japan, China, Russia, and Mexico. In late January 2019, we
received a positive feedback from the examiner of the European
Patent Office (consisting of 38 country members), showing potential
to be allowed in the near future. In addition, two (2) more
applications are pending in Brazil and India. The SFD
®
patents serve
an important purpose beyond the protection they provide to the
proprietary SFD
®
technology. Our
patents also serve as an independent third-party verification of
the scientific principles that form the basis of the
SFD
®
process and its application.
The
patent protection application process requires disclosure of at
least some aspects of our SFD
®
technology to
third parties and ultimately public disclosure. This disclosure
could significantly increase the risk of unlawful use of our
technology by third parties. Furthermore, we have no assurance
that, even if we seek patent protection, a patent could be
registered to protect our IP in all or any jurisdictions within
North America or other countries throughout the world. If
registered, there can be no assurance that it would be sufficiently
broad to protect our technology or that any potential patent would
not be challenged, invalidated or circumvented or that any right
granted thereunder would provide meaningful protection or a
competitive advantage to us. Finally, protection afforded by
patents is limited by the financial resources available to legally
defend IP rights. We currently do not possess the required
financial resources to fund a lengthy defense of our rights if
challenged by a much larger competitor or an oil and gas
company.
We do
enjoy common and contract law protection of our technology and
trade secrets. Employees and contractors are governed by
confidentiality agreements as well as a fiduciary responsibility to
protect our technology, supporting documentation and other
proprietary information.
Our
strongest protection of the SFD
®
technology
comes from restricting access to knowledge concerning the
technology. Only a very limited number of NXT personnel have access
to or knowledge of the underlying SFD
®
technology and
no one employee and only one officer has access or knowledge of all
aspects of the SFD
®
system.
Currently, no third party has any significant knowledge of the
technology. As further protection, SFD
®
equipment does
not leave the direct control of NXT employees, thereby preventing
unauthorized replication of the equipment.
The
Company reassesses the appropriateness of its IP protection
strategy on an ongoing basis and seeks advice from IP advisors as
necessary.
It is
possible that a third party will copy or otherwise obtain and use
the Company's technology without authorization, develop a similar
technology independently or design around the Company's secrets.
Accordingly, there can be no assurance that the steps taken by the
Company to prevent misappropriation or infringement of our IP will
be successful.
An
inability to protect our IP would make it possible for competitors
to offer similar products and services that could have a material
adverse effect on our business, financial condition and results of
operations.
We experience operational hazards in our flight operations that may
subject us to potential claims in the event that an incident or
accident occurs.
We
experience operational hazards in our flight operations that may
subject us to potential claims in the event that an incident or
accident occurs.
The
flight operations of SFD
®
surveys are
subject to the hazards associated with general flight operations.
An aircraft accident may cause personal injury and loss of life, as
well as severe damage to and destruction of property or the
SFD
®
sensors and related equipment.
Independent
third parties provide all the services required to maintain and
operate the aircraft; they bear the primary risks of flight
operations. These services are provided by an organization
accredited by Transport Canada to operate aircraft in accordance
with Transport Canada approved and audited operating procedures.
The aircraft operator employs the required pilots, aircraft
maintenance engineers and support personnel and ensures that they
operate within their Transport Canada operating certificate. Our
employees do not perform any airworthiness or flight safety
operations.
We
require the flight contractor to maintain appropriate insurance
coverage for the risks associated with aircraft operations and we
obtain insurance coverage to provide us with additional risk
protection. In addition, we maintain general business insurance
coverage, and believe that this insurance and the policy limits are
appropriate for the operational risks that we incur.
Despite
our policy to not operate the aircraft directly and our insurance
coverage, we cannot avoid or alternatively be insured for all risks
of flight operations. In the event of an incident or accident we
may be sued by injured parties in excess of our policy limits or
for damages that are not covered by our insurance policy. The
magnitude of a lawsuit of this nature is not determinable.
Furthermore, to the extent that our SFD
®
equipment is
damaged, we may be unable to conduct SFD
®
surveys for
several months following an accident.
We are a Canadian Company and our nationality may impair the
enforceability of a judgment for any person resident outside
Canada.
Since
we are a Canadian Company and most of our assets and key personnel
are located in Canada, you may not be able to enforce a U.S.
judgment for claims you may bring against us, our assets, our key
personnel or many of the experts named in this document. This may
prevent you from receiving compensation to which you may otherwise
have a claim.
We are
organized under the laws of Alberta, Canada and substantially all
of our assets are normally located in Canada. In addition, all but
two of our current members of our Board of directors and all of our
officers are residents of Canada. As a result, it may be impossible
for you to affect service of process upon us or these individuals
within the U.S. or to enforce any judgments in civil and commercial
matters, including judgments under U.S. federal securities laws. In
addition, a Canadian court may not permit you to bring an original
action in Canada or to enforce in Canada a judgment of a U.S. court
based upon civil liability provisions of the U.S. federal
securities laws.
We conduct operations in foreign countries, which exposes us to
several risks that may have a material adverse effect on the
Company.
We
conduct operations in foreign countries, which exposes us to
several risks that may have a material adverse effect on the
Company.
Criminal Activity and Social Instability
– We have
operated in the past in foreign countries such as Colombia, which
over the past two decades experienced significant social upheaval
and criminal activity relating to drug trafficking, kidnapping and
terrorist acts. While the situation has improved dramatically in
recent years, there can be no guarantee that the situation will not
deteriorate again, nor are these risks eliminated as yet.
Furthermore, other potential international survey locations may
have similar or other indeterminate criminal or social instability
risks.
Systemic
criminal activity in a country or isolated criminal acts may
disrupt operations, impact our ability to earn revenue,
dramatically add to our cost of operations or potentially prevent
us from earning any survey revenue in a country.
In
addition, foreign markets may be susceptible to a higher risk of
corruption and bribery. All of NXT’s employees, contractors
and independent sales agents are required to adhere to the
Company’s code of conduct and business ethics, which
prohibits illegal activities, including any acts of bribery or
corruption.
Political Instability
-
Any changes in regulations or shifts
in political attitudes are beyond the control of the Company and
may adversely affect our business. Exploration may be affected in
varying degrees by government regulations which have the effect of
restricting exploration and production activities. These changes
may adversely impact the laws and policies governing price
controls, export controls, foreign exchange controls, income taxes,
expropriation of property, environmental legislation, site safety
or other areas.
Currently,
there are no restrictions (other than the payment of local
with-holding taxes) on the repatriation back to Canada of our
earnings in foreign countries in which we have operated, such as
Colombia and Bolivia; however, there can be no assurance that
significant restrictions on repatriation to Canada of earnings will
not be imposed in the future.
Our
operations may also be adversely affected by changes in laws and
policies in Canada impacting foreign travel and immigration,
foreign trade, taxation and investment.
Commercial Disputes
– While operating in a foreign
country, we are subjected to local commercial laws which often
involve executing contracts in a foreign language. Although every
effort is made to ensure we have access to an accurate English
translation, misunderstanding and potential disputes between
parties may arise.
In the
event of a dispute arising in connection with our foreign
operations for any reason, we may be subject to the exclusive
jurisdiction of foreign courts or may not be successful in
subjecting foreign persons to the jurisdictions of the courts of
Canada or enforcing Canadian judgments in such other jurisdictions.
We may also be hindered or prevented from enforcing our rights with
respect to a government instrumentality because of the doctrine of
sovereign immunity.
Accordingly,
these risk factors have the potential of adversely reducing the
level of survey revenue from our clients, our ability to operate
effectively or our ability to be paid for our services and may have
a material adverse effect on our financial position.
Where
possible, NXT utilizes risk mitigation products offered by entities
such as Export Development Canada (“EDC”). EDC
financial products include insurance coverage of contract accounts
receivable, guarantee support for contract performance bonds and
wrongful call insurance for such bonds.
We rely upon the right to conduct airborne surveys in foreign
countries. These foreign operations expose us to the risks that we
will be prevented from conducting surveys when requested by
clients.
The
operation of our business, namely conducting aerial SFD
®
surveys and
interpreting SFD
®
data, is not
subject to material governmental or environmental regulation in
Canada and the United States with the exception of flight rules
issued by Transport Canada and the U.S. Federal Aviation
Administration (“FAA”) governing the use of commercial
aircraft, including rules relating to low altitude flights. The
requirements in other countries vary greatly and may require
permits and/or provide other restrictions to conducting flight
operations in the country that may restrict our ability to perform
SFD
®
surveys.
For
example, in South American countries in which we have operated,
such as Colombia and Bolivia, SFD
®
surveys must
comply with additional requirements not encountered in Canada and
the United States, including customs obligations and bonds related
to the importation and exportation of the aircraft into the
country, obtaining permits from the local aviation authority and
obtaining permits from the local Air Force. We have successfully
operated in South America and other global regions in accordance
with these typical requirements.
With
our North America and International experience to date, we do not
anticipate any government controls or regulations that will prevent
timely completion of SFD
®
surveys.
However, we may encounter government restrictions in other
countries that may impact or restrict our ability to conduct
surveys.
If we
encounter government regulation and restrictions that impact or
prevent us from conducting surveys in any country, then we will not
be able to earn revenue in the country and we may be exposed to
forfeiting any performance bonds which may have been
issued.
We caution that the factors referred to above and those referred to
as part of particular forward-looking statements may not be
exhaustive and that new risk factors emerge from time to time in
our rapidly changing business environment.
ITEM
4.
INFORMATION
ON THE COMPANY
A.
History
and development of the Company.
We are
a technology company focused on providing a service to oil and
natural gas exploration clients using our proprietary
SFD
®
remote sensing airborne survey system. SFD
®
and
NXT
®
are both registered trademarks of NXT Energy Solutions
Inc.
NXT’s
corporate history is summarized as follows:
●
NXT was
incorporated under the laws of the State of Nevada on September 27,
1994 as Auric Mining Corporation.
●
In January 1996,
NXT acquired all of the common stock of NXT Energy USA, Inc. (which
was then known as Pinnacle Oil Inc.) from its shareholders in
exchange for common shares. As a consequence of this reverse
acquisition, NXT Energy USA Inc. became a wholly owned subsidiary
and its shareholders acquired a 92% controlling interest in
NXT’s common shares.
●
Prior to this
reverse acquisition transaction, NXT was a corporate shell
conducting no active business, and NXT Energy USA Inc. was a
development stage research and development enterprise holding the
worldwide rights to use what is now our SFD
®
technology for
hydrocarbon exploration purposes.
●
Shortly thereafter,
on February 23, 1996 we changed our name to Pinnacle Oil
International, Inc. and on June 13, 2000, subsequently changed our
name to Energy Exploration Technologies.
●
On October 24,
2003, our shareholders approved the continuance of the Company from
the State of Nevada to the Province of Alberta, Canada under the
Business Corporations Act (Alberta) (the “ABCA”). Also,
our name was modified to Energy Exploration Technologies Inc.
(“EETI”).
●
On September 22,
2008 EETI changed its name to NXT Energy Solutions Inc. by way of
Articles of Amendment filed pursuant to the ABCA.
Our
registered office is located at 302, 3320 –
17
th
AVE
SW, Calgary, Alberta, Canada, T3E 0B4 and our telephone number is
(403) 264-7020.
We are
a reporting issuer in Alberta, Ontario, and British Columbia and
are principally governed by the Alberta Securities Commission in
accordance with the
Securities Act
(Alberta)
and the
Business
Corporations Act (Alberta).
We are a foreign private issuer
under United States securities laws and are subject to the
regulation of the US Securities in accordance with the
Securities Exchange Act of 1934
,
as amended (the “Exchange Act”).
The
underlying technology employed by our SFD
®
survey system
was invented by George Liszicasz, our President and CEO, chairman
and largest shareholder. The technology was initially licensed to
the Company by Mr. Liszicasz until December 31, 2006 through a
series of consecutive license agreements. On December 31, 2006, we
obtained the rights to the technology from Mr. Liszicasz pursuant
to the terms of the TTA.
Upon
execution of the TTA, Mr. Liszicasz transferred to us all his
rights and entitlements to the SFD
®
technology for
use in the field of hydrocarbon exploration.
SFD
®
technology for the purposes of the TTA is defined as the theories
of quantum physics and engineering which are utilized in the
operation of stress field detectors used by NXT for the reception,
collection and recording of subsurface geological stresses for
hydrocarbon exploration.
Our
business does not normally rely on significant capital
expenditures. For the last three fiscal years, the Company made
capital expenditures for property and equipment of $10,006 (2018),
$8,727 (2017), and $89,702 (2016). These annual expenditures
normally relate largely to upgrades to office computer equipment
and SFD
®
survey
equipment.
The
Company does not currently have any significant capital
expenditures in progress, or planned for the short term, for Canada
or other international operations.
SEC
maintains an internet site (http://www.sec.gov), which contains
reports, proxy and information statements, and other information
regarding us that file electronically with the SEC. Our website is
http://www.nxtenergy.com.
Description of the nature of the Company’s operations and
principal activities
We
utilize our proprietary, airborne SFD
®
survey system
to provide a service for the oil and gas exploration industry. NXT
provides a rapid and cost-effective method for our clients to
evaluate large land areas for their exploration
potential.
The
underlying technology employed by our SFD
®
survey system
was invented by George Liszicasz, our President and Chief Executive
Officer (“CEO”), Chairman and one of our largest
shareholders. The technology was initially licensed to the Company
by Mr. Liszicasz until December 31, 2006 through a series of
consecutive license agreements. On December 31, 2006 we obtained
the rights to the technology from Mr. Liszicasz pursuant to the
terms of a Technology Transfer Agreement
(“TTA”).
Upon
execution of the TTA, Mr. Liszicasz transferred to us all his
rights and entitlements to the SFD
®
technology for
use in the field of hydrocarbon exploration.
For
further details of the TTA, see “Section 10.1”
below.
SFD
®
technology for the purposes of the TTA is defined as the theories
of quantum physics and engineering which are utilized in the
operation of stress field detectors used by NXT for the reception,
collection and recording of subsurface geological stresses for
hydrocarbon exploration.
SFD
®
sensors remotely respond to gravity perturbations and changes in
subsurface stress regimes that are meaningful for oil and gas
exploration. These responses are captured as raw data that when
interpreted, can provide an indirect method to detect the presence
of geological features such as structures, faults, fractures and
reefs that are often associated with traps and reservoir
accumulations. SFD
®
is highly
effective in frontier and under-explored areas, in offshore or
onshore environments and over any terrain. The SFD
®
survey system
has been demonstrated to quickly focus exploration resources,
offering the benefit of reducing the risk, time and expense
associated with frontier exploration.
Following
completion of the aerial surveys, we deliver to our clients a
detailed report and maps of the surveyed area that identifies,
ranks and recommends areas with SFD
®
indications of
reservoir potential.
In
2006, we commenced our current business model and began providing
SFD
®
survey services to clients on a fee-for-service basis. In
accordance with this model, we have not invested either directly or
indirectly in exploration or development wells or engaged in other
exploration or production activities. Our current business model
minimizes our capital requirements, thereby conserving cash and
minimizes any perceived or real conflicts between the interests of
NXT and its survey clients.
NXT’s
primary business model is to earn revenues by conducting
SFD
®
surveys for clients on a fee-for-service basis. Secondly, we may be
able to negotiate to earn revenue from gross overriding royalty
income and/or other incentive fees from clients should they
generate production on areas recommended by SFD
®
surveys.
Finally, in the future, we may earn a fee by providing other
related geological and geophysical integration services to
clients.
We also
continue to utilize high quality local sales representatives with
key knowledge of their respective areas, potential clients and the
exploration potential of a region allowing us to cover larger areas
and more clients with minimum fixed cost. Our sales representatives
continue to pursue SFD
®
opportunities
in numerous regions including Latin America, the Middle-East and
Southeast Asia. Furthermore, to ensure our sales representatives
follow industry best practices, each representative is required to
annually certify they adhere to NXT's code of conduct and business
ethics.
In
support of these sales efforts, NXT has also been effective in
positioning the SFD
®
method as an
established geophysical tool for oil & gas exploration
following the successful completion of projects in Latin America
(Bolivia and Mexico) with the publication of technical papers and
the creation of project case studies. In addition, NXT has now been
granted patents or received patent allowance in 48 separate
countries.
Our
overall objective remains to continue to increase industry
awareness and appreciation of the value of our SFD
®
survey system
and our strategy to achieve this includes maximizing client
endorsement opportunities (such as through joint case studies) and
targeting the most appropriate markets (i.e. where SFD
®
provides the
maximum benefits). Our specific tactics include:
1.
Focus
the majority of sales resources on high profile primary markets
which offer the maximum opportunity for success;
2.
Build
upon success in this initial market, and step out to other markets
in Latin America, and in South Asia;
3.
Pursue
requests of interest from qualified potential client "bluebirds"
from all other locations in the world. The bluebird model is
defined as an opportunity that arises, not from deliberate targeted
sales initiatives, but in response to unsolicited client
enquiries;
4.
Continue
to conduct pilot surveys to expand our knowledge base and provide
documentation to support the use of SFD
®
in new
applications. Each new application opens more market opportunities
and provides valuable case studies to support our sales
initiatives; and
5.
Respond
to opportunities to present at technical conferences, publish
papers in periodicals and generally maximize our opportunities to
educate the industry on SFD
®
capabilities
and document case study successes.
We
continue to progress and grow our project pipeline on a Fee for
Survey Project basis. We remain optimistic given our progress
during the year coupled with the steadily improving oil & gas
environment. Notwithstanding, NXT has concurrently sought the
development of an alternative business line though the sale of
“Multi-Client Datasets” focused on IOCs and the
development of their global exploration strategies. The purpose of
this strategy has been to integrate our SFD
®
technology into
the standard exploration process of such organizations. We believe
this approach will be instrumental in helping us to build an
independent and steady backlog of smaller scale data sales enabling
us to enhance and smooth our revenue flow while we continue to
execute on larger Fee for Survey Projects.
Description of the principal markets in which the Company
competes
We have
an opportunity to provide our services in any region of the world
where oil and gas exploration activities are conducted. However, we
choose to be strategic and focus our limited marketing and sales
resources in a limited number of markets in the early stages of
commercialization.
A
summary of revenues derived in our primary geographic market
segments for the last 3 fiscal years, and highlights of global
survey operations, follows:
Year ended
December 31
|
|
|
|
South and Central
America
|
$
-
|
$
-
|
$
1,447,269
|
North
America
|
-
|
-
|
-
|
|
-
|
-
|
1,447,269
|
North America Market
In
February 2019, NXT entered into a Co-operative Agreement with one
of its largest shareholders, Alberta Green Ventures
(“AGV”), to propose up to three SFD
®
surveys
within two years. The Co-operative Agreement is based on a cost
plus formula and a gross overriding royalty interest in oil and gas
production arising on lands subject to the surveys.
Under the Agreement, NXT and AGV will consider at least two
SFD
®
Surveys in North America and an
additional one internationally. The first SFD
®
Survey is expected to be completed by
August 31, 2019, AGV has committed to completing an exploration
drilling program on each of the lands subject to the
SFD
®
surveys within two years of
completion of the surveys.
Latin America and Central America Markets
In
2008, exploration activity seriously diminished in Canada because
of the world-wide credit crisis and falling natural gas commodity
prices. In response, in late 2008 we looked to international
markets for new revenue opportunities, especially where there were
emerging, frontier-type exploration markets. Latin and Central
America became a target market for us, with Colombia viewed as an
attractive initial proving ground due to its many characteristics
desirable for achieving market success for our SFD
®
survey
system.
Colombia’s
business-friendly approach and practical resource policies allowed
it to attract many exploration and production companies from around
the world. In Colombia, there are obstacles to acquire geological
and geophysical data as required to properly evaluate unexplored
land. Obstacles include rain forests, environmental and community
restrictions, security concerns and the high cost and time required
to shoot seismic programs, particularly onshore. SFD
®
can be a very
effective tool to help overcome these obstacles.
NXT
earned survey revenue in Colombia of
US$2.9 million in 2012.
Building
on our initial Colombia success, NXT began to also pursue survey
business in other South America countries as oil and gas
exploration activity expanded in the region.
In
2014, we invested significant marketing efforts in the emerging
Bolivia market. We were able to leverage our experience in Colombia
and Mexico, and in 2015, we successfully secured our largest single
survey project to date. The contract with Yacimientos
Petrolíferos Fiscales Bolivianos (“YPFB”), the
National Oil Company of Bolivia.
Our
SFD
®
data acquisition operations commenced in Bolivia in early June 2015
and the data acquisition phase was completed in August, with
NXT’s related recommendations reports delivered to YPFB in
late October 2015. During the data acquisition phase, YPFB chose to
undertake an additional survey “expansion” project
valued at approximately US$1.0 million. The decision for
YPFB’s expansion was based on the rapid delivery of
preliminary SFD
®
results, which
had excellent correlations noted between anomalies identified by
SFD
®
and the clients’ existing ones identified using seismic
methods. A contract amendment was finalized in October 2015 for
this project, the final results for which were delivered by NXT in
January 2016.
NXT
completed the data acquisition and interpretation of 37,596 line-km
for the first ever SFD
®
Multi-Client
survey in the Gulf of Mexico in June 2017. The airborne survey was
conducted over the area that was identified by Comision Nacional de
Hidrocarburos (“CNH”) for the shallow water bid round
2.1 covering the Tampicao-Misantla, Veracruz and Cuencas del
Sureste exploration areas. The survey data provides 100% grid
coverage over the offshore blocks offered in Bid Round 2.1, an area
of approximately 8,900 square kilometers and was completed ahead of
time and budget. In addition, NXT acquired incidental data over
many of the 35 blocks offered in the recently concluded Bid Round
3.1. Based on the Five-Year Tender Program for the Exploration and
Extraction of Hydrocarbons 2015 - 2019 by the Mexican Secretary of
Energy, much of the remaining data will also be applicable to
future Bid Rounds. To date, there have been no sales of this
proprietary data.
Asia Markets
In October 2018, we signed an MOU with BGP Inc., a subsidiary of
China National Petroleum Corporation, to further explore
opportunities for NXT and BGP Inc. to work together. NXT’s
forward strategy is to secure
SFD
®
contracts with BGP and its
affiliates.
The MOU
entered into between Generation Resource Discoveries
(“GRD”), NXT’s regional representative and the
Government of Aceh, Indonesia on February 22, 2018, GRD has
expired.
As a
result of recent constitutional crises which began in late 2018
with the government of Sri Lanka, our contract negotiations have
been put on hold. We will assess when discussions can be
renewed
African and Middle East Markets
In
March 2019, the Company signed an $8.9 Million USD contract with PE
Energy Limited (“PE”), a Nigerian oil and gas service
company that has a contract with NNPC (National Nigerian Petroleum
Company), to provide 5,000 line kms of SFD
®
Surveys in Nigeria. Data acquisition operations for this contract
commenced in April 2019 and NXT’s interpretations and
recommendations are expected to be delivered during the third
quarter of 2019.
NXT has
entered into a three year exclusive sales representative agreement
with AGV, in nine jurisdictions in the Middle East and Latin
America.
Description of seasonality of the Company’s main
business
There
is no seasonality to our business. NXT does however, have a very
cyclical business, as revenue activity is dependent upon the level
of capital investment in exploration drilling in the oil & gas
industry and the size and timing of a limited number of survey
contracts each year.
Description of the sources and availability of raw
materials
We do
not foresee any constraints upon materials or equipment that will
impede our ability to execute our business plan or affect our
ability to conduct and/or expand our business. Our main direct
project input costs are aircraft operating costs and data
interpretation staff. None of these expenses have been subject to
significant price volatility.
In
order to conduct our survey operations, we require the
following:
●
Survey aircraft
– Historically, we have both owned aircraft and chartered
aircraft from independent charter aircraft companies. From 2009 to
December 2015, we utilized an aircraft charter agreement with Air
Partners, a Calgary-based air-charter operator, to provide
aircraft, crew and maintenance services for our survey operations
worldwide In December 2015, we acquired from Air Partners a jet
aircraft which was previously charter hired to NXT. In April 2017,
NXT completed a sale and leaseback agreement of its aircraft with a
Calgary based international aircraft services organization. The
terms of the agreement resulted in NXT selling its’ 1997
Cessna Citation Ultra 560 jet aircraft. We currently rely on Air
Partners as the manager / operator of the aircraft which we use in
SFD
®
survey operations.
●
SFD
®
sensors
- All of the survey sensors are manufactured in-house. Certain
machining is required by third party machine shops, with final
assembly performed by our technical staff. The sensors, once
assembled, require flight testing prior to being considered
acceptable for operational use. Not all sensors meet the
performance criteria for operational use; however, we have
demonstrated our ability to manufacture new functional
SFD
®
sensors.
●
SFD
®
assembly
- The units in which the sensors are incorporated are custom
designed, fabricated and assembled in-house or through
subcontracted vendors. We utilize the services of Transport Canada
approved Design Approval Representatives to prepare subsequent type
certificates (“STC”) for the installation of our
SFD
®
units in each aircraft that we utilize for surveys. The time to
obtain an STC approval for the installation of our SFD
®
units into any
proposed aircraft type may require several months.
●
Computer hardware and
software
- (
Data
Acquisition System, SFD
®
Signal
Conditioning Unit
, and data
Interpretation software).
During 2016,
a new data acquisition system completed final testing. The software
was developed by in-house personnel and will be utilized on future
surveys. The hardware we use in our SFD
®
survey systems
(other than the SFD
®
unit), and the
balance of the computer software we use, are all readily available
from retail or wholesale sources.
We are
not dependent upon any other third-party contract manufacturers or
suppliers to satisfy our technology requirements.
Description of marketing channels
We
largely use direct sales methods with some use of independent
commissioned sales representatives in international
markets.
Summary information on dependence on patents, licenses and
contracts
Patents
In May
2012, we commenced a “provisional” patent application
process in the U.S. and formally filed a patent on May 22, 2013,
which was subsequently published on November 28, 2013. We intend to
continue expanding the process with additional formal patent
applications in the future. We understand that our right to patent
the SFD
®
technology is
not compromised by our ongoing commercial use of the technology, as
the components of the SFD
®
technology have never been disclosed to third parties (except under
very limited and confidential terms) or released in any manner into
the public domain.
Initiatives
to expand and protect our IP (including patenting and new R&D
initiatives) were very successful in 2017. Squire Patton Boggs LLP,
a United States (“US”) based leader in IP protection,
has been advising NXT on our IP strategy, including the prior
filing of an initial US provisional patent application in May 2012.
In November 2014, NXT filed a related patent amendment submission
in the US and since that time has undertaken new patent
applications in select strategic international
markets.
NXT’s
patent applications have been filed in nine (9) jurisdictions
worldwide. Thus far, seven (7) patents have been granted: two
(2) in U.S.A., and one (1) in each of the following countries:
Canada, Japan, China, Russia, and Mexico. In late January 2019, we
received a positive feedback from the examiner of the European
Patent Office (consisting of 38 country members), showing potential
to be allowed in the near future. In addition, two (2) more
applications are pending in Brazil and India. However, there can be
no assurance that the patents will be granted by the European
Patent Office, Brazil or India. SFD
®
patents granted
in the U.S.A. and many other countries serve an important purpose
beyond protection of our proprietary SFD
®
technology.
They also provide multiple independent third-party recognitions of
the technological invention in terms of the practical
applicability, conceptual novelty, and knowledge
advancement.
Basis for statements made
regarding
competitive position
Our
SFD
®
airborne survey service is based upon a proprietary technology,
which is capable of remotely identifying, from a survey aircraft,
subsurface anomalies associated with potential hydrocarbon traps
with a resolution that we believe is technically superior to other
airborne survey systems. To our knowledge there is no other company
employing technology comparable to our SFD
®
survey system
for oil and natural gas exploration.
Seismic
is the standard technology used by the oil & gas industry to
image subsurface structures. It is our view that the
SFD
®
survey system is highly complementary to seismic analysis. Our
system may reduce the need for seismic in wide-area reconnaissance
but will not replace the role of seismic in verifying structure,
closure and selecting drilling locations. The seismic industry is
very competitive with many international and regional service
providers.
The
SFD
®
system can be used as a focusing tool for seismic. With an
SFD
®
survey a large tract (i.e. over 5,000 square kilometers) of land
can be evaluated quickly to identify locations with indications of
reservoir potential. Seismic surveys, although effective in
identifying these locations, are much more expensive, require
significantly more time and impose a much greater negative impact
on local communities and the environment. An SFD
®
survey deployed
first can provide necessary information to target a seismic program
over a limited area of locations selected by SFD
®
. This approach
can result in a more effective seismic program and reduce the
overall cost, time, community resistance and environmental impact
required to locate and qualify a prospect.
The
industry uses other technologies for wide area oil and natural gas
reconnaissance exploration, such as aeromagnetic and gravity
surveys. These systems can provide regional geological information,
such as basement depth, sedimentary thickness and major faulting
and structural development; however, these other airborne
techniques are not as suitable for identifying areas with reservoir
potential as the SFD
®
system.
Description of material effects of governmental & environmental
regulation
SFD
®
Survey Flight Operations
The
operation of our business, namely conducting aerial SFD
®
surveys and
interpreting SFD
®
data, is not
subject to material governmental or environmental regulation in
Canada and the United States with the exception of flight rules
issued by Transport Canada and the Federal Aviation Authority
governing the use of commercial aircraft, including rules relating
to low altitude flights. The requirements in other countries vary
greatly and may require permits and/or provide other restrictions
to conducting flight operations in the country that may restrict
our ability to perform SFD
®
surveys as
freely as in Canada and the United States.
For
example, in Colombia, SFD
®
surveys must
comply with three requirements not encountered in Canada and the
United States. These requirements are i) customs obligations and
bonds related to the importation and exportation of the aircraft
into Colombia, ii) obtaining permits from the local aviation
authority, and iii) obtaining permits from the Colombian Air Force.
NXT has successfully operated in the past in Colombia in accordance
with these requirements.
With
our past experience in Canada, the United States, Bolivia, Mexico,
Colombia and other countries, we do not anticipate any unusual
government controls or regulations that might significantly prevent
timely completion of SFD
®
surveys.
However, we may encounter unforeseen government regulations or
restrictions in other countries that may impair or restrict our
ability to conduct surveys, which could limit our ability to earn
revenue or potentially expose us to forfeiture of performance
bonds.
C.
Organizational
structure.
The
following table provides a list of all subsidiaries and other
companies controlled by NXT:
Subsidiaries
|
Date and Manner of Incorporation
|
Authorized Share Capital
|
Issued and Outstanding Shares
|
Nature of the Business
|
% of each Class of Shares owned by NXT
|
NXT Energy USA, Inc.
|
October 20, 1995 by Articles of Incorporation – State of
Nevada
|
20,000,000 common
|
5,000,000 common
|
Inactive
|
100%
|
|
|
|
|
|
|
NXT Aero USA, Inc.
|
August 28, 2000 by Articles of Incorporation – State of
Nevada
|
1,000 common
|
100 common
|
Inactive
|
100%
|
4,000 preferred
|
|
|
|
|
|
|
|
|
|
Cascade Petroleum Inc. (Formerly Survey Services International
Inc.)¹
|
September 6, 2011 by Articles of Incorporation – Province of
Alberta
|
Unlimited number of common shares
|
100 common
|
Inactive
|
100%
|
|
|
|
|
|
|
NXT Energy Services (SFD) Inc.
|
December 2008 by Federal Articles of Incorporation –
Canada
|
Unlimited number of common shares
|
100 common
|
Inactive
|
100%
|
|
|
|
|
|
|
PetroCaza Exploration Inc.
|
May 2015 by Articles of Incorporation Province of
Alberta
|
Unlimited number of common and preferred shares
|
100 common
|
Inactive
|
100%
|
¹On January 16
th
, 2017, the name of
Survey Services International Inc. was changed to “Cascade
Petroleum Inc.”
|
|
In
February 2010, NXT registered a wholly owned “Branch”
entity with the tax administration and Chamber of Commerce
authorities in Colombia, (NXT Energy Solutions Inc. Sucursal
Colombia). The formation of this branch became a Colombian legal
requirement following the Company commencing permanent activity in
Colombia in 2010 while conducting commercial survey operations.
This branch was closed in 2017.
In
addition, in March 2015, NXT registered NXT Energy Solutions Inc.
(Sucursal Bolivia) as a wholly owned “Branch” entity
under the laws of the Plurinational State of Bolivia, to contract
and conduct survey operations in Bolivia. Operations have now
ceased in Bolivia and we are in the process of closing the branch
which should be completed in the second quarter of
2019.
D.
Property,
plant and equipment.
Oil and Gas Properties
We have
minor historical interests in a limited number of acreage holdings
of undeveloped lands in western Canada. These assets are not a
material asset and have been written off in our financial
statements. Additionally, we may in the future become entitled to
receive gross over-riding royalty (“GORR”) interests on
production from portions of certain lands where we conducted past
surveys for clients in Canada. There is no certainty that wells on
these lands will become placed on production, or that future
royalty revenues will be earned from these entitlements prior to
the expiry of the landowners’ related mineral leases. No
asset value has been recorded in the financial statements for these
GORRs.
Facilities / Office Premises
In
August 2015, NXT moved to a new office premises (11,333 square
feet) at 3320 – 17
th
Avenue SW in
Calgary under a 10-year lease at an initial estimated minimum
monthly lease payment of $48,243 (including building operating
costs) commencing in October 2015. See also Item 5.F
“Contractual Obligations”.
Aircraft
In
order to perform our survey services, NXT requires to fly the
survey area in a jet aircraft. In April 2017, NXT completed a sale
and leaseback agreement of its aircraft with a Calgary based
international aircraft services organization (the
“Lessor”). The terms of the agreement resulted in NXT
selling its’ 1997 Cessna Citation Ultra 560 jet aircraft that
was purchased in 2015. NXT has leased the aircraft over an initial
term of 60 months and retains all existing operating rights and
obligations. NXT is required to make monthly payments to the Lessor
of approximately US$39,500. NXT has the option to extend the term
of the lease by an additional two years. Should NXT want to
repurchase the aircraft at the end of the initial lease term, the
purchase price is US$1,450,000. When the aircraft is not needed for
use by NXT, we seek to earn charter hire revenues from the aircraft
through a third party, Air Partners.
Air
Partners also has access to an alternate, similar model aircraft
(certified for the use of our survey equipment) which could be
charter hired for use by NXT if needed.
Equipment
Our
SFD
®
technology is comprised of three main components, detailed below,
which we collectively refer to as our SFD
®
survey system.
This system is generally stored at our Calgary office facility
unless deployed during survey operations when this equipment would
travel with the aircraft or be stored in a locked facility at the
survey location when not in use. In addition, there is extensive
interpretation equipment located in Calgary. The main categories of
equipment we use are:
●
|
Stress Field Detector -
the stress field detector, or
SFD
®
system, including a unit which houses the SFD
®
sensors, is the
principal component of our technology. SFD
®
sensors respond
to changes in subsurface stress. These responses are transformed
through a passive transducer into electronic digital signals.
Airborne surveys are normally conducted utilizing an array of 22
SFD
®
sensors, consisting of 6 primary, 8 secondary and 8 development
sensors, allowing the acquisition of multiple independent
SFD
®
signals responses at all points of a survey.
|
●
|
Data Acquisition System -
used in conjunction with the
SFD
®
sensor array on surveys, our data acquisition system is a compact,
portable computer system which concurrently acquires the electronic
digital signals from the SFD
®
sensor array
and other pertinent client data, including the GPS location
information of the data.
|
●
|
SFD
®
Signal Conditioning Unit -
this self-contained unit contains
electronic circuits for stabilizing and conditioning electronic
signals. All sensor output is directly connected to this unit and
after signal conditioning is completed, all output is forwarded to
the computer system.
|
●
|
Interpretation Theatre -
once returned to our home base, the
SFD
®
data collected is processed and converted into a format that can be
used by our interpretation staff using systems consisting of
generally off-the-shelf computer equipment, high definition
monitors, projectors and screens. This equipment is generally
permanently set up at our Calgary office facility. A remote
SFD
®
data interpretation theater is available and may be deployed during
survey operations and would be set up in a facility at the survey
client’s city.
|
We are
not affected by any significant environmental concerns, nor is
there any planned significant capital additions
contemplated.
ITEM
4A.
UNRESOLVED
STAFF COMMENTS
None.
ITEM
5.
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of
operations should be read in conjunction with the “Selected
Financial Data” and the accompanying Consolidated Financial
Statements and the notes to those statements incorporated by
reference elsewhere in this Form 20-F. The following discussion
contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially
from those discussed in these forward-looking statements. Factors
that could cause or contribute to such differences include, but are
not limited to, those discussed below and elsewhere in this annual
report, particularly under the caption “Risk
Factors”.
Overall
Operational Performance
Selected Annual Information
|
For the year ended December 31
|
|
|
|
|
|
|
|
|
Survey
revenue
|
$
-
|
$
-
|
$
1,447,269
|
Net
comprehensive income (loss)
|
(6,968,511
)
|
(8,970,398
)
|
(9,099,562
)
|
Net
income (loss) per common share - basic
|
(0.11
)
|
$
(0.16
)
|
$
(0.17
)
|
Net
income (loss) per common share - diluted
|
(0.11
)
|
$
(0.16
)
|
$
(0.17
)
|
Net
cash generated by (used in) operating activities
|
(6,043,919
)
|
(5,464,679
)
|
(7,587,614
)
|
Cash
and short term investments
|
4,239,532
|
1,116,618
|
1,943,587
|
Total
assets
|
25,264,268
|
23,920,991
|
28,689,166
|
Long
term liabilities
|
510,661
|
741,408
|
264,775
|
Summary
financial highlights for the last three fiscal years are as
follows:
Financial Highlights for 2018
●
Following the
Company’s participation at the Upstream West Africa Summit in
Senegal in Q2, NXT management traveled twice to Africa to meet with
representatives of the Nigerian National Petroleum Corporation
(“NNPC”) and the Ghana National Petroleum Corporation
(“GNPC”) to discuss the benefits
SFD
®
would
bring to their current exploration programs.
●
Discussions with
NNPC continued in the fourth quarter of 2018 and have resulted in
the signing of a contract in March 2019 with PE Energy Limited, a
Nigerian oil and gas service company, for the value of
approximately $US8.9 million. Details of the contract are provided
below.
●
In February 2019,
NXT entered into a Co-operative Agreement with Alberta Green
Ventures (“AGV”), for AGV to propose up to three
SFD
®
Surveys
within two years. The Co-operative Agreement is based on a cost
plus formula and a gross overriding royalty interest in oil and gas
production arising on lands subject to the surveys. AGV now holds
approximately 20.0% of the Company's 68,573,558 outstanding common
shares including common shares issuable through the exercise of its
warrants.
●
NXT has entered
into a three year exclusive sales representative agreement with
AGV, in nine jurisdictions in the Middle East and Latin America.
This includes an at-market subscription right to purchase treasury
shares of NXT in a dollar amount equal to 25% of the contracts
introduced by AGV to NXT in the first year of the Agreement,
subject to approval from the TSX.
●
NXT received
notification of the granting of NXT's SFD
®
patent in
China on April 13, 2018.
●
In September 2018,
NXT received a United States patent for its new sensor design we
term the “Cascade” configuration.
o
The Cascade sensor
is the result of NXT’s continued research & development
efforts and builds upon our existing US patent. Management believes
the Company’s Cascade sensors will provide enhanced ability
for identifying trapped fluid bodies indicative of potential
hydrocarbon accumulations along with improved reliability and
flexibility during SFD
®
survey
operations.
●
In October 2018, we signed an MOU with BGP Inc., a
subsidiary of China National Petroleum Corporation, to further
explore opportunities for NXT and PGP Inc. to work together.
NXT’s forward strategy is to secure
SFD
®
contracts with BGP and its
affiliates.
●
The MOU entered
into between Generation Resource Discoveries (“GRD”),
NXT’s regional representative, and the Government of Aceh,
Indonesia on February 22, 2018, GRD has expired.
●
As mentioned in the
third quarter, as a result of recent political changes in the
government of Sri Lanka, our contract negotiations have been put on
hold. We will assess when discussions can be renewed.
●
NXT completed a
Private Placement financing on July 3, 2018 of $9,484,810 through
the issuance of an aggregate of 10,264,946 units at $0.924 per unit
(the "Private Placement"). Each unit consists of one common share
and one-third of one common share purchase warrant (each whole
warrant, a "Warrant"), and each Warrant entitles the holder to
acquire one common share at an exercise price of $1.20 for twelve
(12) months from closing of the first tranche of the Private
Placement on February 16, 2018. As the result of the Co-operation
Agreement between AGV and NXT, the Company has received conditional
approval from the Toronto Stock Exchange to extend the Warrants for
12 months until February 16, 2020, subject to disinterested
shareholder approval.
●
No survey revenues
were recorded in 2018.
●
A net loss of $1.39
million was recorded for Q4-18, including amortization expense of
$0.45 million and stock-based compensation expense recovery in Q4
of $(0.17) million.
●
A net loss of $6.97
million was recorded for 2018 YTD, including amortization expense
of $1.79 million and stock-based compensation expense of $0.39
million.
●
Operating
activities used $1.16 million of cash during Q4-18 and net cash
used for financing activities was $0.01 million.
●
Losses per common
share were $0.02
for
Q4-18 and $0.11 for 2018 YTD (basic and diluted).
●
Operating
activities used $6.04 million as at 2018 YTD and net cash from
financing activities was $9.18 million.
●
General and
administrative costs for 2018 YTD as compared to 2017 YTD have been
reduced by $0.96 million or 19% mostly due to a reduction in
headcount, public company costs and partially offset by increased
business development activity.
●
Cash and short-term
investments at the end of the Q4-18 were $4.24
million.
Financial Highlights for 2017
●
No
survey revenues were recorded for 2017.
●
NXT completed its
first ever SFD
®
Multi-Client
survey in the Gulf of Mexico.
o
Acquired
37,596 line km of SFD
®
data in June
2017 for the shallow water Bid Round 2.1 covering the
Tampicao-Misantla, Veracruz and Cuencas del Sureste exploration
areas. The SFD
®
survey data
provides 100% grid coverage over the offshore blocks, an area of
approximately 8,900 km2. In addition, NXT acquired incidental data
over many of the 35 blocks offered in the recently concluded Bid
Round 3.1 and believe the remaining data will also be applicable to
future bid rounds.
●
Successfully
tested the upgraded SFD
®
Data
Acquisition System during the Gulf of Mexico survey.
●
Significantly
expanded protection of IP through multiple patent grants
globally.
o
SFD
®
patents granted in Russia (January
2017), Japan (July 2017), Mexico (July 2017), Canada (August 2017)
and the United States (November 2017); and notices of allowance
received from China (February 2018).
●
A
net loss of $8,970,398 for the year including amortization expense
of $1,897,576.
●
Operating activities used $5,464,679 of cash
during the year and net cash utilization was
$323,878
.
●
Losses per common share were
$0.16
(basic and diluted).
●
Significant
progress made in 2017 and the first quarter of 2018 to reduce
corporate costs and execute on financing options significantly
strengthening the Company’s liquidity and working capital
position.
o
$2.7
million sale and leaseback arrangement on our airplane completed in
April 2017.
o
Rights offering completed on November
3
rd
for gross proceeds of
$2,093,645.
o
On
February 16, 2018 announced a three-tranche Private Placement of
10,905,212 Units at a price of $0.924 per Unit for total gross
proceeds of approximately $10,076,416.
o
Cash and short-term
investments at the end of 2017 were
$1,116,618.
Financial Highlights for 2016
●
While conducting
operations in Bolivia during the summer of 2015, NXT acquired
additional proprietary SFD
®
data flight
lines requested by YPFB Andina and minor additional SFD
®
data for YPFB
Chaco. Additional YPFB Chaco data resulted in a total revenue
amount of $1.45m CAD recognized in 2016. At present, we are
uncertain as to the timing of the YPFB Andina data sale and receipt
of the associated funds.
●
Survey costs were
$1,157,185, we experienced a net loss of $9,099,562 for 2016,
compared to net income of $10,540,228 in 2015.
●
Cash flow from
operating activities was $(7,587,614) for 2016, compared to
$6,984,922 for 2015.
●
Capital
expenditures in 2016 resulted in net cash use of $89,702 which is
primarily associated with the purchase of computer hardware and
software.
●
We had cash and
short-term investments of $1,943,587 at the end of
2016.
Net Income (Loss)
|
|
|
|
|
|
|
|
Survey
revenue
|
$
-
|
$
-
|
1,447,269
|
Expenses
|
|
|
|
Survey
costs
|
1,103,946
|
1,289,429
|
1,157,185
|
General
and administrative
|
3,999,089
|
4,960,961
|
5,645,459
|
Stock
based compensation expense
|
386,154
|
581,356
|
790,500
|
Amortization
expense
|
1,790,267
|
1,897,576
|
2,104,864
|
|
7,279,456
|
8,729,322
|
9,698,008
|
Other
expense (income), net
|
(310,945
)
|
165,531
|
474,312
|
Income
(loss) before income taxes
|
(6,968,511
)
|
(8,894,853
)
|
(8,725,051
)
|
Income
tax expense (recovery)
|
|
|
|
Current
|
-
|
75,545
|
374,511
|
Deferred
|
-
|
-
|
-
|
|
-
|
75,545
|
374,511
|
Net
income (loss) for the year
|
(6,968,511
)
|
(8,970,398
)
|
(9,099,562
)
|
Expenses for the years ended December 31, 2018, 2017 and
2016
Survey costs
– These costs depend on the number of
survey projects conducted and completed in each fiscal year. We
recognize revenue earned on SFD
®
survey
contracts (net of any related foreign sales taxes) over time by
measuring the progress toward complete satisfaction of its
performance obligations to the customer. This method of revenue
recognition is currently deemed appropriate given the complex
nature of the end product that is delivered to the client. While
the quantity of data acquisition can be measured based on actual
line kilometers flown, the acquired SFD
®
data does not
realize its full value until it is processed, interpreted in detail
and a recommendations report is generated and reviewed with the
client's geological and geophysical staff. Survey costs only
represent the direct costs that were incurred during operations of
this survey and exclude any indirect costs associated with the use
of the technology. Survey costs may also periodically include
expenses related to some R&D and equipment test flights (as was
the case in 2016 and 2014) as well as aircraft maintenance charges,
which are not necessarily directly related to projects undertaken.
The aircraft is available for charter to third parties through our
aircraft manager when it is not being used by NXT. Any charter fees
received are used to offset aircraft costs.
In
comparing 2018 with 2017, costs for aircraft operations are higher
because of the Phase 5 major maintenance performed on the aircraft.
This was offset by increased charter hours for all of 2018 which
offset operating costs. Aircraft lease costs in 2018 are $202,085
higher than 2017 as the lease payments started in May 2017, which
resulted in 4 months less of lease costs in 2017. Correspondingly,
amortization costs are lower in 2018.
For
most of 2017, the survey costs related entirely to the aircraft
lease and maintenance costs, net of charter hire revenue. During Q2
2017, NXT completed its first ever SFD
®
Multi-Client
survey in the Gulf of Mexico. There have been no sales for the
SFD
®
data that was recorded and therefore the direct costs of the survey
have been expensed. Survey costs only represent the direct costs
that were incurred during operations of this survey and exclude any
indirect costs associated with the use of the
technology.
Survey
expenses in 2016 include the net costs related to maintaining our
survey aircraft, which was acquired in December 2015. The aircraft
is available for charter to third parties through our aircraft
manager when it is not being used by NXT.
General and administrative (“G&A”) expense
-
G&A is a major component of NXT's total expenses. All salaries
and overhead costs related to SFD
®
data
interpretation staff (other than out of country per diem
allowances) are included in G&A, and not included with direct
survey expenses. The categories included in G&A expense are as
follows:
For the year ended
December 31
|
|
|
|
Salaries,
benefits and consulting charges
|
$
2,046,886
|
$
2,709,194
|
$
3,192,304
|
Board,
professional fees, and public company costs
|
781,330
|
873,864
|
908,086
|
Indirect
financing costs
|
-
|
35,865
|
-
|
Premises
and administrative overhead
|
753,380
|
842,994
|
886,795
|
Business
development
|
382,146
|
257,465
|
589,300
|
Bolivia/Colombia
overhead
|
35,347
|
241,579
|
68,973
|
Total
G&A
|
3,999,089
|
4,960,961
|
5,645,459
|
G&A
expenses decreased by 19% or $961,872 in 2018:
●
The main reason for
salaries, benefits and consulting charges being lower in 2018 than
2017 is due to a reduction in corporate headcount. In addition,
focus was put on reducing vacation liabilities.
●
Board, professional
fees and public company costs, were 14% lower in 2018 compared to
2017 as the Advisory Board was indefinitely suspended and there was
one less Director on the Board of Directors. Also, professional
fees were higher in 2017 as there were two significant
transactions, the Rights Offering and the Sale Leaseback
transaction which required significant legal assistance. In 2018,
the significant transaction was the Private Placement.
●
Premises and administrative overhead was 11% lower
in
2018
compared to the prior
year, mostly due to lower property taxes and lower maintenance
costs early in the year. In addition, there was significant cost
reduction efforts in office overhead costs like supplies and
subscriptions.
●
Business development costs increased $124,681 as
the Company increased marketing efforts for the
SFD
®
technology
during
2018.
●
2018
YTD Bolivian overhead costs of $35,347 are related to closing of
the branch.
Total
G&A for 2017 was 5.0 million which was 0.7 million lower than
2016. G&A within the six individual expense categories noted
above reflect several factors:
●
2017 salaries,
benefits and consulting charges are lower than 2016 levels due to
lower staffing levels.
●
For
2017 the full year costs were slightly down due to 2 less board
members and other cost controls.
●
Indirect
financing costs in 2017 were higher due to work focused on
obtaining new financing and negotiating the aircraft
leaseback.
●
Premises
and administrative overhead where lower in 2017 versus the 2016 due
to cost reduction and deferred spending efforts.
●
Business
development costs were lower for the year as marketing costs were
reduced.
●
Before 2017, Bolivian overhead costs were
classified as consolidated survey costs as the sole purpose of the
office opening was to administer the YPFB survey. At the beginning
of Q1 2017, Bolivian overhead costs were presented as G&A to
reflect the fact the office has been maintained to facilitate
periodic operating activities in Bolivia that are anticipated from
time to time.
In Q2 2017, a previously held “fiscal
tax credit” of $127,798 was expensed as the recoverability of
this receivable was no longer considered certain. The credit
related to the Bolivian equivalent of input sales tax and is
usually offset against output sales tax. It is not refundable if
input tax exceeds output tax.
Stock-Based Compensation Expense (“SBCE”)
-
This
expense varies in any given quarter or year as it is a function of
several factors including the number of stock options issued in the
period and the period of amortization (based on the term of the
contract and/or number of years for full vesting of the options,
which is normally three years) of the resultant expense. Also, SBCE
is a function of periodic changes in the inputs used in the
Black-Scholes option valuation model, such as volatility in NXT's
trailing share price.
SBCE
was lower in 2018 as significant unvested options were forfeited
and almost all remaining options were fully vested early
2018.
There
was a lower average number of options outstanding at the end of
2017 (total of 1,648,667 as compared to 3,321,001 at the end of
2016).
Amortization expense
– consists of the following
amounts:
|
|
|
|
Amortization
of:
|
|
|
|
Property
and equipment
|
$
105,534
|
$
212,841
|
$
420,131
|
Intellectual
property
|
1,684,733
|
1,684,735
|
1,684,733
|
|
1,790,267
|
1,897,576
|
2,104,864
|
Most of
our capital investment in property and equipment is in computer
hardware, which is amortized on a 30% declining balance basis, such
that amortization is high in the initial year of capital
investment. Since 2016, annual capital spending has been minimal,
resulting in declining levels of amortization expense.
Capital
expenditure in 2018 was $10,006 and this related mainly to a new
data acquisition system and other IT upgrades. The aircraft was
sold in April 2017 in the sales leaseback transaction and therefore
amortization expense of equipment is lower for 2017.
Amortization
expense for 2017 also relates to intellectual property, which was
acquired by NXT upon the August 31, 2015 conversion (the
“Conversion”) of the final 8 million NXT preferred
shares.
The
Conversion gave rise to the application of “fair-value”
accounting in Q3-15, whereby the 8 million common shares issued
were assigned an estimated fair-value of $18.5 million. An
intellectual property (“IP”) asset related to the
technology acquired was recognized at approximately $25.3 million,
which included a tax effect gross-up of $6.8 million (as the IP
acquired has no corresponding deferred tax pool deduction for
ongoing Canadian current income tax purposes).
The IP
assets December 31, 2018 net book value of $19.7 million is
amortized on a straight line basis over a 15-year period and will
also be subject to ongoing tests of potential impairment of the
recorded net book value.
Other Expense (Income)
|
|
|
|
Interest expense
(income), net
|
$
(62,004
)
|
$
4,485
|
$
(17,254
)
|
Foreign exchange
(gain) loss
|
(19,852
)
|
69,676
|
272,713
|
Intellectual
property, R&D and ARO
|
(43,428
)
|
91,370
|
218,853
|
Gain on
extinguishment of liability
|
(185,661
)
|
-
|
-
|
|
(310,945
)
|
165,531
|
474,312
|
Interest expense (income)
- Interest income, generated by
short term investments, is offset by interest expense incurred on
such items as capital lease obligations for leasehold improvements
and varies by year based on the level of cash available for
investment. For 2018 net interest income was $62,004 and for 2017
net interest expense was $4,485. Proceeds from the Private
Placement were placed in short-term investments when they were
received and therefore interest income increased versus the prior
periods. Short-term investments were minimal in and 2017. Interest
expense as at the end of 2017 was $4,485 as compared to interest
income in 2016.
Foreign exchange
(gain) loss
– this total
is caused by changes in the relative exchange values of the US$ and
CDN$. For example, when the CDN$ trades higher relative to the US$,
cash held in US$ and monetary assets denominated in US$ will
decline in value. This decline will be reflected as a foreign
exchange loss in the period. NXT normally holds its cash and
short-term investments in CDN$ to reduce the effect of market
volatility. The security deposit for the aircraft is held in US$,
which has a significant effect on the unrealized foreign exchange
gain and loss each quarter.
The
foreign exchange (gain) loss for the periods was primarily caused
by the translation of assets and liabilities in the Canadian
Company which were held in US$.
Intellectual property, R&D and ARO
– this total
includes costs incurred for the following:
|
|
|
|
Intellectual
property, R&D and ARO
|
$
(43,428
)
|
$
86,604
|
$
60,143
|
TSX
Listing
|
-
|
-
|
147,099
|
Other,
net
|
-
|
4,766
|
11,611
|
|
(43,428
)
|
91,370
|
218,853
|
This
category includes primarily costs related to intellectual property
("IP") filings and R&D activity related to the SFD
®
technology and
costs for certain non-recurring, "project" activities.
For
2018, the Company's Intellectual property and R&D expenses were
negative as it incurred less costs from a provider of services than
originally estimated. The Company also updated estimates for
several asset retirement obligations related to minor non-operated
interests in oil and natural gas wells in which NXT has outstanding
abandonment and reclamation obligations in accordance with
government regulations were significantly reduced in
Q4-18.
Gain on Extinguishment of Liability -
In 2018 YTD, the
Company determined that liabilities it had recorded before 2005
were no longer payable. As a result, a gain of $185,661 was
recorded in other income on the extinguishment of the liability. No
cash was paid to settle the liability. For 2017 YTD, other expenses
consisted primarily of costs incurred to secure a patent for
SFD
®
in the United States and to continue to develop SFD
®
technology.
For
2017, Intellectual property and R&D costs consisted primarily
of costs incurred to secure a patent for SFD
®
in the United
States and to continue to develop SFD
®
technology.
In
March 2016, NXT graduated from the TSX Venture Exchange to the main
TSX Exchange. There were certain costs incurred associated with
this move which totaled $147,099.
Other
expenses includes primarily discretionary costs related to
intellectual property / patent filings and R&D activity related
to the SFD
®
technology.
We currently have no other outstanding derivative financial
instruments, such as foreign currency hedges.
Income tax expense
- NXT periodically earns revenues while
operating outside of Canada as a non-resident within certain
foreign jurisdictions and services rendered to clients in such
countries may be subject to foreign withholding taxes, which are
only recoverable in certain limited circumstances. Income tax
expense for 2017 is a result of withholding taxes that were
incurred on charges related to the Bolivia survey project. There
was no income tax expense in Canada or Bolivia during
2018.
In
2017, NXT expensed foreign withholding tax of $75,545 (2016 -
$159,990) which was incurred in connection with the Bolivia survey
project.
A total
net income tax was recognized as follows:
|
|
|
|
Foreign
with-holding taxes incurred
|
$
-
|
$
75,545
|
$
159,990
|
|
-
|
75,545
|
159,990
|
Foreign
corporate taxes incurred
|
-
|
-
|
446,925
|
Less
portion accrued at Dec 2015
|
-
|
-
|
(232,404
)
|
Corporate
income tax expense – foreign
|
-
|
75,545
|
214,521
|
|
-
|
75,545
|
374,511
|
Deferred
tax recovery
|
-
|
-
|
-
|
Net
tax expense (recovery)
|
-
|
75,545
|
374,511
|
At the
end of 2018, NXT has available for future Canadian income tax
deduction purposes significant unrecorded deferred income tax
assets, the benefit of which has not been recorded in the
Company’s financial statements due to uncertainty regarding
the amount and timing of their potential future utilization. These
deferred income tax assets include non-capital losses
carried-forward (expiring in 2027 to 2039) and other resource
deductions totaling approximately $44.5 million.
Summary of Quarterly Results (Unaudited)
A
summary of operating results for each of the trailing 8 quarters
(including a comparison to each respective prior quarter) follows.
The extent of the profit or loss each quarter is mainly due to the
timing and the number of survey contracts that are underway, and
variances in such non-cash items as SBCE, which can occasionally be
a significant expense in any given quarter
|
|
|
|
|
|
|
|
|
|
Survey
revenue
|
$
-
|
$
-
|
$
-
|
$
-
|
Net income
(loss)
|
(1,392,716
)
|
(1,660,031
)
|
(1,961,114
)
|
(1,954,650
)
|
Income (loss) per
share - basic
|
(0.02
)
|
(0.02
)
|
(0.03
)
|
(0.03
)
|
Income (loss) per
share - diluted
|
(0.02
)
|
(0.02
)
|
(0.03
)
|
(0.03
)
|
|
|
|
|
|
|
|
|
|
|
Survey
revenue
|
$
-
|
$
-
|
$
-
|
$
-
|
Net income
(loss)
|
(2,096,360
)
|
(1,935,356
)
|
(2,723,956
)
|
(2,214,726
)
|
Income (loss) per
share - basic
|
(0.04
)
|
(0.04
)
|
(0.05
)
|
(0.04
)
|
Income (loss) per
share - diluted
|
(0.04
)
|
(0.04
)
|
(0.05
)
|
(0.04
)
|
Significant or Unusual Items Impacting Net Loss:
There
have been no revenues in the last eight quarters. The extent of the
net loss in each quarter is mainly due to survey costs (related to
aircraft lease and aircraft maintenance costs), G&A costs and
non-cash items like stock-based compensation expense ("SBCE"). All
of these costs can be a significant expense in any given quarter.
In addition, net loss was affected by the following:
●
In Q4-18, SBCE was
lower by $283,811 as unvested options were forfeited. In addition,
G&A costs decreased $156,271 for two reasons. Firstly, business
development decreased as most of the business development work was
centred in Calgary supporting Nigerian SFD
®
survey
negotiations. Secondly, there was a decrease in public company
costs as the previous quarter had significant costs related to the
Private Placement. Offsetting this was an increase of $44,010 in
survey expenses as NXT’s aircraft incurred a scheduled major
maintenance in December 2018.
●
In Q3-18, a gain of
$185,661 has been recognized on the extinguishment of a liability
that was recorded before 2005 which is no longer payable. Also,
interest income of $26,171 was earned on cash received from the
Private Placement.
●
In Q1-18, G&A
costs were lower as NXT began to recognize the full extent of cost
reductions started in the prior quarter.
●
In Q4-17, G&A
costs were higher due to severance and other costs incurred to
implement cost reduction plans.
●
In Q2-17, all
costs related to an
SFD
®
multi-client survey conducted in the Gulf of Mexico were
expensed.
B.
Liquidity
and capital resources.
NXT's
cash and cash equivalents plus short-term investments at December
31, 2018 was $4,239,532.
In
order for NXT to continue to operate on a going concern basis, NXT
must generate sufficient cash from successfully signing contracts
and receiving advance payments
.
NXT's longer-term success remains
dependent upon our ability to continue to attract new client
projects and expand the revenue base to a level sufficient to
exceed G&A expenses and generate excess net cash flow from
operations
. Proceeds from past equity
financings have been and the proceeds from the Private Placement
are expected to be used to provide NXT with funds to pursue, close
and implement commercial transactions currently in negotiation,
develop additional revenue streams including multi-client data
sales, strategic partnerships, for general corporate and working
capital purposes.
Going Concern:
The
events described in the following paragraphs highlight that there
is substantial doubt about NXT’s ability to continue as a
going concern within one year after the date that these financial
statements have been issued.
As a
result of the extended duration between revenue bearing contracts,
NXT’s balance of current assets less current liabilities has
been declining since the closing of the first tranche of the
Private Placement on February 2018. As a result, the
Company’s current and forecasted cash position is not
expected to be sufficient to meet its obligations for the 12-month
period beyond the date that these financial statements have been
issued.
While
near term survey prospects are expected to translate into revenue
bearing contacts and provide positive contribution to the liquidity
position, there are no certainties that several of these prospects
will convert into executed contracts prior to the full depletion of
the Company’s cash resources. As discussed below, in
February 2019, the Company signed a Co-operation agreement for
which it will receive a non-refundable deposit of $200,000 United
States Dollars. In March 2019, NXT signed a SFD
®
Survey contract
for the approximate revenue value of $8,900,000 United States
dollars. Advance payments totaling $300,000 United States Dollars
for mobilization and demobilization costs have been received in
March of 2019 and an additional $1,000,000 United States Dollars is
to be received upon successful completion of a pilot survey. The
Company has also taken further steps to reduce costs which include
evaluating alternatives to reduce aircraft costs and office costs.
In addition, the Advisory Board has been suspended indefinitely and
staffing costs are being reduced with new human resource policies.
If required, further financing options that may be available to the
Company include issuance of new equity, debentures or bank credit
facilities. The need and availability of any of these options
will be dependent on the timing of securing further new contracts
and obtaining financing terms that are acceptable to both the
Company and the financier.
NXT
continues to develop its pipeline of opportunities to secure new
revenue contracts. However, the Company’s longer-term success
remains dependent upon its ability to convert these opportunities
into successful contracts and to continue to attract new client
projects and expand the revenue base to a level sufficient to
exceed fixed operating costs and generate positive cash flow from
operations. The occurrence and timing of these events cannot
be predicted with certainty.
Risks
related to having sufficient ongoing working capital to execute
survey project contracts are mitigated through our normal practice
of obtaining progress payments from prospective clients throughout
the course of the projects, which often span three to four months.
In addition, where possible, risk of default on client billings has
been mitigated through the use of export insurance programs offered
by Export Development Canada.
During
2018, NXT continued to make progress in strengthening its liquidity
and working capital position through a series of corporate actions
described below.
Reduction in corporate costs:
Following the completion of
the Leaseback Transaction, NXT took further steps to reduce
corporate costs. The most significant of these steps included a
reduction in non-essential staff
and new Human Resource policies to
reduce staffing costs.
Please see the
discussion under "
General and
administrative (“G&A”) expense
" for the
results of these reductions.
Private Placement:
NXT completed a Private Placement
financing on July 3, 2018 of $9,484,810 through the issuance of an
aggregate of 10,264,946 units at $0.924 per unit. Each unit
consists of one common share and one-third of one common share
purchase warrant (each whole warrant, a "Warrant") and each Warrant
entitles the holder to acquire one common share at an exercise
price of $1.20 for twelve (12) months from closing of the first
tranche of the Private Placement on February 16, 2018. As the
result of the Co-operation Agreement between AGV and NXT, the
Company has received conditional approval from the Toronto Stock
Exchange to extend the Warrants for 12 months until February 16,
2020, subject to disinterested shareholder approval.
Nigerian SFD
®
Survey:
With the signing of the Nigerian project with PE Energy including
the receipt of $0.3 million US$ mobilization/demobilization fee,
the expected receipt of the $1,000,000 advance payment after the
completion of the pilot survey and maintaining current staffing and
spending levels, NXT estimates it will have sufficient funds to
meet its ongoing obligations for a period of approximately 5 months
from the date of this MD&A. If as expected NXT receives timely
receipt of milestone payments from the Nigerian SFD
®
survey, NXT
estimates it will have sufficient funds to meet its ongoing
obligations for an additional 19 months. After this period NXT will
require additional funds in order to continue to seek revenue
contracts, pay salaries, suppliers and to maintain its aircraft
obligations.
This
discussion includes references to the term “net working
capital”, which do not have a standardized meaning prescribed
by U.S. GAAP and may not be comparable to similar measures
presented by other entities. NXT management uses this
non-GAAP measure to improve our ability to assess liquidity at
a point in time. Net working capital is defined as total
current assets less total current liabilities, excluding amounts
accumulated in work in progress and deferred revenue.
Management excludes these amounts from the calculation as they do
not represent future cash inflows or outflows to the
Company.
NXT has
minimal secured debt and had total “net working
capital” of $3.8 million as at December 2018 as
follows:
|
|
|
|
|
|
|
|
Current
assets (current liabilities):
|
|
|
|
Cash
and cash equivalents
|
$
339,532
|
$
166,618
|
$
172,914
|
Short-term
investments
|
3,900,000
|
950,000
|
2,950,000
|
|
4,239,532
|
1,116,618
|
3,122,914
|
Accounts
receivable
|
61,279
|
60,027
|
1,252
|
Prepaid
expenses and deposits
|
65,159
|
107,363
|
(42,204
)
|
Accounts
payable and accrued liabilities
|
(499,535
)
|
(1,562,394
)
|
1,062,859
|
Income
taxes payable
|
-
|
(201
)
|
201
|
Current
portion of capital lease obligation
|
(42,603
)
|
(39,579
)
|
(3,024
)
|
Net
Working Capital
|
3,823,832
|
(318,166
)
|
4,141,998
|
The
increase in working capital was due to the cash provided by the
Private Placement, net of cash operating costs during 2018. In
addition, liabilities are lower as the Company paid outstanding
liabilities with funds received from the Private
Placement.
Sources and uses of cash
The
following table, and the narrative below, summarizes NXT’s
net cash flows, and the total cash plus short-term investments held
at the end of the periods, for the last three fiscal
years:
For the year
ended December 31
|
|
|
|
Cash
provided by (used in):
|
|
|
|
Operating
activities
|
$
(6,043,919
)
|
$
(5,464,679
)
|
$
(7,587,614
)
|
Financing
activities
|
9,176,839
|
2,022,943
|
464,811
|
Investing
activities
|
(2,960,006
)
|
3,117,858
|
527,496
|
Net
cash inflow (outflow)
|
172,914
|
(323,878
)
|
(6,595,307
)
|
Cash
& cash equivalents, start of the year
|
166,618
|
490,496
|
7,085,803
|
Cash
& cash equivalents, end of the year
|
339,532
|
166,618
|
490,496
|
|
|
|
|
Cash
& cash equivalents
|
339,532
|
166,618
|
490,496
|
Short-term
investments
|
3,900,000
|
950,000
|
1,453,091
|
Total
|
4,239,532
|
1,116,618
|
1,943,587
|
Operating Activities
Net
cash flow from operating activities listed above is a function of
net income (loss) for the year, an add back of the net non-cash
revenue and expense items (such as SBCE, amortization expense,
deferred tax expense / (recovery) and the net change in year-end
working capital items (for example, a net decrease in working
capital in the year gives rise to a source of cash), with these
components each year as follows:
For the year
ended December 31
|
|
|
|
Comprehensive
income (loss) for the year
|
$
(6,968,511
)
|
$
(8,970,398
)
|
$
(9,099,562
)
|
Add
back net non-cash expense and income items
|
1,782,762
|
2,676,705
|
2,896,447
|
|
(5,185,749
)
|
(6,293,693
)
|
(6,196,585
)
|
Change
in non-cash working capital balances
|
(858,170
)
|
829,014
|
(1,384,499
)
|
Total
cash provided by (used in) in operations
|
(6,043,919
)
|
(5,464,679
)
|
(7,587,614
)
|
For all periods, changes in operating cash flow was driven by the
lack of revenue and incurred operating costs for the period.
When comparing 2018 to 2017 cost reduction and cash deferral
efforts reduced the operating cash by $1,107,944 but payments of
deferred liabilities decreased non-cash working capital by
$1,687,184 resulting in a total change of $579,240 (decrease) in
operating cash flow.
Financing Activities
2018
– During 2018 NXT recorded a net inflow of
$9,176,839 as a result of proceeds received from the closing of
tranches in the Private Placement.
2017
- NXT recorded a cash inflow of $2,019,865 in 2017
related mostly from the Rights Offering.
2016
- The only financing activity was related to proceeds
from exercise of NXT stock options. Q4-16 reflects a
$34,159
cash use for repayments of the
capital lease obligation and
$498,970
proceeds from the exercise of NXT
stock options.
Investing Activities
2018
–2018 short term investments increased as a
result of the Private Placement funds.
2017
- The overall net cash source in investing activities
of $3,117,858 for 2017 reflects these components:
●
On April
28
th
, 2017
NXT completed a sale and leaseback transaction on its’ Cessna
Citation aircraft for $3,142,260 (US$2,300,000).
●
A use of $518,765
for deposits on the aircraft and building leases.
●
A source of
$503,091 from a net decrease in cash invested in short-term
investments.
2016
– The overall net cash source in investing
activities of $527,496 for 2016 reflects these
components:
●
A use of $89,702
for net capital additions, which relate primarily to $45,725 for
computer equipment, $16,178 for SFD
®
Equipment
– non computer, $15,141 for computer software, $8,102 for
SFD
®
computer hardware and $4,555 for leaseholds.
●
A source of
$602,387 from a net decrease in cash invested in short-term
investments.
●
A source of $75,000
related to a decrease in restricted cash balance.
●
A use of $60,187
arising from a decrease in non – cash working capital
balances related to investing activities.
C.
Research
and development, patents and licenses, etc.
There
was no separate R&D expense reported in the financial
statements in the years 2018, 2017 and 2016. In these three years,
expenditures related to R&D were included within general and
administrative expense (related to a portion of staff salaries and
overhead) and in other expense (for patent filings and related
costs).
We have
historically conducted a limited number of service contracts each
year, the dollar value and timing of securing and ultimate delivery
of which are subject to numerous external factors. As at April 30,
2019 we are in the first stage of the Nigerian SFD
®
survey.
We are
not aware of any current external trends (such as in commodity
prices, etc.) which could affect our operations for the next fiscal
year. As noted previously, the amount and timing of our annual
revenues can vary widely year to year, as we derive our revenues
from a limited number of service contracts each year and each
individual contract may have a large effect on the aggregate annual
revenues and profits. For example, in 2012, we conducted our first
contract with PEMEX, the National Oil Company of Mexico. This
project was completed in 2012 and was our largest to that time, at
US$5.8 million. In 2015, projects totaling US$13 million were
completed in Bolivia for YPFB.
E.
Off-balance
sheet arrangements.
The
Company has no off-balance sheet arrangements as of the date of
this Form 20-F other than operating leases as described in
Contractual Commitments.
F.
Tabular
disclosure of contractual obligations.
The
following table sets forth our outstanding contractual obligations
as at December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
Capital
(finance) lease obligations
|
85,118
|
42,603
|
42,515
|
-
|
-
|
Operating
lease obligations:
|
|
|
|
|
|
Premises
rent / operating lease
|
3,967,216
|
578,914
|
1,172,715
|
1,181,646
|
1,033,941
|
Aircraft
Lease
|
2,101,550
|
646,631
|
1,293,262
|
161,657
|
-
|
Purchase
obligations
|
-
|
-
|
-
|
-
|
-
|
Other
long term liabilities:
|
|
|
|
|
|
Asset
retirement obligation
|
26,778
|
-
|
26,778
|
-
|
-
|
ITEM
6.
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors
and senior management.
Our
articles of incorporation provide for a minimum of one director and
a maximum of 15 directors comprising our Board of directors. At
present, our Board of directors consists of five
members.
Our
directors are elected by our shareholders at our annual meeting of
shareholders and hold the position either until the next annual
shareholders’ meeting, the date of their resignation or until
a successor is appointed.
The
following sets forth information, including directorships in other
reporting issuers, as of April 30, 2018, for our directors,
executive officers and key employees:
George Liszicasz
Director, Chairman
and Chief
Executive Officer
since January
1996;
President since July 2002
|
Mr.
Liszicasz is the inventor of the SFD
®
Technology and
has been Chairman and Chief Executive Officer since the
Corporation's inception in 1996. Mr. Liszicasz’ primary
responsibilities, as the President and CEO, are to oversee all
operations and to further develop the SFD
®
technology.
He
holds an Electronics Engineer degree from the Landler Jeno
Technitken in Hungary in 1973 and studied general sciences at the
University of British Columbia between 1979 and 1983. Mr. Liszicasz
has extensive R&D body of work with various technologies, and
52 inventions.
|
Charles Selby
Director
since January 2006
|
Mr.
Selby holds a B.Sc. (Hons) in Chemical Engineering, a J.D. degree
and is a registered Professional Engineer in the Province of
Alberta. He previously practiced law for two large Canadian law
firms specializing in securities and corporate finance matters.
Since leaving the practice of law, Mr. Selby was a Vice President
of Pengrowth corporation for almost 20 years. He also has served on
the board and in management of a number of reporting issuers
including Arakis Energy, which had operations in the Sudan, and
other issuers in the oil and natural gas industry.
He is
currently the Chairman and CEO of Montana Exploration Corp.
(formerly AltaCanada Energy Corp.), an oil and gas company listed
on the TSX-V, and is the president of Caledonian Royalty
Corporation, Caledonian Global Corporation and Caledonian Midstream
Corporation, private entities which are involved in oil & gas
production and the midstream business.
Mr.
Selby is the Lead Director of NXT. He is also Chair of
NXT’s Compensation Committee and a member of the Audit,
Disclosure, and Strategic Planning Committees.
Mr.
Selby also served as the Company’s interim CFO from December,
2017 to January, 2018.
|
John Tilson
Director
since February 2015
|
Mr.
Tilson is retired, and after obtaining MBA and CFA designations,
had a distinguished career as an analyst, portfolio manager,
and advisor in the US investment and financial industry with
such firms as Sutro & Company and EF Hutton & Company.
Mr. Tilson joined Roger Engemann and Associates in 1983 when assets
under management were roughly US$160 million. During
his tenure there, the Pasadena Group of Mutual Funds was
started, with Pasadena Capital Corporation formed as the holding
company for the mutual funds and investment management business.
After working as an analyst and portfolio manager, John later
became Executive Vice President & Managing Director of Pasadena
Capital Corporation. Assets under management had grown to over US$5
billion by the time the firm was sold to Phoenix Companies in 1997.
Mr. Tilson later retired in 2005.
From
2006 to 2012 Mr. Tilson was a member of the Board of Trustees,
including three years serving as VP and Chairman of the long-range
planning committee, for Lotusland, a Santa Barbara non-profit
organization established by Madame Ganna Walska.
Mr.
Tilson is the Chair of the Board’s Strategic Planning
Committee, and a member of the Compensation, Governance and Audit
Committees.
|
Thomas E. Valentine
Director since
November 2007
Corporate Secretary
since April 2014
|
Mr.
Valentine is a Partner with Norton Rose Fulbright Canada LLP, where
he has practiced law, both as a Barrister and a Solicitor, since
his call to the Bar in 1987. He is a member of the firm’s
Energy and Infrastructure Practice Group and is involved in energy
and energy related matters throughout the Middle East, North
Africa, the CIS, Asia and South America.
Mr.
Valentine is a member of the Board of Directors of Touchstone
Exploration Inc., and formerly was a director of two other Canadian
public companies, Calvalley Petroleum Inc. (to May 2015) and Veraz
Petroleum Ltd.
Mr.
Valentine holds a BA from the University of British Columbia, a LLB
from Dalhousie University, and a LL.M. from the London School of
Economics.
Mr.
Valentine is the Chair of the Governance Committee and a member of
the Compensation Committee.
|
Bruce G.
Wilcox
Director since June
2015
|
Mr.
Wilcox has had a long career as an investment company CEO, analyst
and portfolio manager. He spent most of his career with Cumberland
Associates, LLC, a New York equity fund, from 1986 through
retirement in 2010, progressing from analyst / portfolio manager to
partner, and Chairman of the Management Committee. Mr. Wilcox
specialized in Cumberland’s investments in the energy
industry (E&P and service companies), with an emphasis on value
and long-term holdings. During his tenure, the fund’s assets
under management ranged from US$0.7 to $1.5 billion.
From
1984 to 1986, Mr. Wilcox was with Central National-Gottesman, Inc.
as an analyst and portfolio manager on a team responsible for a
$500 million listed equity portfolio.
Mr.
Wilcox is presently CEO of E Street Management, LLC which manages a
long/short equity fund of funds. He is also one of the managing
members of Xiling Fund III, LLC, part of a series of private equity
funds (US$100+ million) which specialize in investing in museum
quality Chinese art and collectibles.
Mr.
Wilcox obtained a BA (Honors), in Modern Chinese from the
University of California, Santa Barbara, and a Master of
International Management from the American Graduate School of
International Management in Phoenix.
Mr.
Wilcox is a member of several Boards, including the Teachers
College of Colombia University (2003 to date, including acting as
the Chair of the Investment Committee), the University of
California Santa Barbara Foundation (2003 to date, including as
former Chair of the Board, Investment and Finance Committees), and
is a Trustee (2001 to date) of the Manhattan Institute For Policy
Research, a leading urban, state, and national policy institution,
which works on matters such as energy policy.
Mr.
Wilcox is the chair of the Board’s Audit Committee and a
member of the Disclosure, Governance and Strategic Planning
Committees.
|
Eugene Woychyshyn
Interim
CFO and Corporate Controller
since
December 2018
|
Mr.
Woychyshyn has been serving as a consultant to NXT since late
November 2017 proving controllership services. He has extensive
international experience in North America, Europe and Asia working
in numerous industries and has previous experience in the CFO role
of a TSX Venture listed company. Mr. Woychyshyn is a Chartered
Professional Accountant who holds a Bachelor of Commerce from the
University of Manitoba and a Masters of Business Administration
from St. Joseph’s University, Philadelphia PA.
Mr.
Woychyshyn is a member of the Disclosure Committee.
|
None of
our executive officers or directors have been involved in any
bankruptcy proceedings within the last five years, been convicted
of or have pending any criminal proceeding, been subject to any
order, judgment or decree enjoining, barring, suspending or
otherwise limiting involvement in any type of business, securities
or banking activity or been found to have violated any federal,
state or provincial securities or commodities laws.
A cease
trade order was issued by the Alberta Securities Commission on May
4, 2018 against Montana Exploration Corp. (“
MEC
”) for failing to file its
annual audited financial statements, annual management’s
discussion and analysis and certification of annual filings within
the required time period. Charles Selby is the Chief Executive
Officer of MEC. The TSX Venture Exchange has announced that upon
revocation of the Cease Trade Order, MEC’s shares will remain
suspended until the company meets TSX Venture Exchange
requirements. Charles Selby was previously a member of the board of
directors of Wellpoint Systems Inc. (“Wellpoint”, a
reporting issuer on the TSX-V), which in 2011 had a Receiver
appointed by the Court of Queen’s Bench of the Province of
Alberta on behalf of the holders of secured debts. Wellpoint was
subsequently wound up following a restructuring and sale of its
operating assets. Charles Selby was previously a member of the
board of directors of Idaho Natural Resources Corp., which was
cease-traded by the TSX Venture Exchange in December 2012 for
failing to meet listing requirements.
Messrs.
Tilson, Valentine, and Wilcox are considered "independent" within
the meaning of Canadian National Instrument 58-101.
Executive Compensation
The
following table sets out certain information regarding the annual
and long-term compensation of the Chief Executive Officer, the
Chief Financial Officer at December 31, 2018, as well as any
additional individuals for whom disclosure would have been provided
pursuant to the above criteria except that the individual was not
serving as an officer of the Company at the end of 2018. All
officers of the Company are based in the Calgary, Canada head
office and are paid in Canadian dollars.
Summary
compensation table for the year ended December 31,
2018:
Name & Principal Position
|
|
|
|
|
|
George Liszicasz, President & CEO
(4)
|
$
274,800
|
$
-
|
$
36,992
|
$
11,602
|
$
323,394
|
Charles Selby, Interim CFO
(5)
|
22,671
|
-
|
-
|
27,500
|
50,171
|
Jakub Brogowski, Chief Financial Officer
(5)
|
206,083
|
623,924
|
10,305
|
-
|
840,312
|
Eugene Woychyshyn, Interim Chief Financial
Officer
(6)
|
28,334
|
48,937
|
-
|
197
|
77,468
|
(1) Mr.
Brogowski’s options were forfeited as of December 30,
2018.
(2)
“vacation” represents a cash payout in the year of a
portion of unused vacation entitlements carried
forward.
(3)
“other” consists of any vehicle allowance paid ($9,000
for Mr. Liszicasz) plus the taxable portion of company paid amounts
for group health benefits and parking. In addition Mr. Selby was
paid $27,500 as a member of the Advisory Board.
(4)
salary and other totals exclude the cash portion of fees earned as
Board Members, $35,000 for Mr. Liszicasz and $30,000 for Mr.
Selby.
(5) Mr.
Jakub Brogowski resigned as CFO on November 30, 2018. Mr. Selby was
the interim CFO from December 1, 2017 until January 31,
2018.
(6) Mr.
Eugene Woychyshyn became the Corporate Controller as of November 1,
2018 and is also the Interim Chief Financial Officer from December
1, 2018 to current. Mr. Woychyshyn was employed by a consulting
company from December 2017 to October 2018; $203,555 was paid to
this consulting company from January 2018 to October 2018 for Mr.
Woychyshyn's services and is not included in the table
above.
|
(See
Item 6.E “Share Ownership” for details regarding stock
options granted to officers).
No
amount is set aside or accrued by the Company or its subsidiaries
to provide pension, retirement or similar benefits to officers or
directors.
Director Compensation
NXT
compensates directors for serving on our Board by paying a
combination of an annual cash retainer as well granting stock
options to purchase NXT common shares. New members who join the
Board receive a separate grant of stock options (with entitlement
to exercise vesting over a 3 year period) in the year of joining
the Board. There were no new Board members in 2018 and no options
were granted to Board members.
In
2018, the directors each individually elected to receive cash as
payment of Board fees earned for the year. The annual cash retainer
was based on $30,000 ($35,000 in the case of each of the Chairman
of the Board and the Audit Committee.) Compensation payable
(including pro-rated amounts for periods of partial service in the
year) for 2018 is summarized as follows:
|
|
George
Liszicasz
|
$
35,000
|
Charles
Selby
|
30,000
|
Bruce
Wilcox
|
35,000
|
Tom
Valentine
|
30,000
|
John
Tilson
|
30,000
|
The
amount and terms of any stock options granted as compensation for
Board member services is determined by the Board. We do not provide
additional compensation for committee participation (other than as
noted previously re the minor additional amount for service as the
Chairman of the Board and of the Audit Committee) or for special
assignments of the Board. (See Item 6.E “Share
ownership” for details regarding stock options granted to
directors.)
During
2018, Mr. Charles Selby was paid $22,671 in respect of his being
the Interim Chief Financial Officer and $27,500 as a member of the
Advisory Board.
The
Company reimburses directors for out-of-pocket expenses for
attending Board and committee meetings. We do not provide
termination benefits for directors.
Expiration Dates
No
director or member of our administrative, or supervisory bodies has
an expiration date for their current term of office. Directors are
elected by shareholders at the annual meeting of shareholders and
hold the position either until the next annual shareholders’
meeting or until a successor is appointed. The period during which
each individual has served as a director is set out in the table
under Item 6.A – “Directors and senior
management”.
Service Contracts
No
directors (other than an employment contract for the CEO, Mr.
Liszicasz) have service contracts with the Company or any of its
subsidiaries that provide benefits upon termination of
employment.
Board of Directors Mandate
The
principal role of the Board is stewardship of the Company through
the creation of shareholder value, including the protection and
enhancement of the value of its assets, as the fundamental
objective. The stewardship responsibility means that the Board
oversees the general operation of the business and management,
which is responsible for the day-to-day conduct of the business.
The Board must assess and ensure systems are in place to manage the
risks of the Company’s business with the objective of
preserving the Company’s assets. The Board, through the CEO,
sets the attitude and disposition of the Company towards compliance
with applicable laws, environmental, safety and health policies,
financial practices and reporting. In addition to its primary
accountability to shareholders, the Board is also accountable to
employees, government authorities, other stakeholders and the
public. The Mandate of the Board of directors is posted on the
Company website and may viewed at www.nxtenergy.com or you may
request a copy be mailed to you by writing to our offices at Suite
302, 3320 - 17th Avenue SW Calgary, Alberta, Canada, T3E
0B4.
Board Committees
CORPORATE
GOVERNANCE COMMITTEE
The
Company and the Board recognize the importance of corporate
governance to the effective management of the Company and to its
shareholders. The Company’s approach to significant issues of
corporate governance is designed with a view to ensuring that the
business and affairs of the Company are effectively managed so as
to enhance shareholder value. The Mandate of the Corporate
Governance Committee is posted on the Company website and may be
viewed at www.nxtenergy.com or you may request a copy be mailed to
you by writing to our offices at Suite 302, 3320 - 17th Avenue SW
Calgary, Alberta, Canada, T3E 0B4.
The
Board and management endorse the need to establish forward-looking
governance policies and to continuously evaluate and modify them to
ensure their effectiveness.
Composition of the Corporate Governance Committee
Messrs.
Valentine (Chair), Wilcox and Tilson are the current members of the
Corporate Governance Committee. All members of the Corporate
Governance Committee are independent within the meaning of Canadian
National Instrument 58-101.
Responsibilities of the Corporate Governance Committee
The
Corporate Governance Committee’s duties, as outlined in its
charter, are to deal with the Company’s approach to corporate
governance and the promotion of compliance with industry and
regulatory standards. The committee is responsible for overseeing
and assessing the functioning of the Board and the committees of
the Board and for the development, recommendation to the Board,
implementation and assessment of effective corporate governance
principles and guidelines. The Committee’s responsibilities
also include identifying new candidates for director and
recommending that the Board select qualified director candidates
for election at the next annual meeting of
shareholders.
DISCLOSURE
COMMITTEE
Composition of the Disclosure Committee
The
Disclosure Committee currently consists of Mr. Selby, Mr. Wilcox
(Chair) and Mr. Woychyshyn (the Corporate Controller and Interim
CFO of the Company).
Responsibilities of the
Disclosure
Committee
The
Disclosure Committee duties are to ensure that the Company provides
timely, accurate and balanced disclosure of all material
information about the Company and to provide fair and equal access
to such information. All news releases, including but not limited
to releases of material information, are managed by the Disclosure
Committee. If the information has been determined by the Disclosure
Committee to be material, news releases will be prepared, reviewed
and then disseminated through a news-wire service that provides
simultaneous service to widespread news services and financial
media. Additionally, the Committee is responsible for ensuring
public disclosure through filing these news releases on SEDAR and
EDGAR as well as the Company’s website.
STRATEGIC
PLANNING COMMITTEE
Composition of the Strategic Planning Committee
Messrs.
Tilson (Chair), Wilcox and Selby are the current members of the
Strategic Planning Committee. Messrs. Tilson (Chair) and Wilcox are
independent.
Responsibilities
of the Strategic Planning Committee
The
Strategic Planning Committee's duties are to set out the long-term
goals of the Company and to take an active role in the development
and execution of plans to achieve those goals. The Committee
participates in establishing priority areas of Company business,
assessment of strategic initiatives from Company senior executives
with regard to development and implementation control of the
Company Strategy and business area specific strategies of the
Company. The Committee also makes recommendations regarding the
overall organization and management structure including areas where
management needs to be strengthened, reviewing the organizational
job descriptions, requirements and also procedures for coordination
of organizational management and board resources. The Committee is
actively involved in the Company’s strategic planning process
and reviews all materials relating to the strategic plan with
management. The Board is responsible for reviewing and approving
the strategic plan. At least one board meeting each year is
centered on discussing and considering the strategic plan, which
takes into account the risks and opportunities of the business.
Management must seek the Board’s approval for any transaction
that would have a significant impact on the strategic
plan.
AUDIT
COMMITTEE
Composition of the Audit Committee
The
Audit Committee consists of Messrs. Wilcox (Chair), Selby and
Tilson. Messrs. Wilcox (Chair) and Tilson are independent and each
member is financially literate. The Company’s Audit Committee
Charter is posted on our website and may be viewed at
www.nxtenergy.com or you may request a copy be mailed to you by
writing to our offices at Suite 302, 3320 – 17
th
Avenue SW, Calgary,
Alberta, Canada, T3E 0B4.
Bruce Wilcox
Mr.
Wilcox holds a Master of International Management from the American
Graduate School of International Management, and has extensive
experience in financial statement analysis, through his career
serving as an analyst, fund manager and CEO in the investment
management industry. He has previously served as audit committee
chair of a publicly traded company.
Charles Selby
Mr.
Selby is both a lawyer and Professional Engineer, holding B.Sc.
(Hons) and JD degrees. He previously practiced law for two large
Canadian law firms specializing in securities and corporate finance
matters and remains a member of good standing with the Bar. He has
served on the board and in management of a number of reporting
issuers including Arakis Energy, which had operations in the Sudan,
and other issuers in the oil and natural gas industry. He is
currently the CEO of Montana Exploration Corp. (formerly AltaCanada
Energy Corp.), an oil and gas company listed on the TSX, and is the
president of Caledonian Royalty Corporation and Caledonian Global
Corporation, both private entities.
Mr.
Selby was also formerly the Chairman and CEO of Canadian Star
Energy Limited, and was formerly the Chief Financial Officer of
AltaCanada Energy Corp. He also formerly served as the Vice
President and Corporate Secretary of Pengrowth Corporation, the
administrator of Pengrowth Energy Trust. Mr. Selby has previously
served on the audit committee and as audit chairman of several
reporting issuers.
John Tilson
Mr.
Tilson has both MBA and CFA designations, He previously served as
an analyst, portfolio manager, and advisor in the US
investment and financial industry with such firms as Sutro &
Company and EF Hutton & Company, and Roger Engemann. After
working as an analyst and portfolio manager, Mr. Tilson later
became Executive Vice President & Managing Director of Pasadena
Capital Company.
All
members of the Audit Committee have the educational background and
experience that provides them with the knowledge and ability to
understand accounting policies and related financial reporting and
disclosure issues, in order to fulfill their duties and
responsibilities as an Audit Committee member.
Audit Committee Oversight
-
The Company’s Board has adopted all
recommendations by the Audit Committee with respect to the
nomination and compensation of the external auditor.
Pre-Approval Policies and Procedures
-
The Audit
Committee has adopted a formal policy requiring the pre-approval of
all audit and non-audit related services to be provided by
the
Company’s
principal
auditor prior to the commencement of the engagement, subject to the
following:
●
The Audit Committee
will review annually a list of audit, audit related, recurring tax
and other non-audit services and recommend pre-approval of those
services for the upcoming year. Any additional requests will be
addressed on a case-by-case specific engagement basis;
●
For engagements not
on the pre-approved list, the Audit Committee has delegated to the
Chair of the Committee the authority to pre-approve individual
non-audit service engagements with expected costs of up to $50,000
(annual aggregate total) subject to reporting to the Audit
Committee, at its next scheduled meeting; and
●
For engagements not
on the pre-approved list and with expected costs greater than
$350,000 (annual aggregate total), the entire Audit Committee must
approve this service, generally at its next scheduled
meeting.
COMPENSATION
COMMITTEE
Composition of
the
Compensation
Committee
Messrs.
Selby (Chair), and Tilson and Valentine are members of the
Compensation Committee. Messrs. Tilson and Valentine are
independent. The charter or mandate of the Compensation Committee
is posted on the Company website and may viewed at
www.nxtenergy.com or you may request a copy be mailed to you by
writing to our offices at 302, 3320 – 17
th
Avenue SW, Calgary,
Alberta, Canada, T3E 0B4.
Responsibilities of
the
Compensation
Committee
The
Compensation Committee's duties, as outlined in its charter, are to
deal with the assessment of management and succession to key
positions and compensation within the Company. The Compensation
Committee shall assist the Board in discharging the Board’s
oversight responsibilities relating to the compensation and
retention of key senior management employees, and in particular the
CEO, with the skills and expertise needed to enable the Company to
achieve its goals and strategies at fair and competitive
compensation and appropriate performance incentives. In discharging
its responsibilities, the Compensation Committee will report and
where appropriate, make recommendations to the Board in respect of
the matters identified in the charter.
Fiscal year ended December 31, 2018
As of
the fiscal year ended December 31, 2018, we had a total of 11
employees. NXT has no employees that are members of a labor union.
The following summarizes the number of employees and independent
contractors by main job function as at December 31,
2018
:
Function
|
|
|
|
Senior
management team
|
2
|
-
|
2
|
Finance,
administration and sales
|
3
|
-
|
3
|
Operations
and technical development
|
6
|
-
|
6
|
Total
|
11
|
-
|
11
|
All of
the above noted staff are based in Calgary, Canada. The 6
operations and technical development staff includes one research
scientist holding a Ph.D. and 3 geoscientists. We periodically
engage other technical and administrative contract personnel as
required on a project basis.
Fiscal year ended December 31, 2017
As at
December 31, 2017, we had a staff of 9 and one contractor, all
based in Calgary, as follows:
Function
|
|
|
|
Senior
management team
|
1
|
-
|
1
|
Finance,
administration and sales
|
3
|
1
|
4
|
Operations
and technical development
|
5
|
-
|
5
|
Total
|
9
|
1
|
10
|
All of
the above noted staff are based in Calgary, Canada. The 5
operations and technical development staff includes one research
scientist holding a Ph.D. and 4 geoscientists. We periodically
engage other technical and administrative contract personnel as
required on a project basis.
Information
on the ownership of our common shares is given under Item 7, Major
Shareholders and Related Party Transactions.
Summary of Stock Options, Restricted Share Units and Stock
Appreciation Rights Granted To Executive Officers and
Directors
All
stock options have been granted pursuant to the Stock Option Plan
(the “Plan”) of the Company or predecessor plans with
substantially the same terms. The Plan is approved and ratified by
shareholders every three years at the Company’s annual
general meeting (“AGM”). The Plan, as was re-approved
and ratified at the Company’s AGM held on June 4, 2016.
Pursuant to this Plan, all stock option grants must be approved by
the Board of directors of the Company. Stock options
may be granted to the directors, officers and
employees of NXT and to consultants retained by the Company. The
aggregate number of common shares reserved for issuance under this
Plan, and any other plan of the Corporation, shall not, at the time
of the stock option grant, exceed ten percent of the total number
of issued and outstanding shares (calculated on a non-diluted
basis) unless the Company receives the permission of the stock
exchange or exchanges on which the shares are then listed to exceed
such threshold. No stock option shall be exercisable for a period
exceeding five (5) years from the date the stock option is granted
unless the Company receives the permission of the stock exchange or
exchanges on which the shares are then listed and as specifically
provided by the Board and as permitted under the rules of any stock
exchange or exchanges on which the shares are then listed, and in
any event, no stock option shall be exercisable for a period
exceeding ten (10) years from the date the option is
granted.
Stock options are generally issued with a three year vesting period
wherein entitlement to exercise one third of the options granted
shall vest at the end of each of the first three years following
the grant date. The exercise price for an option grant is set at
the last trade price on the date preceding the grant or some higher
price at the discretion of the Board.
The Restricted Share Unit Plan (the”RSU”) was approved
and ratified by the shareholders at the Company’s annual
meeting on June 21, 2017.
Pursuant to the RSU, all grants
must be approved by the Board of directors of the Company.
RSU’s
may be granted to the
directors, officers and employees of NXT and to consultants
retained by the Company. The aggregate number of common shares
reserved for issuance under this Plan, and any other plan of the
Corporation, shall not, at the time of the RSU grant, exceed ten
percent of the total number of issued and outstanding shares
(calculated on a non-diluted basis).
The RSU’s are issued with a three year vesting where they
shall vest at the end of each of the first three years following
the grant date. The price is determined on the vesting
date.
The
following stock options were granted to NXT’s executive
officers and directors in the three prior fiscal years ended
December 31, 2018, 2017, and 2016 and to date to April 30, 2018. No
RSU’s have been granted to date.
In 2018 and to date in 2019:
●
A total of
1,000,000 stock options with an exercise price of $1.13 per common
share were granted in February 2018 to the new Chief Financial
Officer. These options were forfeited on December 30,
2018.
●
A total of 150,000
stock options with an exercise price of $0.59 per common share were
granted in November 2018 to the new Corporate
Controller.
In 2017
:
●
No options were
granted in 2017.
In 2016:
●
A total of 150,000
stock options with an exercise price of $1.49 per common share were
granted in May 2016 to the new Chief Financial
Officer.
●
A total of 37,500
stock options with an exercise price of $1.48 per common share were
granted in July 2016 to three directors as part of their elected
form of payment of the Board of director fees earned for 2016. All
of these options had immediate vesting at the grant
date.
●
A total of 50,000
stock options with an exercise price of $1.50 per common share were
granted in July 2016 to a directors as part of their Advisory Board
of director fees earned for 2016.
●
A total of 37,500
stock options with an exercise price of $1.45 per common share were
granted in December 2016 to three directors as part of their
elected form of payment of the Board of director fees earned for
2016. All of these options had immediate vesting at the grant
date.
The
following table sets forth information regarding outstanding stock
options which have been granted to our directors and officers as of
April 30, 2019. All options are issued at an exercise price
set at the closing trade price on the
trading date prior to the grant.
Each option entitles the
option holder to acquire one common share of the
Company.
Issued and outstanding stock options held by directors and officers
of the Company
(as of April 30, 2019)
Name and Position
|
|
|
|
|
% of total outstanding options
|
George Liszicasz
|
$
1.39
|
9-Jul-2014
|
9-Jul-2019
|
7,500
|
|
CEO
& Director
|
$
1.35
|
9-Jan-2015
|
9-Jan-2020
|
7,500
|
|
|
|
|
|
15,000
|
1.2
%
|
|
|
|
|
|
|
Eugene Woychyshyn
|
$
0.59
|
01-Nov-2018
|
01-Nov-2023
|
150,000
|
|
Corporate
Controller
& Interim
CFO
|
|
|
|
|
|
|
|
|
|
150,000
|
11.8
%
|
|
|
|
|
|
|
Charles Selby
|
$
1.39
|
9-Jul-2014
|
9-Jul-2019
|
7,500
|
|
Director
|
$
1.35
|
9-Jan-2015
|
9-Jan-2020
|
7,500
|
|
|
$
1.50
|
22-Jul-2016
|
22-Jul-2021
|
50,000
|
|
|
|
|
|
65,000
|
5.1
%
|
|
|
|
|
|
|
John Tilson
|
$
2.10
|
16-Sep-2015
|
16-Sep-2020
|
150,000
|
|
Director
|
$
1.73
|
10-Dec-2015
|
10-Dec-2020
|
25,600
|
|
|
$
1.48
|
14-Jul-2016
|
14-Jul-2021
|
15,000
|
|
|
$
1.45
|
22-Dec-2016
|
22-Dec-2021
|
15,000
|
|
|
|
|
|
205,600
|
16.2
%
|
|
|
|
|
|
|
Thomas Valentine
|
$
1.39
|
9-Jul-2014
|
9-Jul-2019
|
7,500
|
|
Director
|
$
1.35
|
9-Jan-2015
|
9-Jan-2020
|
7,500
|
|
|
$
1.48
|
14-Jul-2016
|
14-Jul-2021
|
7,500
|
|
|
$
1.45
|
21-Dec-2016
|
21-Dec-2021
|
7,500
|
|
|
|
|
|
30,000
|
2.4
%
|
|
|
|
|
|
|
Bruce Wilcox
|
$
2.10
|
16-Sep-2015
|
16-Sep-2020
|
150,000
|
|
Director
|
$
1.73
|
10-Dec-2015
|
10-Dec-2020
|
17,000
|
|
|
$
1.48
|
14-Jul-2016
|
14-Jul-2021
|
15,000
|
|
|
$
1.45
|
22-Dec-2016
|
22-Dec-2021
|
15,000
|
|
|
|
|
|
197,000
|
15.5
%
|
|
|
|
|
|
|
Total number of stock options held by officers and
directors
|
|
662,600
|
52.1
%
|
ITEM
7.
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The
following table sets forth information concerning the beneficial
ownership of our common shares as of April 30, 2019 by persons who
beneficially own 5% or more of the outstanding common shares of
NXT, each person who is a director of NXT, each executive officer
named in this Form 20-F, each individual referenced in Item 6.E
above and all directors and executive officers as a group. For the
purposes of this Form 20-F, a person is considered to be a
“beneficial owner” of common shares in the Company if
that person has, or shares with another person, the power to direct
the vote or disposition of the common shares or to receive the
economic benefit of ownership of the common shares.
A
person is also deemed to be a beneficial owner of a common share if
that person has the right to acquire the share within 60 days by
option or other agreement (whether or not, in the case of a stock
option, the current market price of the underlying common share is
below the stock option exercise price). Therefore, the table below
also reflects, for each such beneficial owner, the number of
options exercisable into common shares within 60 days of April 30,
2019 that are owned by each beneficial owner, but, in determining
the percentage ownership and general voting power of such person,
does not assume the exercise of options or the conversion of
securities owned by any other person.
We
believe that the beneficial owners of common shares listed below,
based on information they furnished, have sole voting and
investment power over the number of shares listed opposite their
names. The percentage of beneficial ownership is based on
68,573,558 common shares issued and outstanding as of April 30,
2019. This total of 68,573,558 excludes all outstanding options and
warrants that are exercisable within 60 days of April 30, 2019
(which is adjusted for each individuals’ % purposes as noted
in footnote 5 below).
Beneficial Ownership of Directors and Officers
(“D&O”)
|
Beneficially Owned as at April 30, 2019
|
Percent of Common Shares
6
|
Directors and Officers:
|
|
|
George Liszicasz
1 &
2
|
15,835,617
|
23.09
%
|
Charles Selby
1
|
473,161
|
*
3
|
John Tilson
1
|
3,017,348
|
4.40
%
|
Thomas E. Valentine
1
|
30,000
|
*
3
|
Bruce Wilcox
1
|
412,253
|
*
3
|
Eugene Woychyshyn
2
|
76,200
|
*
3
|
Total
D & O Common Shares
|
19,844,579
|
28.94
%
|
Major Shareholders (> 5%):
|
|
|
Alberta Green Ventures Limited Partnership
5
|
13,686,592
|
19.96
%
|
Mork Capital Management, LLC., and Michael
Mork
4
|
5,717,420
|
8.34
%
|
1
Director of NXT
2
Officer of NXT
3
Beneficially owns less than one
percent of the total outstanding common shares.
4
based on i
nformation provided
to the Company as at April 23, 2019 by Mork Capital
Management, LLC. and its principal, Mr. Michael
Mork.
5
Alberta Green
Ventures Limited partnership includes shares and warrants. Please
see below for more information on the warrants.
For
each beneficial owner’s percentage of common shares
calculation, it is assumed that any stock options that they hold
which are or will become exercisable within 60 days of April 30,
2018 have been exercised (while also assuming that no one else
similarly exercises), and such options are thus included in both
the numerator and denominator for purposes of each of their own
individual calculations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liszicasz
|
15,820,617
|
15,000
|
15,835,617
|
Selby
|
408,161
|
65,000
|
473,161
|
Tilson
|
2,811,748
|
205,600
|
3,017,348
|
Valentine
|
-
|
30,000
|
30,000
|
Wilcox
|
215,253
|
197,000
|
412,253
|
Woychyshyn
|
26,200
|
50,000
|
76,200
|
|
19,281,979
|
652,600
|
19,844,579
|
Major
changes in the last 3 years in the percentage ownership of persons
who beneficially own (as at the respective December 31, year-end
dates) 5% or more of the outstanding common shares of NXT
were:
1.
In July 2018, the company completed the Private
Placement with AGV
. In total, AGV purchased
10,264,946
Units at a
price of $0.924 per Unit for total gross proceeds of approximately
$9,484,810.
As a result of the Private
Placement, a total of 10,264,946 common shares and a total of
3,421,648 warrants were issued to the Subscriber. As of the date of
this Form 20-F the Company has received conditional approval from
the TSX to extend the warrants to February 16, 2020, subject
to
disinterested shareholder approval. NXT intends to table
a resolution for the approval of disinterested shareholders at the
2019 Annual Shareholder Meeting of the NXT to ratify a twelve (12)
month extension of AGV’s 3,421,648 warrants
(“Warrants”) to February 16, 2020. If approved, each
Warrant entitles the holder to acquire one Common Share at an
exercise price of $1.20 for an additional twelve months to February
16, 2020
. The date of the Annual
Shareholder Meeting is June 25, 2019. Until the extension is
approved by shareholders at the meeting, the warrants will not be
exercisable by AGV. If the extension is not approved, then the
warrants will terminate.
The following information is taken from the records of
Computershare Trust Company of Canada, located in Calgary, Alberta,
Canada, the Company's transfer agent for its common shares. As
of
April 30, 2019, there were 142 registered holders of
record of the Company's common shares, including 81 in the United
States who collectively held 22,958,367 common shares, representing
33.48% of NXT’s 68,573,558 total issued and outstanding
common shares.
NXT is
a foreign private issuer for its current fiscal year. As of the
last business day of the Company’s first fiscal quarter, the
majority of the Company’s executive officers and directors
are Canadian citizens who reside in Canada, the majority of the
Company’s assets are in Canada and the Company is
administered principally in Canada. The Company’s major
shareholders in common shares have the same voting rights as other
holders of common shares. The Company is not directly or indirectly
owned or controlled by another corporation, a foreign government or
any other natural or legal persons severally or jointly. There are
no arrangements known to the Company which may result in a change
of control of the Company.
B.
Related
party transactions.
Summarized
below are certain other transactions and business relationships
between NXT and persons who are related parties, for the current
fiscal year ended December 31, 2018 through the current date, April
30, 2019:
●
Details of stock
options which have been granted to related parties during the above
noted period are included with Item 6.E above. No stock options
have been exercised by related parties in this period.
●
One of the members
of NXT’s Board of directors is a partner in a law firm which
provides legal advice to NXT. In 2018, NXT incurred legal expenses
of $249,218 with this firm, for which a total of $5,999 is included
in accounts payable as at December 31, 2018. In 2019 as of the
report date total fees incurred are $39,861 for which $40,761 is
still outstanding.
●
In 2017, one board
member received $22,671 in compensation for services provided as
the Interim CFO during 2018. He also received $27,500 as
compensation as a member of the Advisory Board.
●
Accounts payable
and accrued liabilities at December 31, 2018 includes a total of
$7,461 related to re-imbursement of expenses owing to persons who
are directors and officers of NXT. As of the report date $NIL was
outstanding to persons who are directors and officers of
NXT.
C.
Interests
of experts and counsel.
Not
applicable.
ITEM
8.
FINANCIAL
INFORMATION
A.
Consolidated
statements and other financial information.
The
Company’s consolidated financial statements are stated in
Canadian dollars and are prepared in accordance with U.S. generally
accepted accounting principles.
The
financial statements and notes thereto as required under Item 8 are
attached as Exhibit 15.1 to this annual report and are incorporated
by reference herein. The audit report of KPMG LLP is included
therein immediately preceding the consolidated financial statements
and is also incorporated by reference herein.
No
significant events or changes have occurred subsequent to the date
of the December 31, 2018 consolidated financial statements, except
as otherwise disclosed therein.
Legal Proceedings
To the
best of the Company's knowledge, there are no legal or arbitration
proceedings existing or pending which have had or may have,
significant effects on the Company's financial position or
profitability and no such proceedings are pending or known to be
contemplated by governmental authorities.
Dividend Policy
The
Company does not pay dividends.
B.
Consolidated
statements and other financial information.
As of
April 30, 2018, there have not been any significant subsequent
events which have occurred subsequent to the date of consolidated
financial statements for the year ended December 31, 2018.
NXT’s interim, unaudited consolidated financial statements
for the 3-month period ended March 31, 2018 will be released in
mid-May, 2018.
ITEM
9.
THE
OFFER AND LISTING
A.
Offer and listing details.
Our common shares are currently quoted in the United States on the
OTC Markets QB Exchange under the symbol “NSFDF”, in
Canada on the TSX under the symbol “SFD”. There have
been no trading suspensions over the last three years.
Not
applicable.
Our common shares are currently quoted in the United States on the
OTC Markets QB Exchange under the symbol “NSFDF”, in
Canada on the TSX-V under the symbol “SFD.V” (to March
21, 2016) and on the TSX under the symbol “SFD”
effective from March 22, 2016, and in Europe on the
Frankfurt and Berlin Exchanges (both of these listings are
inactive) under the symbol “EFW”.
The
Company’s common shares commenced trading on the US
Over-The-Counter Bulletin Board pursuant to a reverse takeover
transaction in 1996, and were approved for listing on the Frankfurt
and Berlin Exchanges in January 2004, and on the TSX-V in December
2007. Effective March 22, 2016, NXT upgraded its Canadian listing
from the TSX-V to the TSX.
Not
applicable.
Not
applicable.
F.
Expenses of the issue.
Not
applicable.
ITEM
10.
ADDITIONAL
INFORMATION
Not
applicable.
B.
Memorandum
and articles of association.
NXT was
incorporated in the State of Nevada in 1994. With respect to the
foregoing items, the law applicable to NXT in the Province of
Alberta is not significantly different from that in the State of
Nevada. NXT was established in Alberta pursuant to a Certificate of
Continuance issued October 24, 2003 by the Registrar of
Corporations of the Province of Alberta. NXT’s Alberta
Corporate Access Number is 2010730915. The Articles of Continuance
of NXT were amended to create the Series 1 Preferred Shares on
December 28, 2006, and provide that there are no restrictions on
the nature of the business that may be carried on by NXT. On
September 19, 2008, pursuant to Articles of Amendment, the name of
the Company was changed from Energy Exploration Technologies Inc.
to NXT Energy Solutions Inc.
Quorum
The
Board of directors of NXT may fix the quorum for meetings of the
Board or of a committee of the Board, but unless so fixed, a
majority of the directors or of a committee of directors holding
office at the time of the meeting constitutes a quorum provided
that no business may be transacted unless at least half of the
directors present are resident Canadians. Business cannot be
transacted without a quorum. A quorum of directors may vote on any
matter of business properly brought before the meeting provided
that where a director is a party to a material contract or proposed
material contract or is a director or an officer of or has a
material interest in any person who is a party to a material
contract or proposed material contract with NXT, such director must
disclose his or her interest at the earliest possible date, request
the conflict be noted in the minutes of the meeting and with few
exceptions, refrain from voting on the matter in which the director
has a conflict of interest. There is no limitation on the Board of
directors to vote on matters of their remuneration as a director,
officer, employee or agent of NXT or of an affiliate of
NXT.
Borrowing Powers
The
Board of directors may, without authorization of the shareholders
of NXT:
(a)
borrow money on the
credit of NXT;
(b)
issue, reissue,
sell or pledge debt obligations of NXT;
(c)
subject to
restrictions respecting financial assistance prescribed in the
ABCA, guarantee, on behalf of NXT, the performance of an obligation
of any person; and
(d)
mortgage,
hypothecate, pledge or otherwise create a security interest in all
or any property of NXT, owned or subsequently acquired, to secure
any obligation of NXT.
The
Board of directors of NXT may, by resolution, delegate to a
director, a committee of directors or an officer all or any of the
foregoing borrowing powers.
Directors
A
person is qualified to be or stand for election as a director
provided such person is at least 18 years of age, is not bankrupt
and is not mentally incapacitated pursuant to applicable mental
health legislation of the Province of Alberta or pursuant to an
order of the courts of the Province of Alberta. There is no
provision in NXT’s Articles or By-Laws relating to the
retirement or non-retirement of directors under an age limit
requirement. There is also no requirement in NXT’s Articles
or By-Laws for a director to hold securities of NXT.
Pursuant
to the ABCA, a director or officer shall not be disqualified by his
office, or be required to vacate his office, by reason only that he
is a party to, or is a director or officer or has a material
interest in any person who is a party to, a material contract or
proposed material contract with NXT or subsidiary thereof. Such a
director or officer shall, however, disclose the nature and extent
of his interest in the contract at the time and in the manner
provided by the ABCA. Any such contract or proposed contract shall
be referred to the Board of directors of NXT or shareholders for
approval even if such contract is one that in the ordinary course
of NXT's business would not require approval by the Board or
shareholders. Subject to the provisions of the ABCA, a director
shall not by reason only of his office be accountable to NXT or to
its shareholders for any profit or gain realized from such a
contract or transaction, and such contract or transaction shall not
be void or voidable by reason only of the director's interest
therein, provided that the required declaration and disclosure of
interest is properly made, the contract or transaction is approved
by the directors or shareholders, and it is fair and reasonable to
NXT at the time it was approved and, if required by the ABCA, the
director refrains from voting as a director on the contract or
transaction and absents himself from the director's meeting at
which the contract is authorized or approved by the directors,
except attendance for the purpose of being counted in the
quorum.
Rights Attached to Common Shares
The
holders of the common shares are entitled to dividends as and when
declared by the directors of NXT, to one vote per share at meetings
of shareholders of NXT, and upon liquidation, subject to the rights
of the holders of preferred shares, are entitled to share rateably
with the holders of the common shares in all distributions of
assets of NXT.
Rights Attached to Preferred Shares
Preferred
shares may be issued from time to time in one or more series. The
Board of directors of NXT is expressly authorized to provide by
resolution duly adopted prior to issuance, for the creation of each
such series and to fix the designation, rights, privileges,
restrictions and conditions attached to the shares of each such
series, including the rate or amount of dividends or the method of
calculating dividends, the dates of payment of dividends, the
redemption, purchase and/or conversion prices and terms and
conditions of redemption, purchase and/or conversion, and any
sinking fund or other provisions.
The
preferred shares of each series shall, with respect to the payment
of dividends and the distribution of assets or return of capital in
the event of liquidation, dissolution or winding-up of NXT, whether
voluntary or involuntary, or any other return of capital or
distribution of the assets of NXT among its shareholders for the
purpose of winding up its affairs, rank on a parity with the
preferred shares of every other series and be entitled to
preference over the common shares and over any other shares of NXT,
if any, ranking junior to the preferred shares. The preferred
shares of any series may also be given other preferences, not
inconsistent with the articles of continuance of NXT (the
"Articles"), over the common shares and any other shares of NXT
ranking junior to the preferred shares of a series as may be fixed
by the Board of directors of NXT.
If any
cumulative dividends or amounts payable on the return of capital in
respect of a series of preferred shares are not paid in full, all
series of preferred shares shall participate rateably in respect of
accumulated dividends and return of capital.
Unless
the Board of directors of NXT otherwise determine in the articles
of amendment designating a series of preferred shares, the holder
of each share of a series of preferred shares shall not, as such,
be entitled to receive notice of or vote at any meeting of
shareholders, except as otherwise specifically provided in the
ABCA.
Alteration of the Rights of Shareholders
Under
the ABCA, any substantive change to the Articles (including, but
not limited to, change of any maximum number of shares that NXT is
authorized to issue, creation of new classes of shares, add, change
or remove any rights, privileges, restrictions and conditions in
respect of all or any of its shares, whether issued or unissued,
change the shares of any class or series, whether issued or
unissued, into a different number of shares of the same class or
series or into the same or a different number of shares of other
classes or series) or other fundamental changes to the capital
structure of NXT, including a proposed amalgamation or continuance
of NXT out of the jurisdiction, requires shareholder approval by
not less than 2/3 of the votes cast by shareholders voting in
person or by proxy at a shareholders’ meeting called for that
purpose. In certain prescribed circumstances, holders of shares of
a class or of a series are entitled to vote separately as a class
or series on a proposal to amend the Articles whether or not shares
of a class or series otherwise carry the right to vote. The holders
of a series of shares of a class are entitled to vote separately as
a series only if the series is affected by an amendment in a manner
different from other shares of the same class.
Meetings of Shareholders
NXT’s
By-Laws provide that the Board of directors shall call an annual
meeting of shareholders to be held not later than fifteen months
after holding the last preceding annual meeting. NXT’s
By-Laws provide that the Board of directors may at any time call a
special meeting of shareholders. Only the registered holders of
shares are entitled to receive notice of and vote at annual and
special meetings of shareholders, except to the extent
that:
(a)
if a record date is
fixed, the person transfers ownership of any of the person’s
shares after the record date; or
(b)
if no record date
is fixed, the person transfers ownership of any of the
person’s shares after the date on which the list of
shareholders is prepared; and
(c)
the transferee of
those shares;
●
produces properly
endorsed share certificates; or
●
otherwise
establishes ownership of the shares; and
●
demands, not later
than ten (10) days before the meeting, that the transferee’s
name be included in the list before the meeting; and
●
in which case the
transferee is entitled to vote the shares.
The
ABCA also permits the holders of not less than 5% of the issued
voting securities of NXT to give notice to the Board of directors
requiring them to call and hold a meeting of NXT.
The
only persons entitled to be present at a meeting of shareholders
are:
(a)
the shareholders
entitled to vote at the meeting;
(b)
the Board of
directors of NXT;
(c)
the external
auditor of NXT; and
(d)
any others who,
although not entitled or required under the provisions of the ABCA,
any unanimous shareholder agreement, or the Articles or the
By-Laws, are allowed to be present at the meeting.
Any
other person may be admitted only on the invitation of the
Chairperson of the meeting or with the consent of the
meeting.
There
are no restrictions in NXT’s Articles or By-Laws as to the
number of shares that may be held by non-residents other than
restrictions set out in the
Investment Canada Act
(the
“ICA”) (Canada), as further described under Item 10.D
– “Exchange Controls” below.
Change of Control
There
are no specific provisions in the Articles or By-Laws of NXT that
have the effect of delaying, deferring or preventing a change of
control of NXT and that would operate only with respect to a
merger, acquisition or corporate restructuring involving NXT (or
any of its subsidiaries). Notwithstanding this, the Board of
directors, under the general powers conferred to it under
NXT’s By-Laws, have the authority to approve and invoke a
shareholders rights plan that will protect shareholders from
unfair, abusive or coercive take-over strategies, including the
acquisition or control of NXT by a bidder in a transaction or
series of transactions that does not treat all shareholders equally
or fairly or that does not afford all shareholders an equal
opportunity to share in any premium paid upon an acquisition of
control. NXT has not adopted such a plan.
Shareholder Ownership Disclosure
There
are no provisions in NXT’s By-Laws regarding public
disclosure of individual shareholdings.
Each
material contract, other than contracts entered into in the
ordinary course of business, to which the Company has been a party,
for the two years immediately preceding publication of this annual
report, is summarized elsewhere herein. Please see Item 4. B for
description of the AGV Co-operative Agreement, The AGV Sales
Representative Agreement and the Nigerian SFD
®
survey with PE
Energy. Also see Item 3. D for a description of the Sales Leaseback
contract.
There
are no governmental laws, decrees or regulations in Canada relating
to restrictions on the export or import of capital, or affecting
the remittance of interest, dividends or other payments to
non-residents. Dividends paid to U.S. residents, however, are
subject to a 15% withholding tax or a 5% withholding tax for
dividends if the shareholder is a corporation owning at least 10%
of the outstanding voting shares of NXT pursuant to Article X of
the reciprocal tax treaty between Canada and the U.S.
Except
as provided in the ICA, which has provisions that restrict the
holding of voting shares by non-Canadians, there are no limitations
specific to the rights of non-Canadians to hold or vote the common
shares under the laws of Canada or the Province of Alberta, or in
the charter documents of NXT or its subsidiaries.
Management
of NXT believes that the following summary fairly describes those
provisions of the ICA pertinent to an investment in NXT by a person
who is not a Canadian resident (a
“non-Canadian”).
The ICA
requires a non-Canadian making an investment which would result in
the acquisition of control of a Canadian business (i.e. the gross
value of the assets of which exceed a certain monetary threshold)
to identify, notify, or file an application for review with the
Investment Review Division of Industry Canada
(“IRD”).
The
notification procedure involves a brief statement of information
about the investment on a prescribed form which is required to be
filed with the IRD by the investor at any time up to 30 days
following implementation of the investment. It is intended that
investments requiring only notification will proceed without
government intervention unless the investment is in a specific type
of business activity related to Canada’s cultural heritage
and national identity.
If an
investment is reviewable under the ICA, an application for review
in the form prescribed is normally required to be filed with the
IRD prior to the investment taking place and the investment may not
be implemented until the review has been completed and the Minister
of Industry Canada (the “Minister”) (the Minister
responsible for Investment Canada) is satisfied that the investment
is likely to be of net benefit to Canada. The Minister has up to 75
days to make this determination. If the Minister is not satisfied
that the investment is likely to be of net benefit to Canada, the
non-Canadian must not implement the investment or, if the
investment has been implemented, may be required to divest himself
of control of the business that is the subject of the
investment.
The
following investments by non-Canadians are subject to notification
under the ICA:
1.
An investment to
establish a new Canadian business; and
2.
An investment to
acquire control of a Canadian business that is not reviewable
pursuant to the Act.
The
following investments by a non-Canadian are subject to review under
the ICA:
1.
An investment is
reviewable if there is an acquisition of a Canadian business and
the asset value of the Canadian business being acquired equals or
exceeds the following thresholds:
(a)
For non-World Trade
Organization (“WTO”) investors, the threshold is $5
million for a direct acquisition and $50 million for an indirect
acquisition; the $5 million threshold will apply however for an
indirect acquisition if the asset value of the Canadian business
being acquired exceeds 50% of the asset value of the global
transaction;
(b)
Except as specified
in paragraph (c) below, a threshold is calculated annually for
reviewable direct acquisitions by or from WTO investors. The
threshold for 2012 was $330 million. Pursuant to Canada’s
international commitments, indirect acquisitions by or from WTO
investors are not reviewable;
(c)
The limits set out
in paragraph (a) apply to all investors for acquisitions of a
Canadian business that:
(i)
engages in the
production of uranium and owns an interest in a producing uranium
property in Canada;
(ii)
provides any
financial service;
(iii)
provides any
transportation services; or
(iv)
is a cultural
business.
Notwithstanding
the above, any investment which is usually only notifiable,
including the establishment of a new Canadian business, and which
falls within a specific business activity, including the
publication and distribution of books, magazines, newspapers, film
or video recordings, audio or video music recordings, or music in
print or machine-readable form may be reviewed if an
Order-in-Council directing a review is made and a notice is sent to
the investor within 21 days following the receipt of a certified
complete notification.
Generally
speaking, an acquisition is direct if it involves the acquisition
of control of the Canadian business or of its direct or indirect
Canadian parent and an acquisition is indirect if it involves the
acquisition of control of a non-Canadian direct or indirect parent
of an entity carrying on the Canadian business. No change of voting
control will be deemed to have occurred if less than one-third of
the voting control of a Canadian corporation is acquired by an
investor.
A WTO
investor, as defined in the ICA, includes an individual who is a
national of a member country of the WTO or who has the right of
permanent residence in relation to that WTO member, a government or
government agency of a WTO investor-controlled corporation, a
limited partnership, trust or joint venture that is neither
WTO-investor controlled or Canadian controlled of which two-thirds
of its Board of directors, general partners or trustees, as the
case may be, are any combination of Canadians and WTO
investors.
The ICA
exempts certain transactions from the notification and review
provisions of ICA, including, among others, (a) an acquisition of
voting shares if the acquisition were made in the ordinary course
of that person’s business as a trader or dealer in
securities; (b) an acquisition of control of the Company in
connection with the realization of a security interest granted for
a loan or other financial assistance and not for any purpose
related to the provisions of the ICA; (c) the acquisition of voting
interests by any person in the ordinary course of a business
carried on by that person that consists of providing, in Canada,
venture capital on terms and conditions not inconsistent with such
terms and conditions as may be fixed by the Minister; and (d)
acquisition of control of the Company by reason of an amalgamation,
merger, consolidation or corporate reorganization, following which
the ultimate direct or indirect control in fact of the Company,
through the ownership of voting interests, remains
unchanged.
Certain United States Federal Income Tax
Considerations
The
following is a general summary of certain material U.S. federal
income tax considerations applicable to a U.S. Holder (as defined
below) arising from and relating to the acquisition, ownership and
disposition of common shares of the Company.
This
summary is for general information purposes only and does not
purport to be a complete analysis or listing of all potential U.S.
federal income tax considerations that may apply to a U.S. Holder
arising from and relating to the acquisition, ownership and
disposition of common shares. In addition, this summary does not
take into account the individual facts and circumstances of any
particular U.S. Holder that may affect the U.S. federal income tax
consequences to such U.S. Holder, including, without limitation,
specific tax consequences to a U.S. Holder under an applicable
income tax treaty. Accordingly, this summary is not intended to be,
and should not be construed as, legal or U.S. federal income tax
advice with respect to any U.S. Holder. This summary does not
address the U.S. federal alternative minimum, U.S. federal estate
and gift, U.S. state and local, and non-U.S. tax consequences to
U.S. Holders of the acquisition, ownership and disposition of
common shares. In addition, except as specifically set forth below,
this summary does not discuss applicable tax reporting
requirements. Each prospective U.S. Holder should consult its own
tax advisors regarding the U.S. federal, U.S. federal alternative
minimum, U.S. federal estate and gift, U.S. state and local, and
non-U.S. tax consequences relating to the acquisition, ownership
and disposition of common shares.
No
legal opinion from U.S. legal counsel or ruling from the Internal
Revenue Service (the “IRS”) has been requested, or will
be obtained, regarding the U.S. federal income tax consequences of
the acquisition, ownership, and disposition of common shares. This
summary is not binding on the IRS and the IRS is not precluded from
taking a position that is different from, and contrary to, the
positions taken in this summary. In addition, because the
authorities on which this summary is based are subject to various
interpretations, the IRS and the U.S. courts could disagree with
one or more of the conclusions described in this
summary.
Scope of this Summary
Authorities
This
summary is based on the Internal Revenue Code of 1986, as amended
(the “Code”), Treasury Regulations (whether final,
temporary, or proposed), published rulings of the IRS, published
administrative positions of the IRS, the Convention Between Canada
and the United States of America with Respect to Taxes on Income
and Capital, signed September 26, 1980, as amended (the
“Canada-U.S. Tax Convention”), and U.S. court decisions
that are applicable, and, in each case, as in effect and available,
as of the date of this document. Any of the authorities on which
this summary is based could be changed in a material and adverse
manner at any time, and any such change could be applied
retroactively. This summary does not discuss the potential effects,
whether adverse or beneficial, of any proposed
legislation.
U.S. Holders
For
purposes of this summary, the term "U.S. Holder" means a beneficial
owner of common shares that is for U.S. federal income tax
purposes:
●
an individual who
is a citizen or resident of the United States;
●
a corporation (or
other entity treated as a corporation for U.S. federal income tax
purposes) organized under the laws of the United States, any state
thereof or the District of Columbia;
●
an estate whose
income is subject to U.S. federal income taxation regardless of its
source; or
●
a trust that (1) is
subject to the primary supervision of a court within the U.S. and
the control of one or more U.S. persons for all substantial
decisions or (2) has a valid election in effect under applicable
Treasury Regulations to be treated as a U.S. person.
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not
Addressed
This
summary does not address the U.S. federal income tax considerations
applicable to U.S. Holders that are subject to special provisions
under the Code, including, but not limited to, U.S. Holders that:
(a) are tax-exempt organizations, qualified retirement plans,
individual retirement accounts, or other tax-deferred accounts; (b)
are financial institutions, underwriters, insurance companies, real
estate investment trusts, or regulated investment companies; (c)
are broker-dealers, dealers, or traders in securities or currencies
that elect to apply a mark-to-market accounting method; (d) have a
“functional currency” other than the U.S. dollar; (e)
own common shares as part of a straddle, hedging transaction,
conversion transaction, constructive sale, or other arrangement
involving more than one position; (f) acquire common shares in
connection with the exercise of employee stock options or otherwise
as compensation for services; (g) hold common shares other than as
a capital asset within the meaning of Section 1221 of the Code
(generally, property held for investment purposes); (h) are
required to accelerate the recognition of any item of gross income
with respect to common shares as a result of such income being
recognized on an applicable financial statement; or (i) own, have
owned or will own (directly, indirectly, or by attribution) 10% or
more of the total combined voting power or value of the outstanding
shares of the Company. This summary also does not address the U.S.
federal income tax considerations applicable to U.S. Holders who
are: (a) U.S. expatriates or former long-term residents of the
U.S.; (b) persons that have been, are, or will be a resident or
deemed to be a resident in Canada for purposes of the Income Tax
Act (Canada) (the “Tax Act”); (c) persons that use or
hold, will use or hold, or that are or will be deemed to use or
hold common shares in connection with carrying on a business in
Canada; (d) persons whose common shares constitute “taxable
Canadian property” under the Tax Act; or (e) persons that
have a permanent establishment in Canada for the purposes of the
Canada-U.S. Tax Convention. U.S. Holders that are subject to
special provisions under the Code, including, but not limited to,
U.S. Holders described immediately above, should consult their own
tax advisors regarding the U.S. federal, U.S. federal alternative
minimum, U.S. federal estate and gift, U.S. state and local, and
non-U.S. tax consequences relating to the acquisition, ownership
and disposition of common shares.
If an
entity or arrangement that is classified as a partnership (or other
“pass-through” entity) for U.S. federal income tax
purposes holds common shares, the U.S. federal income tax
consequences to such entity or arrangement and the partners (or
other owners or participants) of such entity or arrangement
generally will depend on the activities of the entity or
arrangement and the status of such partners (or owners or
participants). This summary does not address the tax consequences
to any such partner (or owner or participants). Partners (or other
owners or participants) of entities or arrangements that are
classified as partnerships or as “pass-through”
entities for U.S. federal income tax purposes should consult their
own tax advisors regarding the U.S. federal income tax consequences
arising from and relating to the acquisition, ownership and
disposition of common shares.
Passive Foreign Investment Company Rules
PFIC Status of the Company
If the
Company were to constitute a “passive foreign investment
company” under the meaning of Section 1297 of the Code (a
“PFIC”, as defined below) for any year during a U.S.
Holder’s holding period, then certain potentially adverse
rules may affect the U.S. federal income tax consequences to a U.S.
Holder as a result of the acquisition, ownership and disposition of
common shares. The Company believes that it was classified as a
PFIC for the tax year ended December 31, 2018, but based on current
business plans and financial expectations, the Company does not
anticipate that it will be a PFIC for its current tax year. No
opinion of legal counsel or ruling from the IRS concerning the
status of the Company as a PFIC has been obtained or is currently
planned to be requested. The determination of whether any
corporation was, or will be, a PFIC for a tax year depends, in
part, on the application of complex U.S. federal income tax rules,
which are subject to differing interpretations. In addition,
whether any corporation will be a PFIC for any tax year depends on
the assets and income of such corporation over the course of each
such tax year and, as a result, cannot be predicted with certainty
as of the date of this document. Accordingly, there can be no
assurance that the IRS will not challenge any determination made by
the Company (or any subsidiary of the Company) concerning its PFIC
status. Each U.S. Holder should consult its own tax advisors
regarding the PFIC status of the Company and each subsidiary of the
Company.
In any
year in which the Company is classified as a PFIC, a U.S. Holder
will be required to file an annual report with the IRS containing
such information as Treasury Regulations and/or other IRS guidance
may require. In addition to penalties, a failure to satisfy such
reporting requirements may result in an extension of the time
period during which the IRS can assess a tax. U.S. Holders should
consult their own tax advisors regarding the requirements of filing
such information returns under these rules, including the
requirement to file an IRS Form 8621.
The
Company generally will be a PFIC if, for a tax year, (a) 75% or
more of the gross income of the Company is passive income (the
“PFIC income test”) or (b) 50% or more of the value of
the Company’s assets either produce passive income or are
held for the production of passive income, based on the quarterly
average of the fair market value of such assets (the “PFIC
asset test”). “Gross income” generally includes
all sales revenues less the cost of goods sold, plus income from
investments and from incidental or outside operations or sources,
and “passive income” generally includes, for example,
dividends, interest, certain rents and royalties, certain gains
from the sale of stock and securities, and certain gains from
commodities transactions.
For
purposes of the PFIC income test and PFIC asset test described
above, if the Company owns, directly or indirectly, 25% or more of
the total value of the outstanding shares of another corporation,
the Company will be treated as if it (a) held a proportionate share
of the assets of such other corporation and (b) received directly a
proportionate share of the income of such other corporation. In
addition, for purposes of the PFIC income test and PFIC asset test
described above, and assuming certain other requirements are met,
“passive income” does not include certain interest,
dividends, rents, or royalties that are received or accrued by the
Company from certain “related persons” (as defined in
Section 954(d) (3) of the Code) also organized in Canada, to the
extent such items are properly allocable to the income of such
related person that is not passive income.
Under
certain attribution rules, if the Company is a PFIC, U.S. Holders
will generally be deemed to own their proportionate share of the
Company’s direct or indirect equity interest in any company
that is also a PFIC (a ‘‘Subsidiary
PFIC’’), and will generally be subject to U.S. federal
income tax on their proportionate share of (a) any “excess
distributions,” as described below, on the stock of a
Subsidiary PFIC and (b) a disposition or deemed disposition of the
stock of a Subsidiary PFIC by the Company or another Subsidiary
PFIC, both as if such U.S. Holders directly held the shares of such
Subsidiary PFIC. In addition, U.S. Holders may be subject to U.S.
federal income tax on any indirect gain realized on the stock of a
Subsidiary PFIC on the sale or disposition of common shares.
Accordingly, U.S. Holders should be aware that they could be
subject to tax under the PFIC rules even if no distributions are
received and no redemptions or other dispositions of common shares
are made.
Default PFIC Rules under Section 1291 of the Code
If the
Company is a PFIC for any tax year during which a U.S. Holder owns
common shares, the U.S. federal income tax consequences to such
U.S. Holder of the acquisition, ownership, and disposition of
common shares will depend on whether and when such U.S. Holder
makes an election to treat the Company and each Subsidiary PFIC, if
any, as a “qualified electing fund” or
“QEF” under Section 1295 of the Code (a “QEF
Election”) or makes a mark-to-market election under Section
1296 of the Code (a “Mark-to-Market Election”). A U.S.
Holder that does not make either a QEF Election or a Mark-to-Market
Election will be referred to in this summary as a
“Non-Electing U.S. Holder.”
A
Non-Electing U.S. Holder will be subject to the rules of Section
1291 of the Code (described below) with respect to (a) any gain
recognized on the sale or other taxable disposition of common
shares and (b) any “excess distribution” received on
the common shares. A distribution generally will be an
“excess distribution” to the extent that such
distribution (together with all other distributions received in the
current tax year) exceeds 125% of the average distributions
received during the three preceding tax years (or during a U.S.
Holder’s holding period for the common shares, if
shorter).
Under
Section 1291 of the Code, any gain recognized on the sale or other
taxable disposition of common shares (including an indirect
disposition of the stock of any Subsidiary PFIC), and any
“excess distribution” received on common shares or with
respect to the stock of a Subsidiary PFIC, must be ratably
allocated to each day in a Non-Electing U.S. Holder’s holding
period for the respective common shares. The amount of any such
gain or excess distribution allocated to the tax year of
disposition or distribution of the excess distribution and to years
before the entity became a PFIC, if any, would be taxed as ordinary
income (and not eligible for certain preferred rates). The amounts
allocated to any other tax year would be subject to U.S. federal
income tax at the highest tax rate applicable to ordinary income in
each such year, and an interest charge would be imposed on the tax
liability for each such year, calculated as if such tax liability
had been due in each such year. A Non-Electing U.S. Holder that is
not a corporation must treat any such interest paid as
“personal interest,” which is not
deductible.
If the
Company is a PFIC for any tax year during which a Non-Electing U.S.
Holder holds common shares, the Company will continue to be treated
as a PFIC with respect to such Non-Electing U.S. Holder, regardless
of whether the Company ceases to be a PFIC in one or more
subsequent tax years. A Non-Electing U.S. Holder may terminate this
deemed PFIC status by electing to recognize gain (which will be
taxed under the rules of Section 1291 of the Code discussed above),
but not loss, as if such common shares were sold on the last day of
the last tax year for which the Company was a PFIC.
QEF Election
A U.S.
Holder that makes a timely and effective QEF Election for the first
tax year in which the holding period of its common shares begins
generally will not be subject to the rules of Section 1291 of the
Code discussed above with respect to its common shares. A U.S.
Holder that makes a timely and effective QEF Election will be
subject to U.S. federal income tax on such U.S. Holder’s pro
rata share of (a) the net capital gain of the Company, which will
be taxed as long-term capital gain to such U.S. Holder, and (b) the
ordinary earnings of the Company, which will be taxed as ordinary
income to such U.S. Holder. Generally, “net capital
gain” is the excess of (a) net long-term capital gain over
(b) net short-term capital loss, and “ordinary
earnings” are the excess of (a) “earnings and
profits” over (b) net capital gain. A U.S. Holder that makes
a QEF Election will be subject to U.S. federal income tax on such
amounts for each tax year in which the Company is a PFIC,
regardless of whether such amounts are actually distributed to such
U.S. Holder by the Company. However, for any tax year in which the
Company is a PFIC and has no net income or gain, U.S. Holders that
have made a QEF Election would not have any income inclusions as a
result of the QEF Election. If a U.S. Holder that made a QEF
Election has an income inclusion, such a U.S. Holder may, subject
to certain limitations, elect to defer payment of current U.S.
federal income tax on such amounts, subject to an interest charge.
If such U.S. Holder is not a corporation, any such interest paid
will be treated as “personal interest,” which is not
deductible.
A U.S.
Holder that makes a timely and effective QEF Election with respect
to the Company generally (a) may receive a tax-free distribution
from the Company to the extent that such distribution represents
“earnings and profits” of the Company that were
previously included in income by the U.S. Holder because of such
QEF Election and (b) will adjust such U.S. Holder’s tax basis
in the common shares to reflect the amount included in income or
allowed as a tax-free distribution because of such QEF Election. In
addition, a U.S. Holder that makes a QEF Election generally will
recognize capital gain or loss on the sale or other taxable
disposition of common shares.
The
procedure for making a QEF Election, and the U.S. federal income
tax consequences of making a QEF Election, will depend on whether
such QEF Election is timely. A QEF Election will be treated as
“timely” if such QEF Election is made for the first
year in the U.S. Holder’s holding period for the common
shares in which the Company was a PFIC. A U.S. Holder may make a
timely QEF Election by filing the appropriate QEF Election
documents at the time such U.S. Holder files a U.S. federal income
tax return for such year. If a U.S. Holder does not make a timely
and effective QEF Election for the first year in the U.S.
Holder’s holding period for the common shares, the U.S.
Holder may still be able to make a timely and effective QEF
Election in a subsequent year if such U.S. Holder meets certain
requirements and makes a “purging” election to
recognize gain (which will be taxed under the rules of Section 1291
of the Code discussed above) as if such common shares were sold for
their fair market value on the day the QEF Election is effective.
If a U.S. Holder makes a QEF Election but does not make a
“purging” election to recognize gain as discussed in
the preceding sentence, then such U.S. Holder shall be subject to
the QEF Election rules and shall continue to be subject to tax
under the rules of Section 1291 discussed above with respect to its
common shares. If a U.S. Holder owns PFIC stock indirectly through
another PFIC, separate QEF Elections must be made for the PFIC in
which the U.S. Holder is a direct shareholder and the Subsidiary
PFIC for the QEF rules to apply to both PFICs.
A QEF
Election will apply to the tax year for which such QEF Election is
timely made and to all subsequent tax years, unless such QEF
Election is invalidated or terminated or the IRS consents to
revocation of such QEF Election. If a U.S. Holder makes a QEF
Election and, in a subsequent tax year, the Company ceases to be a
PFIC, the QEF Election will remain in effect (although it will not
be applicable) during those tax years in which the Company is not a
PFIC. Accordingly, if the Company becomes a PFIC in another
subsequent tax year, the QEF Election will be effective and the
U.S. Holder will be subject to the QEF rules described above during
any subsequent tax year in which the Company qualifies as a
PFIC.
U.S.
Holders should be aware that there can be no assurances that the
Company will satisfy the record keeping requirements that apply to
a QEF, or that the Company will supply U.S. Holders with
information that such U.S. Holders are required to report under the
QEF rules, in the event that the Company is a PFIC including a PFIC
Annual Information Statement. Thus, U.S. Holders may not be able to
make a QEF Election with respect to their common shares. Each U.S.
Holder should consult its own tax advisors regarding the
availability of, and procedure for making, a QEF
Election.
A U.S.
Holder makes a QEF Election by attaching a completed IRS Form 8621,
including a PFIC Annual Information Statement, to a timely filed
United States federal income tax return. However, if the Company
does not provide the required information with regard to the
Company or any of its Subsidiary PFICs, U.S. Holders will not be
able to make a QEF Election for such entity and will continue to be
subject to the rules of Section 1291 of the Code discussed above
that apply to Non-Electing U.S. Holders with respect to the
taxation of gains and excess distributions.
Mark-to-Market Election
A U.S.
Holder may make a Mark-to-Market Election only if the common shares
are marketable stock. The common shares generally will be
“marketable stock” if the common shares are regularly
traded on (a) a national securities exchange that is registered
with the Securities and Exchange Commission, (b) the national
market system established pursuant to section 11A of the Securities
and Exchange Act of 1934, or (c) a foreign securities exchange that
is regulated or supervised by a governmental authority of the
country in which the market is located, provided that (i) such
foreign exchange has trading volume, listing, financial disclosure,
and surveillance requirements, and meets other requirements and the
laws of the country in which such foreign exchange is located,
together with the rules of such foreign exchange, ensure that such
requirements are actually enforced and (ii) the rules of such
foreign exchange effectively promote active trading of listed
stocks. If such stock is traded on such a qualified exchange or
other market, such stock generally will be “regularly
traded” for any calendar year during which such stock is
traded, other than in de minimis quantities, on at least 15 days
during each calendar quarter. Provided that the common shares are
“regularly traded” as described in the preceding
sentence, the common shares are expected to be marketable stock.
However, each U.S. Holder should consult its own tax advisor in
this regard.
A U.S.
Holder that makes a Mark-to-Market Election with respect to its
common shares generally will not be subject to the rules of Section
1291 of the Code discussed above with respect to such common
shares. However, if a U.S. Holder does not make a Mark-to-Market
Election beginning in the first tax year of such U.S.
Holder’s holding period for the common shares for which the
Company is a PFIC and such U.S. Holder has not made a timely QEF
Election, the rules of Section 1291 of the Code discussed above
will apply to certain dispositions of, and distributions on, the
common shares.
A U.S.
Holder that makes a Mark-to-Market Election will include in
ordinary income, for each tax year in which the Company is a PFIC,
an amount equal to the excess, if any, of (a) the fair market value
of the common shares, as of the close of such tax year over (b)
such U.S. Holder’s adjusted tax basis in such common shares.
A U.S. Holder that makes a Mark-to-Market Election will be allowed
a deduction in an amount equal to the excess, if any, of (a) such
U.S. Holder’s adjusted tax basis in the common shares, over
(b) the fair market value of such common shares (but only to the
extent of the net amount of previously included income as a result
of the Mark-to-Market Election for prior tax years).
A U.S.
Holder that makes a Mark-to-Market Election generally also will
adjust such U.S. Holder’s tax basis in the common shares to
reflect the amount included in gross income or allowed as a
deduction because of such Mark-to-Market Election. In addition,
upon a sale or other taxable disposition of common shares, a U.S.
Holder that makes a Mark-to-Market Election will recognize ordinary
income or ordinary loss (not to exceed the excess, if any, of (a)
the amount included in ordinary income because of such
Mark-to-Market Election for prior tax years over (b) the amount
allowed as a deduction because of such Mark-to-Market Election for
prior tax years). Losses that exceed this limitation are subject to
the rules generally applicable to losses provided in the Code and
Treasury Regulations.
A U.S.
Holder makes a Mark-to-Market Election by attaching a completed IRS
Form 8621 to a timely filed United States federal income tax
return. A Mark-to-Market Election applies to the tax year in which
such Mark-to-Market Election is made and to each subsequent tax
year, unless the common shares cease to be “marketable
stock” or the IRS consents to revocation of such election.
Each U.S. Holder should consult its own tax advisors regarding the
availability of, and procedure for making, a Mark-to-Market
Election.
Although
a U.S. Holder may be eligible to make a Mark-to-Market Election
with respect to the common shares, no such election may be made
with respect to the stock of any Subsidiary PFIC that a U.S. Holder
is treated as owning, because such stock is not marketable. Hence,
the Mark-to-Market Election will not be effective to avoid the
application of the default rules of Section 1291 of the Code
described above with respect to deemed dispositions of Subsidiary
PFIC stock or excess distributions from a Subsidiary PFIC to its
shareholder.
Other PFIC Rules
Under
Section 1291(f) of the Code, the IRS has issued proposed Treasury
Regulations that, subject to certain exceptions, would cause a U.S.
Holder that had not made a timely QEF Election to recognize gain
(but not loss) upon certain transfers of common shares that would
otherwise be tax-deferred (e.g., gifts and exchanges pursuant to
corporate reorganizations). However, the specific U.S. federal
income tax consequences to a U.S. Holder may vary based on the
manner in which common shares are transferred.
Certain
additional adverse rules may apply with respect to a U.S. Holder if
the Company is a PFIC, regardless of whether such U.S. Holder makes
a QEF Election. For example, under Section 1298(b)(6) of the Code,
a U.S. Holder that uses common shares as security for a loan will,
except as may be provided in Treasury Regulations, be treated as
having made a taxable disposition of such common
shares.
Special
rules also apply to the amount of foreign tax credit that a U.S.
Holder may claim on a distribution from a PFIC. Subject to such
special rules, foreign taxes paid with respect to any distribution
in respect of stock in a PFIC are generally eligible for the
foreign tax credit. The rules relating to distributions by a PFIC
and their eligibility for the foreign tax credit are complicated,
and a U.S. Holder should consult with its own tax advisors
regarding the availability of the foreign tax credit with respect
to distributions by a PFIC.
The
PFIC rules are complex, and each U.S. Holder should consult its own
tax advisors regarding the PFIC rules and how the PFIC rules may
affect the U.S. federal income tax consequences of the acquisition,
ownership, and disposition of common shares.
General Rules Applicable to the Ownership and Disposition of Common
Shares
The
following discussion describes the general rules applicable to the
ownership and disposition of the common shares but is subject in
its entirety to the special rules described above under the heading
“Passive Foreign Investment Company
Rules.”
Distributions on Common Shares
A U.S.
Holder that receives a distribution, including a constructive
distribution, with respect to a common share will be required to
include the amount of such distribution in gross income as a
dividend (without reduction for any Canadian income tax withheld
from such distribution) to the extent of the current and
accumulated “earnings and profits” of the Company, as
computed for U.S. federal income tax purposes. A dividend generally
will be taxed to a U.S. Holder at ordinary income tax rates if the
Company is a PFIC for the tax year of such distribution or the
preceding tax year. To the extent that a distribution exceeds the
current and accumulated “earnings and profits” of the
Company, such distribution will be treated first as a tax-free
return of capital to the extent of a U.S. Holder's tax basis in the
common shares and thereafter as gain from the sale or exchange of
such common shares. (See “Sale or Other Taxable Disposition
of Common Shares” below). However, the Company may not
maintain the calculations of its earnings and profits in accordance
with U.S. federal income tax principles, and each U.S. Holder may
have to assume that any distribution by the Company with respect to
the common shares will constitute ordinary dividend income.
Dividends received on common shares by corporate U.S. Holders
generally will not be eligible for the “dividends received
deduction.” Subject to applicable limitations and provided
the Company is eligible for the benefits of the Canada-U.S. Tax
Convention, dividends paid by the Company to non-corporate U.S.
Holders, including individuals, generally will be eligible for the
preferential tax rates applicable to long-term capital gains for
dividends, provided certain holding period and other conditions are
satisfied, including that the Company not be classified as a PFIC
in the tax year of distribution or in the preceding tax year. The
dividend rules are complex, and each U.S. Holder should consult its
own tax advisors regarding the application of such
rules.
Sale or Other Taxable Disposition of Common Shares
Upon
the sale or other taxable disposition of common shares, a U.S.
Holder generally will recognize capital gain or loss in an amount
equal to the difference between the U.S. dollar value of cash
received plus the fair market value of any property received and
such U.S. Holder's tax basis in such common shares sold or
otherwise disposed of. A U.S. Holder’s tax basis in common
shares generally will be such holder’s U.S. dollar cost for
such common shares. Gain or loss recognized on such sale or other
disposition generally will be long-term capital gain or loss if, at
the time of the sale or other disposition, the common shares have
been held for more than one year.
Preferential
tax rates currently apply to long-term capital gain of a U.S.
Holder that is an individual, estate, or trust. There are currently
no preferential tax rates for long-term capital gain of a U.S.
Holder that is a corporation. Deductions for capital losses are
subject to significant limitations under the Code.
Additional Considerations
Additional Tax on Passive Income
Certain
U.S. Holders that are individuals, estates or trusts (other than
trusts that are exempt from tax) will be subject to a 3.8% tax on
all or a portion of their “net investment income,”
which includes dividends on the common shares and net gains from
the disposition of the common shares. Further, excess distributions
treated as dividends, gains treated as excess distributions under
the PFIC rules discussed above, and mark-to-market inclusions and
deductions are all included in the calculation of net investment
income.
Treasury
Regulations provide, subject to the election described in the
following paragraph, that solely for purposes of this additional
tax, that distributions of previously taxed income will be treated
as dividends and included in net investment income subject to the
additional 3.8% tax. Additionally, to determine the amount of any
capital gain from the sale or other taxable disposition of common
shares that will be subject to the additional tax on net investment
income, a U.S. Holder who has made a QEF Election will be required
to recalculate its basis in the common shares excluding QEF basis
adjustments.
Alternatively,
a U.S. Holder may make an election which will be effective with
respect to all interests in a PFIC for which a QEF Election has
been made and which is held in that year or acquired in future
years. Under this election, a U.S. Holder pays the additional 3.8%
tax on QEF income inclusions and on gains calculated after giving
effect to related tax basis adjustments. U.S. Holders that are
individuals, estates or trusts should consult their own tax
advisors regarding the applicability of this tax to any of their
income or gains in respect of the common shares.
Receipt of Foreign Currency
The
amount of any distribution paid to a U.S. Holder in foreign
currency, or on the sale, exchange or other taxable disposition of
common shares, generally will be equal to the U.S. dollar value of
such foreign currency based on the exchange rate applicable on the
date of receipt (regardless of whether such foreign currency is
converted into U.S. dollars at that time). A U.S. Holder will have
a basis in the foreign currency equal to its U.S. dollar value on
the date of receipt. Any U.S. Holder who converts or otherwise
disposes of the foreign currency after the date of receipt may have
a foreign currency exchange gain or loss that would be treated as
ordinary income or loss, and generally will be U.S. source income
or loss for foreign tax credit purposes. Different rules apply to
U.S. Holders who use the accrual method of tax accounting. Each
U.S. Holder should consult its own U.S. tax advisors regarding the
U.S. federal income tax consequences of receiving, owning, and
disposing of foreign currency.
Foreign Tax Credit
Subject
to the PFIC rules discussed above, a U.S. Holder that pays (whether
directly or through withholding) Canadian income tax with respect
to dividends paid on the common shares generally will be entitled,
at the election of such U.S. Holder, to receive either a deduction
or a credit for such Canadian income tax. Generally, a credit will
reduce a U.S. Holder’s U.S. federal income tax liability on a
dollar-for-dollar basis, whereas a deduction will reduce a U.S.
Holder’s income that is subject to U.S. federal income tax.
This election is made on a year-by-year basis and applies to all
foreign taxes paid (whether directly or through withholding) by a
U.S. Holder during a year.
Complex
limitations apply to the foreign tax credit, including the general
limitation that the credit cannot exceed the proportionate share of
a U.S. Holder’s U.S. federal income tax liability that such
U.S. Holder’s “foreign source” taxable income
bears to such U.S. Holder’s worldwide taxable income. In
applying this limitation, a U.S. Holder’s various items of
income and deduction must be classified, under complex rules, as
either “foreign source” or “U.S. source.”
Generally, dividends paid by a foreign corporation should be
treated as foreign source for this purpose, and gains recognized on
the sale of stock of a foreign corporation by a U.S. Holder should
be treated as U.S. source for this purpose, except as otherwise
provided in an applicable income tax treaty, and if an election is
properly made under the Code. However, the amount of a distribution
with respect to the common shares that is treated as a
“dividend” may be lower for U.S. federal income tax
purposes than it is for Canadian federal income tax purposes,
resulting in a reduced foreign tax credit allowance to a U.S.
Holder. In addition, this limitation is calculated separately with
respect to specific categories of income. The foreign tax credit
rules are complex, and each U.S. Holder should consult its own U.S.
tax advisors regarding the foreign tax credit rules.
Backup Withholding and Information Reporting
Under
U.S. federal income tax law, certain categories of U.S. Holders
must file information returns with respect to their investment in,
or involvement in, a foreign corporation. For example, U.S. return
disclosure obligations (and related penalties) are imposed on
individuals who are U.S. Holders that hold certain specified
foreign financial assets in excess of certain thresholds. The
definition of specified foreign financial assets includes not only
financial accounts maintained in foreign financial institutions,
but also, unless held in accounts maintained by a financial
institution, any stock or security issued by a non-U.S. person, any
financial instrument or contract held for investment that has an
issuer or counterparty other than a U.S. person and any interest in
a foreign entity. U.S. Holders may be subject to these reporting
requirements unless their common shares are held in an account at
certain financial institutions. Penalties for failure to file
certain of these information returns are substantial. U.S. Holders
should consult with their own tax advisors regarding the
requirements of filing information returns, including the
requirement to file an IRS Form 8938.
Payments
made within the U.S., or by a U.S. payer or U.S. middleman, of
dividends on, and proceeds arising from the sale or other taxable
disposition of, common shares will generally be subject to
information reporting and backup withholding tax, at the rate of
24%, if a U.S. Holder (a) fails to furnish such U.S. Holder’s
correct U.S. taxpayer identification number (generally on Form
W-9), (b) furnishes an incorrect U.S. taxpayer identification
number, (c) is notified by the IRS that such U.S. Holder has
previously failed to properly report items subject to backup
withholding tax, or (d) fails to certify, under penalty of perjury,
that such U.S. Holder has furnished its correct U.S. taxpayer
identification number and that the IRS has not notified such U.S.
Holder that it is subject to backup withholding tax. However,
certain exempt persons generally are excluded from these
information reporting and backup withholding rules. Backup
withholding is not an additional tax. Any amounts withheld under
the U.S. backup withholding tax rules will be allowed as a credit
against a U.S. Holder’s U.S. federal income tax liability, if
any, or will be refunded, if such U.S. Holder furnishes required
information to the IRS in a timely manner.
The
discussion of reporting requirements set forth above is not
intended to constitute a complete description of all reporting
requirements that may apply to a U.S. Holder. A failure to satisfy
certain reporting requirements may result in an extension of the
time period during which the IRS can assess a tax and, under
certain circumstances, such an extension may apply to assessments
of amounts unrelated to any unsatisfied reporting requirement. Each
U.S. Holder should consult its own tax advisors regarding the
information reporting and backup withholding rules.
THE
ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF
ALL TAX CONSIDERATIONS APPLICABLE TO U.S. HOLDERS WITH RESPECT TO
THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF COMMON SHARES. U.S.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX
CONSIDERATIONS APPLICABLE TO THEM IN THEIR OWN PARTICULAR
CIRCUMSTANCES
F.
Dividends
and paying agents.
Not
applicable – The Company is filing this Form 20-F as an
annual report.
Not
applicable – The Company is filing this Form 20-F as an
annual report.
We will
furnish our shareholders with annual reports, which will include a
review of operations and annual audited consolidated financial
statements prepared in conformity with U.S. GAAP. We intend,
although we are not obligated to do so, to furnish when requested
by our shareholders quarterly reports by mail with the assistance
of a corporate services provider, which will include unaudited
interim financial information prepared in conformity with U.S. GAAP
for each of the three quarters of each fiscal year following the
end of each such quarter. We may discontinue providing quarterly
reports at any time without prior notice to our shareholders. For
additional information on the Company, please consult our website
at www.nxtenergy.com, or the SEDAR website at
http://sedar.com.
Our
reports and other information, including this annual report and the
exhibits hereto, as filed with the SEC in accordance with the
Exchange Act, may be inspected and copied at the public reference
facilities maintained by the SEC at 100 F Street, Washington, D.C.
20549. In addition, copies of such reports and other information
filed with the SEC can be obtained from www.sec.gov.
ITEM
11.0
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As at
December 31, 2018 and to date in 2019, we do not have any interest
bearing debt facilities or any forward / futures hedging contracts
in place to manage risks related to foreign currency or interest
rate fluctuations.
Currency Fluctuations
We
currently hold our cash in both Canadian and United States of
America currency, as we generally bill revenues in U.S. currency,
and periodically hold certain short-term monetary assets and
liabilities in other foreign currencies. Any transaction in a
currency other than the Canadian dollar exposes us to the impact of
exchange rate fluctuations between the Canadian and the foreign
currencies. We do not currently engage in hedging activities to
mitigate the effects of foreign currency fluctuation, and are
reviewing opportunities to do so.
As at
December 31, 2018, we held U.S $ cash and short term investments
totaling US$13,309. Accordingly, a hypothetical 10% change in the
value of one U.S. $ expressed in Canadian dollars as at December
31, 2018 would have had a $1,331 effect on the unrealized foreign
exchange gain or loss for the year.
Interest Fluctuations
Aa at
December 31, 2018, we held a total of $4,239,532 in cash, cash
equivalents and short term investments. If all this cash was held
in an interest bearing account for a full year, an actual 1% change
in interest rates during the year ended December 31, 2018 would
have resulted in approximately an $42,395 change in interest income
for the year.
We caution that the factors referred to above and those referred to
as part of particular forward-looking statements may not be
exhaustive and that new risk factors emerge from time to time in
our rapidly changing business environment.
ITEM
12.
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
Not
applicable.