NSFDF NXT Energy Solutions Inc (QB)

ITEM 3.     KEY INFORMATION

A.            Selected financial data.

Not applicable. 

B.            Capitalization and indebtedness.

This Form 20-F is being filed as an annual report under the U.S. Exchange Act and, as such, there is no requirement to provide any information under this item.

C.            Reasons for the offer and use of proceeds.

This Form 20-F is being filed as an annual report under the U.S. Exchange Act and, as such, there is no requirement to provide any information under this item.

D.            Risk factors.

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

Our ability to continue operating.

The consolidated financial statements as at and for the year ended, December 31, 2021 have been prepared on a going concern basis.  The going concern basis of presentation assumes that NXT will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. 

NXT is still in the early stages of realizing wide-spread commercialization of its SFD^® technology.  Its ability to generate cash flow from operations will depend on its ability to service its existing clients and develop new clients for its SFD^® services.  Management recognizes that the commercialization phase can last for several years, and that it can have significant economic dependence on a small number of clients, which can have a material effect on the Company's operating results and financial position.

The events described in the following paragraphs highlight that there is substantial doubt about NXT’s ability to continue as a going concern within one year after the date that the consolidated financial statements for the year ended December 31, 2021 have been issued.  The Company’s current cash position is not expected to be sufficient to meet the Company’s obligations and planned operations for a year beyond the date that these financial statements have been issued.

The Board has approved a plan to defer and reduce operating costs including payroll and other general and administrative costs as of April 2022.  If required, further financing options that may or may not be available to the Company include issuance of new equity, debentures or bank credit facilities.  The need for any of these options will be dependent on the timing of securing new SFD^® survey contracts and obtaining financing on terms that are acceptable to both the Company and the financier.

NXT continues to develop its pipeline of opportunities to secure new revenue contracts.  However, the Company’s longer-term success remains dependent upon its ability to convert these opportunities into successful contracts, to continue to attract new client projects, ultimately to expand the revenue base to a level sufficient to exceed fixed operating costs and generate positive cash flow from operations.  The occurrence and timing of these events cannot be predicted with sufficient certainty. 

The consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate.  If the going concern basis were not appropriate for the consolidated financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses and the balance sheet classifications used.  These adjustments could be material.

If the Company were to default on its office lease, the current month rent plus the next three months become immediately due.  If the Company were to default on the aircraft lease, the Company would be required to deliver the aircraft back to the Lessor.

Covid-19 (2019-nCoV/COVID-19) Pandemic

As of the date of this 20-F the Covid-19 pandemic continues to be a risk to the operations of the Company.  The Company has made provisions so employees can work safely in the office or if necessary from home, followed all Alberta Health Services and Health Canada recommendations, and implemented hygiene and physical distancing policies.  Demand for our services and prospective revenues may become adversely impacted the longer the Covid-19 pandemic continues.  The impact of the continuation of the Covid-19 pandemic may hamper our ability to deliver SFD^® related revenues in the following ways.  If restrictions on international travel continue, our aircraft and personal may not be able to perform project surveys.  An outbreak of the virus among our staff or our customers’ personnel could delay any survey in progress.  Business development may be delayed when in-person meetings and technical presentations may be a superior delivery method to tele-conferences or on-line video conferencing.

The situation is dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect to the Company is not known at this time.  Estimates and judgments made by management in the preparation of these consolidated financial statements are subject to a higher degree of measurement uncertainty during this volatile period.

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

In preparing these consolidated financial statements, NXT is required to make estimates and assumptions that affect both the amount and timing of recording assets, liabilities, revenues and expenses since the determination of these items may be dependent on future events. The Company uses the most current information available and exercises careful judgment in making these estimates and assumptions. In the opinion of management, the consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the Company’s significant accounting policies.  The estimates and assumptions used are based upon management's best estimate as at the date of the consolidated financial statements.  Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period when determined. Actual results may differ from those estimates.

Critical accounting estimates relate primarily to the use of the going concern assumption, estimated useful lives and the valuation of intellectual property and property and equipment, and the measurement of stock-based compensation expense.

Volatility in oil and natural gas commodity prices may affect demand for our services.

NXT's customer base is in the oil and natural gas exploration industry, which is exposed to risks of volatility in oil and natural gas commodity prices.   As such, demand for our services and prospective revenues may become adversely impacted by fluctuations in oil and natural gas prices.  The impact of price changes on our ability to enter into SFD^® survey contracts cannot be readily determined at this time.  However, in general, as commodity prices have declined significantly, our opportunity to obtain and execute SFD^® survey contracts may also likely decline, at least in the short term.  Therefore, NXT focuses on national oil companies as they have a long term strategic view and are not as affected by short-term oil fluctuations.

Our financial position is affected by foreign currency fluctuations.

The Company is exposed to foreign exchange risk in relation to its holding of significant US$ balances cash and cash equivalents, short-term investments, accounts receivable, deposits, accounts payables, accrued liabilities, lease obligations and entering into United States dollar SFD^® related revenue contracts.  To mitigate exposure to fluctuations in foreign exchange, the Company does not currently enter into hedging contracts, but uses strategies to reduce the volatility of United States Dollar assets including converting excess United States dollars to Canadian dollars.  As at December 31, 2021, the Company held net U.S dollar assets totaling US$1,177,291.  Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2021 would have had an approximately $150,039 effect on the unrealized foreign exchange gain or loss for the year.

Debt Service

NXT may finance a significant portion of its operations through debt.  Amounts paid in respect of interest and principal on debt incurred by NXT may impair NXT's ability to satisfy its other obligations. Variations in interest rates and scheduled principal repayments could result in significant changes in the amount required to be applied to debt service before payment by NXT of its debt obligations. Lenders may be provided with security over substantially all of the assets of NXT.  If NXT becomes unable to pay its debt service charges or otherwise commits an event of default such as bankruptcy, a lender may be able to foreclose on or sell the assets of NXT.

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

We periodically invest available cash in short term investments that generate interest income that will be affected by any change in interest rates.   (See Item 11).  The Company’s long-term debt interest is fixed at 4% until 2031.  The Company also is recorded interest expense of 15.70% on the financial liability of its aircraft lease for the years 2019 to 2021 which resulted from the deferred gain of the sales and leaseback agreement of its aircraft.  This interest expense will end in April 2022.

Availability of Aircraft.

In April 2017, NXT completed a sale and leaseback agreement of its aircraft with a Calgary based international aircraft services organization (the “Lessor”).  The terms of the agreement resulted in NXT selling its 1997 Cessna Citation Ultra 560 jet aircraft that was purchased in 2015.  NXT has leased the aircraft over an initial term of 60 months and retains all existing operating rights and obligations.  NXT is required to make monthly payments to the Lessor of approximately US$39,500.  In December 2021, the Company determined it was reasonably certain it would extend term of its Aircraft Leasing Agreement effective in the second quarter of 2022 for a period of 24 months with payments of approximately US$22,500 (CDN$28,675) per month, or US$270,000 (CDN$344,099) per year.   

The Lessor also has access to an alternate, similar model aircraft (certified for the use of our survey equipment) which could be charter hired for use by NXT if needed.

In the event that NXT’s aircraft is not available (due to damage, a need for extensive repairs, or other unforeseen events) to conduct survey projects, there is a risk that suitable alternative aircraft may not be available on a timely basis from other charter operators when needed.  This inability to conduct survey operations could have a material adverse effect on the Company's business, financial condition and results of operations.

We are a small business with limited personnel and our inability to segregate duties between administrative staff is an internal control weakness.

Certain duties that are most appropriately segregated between different employees are, due to our current limited staff, assigned to one or two individuals depending on the task.

Standard internal control methodology involves the separation of incompatible functions by assigning these functions to separate individuals and in larger organizations to separate departments.  We often cannot allocate these functions to separate individuals because our administrative staff is limited.

Although we have adopted alternative control methods designed to compensate for the reduced ability to separate incompatible functions, these alternative controls are not effective and there is more than a remote likelihood that our internal control over financial reporting will not prevent or detect material misstatements if they should exist in our financial statements.  This lack of separation of duties exposes NXT to potential misappropriation of funds, embezzlement and other forms of fraud and could have a material adverse effect on our business, financial condition and results of operations. (See also Item 15.)

We may periodically engage in transactions with related parties.

We may periodically enter into related party transactions with our officers and directors.  The most significant transaction was a “Technology Transfer Agreement” (the “TTA”) that was executed on December 31, 2006 between NXT and Mr. George Liszicasz, our Chief Executive Officer, President and Chairman (“CEO”) wherein we issued 10,000,000 convertible preferred shares to him in exchange for the rights to the SFD^® technology for use in hydrocarbon exploration.  In 2013, a total of 2,000,000 of these preferred shares were converted (on a one-to-one basis) into common shares, and the remaining 8,000,000 preferred shares were converted in August 2015.  On April 18, 2021 the TTA was amended so that Mr. Liszicasz transferred to us all his rights and entitlements to the SFD^® technology for the use in the field of geothermal resources (Please refer to Section 4. B for further discussion on Geothermal Right).  In addition to the related party transactions discussed elsewhere herein (i.e. the Co-operation Agreement (defined below) and the Targeted Issuer Bid, Item 16.E.), one of the members of NXT's Board, Thomas Valentine, is a partner in the law firm Norton Rose Fulbright Canada LLP which provides legal advice to NXT and a company owned by a family member of an executive officer was contracted to provide presentation design services to the Company.

For a full history of the TTA see also Item 4. part A, “Information on the Company - History and development of the Company”, and Item 4. part B. “Information on the Company - Business Overview - Technology Transfer Agreement”.

Although we manage this potential conflict of interest risk through maintenance of a strong independent Board, all related party transactions have the potential for conflicts of interest that may compromise the ability of Board members to exercise their fiduciary responsibility to NXT shareholders.

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 29, 2022 owns approximately 23.55% 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 directors who collectively represent a majority of the Board.  Furthermore, all material related party transactions are disclosed publicly. 

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 IP, our rights to commercialize this IP or our right to create SFD^® devices and processes.  However, we believe that such a claim would be without merit.

The SFD^® technology is an essential component of our business plan.  If a third party challenged our lawful entitlement to this technology, the legal defense of our right to the technology may be expensive and could cause a loss of our right to the SFD^® technology, or a protracted legal process to assert our right to the technology would have a material adverse effect on the Company's business, financial condition and results of operations.

We rely on specialized equipment, including a limited number of SFD^® sensors and this limitation may affect our ability to conduct business.

We rely on specialized data acquisition equipment, including a limited number of SFD^® sensor devices, to conduct our aerial SFD^® survey operations.  We would be at risk if these survey sensors were to become damaged, destroyed, worn out, stolen or in any way became unavailable for use in operations prior to us creating and testing additional sensors.  Should the sensors become unavailable for any reason, our ability to conduct surveys could be delayed for several months as we built new sensors.  During this period, we may become unable to satisfy contractual obligations, which may jeopardize future revenue opportunities and may potentially result in a client drawing on a contract performance bond posted by the Company or otherwise making claims against the Company for breach of contract.  In addition, an inability to satisfy contractual obligations may have an adverse effect on our developing reputation within the oil and gas community.

NXT mitigates this risk by researching new designs, constructing additional SFD^® sensor devices and obtaining replacement cost insurance on each SFD^® sensor.

As the Company is in the early commercialization phase, SFD^® surveys have not been tested over all potential geological conditions. 

Some geological conditions may subsequently be proven to be unsuited for SFD^® surveys thereby creating unforeseen limitations to the application of SFD^® surveys. 

Any limitation to the application of SFD^® surveys has the potential of restricting future revenue opportunities and if not properly disclosed to industry clients, such limitations may impact the reputation of the Company with these clients.

Unless we pursue ongoing technological improvement and development, we may be unable to respond to changes in customer requirements or new competitive technologies.

We must continue to refine and develop our SFD^® survey system to make it scalable for growth and to respond to potential future competitive pressures.  These improvements require substantial time and resources.  Furthermore, even if resources are available, there can be no assurance that the Company will be commercially or technically successful in enhancing the technology.  Our inability to keep pace with new technologies and evolving industry standards and demands could have a material adverse effect on our business, financial condition and results of operations.

We rely on a limited number of key personnel who collectively possess the knowledge and skills to conduct SFD^® surveys and interpret SFD^® data as required to meet contract obligations. 

We rely on a limited number of key personnel who collectively possess the knowledge and skills to conduct SFD^® surveys and interpret SFD^® data as required to meet contract obligations.  Additional or replacement personnel 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 an employment agreement with its President and CEO, Mr. Liszicasz.

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.  In addition, we are developing new algorithms that once completed and if successful, will reduce the reliance of these key persons in the interpretation of 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 in the United States (“U.S.”) OTC Markets Group’s Venture Stage Marketplace (the “OTCQB”) and there is a risk that a broader or more active public trading market for our common shares will not develop or be sustained, or that current trading levels will not be sustained. 

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

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

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

You will be subject to the penny stock rules to the extent our stock price on the OTCQB is less than $5.00.

Since the common shares are not listed on a national stock exchange within the United States, trading in the common shares on the OTCQB is subject, to the extent the market price for the common shares is less than $5.00 per share, to a number of regulations known as the "penny stock rules".  The penny stock rules, subject to certain exemptions, require a broker‑dealer to deliver a standardized risk disclosure, the form of which is developed by the U.S. Securities and Exchange Commission (the “SEC”) to provide the customer with additional information, including current bid and offer quotations for the penny stock, the compensation of the broker‑dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, make a special written determination that the penny stock is a suitable investment for the purchaser and to receive the purchaser's written agreement to the transaction.  To the extent these requirements may be applicable, they will reduce the level of trading activity in the secondary market for the common shares and may severely and adversely affect the ability of broker‑dealers to sell the common shares.

You should not expect to receive dividends in the foreseeable future.

We have never paid any cash dividends on our common shares and we do not anticipate that we will pay any dividends in the foreseeable future.  Our current business plan is to retain any future earnings to finance the expansion of our business.  Any future determination to pay cash dividends will be at the discretion of our Board and will be dependent upon our consolidated financial condition, results of operations, capital requirements and other factors as our Board may deem relevant at that time.

Our right to issue additional capital stock at any time could have an adverse effect on your proportionate ownership and voting rights.

We are authorized under our Articles of Incorporation to issue an unlimited number of common shares and an unlimited number of preferred shares.  We may issue these shares under such circumstances and in such manner and at such times, prices, amounts, and purposes as our Board may, in its discretion, determine to be necessary and appropriate, subject to compliance with all applicable exchange regulations and corporate and securities laws.  Proportionate ownership and voting rights of common shareholders could be adversely affected by the issuance of additional common shares which may result in common share value dilution.

We may not be able to protect our trade secrets and IP from competitors who would use this knowledge to eliminate or reduce our technological advantage.

Our success and future revenue growth will depend, in part, on our ability to protect our IP.  We have commenced an IP strategy process to obtain patents related to the SFD^® technology, while also utilizing "trade secrets" protection of the proprietary nature of our technology as applicable.

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

The patent protection application process requires disclosure of at least some aspects of our SFD^® technology to third parties and ultimately public disclosure.  This disclosure could significantly increase the risk of unlawful use of our technology by third parties.  Furthermore, we have no assurance that, even if we seek patent protection, a patent could be registered to protect our IP in all or any jurisdictions within North America or other countries throughout the world.  If registered, there can be no assurance that it would be sufficiently broad to protect our technology or that any potential patent would not be challenged, invalidated, or circumvented or that any right granted thereunder would provide meaningful protection or a competitive advantage to us.  Finally, protection afforded by patents is limited by the financial resources available to legally defend IP rights.  We currently do not possess the required financial resources to fund a lengthy defense of our rights if challenged by a much larger competitor or an oil and gas company.

We enjoy common and contract law protection of our technology and trade secrets.  Employees and contractors are governed by confidentiality agreements as well as a fiduciary responsibility to protect our technology, supporting documentation and other proprietary information.

Our strongest protection of the SFD^® technology comes from restricting access to knowledge concerning the technology.  Only a very limited number of NXT personnel have access to or knowledge of the underlying SFD^® technology and no one employee and only one officer has access or knowledge of all aspects of the SFD^® system.  Currently, no third party has any significant knowledge of the technology.  As further protection, SFD^® equipment does not leave the direct control of NXT employees, thereby preventing unauthorized replication of the equipment.

The Company reassesses the appropriateness of its IP protection strategy on an ongoing basis and seeks advice from IP advisors as necessary.

It is possible that a third party will copy or otherwise obtain and use the Company's technology without authorization, develop a similar technology independently or design around the Company's secrets.  Accordingly, there can be no assurance that the steps taken by the Company to prevent misappropriation or infringement of our IP will be successful.

An inability to protect our IP would make it possible for competitors to offer similar products and services that could have a material adverse effect on our business, financial condition, and results of operations.

We experience operational hazards in our flight operations that may subject us to potential claims in the event that an incident or accident occurs.

We experience operational hazards in our flight operations that may subject us to potential claims in the event that an incident or accident occurs.

The flight operations of SFD^® surveys are subject to the hazards associated with general flight operations.  An aircraft accident may cause personal injury and loss of life, as well as severe damage to and destruction of property or the SFD^® sensors and related equipment.

Independent third parties provide all the services required to maintain and operate the aircraft; they bear the primary risks of flight operations.  These services are provided by an organization accredited by Transport Canada to operate aircraft in accordance with Transport Canada approved and audited operating procedures.  The aircraft operator employs the required pilots, aircraft maintenance engineers and support personnel and ensures that they operate within their Transport Canada operating certificate.  Our employees do not perform any airworthiness or flight safety operations.

We require the flight contractor to maintain appropriate insurance coverage for the risks associated with aircraft operations and we obtain insurance coverage to provide us with additional risk protection.  In addition, we maintain general business insurance coverage, and believe that this insurance and the policy limits are appropriate for the operational risks that we incur.

Despite our policy to not operate the aircraft directly and our insurance coverage, we cannot avoid or alternatively be insured for all risks of flight operations.  In the event of an incident or accident we may be sued by injured parties in excess of our policy limits or for damages that are not covered by our insurance policy.  The magnitude of a lawsuit of this nature is not determinable.  Furthermore, to the extent that our SFD^® equipment is damaged, we may be unable to conduct SFD^® surveys for several months following an accident.

We are a Canadian Company and our nationality may impair the enforceability of a judgment for any person resident outside Canada.

Since we are a Canadian company and most of our assets and key personnel are located in Canada, you may not be able to enforce a U.S. judgment for claims you may bring against us, our assets, our key personnel or many of the experts named in this document.  This may prevent you from receiving compensation to which you may otherwise have a claim.

We are organized under the laws of Alberta, Canada and substantially all of our assets are normally located in Canada.  In addition, all but two of our current members of our Board and all of our officers are residents of Canada.  As a result, it may be impossible for you to affect service of process upon us or these individuals within the U.S. or to enforce any judgments in civil and commercial matters, including judgments under U.S. federal securities laws.  In addition, a Canadian court may not permit you to bring an original action in Canada or to enforce in Canada a judgment of a U.S. court based upon civil liability provisions of the U.S. federal securities laws.

We conduct operations in foreign countries, which exposes us to several risks that may have a material adverse effect on the Company. 

We conduct operations in foreign countries, which exposes us to several risks that may have a material adverse effect on the Company. 

Criminal Activity and Social Instability - We have operated in the past in foreign countries such as Colombia, which over the past two decades experienced significant social upheaval and criminal activity relating to drug trafficking, kidnapping and terrorist acts.  While the situation has improved dramatically in recent years, there can be no guarantee that the situation will not deteriorate again, nor are these risks eliminated as yet.  Furthermore, other potential international survey locations may have similar or other indeterminate criminal or social instability risks.

Systemic criminal activity in a country or isolated criminal acts may disrupt operations, impact our ability to earn revenue, dramatically add to our cost of operations or potentially prevent us from earning any survey revenue in a country.

Political Instability - Any changes in regulations or shifts in political attitudes are beyond the control of the Company and may adversely affect our business.  Exploration may be affected in varying degrees by government regulations which have the effect of restricting exploration and production activities.  These changes may adversely impact the laws and policies governing price controls, export controls, foreign exchange controls, income taxes, expropriation of property, environmental legislation, site safety or other areas.

Currently, there are no restrictions (other than the payment of local with-holding taxes) on the repatriation back to Canada of our earnings in foreign countries in which we have operated, such as Colombia and Bolivia; however, there can be no assurance that significant restrictions on repatriation to Canada of earnings will not be imposed in the future.

Our operations may also be adversely affected by changes in laws and policies in Canada impacting foreign travel and immigration, foreign trade, taxation, and investment.

Commercial Disputes - While operating in a foreign country, we are subjected to local commercial laws which often involve executing contracts in a foreign language.  Although every effort is made to ensure we have access to an accurate English translation, misunderstanding and potential disputes between parties may arise.

In the event of a dispute arising in connection with our foreign operations for any reason, we may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdictions of the courts of Canada or enforcing Canadian judgments in such other jurisdictions.  We may also be hindered or prevented from enforcing our rights with respect to a government instrumentality because of the doctrine of sovereign immunity.

Accordingly, these risk factors have the potential of adversely reducing the level of survey revenue from our clients, our ability to operate effectively or our ability to be paid for our services and may have a material adverse effect on our financial position.

Where possible, NXT utilizes risk mitigation products offered by entities such as Export Development Canada (“EDC”).  EDC financial products include insurance coverage of contract accounts receivable, guarantee support for contract performance bonds and wrongful call insurance for such bonds.  

Corruption and Bribery - Foreign markets may be susceptible to a higher risk of corruption and bribery.  All of NXT’s employees, contractors and independent sales agents are required to adhere to the Company’s code of conduct and business ethics, which prohibits illegal activities, including any acts of bribery or corruption.

We rely upon the right to conduct airborne surveys in foreign countries.  These foreign operations expose us to the risks that we will be prevented from conducting surveys when requested by clients. 

The operation of our business, namely conducting aerial SFD^® surveys and interpreting SFD^® data, is not subject to material governmental or environmental regulation in Canada and the United States with the exception of flight rules issued by Transport Canada and the U.S. Federal Aviation Administration governing the use of commercial aircraft, including rules relating to low altitude flights.  The requirements in other countries vary greatly and may require permits and/or provide other restrictions to conducting flight operations in the country that may restrict our ability to perform SFD^® surveys.

For example, in South American countries in which we have operated, such as Colombia and Bolivia, SFD^® surveys must comply with additional requirements not encountered in Canada and the United States, including customs obligations and bonds related to the importation and exportation of the aircraft into the country, obtaining permits from the local aviation authority and obtaining permits from the local Air Force.  We have successfully operated in South America and other global regions in accordance with these typical requirements.

With our North America and International experience to date, we do not anticipate any government controls or regulations that will prevent timely completion of SFD^® surveys.  However, we may encounter government restrictions in other countries that may impact or restrict our ability to conduct surveys. 

If we encounter government regulation and restrictions that impact or prevent us from conducting surveys in any country, then we will not be able to earn revenue in the country and we may be exposed to forfeiting any performance bonds which may have been issued.

Credit risk arises from the potential that the Company may incur a loss if counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms.

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The carrying value of cash and cash equivalents, short-term investments, and accounts receivable reflects management’s assessment of credit risk.  At December 31, 2021, cash and cash equivalents and short-term investments included balances in bank accounts, term deposits and guaranteed investment certificates, placed with financial institutions with investment grade credit ratings.  The majority of the Company’s accounts receivable relate to sales to one customer in Nigeria, exposing the Company to foreign country credit risks.  The Company manages this credit risk by requiring advance payments before entering into certain contract milestones and when possible accounts receivable insurance.

Tax Matters

The Company and its subsidiaries are subject to income and other taxes in Canada, the United States, and numerous foreign jurisdictions. Changes in tax laws or interpretations thereof or tax rates in the jurisdictions in which the Company or its subsidiaries do business could adversely affect the Company's results from operations, returns to shareholders, and cash flow. Our effective tax rates could also be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. While management believes the Company and its subsidiaries are in compliance with current prevailing tax laws and requirements, one or more taxing jurisdictions could seek to impose incremental or new taxes on the Company or its subsidiaries or the Company or its subsidiaries could be subject to assessment, reassessment, audit, investigation, inquiry or judicial or administrative proceedings by any such taxing jurisdiction. The timing or impacts of any such assessment, reassessment, audit, investigation, inquiry or judicial or administrative proceedings or any future changes in tax laws, including the impacts of proposed regulations, cannot be predicted. Any adverse tax developments, including legislative changes, judicial holdings, or administrative interpretations, could have a material and adverse effect on the results of operations, financial condition, and cash flows of the Company.

Recent Canadian Tax Proposals

In February 2022, the Department of Finance (Canada) released draft legislation, including a proposal on interest deductibility. The proposal is open for public comment until May 2022 and it is unknown when the legislation may be enacted. In addition, in April 2021, the Canadian federal budget was released which proposed changes in relation to international taxation. There has been no significant update on this proposal, and it is unknown when draft legislation may be available. The Company will continue to assess the proposed changes in Canadian tax legislation as they could affect the results of operations, financial condition, and cash flows of the Company.

Recent United States Tax Proposals

Changes to U.S. tax laws (which changes may have retroactive application) could adversely affect the Company or holders of common shares of the Company. In recent years, many changes to U.S. federal income tax laws have been proposed and made, and additional changes to U.S. federal income tax laws are likely to continue to occur in the future.

The U.S. Congress is currently considering numerous items of legislation which may be enacted prospectively or with retroactive effect, which legislation could adversely impact the Company’s financial performance and the value of common shares of the Company. In particular, new proposed legislation known as the “Build Back Better Act” is under consideration within both houses of U.S. Congress. The proposed legislation includes, without limitation, new corporate minimum income taxes. If enacted, most of the proposals would be effective for 2022 or later years. The proposed legislation remains subject to change, and its impact on the Company and holders of common shares of the Company is uncertain.

Occurrence of Natural Disasters, Epidemics or Other Events

Our business could be materially and adversely affected by natural disasters, such as fires or floods, the outbreak of a widespread health epidemic or pandemic, separate from COVID-19, or other events, such as wars, including the military conflict between Russia and Ukraine, acts of terrorism, power shortages or communication interruptions. In addition to previously identified risks associated with the current COVID-19 pandemic, the occurrence of a disaster or similar event could materially disrupt our business and operations. These events could also cause us to close our operating facilities temporarily, which would severely disrupt our operations and have a material adverse effect on our business, financial condition, and results of operations. In addition, our net sales could be materially reduced to the extent that a natural disaster, health epidemic or other major event harms the economies of the countries in which we operate. As such, the outbreak of hostilities between Russia and Ukraine could result in more widespread conflict and could have a severe adverse effect on the surrounding regions and the related markets, and on our business, financial condition, and results of operations. The duration of the conflict and related events and whether it will escalate further cannot be predicted. Our operations could also be severely disrupted if our customers, partners and other third-party providers or other participants were affected by natural disasters, health epidemics, or other major events, such as wars and military conflicts.

Foreign Exchange Risk

The Company is exposed to foreign exchange risk in relation to its holding of significant United States Dollar ("USD") balances in cash and cash equivalents, short-term investments, accounts receivable, deposits, accounts payables, accrued liabilities, lease obligations and entering into USD revenue contracts.  To mitigate exposure to fluctuations in foreign exchange, the Company does not currently enter into hedging contracts, but uses strategies to reduce the volatility of USD assets including converting excess USD to Canadian dollars.  As at December 31, 2021, the Company held net USD assets totaling US$1,177,291.  Accordingly, a hypothetical 10% change in the value of one USD expressed in Canadian dollars as at December 31, 2021 would have had an approximately $150,039 effect on the unrealized foreign exchange gain or loss for the year.  Changes in currency exchange rates could have an adverse effect on the Company's business, financial condition and results of operations.

We caution that the factors referred to above and those referred to as part of particular forward-looking statements may not be exhaustive and that new risk factors emerge from time to time in our rapidly changing business environment.