NXT Energy Solutions Inc. [NSFDF] Filings

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 20-F

 (Mark One)

OR

OR

For the transition period from __ to __

OR

Date of event requiring this shell company report:

Commission file number 000-24027

(Exact Name of Registrant as Specified in its Charter)

Alberta, Canada

(Jurisdiction of incorporation or organization)

Suite 302, 3320 - 17th Avenue SW

Calgary, Alberta, Canada, T3E 0B4

(Address of principal executive offices)

Eugene Woychyshyn

Phone: 403-206-0805

Facsimile: 403-264-6442

Suite 302, 3320 - 17th Avenue SW

Calgary, Alberta, Canada, T3E 0B4

(Name, Telephone, E-mail and/or Facsimile number and address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act: None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Common Shares

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:  None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

68,949,109 common shares outstanding as of December 31, 2022 (77,626,886 common shares outstanding as of May 11, 2023).

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐     No ☒ 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Yes ☐     No ☒ 

Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒     No ☐ 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒     No ☐  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.  See definition of “accelerated filer”, “large accelerated filer”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ☐     Item 18 ☐  

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ☐     No ☒

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

NXT Energy Solutions Inc. is a Calgary-based technology company whose proprietary and patented Stress Field Detection (“SFD^®”) survey system utilizes quantum-scale sensors to detect gravity field perturbations in an airborne survey method, which can be used both onshore and offshore to remotely identify traps and reservoirs with hydrocarbon and geothermal exploration potential.  The SFD^® survey system enables NXT’s clients to focus their exploration decisions concerning land commitments, data acquisition expenditures, and prospect prioritization on areas with the greatest potential.  SFD^® is environmentally friendly and unaffected by ground security issues or difficult terrain and is the registered trademark of NXT.  NXT provides its clients with an effective and reliable method to reduce time, costs, and risks related to exploration.

Except for any historical information contained herein, the matters discussed in this Annual Report on Form 20-F contain certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business.  These statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable.  This information also relate to our future prospects, developments and business strategies.  These forward-looking statements are identified by their use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “will” and similar terms and phrases, including references to assumptions.  These forward-looking statements involve risks and uncertainties, including current trend information, projections for deliveries and other trend projections, that may cause our actual future activities and results of operations to be materially different from those suggested or described in this Annual Report on Form 20-F.

Forward-looking statements in this document includes, but is not limited to:

Such forward-looking information is based on a number of assumptions which may prove to be incorrect.  Assumptions have been made with respect to the following matters, in addition to any other assumptions identified in this document:

Although NXT believes that the expectations reflected in such forward-looking statements are reasonable, undue reliance should not be placed on them as NXT can give no assurance that such expectations will prove to be correct. Forward-looking statements is based on expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by NXT and are described in the forward-looking information. Material risks and uncertainties include, but are not limited to:

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected.  Given these uncertainties, users of the information included in this Annual Report on Form 20-F, including investors and prospective investors, are cautioned not to place undue reliance on such forward-looking statements.  We do not intend to update the forward-looking statements included in this Annual Report on Form 20-F.

In this Annual Report on Form 20-F, except as specified otherwise or unless the context requires otherwise, “we”, “our”, “us”, the “Company”, and “NXT” refer to NXT Energy Solutions Inc. and its subsidiaries.  All references to “fiscal” in connection with a year shall mean the year ended December 31.

All financial information contained herein is expressed in Canadian dollars (“CDN$”) unless otherwise stated.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

This Form 20-F is being filed as an annual report under the United States Securities Exchange Act of 1934, as amended, (the “U.S. Exchange Act”) and, as such, there is no requirement to provide any information under this item.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

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.

ITEM 3. KEY INFORMATION

A. [Reserved].

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.

NXT is still in the early stages of realizing widespread 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 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 the consolidated financial statements have been issued.

The Company has deferred payment of operating costs, including payroll and other general and administrative costs. Subsequent to December 31, 2022, the Company completed a private placement (the “Private Placement”) which resulted in raising an additional net proceeds of $1,658,280. 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^® related revenues 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, expand its revenue base to a level sufficient to exceed fixed operating costs, and generate consistent 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 was 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 (defined below).

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

In preparing the 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, 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.

Certain estimates and judgments have a material impact where the assumptions underlying these accounting estimates relate to matters that are highly uncertain at the time the estimate or judgment is made or are subjective. In 2022 and 2021, the estimates and judgments included the assessment of impairment indicators of intellectual property.

The Company reviews intellectual property for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company considers both internal and external factors when assessing for potential indicators of impairment of its intellectual property, including the consideration of historical and forecasted SFD^® related revenues, market capitalization, control premiums, and the SFD^® related revenue multiples compared to industry peers. When indicators of impairment exist, the Company first compares the total of the estimated undiscounted future cash flows or the estimated sale price to the carrying value of an asset. If the carrying value exceeds these amounts, an impairment loss is recognized for the excess of the carrying value over the estimated fair value of the intellectual property.

Other accounting estimates and judgments that may have a material impact on the financial statements include: the forward looking assumptions related to the going concern assumption, the estimated useful lives of intellectual property and property, plant and equipment, and the assumptions used to measure 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 of 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, 2022, the Company held net U.S. dollar liabilities totaling US$231,161.  Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2022 would have had an approximately $31,327 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.

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 ended 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 was required to make monthly payments to the Lessor of approximately US$39,500 until April 2022.

In Q4-21 the Company extended the 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.  Should NXT want to repurchase the aircraft at the end of the extended term, the purchase price will be US$1.21 million.  

When the aircraft is not needed for use by NXT, we seek to earn charter hire reimbursements 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.

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 former 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, one of the members of NXT’s Board of Directors (the “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.

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 (“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 may not 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 person” insurance on any of our personnel.

We depend on key staff members that are involved in the SFD^® data interpretation process and to continue to enhance our technology.  We are working to minimize dependency on key personnel.    Currently, a total of four persons, two of whom are highly experienced, are trained to interpret SFD^® signals.  In addition, the Company is developing interpretation algorithms which will reduce the reliance on human interpretation.  A process of formal documentation of the ongoing research and development of the sensor technology, the acquisition/survey methodologies, and the processing and interpretation work flows is ongoing and will be part of the management systems.

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.

We have undertaken efforts and other steps to enhance our data security infrastructure.  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, 2022, cash balances in bank accounts  placed with financial institutions with investment grade credit ratings.  The Company manages this credit risk by requiring advance payments before entering into certain contract milestones and when possible accounts receivable insurance.

Tax Matters

Payment made to NXT for services rendered to clients and branch office in certain countries may be subject to foreign income and withholding taxes. Such taxes incurred are only recoverable in certain limited circumstances, including potential utilization in Canada as a foreign tax credit, or against future taxable earnings from the foreign jurisdictions. 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.

The Company may be a “passive foreign investment company” (“PFIC”), which may have adverse U.S. federal income tax consequences for U.S. investors

The Company believes that it was a PFIC for its most recently completed tax year and, based on current business plans and financial expectations, the Company believes that it may be a PFIC for its current tax year and may be a PFIC in future tax years. If the Company is a PFIC for any year during a U.S. taxpayer’s holding period of common shares of the Company, then such U.S. taxpayer generally will be required to treat any gain realized upon a disposition of the common shares of the Company or any so-called ‘‘excess distribution’’ received on its common shares of the Company as ordinary income, and to pay an interest charge on a portion of such gain or distribution. In certain circumstances, the sum of the tax and the interest charge may exceed the total amount of proceeds realized on the disposition, or the amount of excess distribution received, by the U.S. taxpayer. Subject to certain limitations, these tax consequences may be mitigated if a U.S. taxpayer makes a timely and effective QEF Election (as defined below) or a Mark-to-Market Election (as defined below). A U.S. taxpayer who makes a timely and effective QEF Election generally must report on a current basis its share of the Company’s net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts with respect to the common shares of the Company. However, U.S. taxpayers should be aware that there can be no assurance that the Company will satisfy the record keeping requirements that apply to a qualified electing fund, or that the Company will supply U.S. taxpayers with information that such U.S. taxpayers require to report under the QEF Election rules, in the event that the Company is a PFIC and a U.S. taxpayer wishes to make a QEF Election. Thus, U.S. Holders may not be able to make a QEF Election with respect to their common shares. A U.S. taxpayer who makes the Mark-to-Market Election generally must include as ordinary income each year the excess of the fair market value of the common shares of the Company over the taxpayer’s basis therein. This paragraph is qualified in its entirety by the discussion below under the heading ‘‘Certain United States Federal Income Tax Considerations — Passive Foreign Investment Company Rules.’’ Each potential investor who is a U.S. taxpayer should consult its own tax advisor regarding the tax consequences of the PFIC rules and the acquisition, ownership, and disposition of the common shares 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 the common shares of the Company. Additionally, states in which the Company operates or owns assets may impose new or increased taxes. If enacted, most of the proposals would be effective for the current or later years. The proposed legislation remains subject to change, and its impact on the Company and holders of the common shares of the Company is uncertain.

In addition, the Inflation Reduction Act of 2022 includes provisions that will impact the U.S. federal income taxation of corporations. Among other items, this legislation includes provisions that will impose a minimum tax on the book income of certain large corporations and an excise tax on certain corporate stock repurchases that would be imposed on the corporation repurchasing such stock. It is unclear how this legislation will be implemented by the U.S. Department of the Treasury and the Company cannot predict how this legislation or any future changes in tax laws might affect the Company or holders of the common shares of the Company.

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. 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, 2022, the Company held net U.S. dollar liabilities totaling US$231,161.  Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2022 would have had an approximately $31,327 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.

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:

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 and Exchange Commission in accordance with the Exchange Act.

The underlying technology employed by our SFD^® survey system was invented by Mr. Liszicasz, our former President and CEO, chairman.  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. 

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.  All other all rights, title, and interest in and to the SFD^® technologies for all other commercial applications remained with Mr. Liszicasz.

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 SFD^® used by NXT for the reception, collection and recording of subsurface geological stresses for hydrocarbon exploration and geothermal resources. 

Our business does not normally rely on significant capital expenditures other than required regulatory additions to the aircraft.  For 2023 we do not anticipate further significant upgrades for the aircraft.  For the last three fiscal years, the Company made capital expenditures for property and equipment of $nil (2022), $nil (2021) and $nil (2020).   

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

Given the passing on January 21, 2023 of Mr. George Liszicasz, NXT’s former CEO, the Board of Directors has formally empowered a committee of the Board to assume the CEO’s duties.  The Committee, which meets several times weekly with NXT management, consists of Lead Director Charles Selby and Directors Gerry Sheehan and Bruce G. Wilcox, who collectively possess senior operating and management experience in the Energy and Capital Markets Industries.  The Committee will undertake its executive role, until further notice, in close cooperation with NXT’s qualified management team that will continue to manufacture SFD^® systems, perform SFD^® surveys, and provide vital interpretation as contracts are finalized.

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

B. Business overview.

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

NXT Energy Solutions Inc. is a Calgary-based technology company whose proprietary and patented SFD^® survey system utilizes quantum-scale sensors to detect gravity field perturbations in an airborne survey method which can be used both onshore and offshore to remotely identify traps and reservoirs with hydrocarbon and geothermal exploration potential.  The SFD^® survey system enables NXT’s clients to focus their exploration decisions concerning land commitments, data acquisition expenditures and prospect prioritization on areas with the greatest potential.  SFD^® is environmentally friendly and unaffected by ground security issues or difficult terrain and is the registered trademark of NXT.  NXT provides its clients with an effective and reliable method to reduce time, costs and risks related to exploration.

We utilize our proprietary, airborne SFD^® survey system to provide a service for the geothermal and 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. NXT’s principal markets have been in South America, Africa and Asia.

The underlying technology employed by our SFD^® survey system was invented by Mr. Liszicasz, our former President and Chief Executive Officer, and Chairman.  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 NXT all his rights and entitlements to the SFD^® technology for use in the field of hydrocarbon exploration and on April 18, 2021 all his rights and entitlements to the SFD^® technology for geothermal resources. 

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 and geothermal resources.

SFD^® sensors remotely respond to gravity perturbations and changes in subsurface stress regimes that are meaningful for oil and gas exploration and geothermal resources.  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 NXT to cover larger areas and more clients with minimum fixed cost.  Our sales representatives continue to pursue SFD^® opportunities in numerous regions including Africa, Latin America, and 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 46 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:

We continue to progress and grow our project pipeline on a fee for survey project basis.

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.

The Company generates revenue from its SFD^® survey system that enables the clients to focus their exploration decisions concerning land commitments, data acquisition expenditures and prospect prioritization on areas with the greatest potential.  NXT conducts all of its survey operations from its head office in Canada, and occasionally maintains administrative offices in foreign locations if and when needed.  Revenue fluctuations are a normal part of SFD^® related revenue and can vary significantly year-over-year. 

We had no revenues in 2022. Revenues for the years ended December 31, 2021 were generated solely from a single client and the Hydrocarbon Right.  There were no revenues from the Geothermal Right.  Revenues for the year ended December 31, 2020 were the result of the forfeiture of a non-refundable deposit. 

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

International Market

During 2021 the Company completed the delivery of certain pre-existing Hydrocarbon Right SFD^® data to its customer (the “Pre-existing SFD^® Data Sale”).  The Company has been fully paid for the Pre-existing SFD^® Data Sale.

Other

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

The fees payable by AGV were partially secured by a US$100,000 non-refundable deposit.  As AGV did not complete at least one of three SFD^® surveys by June 30, 2020, the non-refundable deposit was forfeited to NXT in 2020.

Geothermal Update

Acquisition of the Geothermal Right

The Company acquired the rights to the geothermal applications of the SFD^® technology (the “Geothermal Right”) from Mr. George Liszicasz, the Company’s former Chairman, President and Chief Executive Officer of NXT on April 18, 2021 (the “Acquisition”).  The agreement providing for the Acquisition was negotiated between Mr. Liszicasz and a special committee of the Board comprised entirely of independent directors (the “Committee”).  The Board delegated authority to the Committee to perform the negotiations.  The initially negotiated consideration payable by the Company in connection with the Acquisition included the following: 

collectively, the “Consideration”.

Geothermal applications of the SFD^® technology include naturally occurring subsurface fluid reservoirs or rock conditions from which heat can be extracted and utilized for generating electric power, or for direct utilization in industrial, agricultural or domestic applications.  The main subsurface properties such as porosity, permeability and impermeable cap rock that are vital in the search for oil and gas resources and are equally critical for locating the most prospective geothermal resources.  For these reasons, the SFD^® technology has a natural extension to geothermal applications.

Since first commercialized in 2007 for hydrocarbon use, NXT’s non-intrusive SFD^® airborne technology enables its customers to significantly improve drill success rates while reducing the overall negative environmental impact of traditional large-scale ground surveys by minimalizing disruptions to community life and surface use.  NXT anticipates applying for patent protection for the geothermal applications of SFD^® once development of the SFD^® sensors reach appropriate milestones.

As industries worldwide transition toward a low-carbon economy, geothermal energy has gained greater prominence for its environmental benefits as a non-intermittent renewable energy source.  NXT will begin to utilize the research and marketing skillsets acquired in hydrocarbon resources to develop and commercialize the application of the SFD^® technology for geothermal resource exploration.  By expanding the Company’s scope of business to include exploring for both hydrocarbon and geothermal resources, the Company anticipates that its scope of revenue sources will expand as well.

Description of Review and Approval Process

The Acquisition constituted a “related party transaction” for the purposes of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (“MI 61‑101”) on the basis that Mr. Liszicasz is a director, officer and control person of the Company.

The Acquisition was reviewed and unanimously approved by the Committee which took into consideration the fair market value of the Geothermal Right as determined by them acting in good faith.  Due to the fair market value not being readily determinable, the Committee considered the potential value to be realized by the Company in exercising the Geothermal Right, the value of the Consideration being offered to Mr. Liszicasz, and the effect on the Company’s share ownership before and after the completion of the Acquisition.

The Acquisition was exempt from the formal valuation and disinterested shareholder approval requirements typically applicable to related party transactions under MI 61-101 on the basis that, at the time the Acquisition was agreed to, neither the fair market value of the Geothermal Right (as determined by the Committee acting in good faith, due to the fair market value not being readily determinable), nor the fair market value of the Consideration to be received by Mr. Liszicasz for the Geothermal Right, exceeded 25% of the Company’s market capitalization, calculated as of April 18, 2021 as follows:

Following the issuance of the 300,000 Common Shares, Mr. Liszicasz’s ownership increased to 15,378,679 Common Shares (representing approximately 23.56% of the Company’s then 65,250,710 Common Shares).

The estate of Mr. Liszicasz retains all rights, title, and interest in and to the SFD^® technologies for all other commercial applications, except for respect to hydrocarbons and geothermal resources.

As of December 31, 2022, the Company has recognized $275,610 for the Acquisition, which is the combination of the US$40,000 (CAD$50,310) and CAD$15,000 signature payments, the value of the 300,000 Common Shares and legal costs.  The cost of the remaining milestone will be recognized when it is deemed probable by the Committee that this milestone will be achieved.

Geothermal Right Development Update

Progress continues with respect to the development of the SFD-GT geothermal sensor family. The objective of this project was to test, identify, and analyze the desired elements of the SFD^® geothermal sensor response over known geothermal areas with the ultimate goal of providing a green upstream geophysical service for advancing renewable power initiatives in Canada and abroad.  The agreed project work was completed in November 2021 with total funding of $50,000 from the National Research Council of Canada Industrial Research Assistance Program (“NRC IRAP”).  During Q1-23, the Company submitted a proposal for up to approximately $200,000 to NRC IRAP for a funding and research plan for the next phase to support the research and development of the SFD^® technology for geothermal applications.

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:

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 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 United States 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.

In 2017, our Initiatives to expand and protect our IP (including patenting and new R&D initiatives) were 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.  As a result, NXT has now been granted SFD^® patents in Brazil (February 2022), India (July 2021), Russia (January 2017), Japan (July 2017), Canada (August 2017), Mexico (September 2017), the United States (two patents were granted in November 2017 and September 2018, respectively), China (April 2018), and Europe (January 2020).  In total, NXT has obtained SFD^® patents in 46 countries.  These patents protect our proprietary SFD^® technology and serve as independent third-party recognition of our technological invention in terms of practical applicability, conceptual novelty, and knowledge advancement.  

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 U. S. 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 U.S.

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 Nigeria, Canada, the U.S., 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 NXT to forfeiture of performance bonds.

C. Organizational structure .

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

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 closed the branch in 2021.

D. Property, plant and equipment.

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 $29,657  commencing in October 2015. On March 15, 2022, the Company surrendered 828 square feet of its office building lease to the landlord.

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 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 (CDN$50,340).  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.  Should NXT want to repurchase the aircraft at the end of the extended term, the purchase price will be US$1.21 million. 

When the aircraft is not needed for use by NXT, we seek to earn charter hire reimbursements 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, as detailed in the first three items 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:

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.  We are not affected by any significant environmental concerns, nor is there any planned significant capital additions contemplated.  We have accrued approximately $24,574 for asset retirement obligations related to the minor non-operating interest in these oil and gas wells in which NXT has outstanding abandonment and reclamation obligations in accordance with government regulations. The estimated future abandonment liability is based on estimates of the future timing and costs to abandon, remediate and reclaim the well sites within the next five years. 

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

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 accompanying consolidated Financial Statements and the notes to those statements incorporated by reference elsewhere in this Form 20-F. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this annual report, particularly under the caption “Risk Factors”.

A. Operating results.

Overall Operational Performance

Selected Annual Information

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

Financial Highlights for 2022

Financial Highlights for 2021

Financial Highlights for 2020

Revenue and expenses for the years ended December 31, 2022, 2021 and 2020

SFD^® related revenues –There were no surveys in 2022 and 2020, but revenue was received from the forfeiture of a deposit from the Co-operation Agreement during 2020.  In 2021 the company sold Pre-existing SFD^® data to a customer.

SFD^® related costs – SFD^® related costs include aircraft charter costs (net of charter hire reimbursements), lease expenses and aircraft operation and maintenance costs.

In 2022, 2021 and 2020, aircraft operations were incurred for aircraft handling and maintenance costs.  Aircraft operations were higher in 2022 due to the timing of routine major preventive maintenance costs in Q1-22 and preparing the aircraft for up to 300 hours of flight hours to conduct SFD^® surveys, but overall survey project costs were $118,441 lower due to the costs incurred for the Pre-existing Data Sale in 2021.

In 2021, SFD^® related costs were higher compared to 2020 due to costs to deliver the Pre-existing SFD^® Data, routine maintenance costs and lower charter hire reimbursements due to the COVID-19 pandemic.  This was offset by lower aircraft lease costs, due to the favourable CDN$ to US$ exchange rate during 2021.

The aircraft is available for charter to third parties through our aircraft manager when it is not being used by NXT.  Any charter hire reimbursements received are used to offset aircraft costs.

In April 2017, NXT completed a sale and leaseback agreement of its aircraft with the Lessor.  NXT has leased the aircraft over an initial term of 60 months and retains all existing operating rights and obligations. NXT is required to make monthly payments to the Lessor of approximately US$39,500.  NXT has the option to extend the term of the lease by an additional two years for payments of approximately US$22,500 per month. 

In Q4-21, 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 incremental borrowing rate is 11.2%.  The Company recognized an additional $615,737 Aircraft Right of use assets and US$481,797 ($615,737) additional Lease obligations.

Should NXT want to repurchase the aircraft at the end of the extended term, the purchase price will be US$1.21 million. 

G&A - G&A is a major component of NXT’s total expenses.  The categories included in G&A are as follows:

G&A increased $546,574 or 17%, in 2022 compared to 2021 for the following reasons: 

G&A before SBCE decreased $151,153, or 5%, in 2021 compared to 2020 for the following reasons: 

Stock-based compensation

SBCE varies in any given year as it is a function of several factors including the number of units of each type of stock based compensation plan issued in the period and the amortization term (based on the term of the contract and/or number of years for full vesting of the units, which is normally three years) of the resultant expense.  Also, SBCE is a function of periodic changes in the inputs used in the Black-Scholes option valuation model, such as volatility in NXT’s trailing share price and for cash-settled stock-based compensation awards variability will occur based on changes to observable prices.  Stock options granted generally expire, if unexercised, five years from the date granted and entitlement to exercise them generally vests at a rate of one-third at the end of each of the first three years following the date of grant.  The deferred share unit (“DSUs”) plan (the “DSU Plan”) is a long-term incentive plan that permits the grant of DSUs to qualified directors.  DSUs granted under the DSU Plan are to be settled at the retirement, resignation or death of the Board member holding the DSUs.  RSUs entitle the holder to receive, at the option of the Company, either the underlying number of shares of the Company’s common stock upon vesting of such units or a cash payment equal to the value of the underlying shares. The RSUs vest at a rate of one-third at the end of each of the first three years following the date of grant.  In the year ended December 31, 2020, the Company granted 1,200,000 RSUs to employees and officers.  In 2022 and 2021, the Company settled the 2021 RSU vesting with shares and cash, and intends to continue to settle the RSUs in shares and cash.  The ESP Plan allows employees and other individuals determined by the Board to be eligible to contribute a minimum of 1% and a maximum of 10% of their earnings to the plan for the purchase of Common Shares in the capital of the Company, of which the Company will make an equal contribution. Common Shares contributed by the Company may be issued from treasury or acquired through the facilities of the TSX.  During 2022, 2021 and 2020 the Company has elected to issue Common Shares from treasury.

SBCE in 2022 is lower compared to 2021 by $72,616 or 25%.  RSU costs in 2022 are higher than 2021 as the 2022 vesting price was higher than in 2021 and in Q1-21 there was a forfeiture by one participant in the RSU plan.  This was offset by the Company’s share price being lower at December 31, 2022 versus December 31, 2021.  Option expense was lower as no options were issued for director fees in Q3-22.  There was no ESP Plan bonus accrual 2022, as all participants in the ESP Plan have been members of the plan for more than one year.  No directors elected to participate in the DSU Plan in 2022 and 2021.

SBCE in 2021 was higher compared to 2020 by $119,484 or 71%.  Option expense in 2021 was higher as a director elected to take options, instead of cash payments for part of their fees.  Option expense in 2020 was a grant of an award of 30,000 fully vested stock options.  The ESP Plan expenses was higher in 2021 as the plan was in effect for the whole year, versus one month in 2020.  The main driver was the RSU Plan recognized twelve months of RSU expense in 2021 versus 128 days in 2020.

Amortization Expense

Property and equipment and Intellectual property is recorded at cost, less accumulated amortization, which is recorded over the estimated service lives of the assets using annual rates and methods which are also subject to ongoing tests of potential impairment of the recorded net book value.

Property and equipment and related amortization expense. Property and equipment amortization was lower in 2022 compared to 2021, and 2021 compared to 2020, due to additional assets becoming fully amortized during the period and the Company not acquiring new assets in the periods.  Amortization also decreases each year as the Company uses the declining balance method of amortization, thereby having the effect of lowering amortization each year on existing assets.

IP and related amortization expense. NXT acquired specific rights to utilize the proprietary SFD^® technology in global hydrocarbon exploration applications from the inventor of the SFD^® technology, NXT’s former Chairman, President and Chief Executive Officer, on August 31, 2015.  The value attributed to the acquired IP assets was $25.3 million.  The IP assets are amortized on a straight-line basis over a 15-year period (future amortization expense of $1,685,000 per year) and are also being subject to an ongoing assessment of potential indicators of impairment of the recorded net book value.    No impairments were recognized in 2022, 2021, or 2020.

As discussed in Item 4.B., the Company acquired the SFD^® technology for the Geothermal Right from NXT’s Chairman, President and Chief Executive Officer on April 18, 2021.  The Geothermal Right is being amortized on a straight line basis over its estimated useful life of 20 years. The annual amortization expense expected to be recognized is approximately $13,781 per year for a five year aggregate total of $68,902.

Interest (income) expense, net. This category of other expenses includes interest income earned on short-term investments netted, by interest expense from the financial liability related to the aircraft lease (up to February 2022) and long-term debt. Interest expense decreased in 2022 versus 2021 due to the cessation of the financial liability in Q1-22, amortization of the HASCAP Loan principle and no short-term investments during Q4-22.  2021 interest (income) expense net decreased $52,017 versus 2020 as interest rates have decreased, less cash was held in short-term investments and interest expense was incurred for the HASCAP Loan. 

Foreign exchange loss (gain). This category of other expenses includes losses and gains caused by changes in the relative currency exchange values of US$ and CDN$.  The Company held net US$ liability at December 31, 2022 and significant net assets in US$ at December 31, 2021 and December 31, 2020, including accounts receivable, cash and cash equivalents, short-term investments, US$ lease obligations and the security deposit for the aircraft, all of which have an effect on the unrealized foreign exchange gain and loss.  At December 31, 2022, the CDN$ to US$ exchange rate was 6.3% lower as compared to the CDN$ to US$ exchange rate at December 31, 2021, resulting in the corresponding foreign exchange gain for 2022.  At December 31, 2021, the CDN$ to US$ exchange rate was slightly lower as compared to the CDN$ to US$ exchange rate at December 31, 2020, resulting in the corresponding foreign exchange loss for 2021. At December 31, 2020, the CDN$ strengthened as compared to the US$ at September 30, 2020, resulting in the corresponding foreign exchange loss for Q4-20. For YE-20 the foreign exchange gain was the result of weakening of the CDN$ versus the US$ from December 31, 2019 to March 31, 2020 and large US$ balances. This foreign exchange gain was reduced in the following three quarters as the CDN$ strengthened. US$ balances were also slowly reduced during each period in 2020. The Company does not currently enter into hedging contracts, but does however use alternative strategies to reduce the volatility of US dollar assets including converting excess US dollars to CDN dollars.

Intellectual property and other.  In 2022, 2021 and 2020, the Company’s IP and other expenses were associated with periodic patent maintenance and renewal fees required during these time periods.

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

Loss on disposal of assets & lease modifications.  In Q1-22, the Company surrendered 826 square feet of office space. As a result of the space surrender, the Company recorded a loss on disposal of leasehold improvement assets and lease modifications.

Income tax expense – There was no income tax expense in 2022, 2021 or 2020. 

At the end of 2022, 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 2041) and other resource deductions totaling approximately $9.14 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

Significant or Unusual Items Impacting Net Income (Loss):

During Q4-22 costs were reduced primarily due to lower vacation and SBCE.  In Q3-22 the Company incurred lower SFD^®-related costs as the aircraft had early completed its required maintenance. In Q2-22 the Company recorded unrealized foreign exchange gains as the CDN$ weakened versus the US$. In Q1-22, the Company incurred maintenance fees on its aircraft to have it available for up to 300 flight hours. In Q4-21, the CEWS and the CERS programs were ended therefore increasing G&A. In Q3-21, the Company recorded favourable exchange gains due to the strengthening of the US$. In Q2-21, revenue was recognized for a Pre-existing SFD^® Data Sale. In Q1-21, costs were lower due to lower aircraft costs, a reduction in RSU accruals, and less fluctuation of exchange rates.  Excluding Q2-21, the Company incurred net losses primarily due to incurred SFD^®-related costs related to aircraft lease and aircraft maintenance costs, G&A, and non-cash items like SBCE, which can be a significant expense in any given quarter. More specific details are provided below:

B. Liquidity and capital resources.

Going Concern

The audited consolidated financial statements for 2022 have been prepared on a going concern basis. The going concern basis of presentation assumes that NXT will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. 

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

The Company continues to defer payment of operating costs, including payroll and other general and administrative costs.  Subsequent to December 31, 2022, the Company completed a Private Placement which resulted in raising an additional net proceeds of $1,658,280.  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^®-related revenues 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, expand its revenue base to a level sufficient to exceed fixed operating costs, and generate consistent positive cash flow from operations.  The occurrence and timing of these events cannot be predicted with sufficient certainty. 

The audited 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 the audited consolidated financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. These adjustments could be material.

NXT’s cash and cash equivalents at December 31, 2022 totaled $0.263 million. Net working capital totaled $(1.691) million. See the information in the section “Liquidity and Capital Resources – Net Working Capital” for further information.

Risks related to having sufficient ongoing net working capital to execute survey project contracts are mitigated through our normal practice of obtaining advance payments and progress payments from customers throughout the course of the projects, which often span three to four months. In addition, where possible, risk of default on client billings has been mitigated through the use of export insurance programs offered by Export Development Canada.

The Company does not have provisions in its leases, contracts, or other arrangements that would trigger additional funding requirements or early payments except that if the Company were to default on its office lease, the current month rent, plus the next three months, become immediately due. If the Company were to default on the aircraft lease, the Company would be required to deliver the aircraft back to the Lessor.

Rights Offering

On December 2, 2022, NXT closed the Rights Offering that had been announced on October 31, 2022. The Company issued 2,149,180 common shares a price of $0.18 per common share, for aggregate gross proceeds of $386,852. Share issue costs of $170,790 were recorded as a reduction to share capital.

Shareholders of record on November 7, 2022 received one right (a “Right”) for each common share held. 2.95 Rights entitles the holder to purchase one common share of the Company at a price of $0.18 per Common Share.

Private Placement

On December 22 the Company announced the Private Placement at $0.195 per share.  At December 22, 2022 the Company issued 1,148,282 common shares for gross proceeds of $223,915 in the first tranche, less issuance costs of $7,732.

On January 25, 2023, the Company closed the Private Placement by issuing an additional 8,510,000 common shares, at $0.195 per common shares, for additional aggregate gross proceeds of approximately $1,659,450, less issuance costs of $1,170.

The proceeds from both Offerings are being used to commence SFD^® surveys, and for general and administrative costs.

Non-GAAP Measure: This discussion includes references to the term “net working capital”, which does 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 had net working capital of $(1,681,003) as at December 31, 2022 as follows:

Net working capital at December 31, 2022 compared to December 31, 2021 decreased by $4,497,485, or 160%, due to cash used in operating activities, offset by cash received from payments on accounts receivable. Accounts payable increased due to annual timing of professional fees, payroll accruals, and the deferral of payments of various G&A.

Long-term Debt (HASCAP Loan)

On May 26, 2021, the Company received $1,000,000 from the BDC’s HASCAP Loan. The HASCAP Loan is a $1,000,000 non-revolving ten-year term credit facility with an interest rate of 4%. Repayment terms were interest only until May 26, 2022, and monthly principal plus interest payments for the remaining nine years. The HASCAP Loan is secured by a general security agreement and is guaranteed by BDC.

Sources and uses of cash 

The overall net changes in cash balances in each of the years noted below is a function of several factors including any inflows (outflows) due to changes in net working capital balances and net of any cash transferred into/out of short-term investments.  Further information on the net changes in cash, by each of the operating, financing, and investing activities, for the last three fiscal years is as follows:

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:

Operating cash flow decreased by $1,900,831 in 2022 as compared to 2021 due larger payments for outstanding accounts receivable in 2021 for the Pre-existing SFD^® Data Sale versus 2022 and increased G&A during 2022.  Operating cash flow decreased by $2,373,927 in 2021 as compared to 2020 due to the payment of the Pre-existing SFD^® Data Sale accounts receivable offset by timing of accounts payable and accrued liabilities. 

Financing Activities

2022 – The Company began to repay its HASCAP Loan at the beginning of Q3-22. Proceeds were received from employee contributions under the ESP Plan, but at a lower rate due to the salary deferral.  The repayment of financial liability was for the sales and leaseback agreement on NXT’s aircraft which ended in Q1-22.  In Q4-22 net proceeds from the Offerings were $432,244.  Please see the sections “Liquidity and capital resources” for a discussion on the Offerings.

2021 – In 2021, proceeds of $1,000,000 were received from the HASCAP Loan. Additionally, proceeds were received from employee contributions under the ESP Plan which began in Q4-20.  This was offset by payments on the financing liability and finance lease. 

2020 – In 2020, the financing activity was for payments on the finance liability and finance lease offset by employee contributions under the ESP Plan.  In Q2-20, the Company terminated the finance lease for office equipment with a final payment of approximately $20,000.

Investing Activities

2022 – Changes in short-term investments were for investments in guaranteed investment certificates to fund operations and investing of excess short-term cash.

2021 - $65,310 was incurred for cash payments on the Acquisition. Changes in short-term investments were for investments in guaranteed investment certificates to fund operations and investing of excess short-term cash.

2020 – Short-term investments decreased in 2020 as the Company used investments in Guaranteed Investment Certificates to fund operations.

C. Research and development, patents, and licenses, etc.

R&D expenditures incurred to develop, improve, and test the SFD^® survey system and related components are expensed as incurred.  Any IP that is acquired for the purpose of enhancing R&D projects, if there is no alternative use for the IP, is expensed in the period acquired. 

Geothermal Right Development Update

Progress continues with respect to the development of the SFD-GT geothermal sensor family. The objective of this project was to test, identify, and analyze the desired elements of the SFD^® geothermal sensor response over known geothermal areas with the ultimate goal of providing a green upstream geophysical service for advancing renewable power initiatives in Canada and abroad.  The agreed project work was completed in November 2021 with total funding of $50,000 from NRC IRAP.  During Q1-23, the Company submitted a proposal for up to approximately $200,000 to NRC IRAP for a funding and research plan for the next phase to support the research and development of the SFD^® technology for geothermal applications. 

Patents

In Q1-22, NXT announced its patent application in Brazil has been allowed. As of the date of this MD&A, NXT has been granted SFD^® patents in Brazil (February 2022), India (July 2021), Russia (January 2017), Japan (July 2017), Canada (August 2017), Mexico (September 2017), the United States (two patents were granted in November 2017 and September 2018, respectively), China (April 2018), and Europe (January 2020). In total, NXT has obtained SFD^® patents or received patent allowances in 46 countries. These patents protect our proprietary SFD^® technology and serve as independent third-party recognition of our technological invention in terms of practical applicability, conceptual novelty, and knowledge advancement.

D. Trend information.

We have historically conducted a limited number of service contracts each year, the dollar value and timing of securing and ultimate delivery of which are subject to numerous external factors.

As 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, then our next survey in Nigeria during 2019 was for US$8.9 million. At the date of this 20-F current external trends such as in commodity prices and the Ukrainian Russian War could affect our operations for the current fiscal year. Please see Item 3 D for a discussion on these risks.

E. Critical Accounting Estimates

In preparing the 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.

Certain estimates and judgments have a material impact where the assumptions underlying these accounting estimates relate to matters that are highly uncertain at the time the estimate or judgment is made or are subjective. In 2022 and 2021, the estimates and judgments included the assessment of impairment indicators of intellectual property.

The Company reviews intellectual property for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company considers both internal and external factors when assessing for potential indicators of impairment of its intellectual property, including the consideration of historical and forecasted SFD^® related revenues, market capitalization, control premiums, and the SFD^® related revenue multiples compared to industry peers. When indicators of impairment exist, the Company first compares the total of the estimated undiscounted future cash flows or the estimated sale price to the carrying value of an asset. If the carrying value exceeds these amounts, an impairment loss is recognized for the excess of the carrying value over the estimated fair value of the intellectual property.

Other accounting estimates and judgments that may have a material impact on the financial statements include: the forward looking assumptions related to the going concern assumption, the estimated useful lives of intellectual property and property, plant and equipment, and the assumptions used to measure stock based compensation expense.

Off-balance sheet arrangements.

The Company has no off-balance sheet arrangements as of the date of this 20-F other than office premise non-lease operating costs with Interloq Capital (the “Landlord”).  If the Company were to default on its office lease the current month rent including operation costs plus the next three months become immediately due.  [Note: the table was replaced with a principles-based liquidity and capital resources requirement focused on material short- and long- term cash requirements from known contractual and other obligations] NXT pays an estimated operating cost during the current year, but has the obligation to pay the actual operating costs incurred as defined in the office lease with the Landlord early in the first quarter of the preceding year if the estimate was low, or will receive a refund if the estimate was too high.  Currently, the Company believes that the current operating cost estimate is reasonable and is constant with discussions with the Landlord.

Safe Harbor.

The Company seeks safe harbor for our forward-looking statements. Please see the section titled “Forward-Looking Statements” above.

ITEM 6. DIRECTORS, SENIOR MANAGEMENTAND 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.  At present, our Board 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 May 11, 2023, for our directors, and executive officer:  

None of the directors or executive officers is, or has been in the last ten years, a director, chief executive officer or chief financial officer of any company that: (i) was subject to a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation for a period of more than 30 consecutive days that was issued while the director was acting in that capacity; (ii) was subject to such an order that was issued after the proposed director ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in such a capacity.

None of the directors or executive officers is, or has been in the last ten years, a director or executive officer of any company that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets, other than as discussed below.

None of the directors or executive officers has, within the last ten years, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold their assets.

Messrs. Tilson and Valentine are considered “independent” within the meaning of Canadian securities law.

B. Compensation

Executive Compensation

The following table sets out certain information regarding the annual and long‑term compensation of the former Chief Executive Officer, the Chief Financial Officer at December 31, 2022, 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 2022.  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, 2022:

(See Item 6.E “Share Ownership” for details regarding stock options, DSUs, RSUs, and ESP Plan shares 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.   

In 2022, the directors’ fees were not paid in cash.  Mr. Tilson, Mr. Selby, Mr. Wilcox and Mr. Valentine elected to receive all or part of their compensation in stock options.  Any compensation not received as stock options has been deferred as part of the Company’s cash retention strategy.    The annual retainer was based on $30,000 ($35,000 in the case of the Chairman of the Audit Committee).  Total compensation payable for 2022 is summarized as follows:

(1)      Mr. Ingriselli resigned from the Board effective January 20, 2023.

We do not provide additional compensation for committee participation (other than as noted previously regarding the minor additional amount for service as the Chairman of the Audit Committee).  (See Item 6.E “Share ownership” for details regarding stock options and DSUs granted to directors.)

The Company reimburses directors for out-of-pocket expenses for attending Board and committee meetings.  We do not provide termination benefits for directors. 

C. Board practices.

Expiration Dates

No director or member of our administrative, or supervisory bodies has an expiration date for their current term of office.  Directors are elected by shareholders at the annual meeting of shareholders and hold the position either until the next annual shareholders’ meeting or until a successor is appointed.  The period during which each individual has served as a director is set out in the table under Item 6.A – “Directors and senior management”. 

Service Contracts

No directors 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 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.  Messrs. Valentine and Tilson 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 and Mr. Woychyshyn (VP of Finance & Chief Financial Officer (“CFO”) of the Company).

Responsibilities of the Disclosure Committee

The Disclosure Committee’s 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 Disclosure Committee is responsible for ensuring public disclosure through filing these news releases on SEDAR, EDGAR, and our 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.  Mr. Tilson is independent within the meaning of Canadian National Instrument 58-101.

 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. Tilson (Chair), Wilcox, and Valentine.  Mr. Tilson and Mr. Valentine are independent within the meaning of Canadian National Instrument 58-101.  Mr. Tilson and Mr. Wilcox are 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 – 17th Avenue SW, Calgary, Alberta, Canada, T3E 0B4.

Bruce G. Wilcox

Mr. Wilcox holds a Master of International Management from the American Graduate School of International Management in Phoenix.  His career as an investment company CEO, analyst and portfolio manager was spent primarily with Cumberland Associates, LLC, and a New York equity fund, where he was a partner, and served as Chairman of the Managing Committee.  He has previously served as audit committee chair of a publicly traded company.

Thomas Valentine

Mr. Valentine is a lawyer.  He has practiced law, both as a barrister and a solicitor, since being admitted to the Law Society of Alberta in 1987. He is a member of his firm’s Energy and Infrastructure Practice Group and is involved in energy-related matters throughout the Middle East, North Africa, the Commonwealth of Independent States, Asia and South America.   

John Tilson

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 and Mr. Wilcox 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.  Mr. Valentine intends to meet the requirements to become financially literate.

Given the passing of Mr. Liszicasz and the establishment of the management committee, on a temporary basis and in exceptional circumstances, National Instrument 52-110 permits the conduct of business by an Audit Committee which does not meet the requirement that the Audit Committee be fully independent provided that a majority of the Committee satisfy the test of independence.  With Mr. Tilson and Mr. Valentine being independent, the Audit Committee meets this requirement.

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:

COMPENSATION COMMITTEE

Composition of the Compensation Committee

Messrs. Selby (Chair), and Tilson and Valentine are members of the Compensation Committee.  Mr. Tilson and Mr. Valentine of the Compensation Committee are independent within the meaning of Canadian National Instrument 58-101. 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.

D. Employees

Fiscal year ended December 31, 2022

As of the fiscal year ended December 31, 2022, we had a total of 10 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, 2022:

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

Fiscal year ended December 31, 2021

As of the fiscal year ended December 31, 2021, we had a total of 10 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, 2021:

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

Fiscal year ended December 31, 2020

As of the fiscal year ended December 31, 2020, we had a total of 11 employees.  NXT had 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, 2020:

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

E. Share ownership.

Information on the ownership of our common shares is given under Item 7, Major Shareholders and Related Party Transactions.

Summary of Stock Options, Restricted Share Units and Stock Appreciation Rights Granted To Executive Officers and Directors

All stock options have been granted pursuant to the Stock Option Plan (the “Plan”) of the Company or predecessor plans with substantially the same terms.  The Plan is approved and ratified by shareholders every three years at the Company’s annual general meeting (“AGM”).  The Plan, was re-approved and ratified at the Company’s AGM held on June 6, 2022.  Pursuant to this Plan, all stock option grants must be approved by the Board.  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 Company, 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.