EXHIBIT 15.1
NXT ENERGY SOLUTIONS INC.
Consolidated Financial Statements
For the Years ended
December 31, 2021, 2020 and 2019
NXT ENERGY SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Assets | | | | | Adjusted - Note 2 | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 2,257,855 | | | $ | 2,690,146 | |
Short-term investments (Note 3) | | | 550,000 | | | | 341,261 | |
Accounts receivable (Note 4) | | | 841,567 | | | | 965,548 | |
Prepaid expenses and deposits (Note 5) | | | 265,436 | | | | 77,532 | |
| | | 3,914,858 | | | | 4,074,487 | |
Long term assets | | | | | | | | |
Deposits (Note 6) | | | 234,475 | | | | 425,830 | |
Property and equipment (Note 7) | | | 624,763 | | | | 707,326 | |
Right of Use Assets (Note 8) | | | 1,943,252 | | | | 1,991,772 | |
Intellectual property (Note 9) | | | 14,867,023 | | | | 16,285,333 | |
| | $ | 21,584,371 | | | $ | 23,484,748 | |
Liabilities and Shareholders’ Equity | | | | | | | | |
Current liabilities | | | | | | | | |
Accounts payable and accrued liabilities (Note 10, 25) | | $ | 500,625 | | | $ | 440,537 | |
Contract obligations (Note 11) | | | 0 | | | | 127,507 | |
Current portion of long-term debt (Note 12) | | | 64,815 | | | | 0 | |
Current portion of lease obligation (Note 13) | | | 532,936 | | | | 687,991 | |
| | | 1,098,376 | | | | 1,256,035 | |
Long-term liabilities | | | | | | | | |
Long-term debt (Note 12) | | | 935,185 | | | | 0 | |
Long-term lease obligations (Note 13) | | | 1,369,668 | | | | 1,401,847 | |
Asset retirement obligation (Note 14) | | | 22,337 | | | | 22,741 | |
| | | 2,327,190 | | | | 1,424,588 | |
| | | 3,425,566 | | | | 2,680,623 | |
| | | | | | | | |
Shareholders’ equity | | | | | | | | |
Common shares (Note 16): - authorized unlimited | | | | | | | | |
Issued: 65,250,710 (2020 - 64,437,790) common shares | | | 95,779,352 | | | | 95,327,123 | |
Contributed capital | | | 9,381,966 | | | | 9,355,716 | |
Deficit (Note 2) | | | (87,002,513 | ) | | | (83,878,714 | ) |
| | | 18,158,805 | | | | 20,804,125 | |
| | $ | 21,584,371 | | | $ | 23,484,748 | |
Going Concern (Note 1)
Commitments (Note 15)
Subsequent event (Note 15)
Signed “George Liszicasz” | Signed “Bruce G. Wilcox” |
Director | Director |
The accompanying notes are an integral part of these consolidated financial statements.
NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Expressed in Canadian dollars)
| | For the Year ended December 31 |
| | 2021 | | | 2020 | | | 2019 | |
| | | | | | Adjusted - Note 2 | | | Adjusted - Note 2 | |
Revenue | | | | | | | | | |
SFD® related revenue (Note 22) | | $ | 3,134,250 | | | $ | 136,566 | | | $ | 11,976,149 | |
Expenses | | | | | | | | | | | | |
SFD® related costs, net (Note 23) | | | 1,224,168 | | | | 1,111,070 | | | | 2,653,055 | |
General and administrative expenses (Note 18, 24 & 25) | | | 3,189,857 | | | | 3,341,010 | | | | 3,541,594 | |
Amortization (Note 7, 9) | | | 1,776,484 | | | | 1,780,806 | | | | 1,781,181 | |
| | | 6,190,509 | | | | 6,232,886 | | | | 7,975,830 | |
Other expenses (income) | | | | | | | | | | | | |
Interest (income) expense, net | | | 37,955 | | | | (14,062 | ) | | | (28,959 | ) |
Foreign exchange loss (gain) | | | 8,597 | | | | (64,432 | ) | | | 177,736 | |
Intellectual property and other | | | 20,988 | | | | 10,402 | | | | 56,833 | |
| | | 67,540 | | | | (68,092 | ) | | | 205,610 | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | (3,123,799 | ) | | | (6,028,228 | ) | | | 3,794,709 | |
| | | | | | | | | | | | |
Income tax expense (Note 19) | | | 0 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | |
Net income (loss) and comprehensive income (loss) | | | (3,123,799 | ) | | | (6,028,228 | ) | | | 3,794,709 | |
Net income (loss) per share (Note 17) | | | | | | | | | | | | |
Basic | | | (0.05 | ) | | | (0.09 | ) | | | 0.06 | |
Diluted | | | (0.05 | ) | | | (0.09 | ) | | | 0.06 | |
The accompanying notes are an integral part of these consolidated financial statements.
NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
| | For the Year ended December 31 |
| | 2021 | | | 2020 | | | 2019 | |
| | | | | Adjusted - Note 2 | | | Adjusted - Note 2 | |
Cash from (used in): | | | | | | | | | |
Operating activities | | | | | | | | | |
Net income (loss) | | $ | (3,123,799 | ) | | $ | (6,028,228 | ) | | $ | 3,794,709 | |
Items not affecting cash: | | | | | | | | | | | | |
Stock based compensation expense (Note 18) | | | 287,900 | | | | 168,416 | | | | 43,809 | |
Amortization | | | 1,776,484 | | | | 1,780,806 | | | | 1,781,181 | |
Accretion expense (recovery) (Note 14) | | | (404 | ) | | | 2,069 | | | | 2,068 | |
Non-cash lease costs | | | (11,736 | ) | | | (11,736 | ) | | | (11,736 | ) |
Change in carry amount of right of use assets & lease liabilities | | | 24,508 | | | | 21,470 | | | | (2,095 | ) |
Unrealized foreign exchange (gain) loss | | | 157 | | | | 35,143 | | | | 64,226 | |
Change in non-cash working capital balances (Note 21) | | | 13,717 | | | | 625,768 | | | | (1,464,695 | ) |
ARO liabilities settled (Note 14) | | | 0 | | | | (809 | ) | | | (7,366 | ) |
| | | 2,090,626 | | | | 2,621,127 | | | | 405,392 | |
Net cash from (used in) operating activities | | | (1,033,173 | ) | | | (3,407,101 | ) | | | 4,200,101 | |
| | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | |
Proceeds from the Employee Share Purchase plan | | | 69,259 | | | | 7,592 | | | | 0 | |
Proceeds from long-term debt (Note 12) | | | 1,000,000 | | | | 0 | | | | 0 | |
Shares purchased and retired (Note 16) | | | 0 | | | | 0 | | | | (1,343,184 | ) |
Share issuance costs (Note 16) | | | (42,697 | ) | | | 0 | | | | 0 | |
Repayment of financial liability and lease obligation (Note 13 and 15) | | | (151,134 | ) | | | (181,208 | ) | | | (159,906 | ) |
Net cash from (used in) financing activities | | | 875,428 | | | | (173,616 | ) | | | (1,503,090 | ) |
| | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | |
Acquisition of intellectual property (Note 9) | | | (65,310 | ) | | | 0 | | | | 0 | |
Purchase of property and equipment, net | | | 0 | | | | 0 | | | | (216,691 | ) |
Proceeds from (used in) short-term investments | | | (208,739 | ) | | | 3,436,691 | | | | 75,939 | |
Net cash from (used in) investing activities | | | (274,049 | ) | | | 3,436,691 | | | | (140,752 | ) |
| | | | | | | | | | | | |
Effect of foreign exchange rate changes on cash and cash equivalents | | | (497 | ) | | | (24,073 | ) | | | (37,546 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (432,291 | ) | | | (168,099 | ) | | | 2,518,713 | |
Cash and cash equivalents, beginning of the year | | | 2,690,146 | | | | 2,858,245 | | | | 339,532 | |
Cash and cash equivalents, end of the year | | $ | 2,257,855 | | | $ | 2,690,146 | | | $ | 2,858,245 | |
| | | | | | | | | | | | |
Supplemental information | | | | | | | | | | | | |
Cash interest paid (received) | | | 14,284 | | | | (21,422 | ) | | | (16,724 | ) |
Cash taxes paid | | | 0 | | | | 0 | | | | 0 | |
The accompanying notes are an integral part of these consolidated financial statements.
NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Shareholders’ Equity
(Expressed in Canadian dollars)
| | For the Year ended December 31 |
| | 2021 | | | 2020 | | | 2019 | |
| | | | | Adjusted - Note 2 | | | Adjusted - Note 2 | |
| | | | | | | |
Common Shares | | | | | | | | | |
Balance at beginning of the year | | $ | 95,327,123 | | | $ | 95,313,064 | | | $ | 96,656,248 | |
Shares purchased and retired during the year (Note 16) | | | - | | | | - | | | | (1,343,184 | ) |
Issuance of common stock on Employee Share Purchase Plan (Note 16) | | | 173,023 | | | | 14,059 | | | | - | |
Issuance of common stock on Restricted Stock Unit Plan (Note 16) | | | 114,604 | | | | - | | | | - | |
Issuance of common stock on acquisition of SFD® Geothermal Right, net of share issuance costs (Note 16) | | | 164,602 | | | | - | | | | - | |
Balance at end of the year | | | 95,779,352 | | | | 95,327,123 | | | | 95,313,064 | |
Contributed Capital | | | | | | | | | | | | |
Balance at beginning of the year | | | 9,355,716 | | | | 9,306,493 | | | | 9,262,684 | |
Issuance of Equity for intellectual property (Note 16) | | | 207,300 | | | | - | | | | - | |
Transfer of equity to common shares (Note 16) | | | (207,300 | ) | | | - | | | | - | |
Recognition of stock based compensation expense (Note 18) | | | 26,250 | | | | 49,223 | | | | 43,809 | |
Balance at end of the year | | | 9,381,966 | | | | 9,355,716 | | | | 9,306,493 | |
Deficit | | | | | | | | | | | | |
Balance at beginning of the year | | | (83,878,714 | ) | | | (77,850,486 | ) | | | (81,645,195 | ) |
Net (loss) income | | | (3,123,799 | ) | | | (6,028,228 | ) | | | 3,794,709 | |
| | | | | | | | | | | | |
Balance at end of the year | | | (87,002,513 | ) | | | (83,878,714 | ) | | | (77,850,486 | ) |
| | | | | | | | | | | | |
Total Shareholders’ Equity at end of the year | | | 18,158,805 | | | | 20,804,125 | | | | 26,769,071 | |
The accompanying notes are an integral part of these consolidated financial statements.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
1. The Company and going concern
NXT Energy Solutions Inc. (the “Company” or “NXT”) is a publicly traded company based in Calgary, Alberta Canada.
NXT’s proprietary Stress Field Detection (“SFD®”) technology is an airborne survey system that utilizes quantum-scale sensors to detect gravity field perturbations in an airborne survey method which can be used both onshore and offshore to remotely identify traps and reservoirs with exploration potential in both the hydrocarbon and geothermal industries.
These consolidated financial statements of NXT have been prepared by management in accordance with generally accepted accounting principles of the United States of America (“US GAAP”).
These consolidated financial statements reflect adjustments, all of which are normal recurring adjustments that are, in the opinion of management, necessary to reflect fairly the financial position and results of operations for the respective periods.
These consolidated financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that NXT will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The events described in the following paragraphs highlight that there is substantial doubt about NXT’s ability to continue as a going concern within one year after the date that these 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 these consolidated financial statements have been issued.
The Company has plans in place to reduce operating costs including payroll and other general and administrative costs and is evaluating alternatives to reduce other costs. If required, further financing options that may or may not be available to the Company include issuance of new equity, debentures or bank credit facilities. The need for any of these options will be dependent on the timing of securing new SFD® 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, ultimately to expand the 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 these consolidated financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses and the balance sheet classifications used. These adjustments could be material.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
Covid-19 Pandemic
As of the date of these consolidated financial statements the Covid-19 pandemic continues to be a risk to the operations of the Company. The Company has made provisions so employees can work safely in the office or if necessary from home, followed all Alberta Health Services and Health Canada recommendations, and implemented hygiene and physical distancing policies. Demand for our services and prospective revenues may become adversely impacted the longer the Covid-19 pandemic continues. The impact of the continuation of the Covid-19 pandemic may hamper our ability to deliver SFD® related revenues in the following ways. If restrictions on international travel continue, our aircraft and personal may not be able to perform project surveys. An outbreak of the virus among our staff or our customers’ personnel could delay any survey in progress. Business development may be delayed when in-person meetings and technical presentations may be a superior delivery method to tele-conferences or on-line video conferencing.
The situation is dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect to the Company is not known at this time. Estimates and judgments made by management in the preparation of these consolidated financial statements are subject to a higher degree of measurement uncertainty during this volatile period.
Use of Estimates and Judgements
In preparing these consolidated financial statements, NXT is required to make estimates and assumptions that affect both the amount and timing of recording assets, liabilities, revenues and expenses since the determination of these items may be dependent on future events. The Company uses the most current information available and exercises careful judgment in making these estimates and assumptions. In the opinion of management, these consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the Company’s significant accounting policies. The estimates and assumptions used are based upon management’s best estimate as at the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period when determined. Actual results may differ from those estimates.
Critical accounting estimates relate primarily to the use of the going concern assumption, estimated useful lives and the valuation of intellectual property, property and equipment and the measurement of stock-based compensation expense.
2. Significant Accounting Policies
Basis of Presentation
These consolidated financial statements for the period ended December 31, 2021 have been prepared by management in accordance with US GAAP.
Consolidation
These consolidated financial statements reflect the accounts of the Company and its wholly owned subsidiaries (all of which are inactive). All significant inter-company balances and transactions among NXT and its subsidiaries have been eliminated and are therefore not reflected in these consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and short term Guaranteed Investment Certificates (“GIC’s”) with an original maturity less than 90 days from the date of acquisition.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
Short Term Investments
Short term investments consist of short term GICs, with original maturity dates greater than 90 days and up to one year.
Derivative Instruments
Derivative instruments are recognized on the balance sheet at fair value with any changes in fair value between periods recognized in the determination of net income (loss) for the period. NXT does not apply hedge accounting to any of its derivatives. As at December 31, 2021 and 2020, NXT had no outstanding derivative instruments.
Fair Value Measures
For any balance sheet items recorded at fair value on a recurring basis or non-recurring basis, the Company is required to classify the fair value measure into one of three categories based on the fair value hierarchy noted below.
In Level I, the fair value of assets and liabilities is determined by reference to quoted prices in active markets for identical assets and liabilities that the Company has the ability to assess at the measurement date.
At December 31, 2021, the fair value of the restricted stock units (“RSU”) liability based on share price was determined using Level I inputs.
In Level II, determination of the fair value of assets and liabilities is based on the extrapolation of inputs, other than quoted prices included within Level I, for which all significant inputs are observable directly or indirectly. Such inputs include published exchange rates, interest rates, yield curves and stock quotes from external data service providers. Transfers between Level I and Level II would occur when there is a change in market circumstances.
In Level III, the fair value of assets and liabilities measured on a recurring basis is determined using a market approach based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities measured at fair value can fluctuate between Level II and Level III depending on the proportion of the value of the contract that extends beyond the time frame for which inputs are considered to be observable. As contracts near maturity and observable market data becomes available, the contracts are transferred out of Level III and into Level II.
The determination of the fair value of the acquisition of the Intellectual property (Note 9) was determined using Level III inputs.
Measurement of credit losses on financial instruments
The impairment model of financial instruments is based on expected losses rather than incurred losses. In making the assessment of expected losses, the Company considers the following factors: historically realized bad debts; a counterparty’s present financial condition and whether a counterparty has breached certain contracts; the probability that a counterparty will enter bankruptcy; changes in economic conditions that correlate to increased levels of default and term to maturity of the specific receivable. These expected credit losses are recognized as an allowance rather than as a direct write-down of the amortized cost basis.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
Deposits
Deposits consist of security payments made to lessors for the Company’s office and aircraft lease. They are classified as long term if the lease end date is greater than one year.
Property and Equipment
Property and equipment is recorded at cost, less accumulated amortization, which is recorded over the estimated service lives of the assets using the following annual rates and methods:
Computer hardware (including survey equipment) | 30% declining balance |
Aircraft equipment | 10% declining balance |
Furniture and other equipment | 20% declining balance |
Leasehold improvements | 10% declining balance |
Intellectual Property
Intellectual property acquired is recorded at cost, less accumulated amortization, which is recorded over the estimated minimum useful life of the assets. The Company incurs periodic costs that are expensed when incurred to file patents and to maintain them.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, which includes property, equipment and intellectual property for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company considers both internal and external factors when assessing for potential indicators of impairment, and with respect to intellectual property, the Company’s assessment includes consideration of historical and forecasted 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 asset.
Research and Development Expenditure
Research and development (“R&D”) expenditures incurred to develop, improve and test the SFD® survey system and related components are expensed as incurred. Any intellectual property that is acquired for the purpose of enhancing research and development projects, if there is no alternative use for the intellectual property, is expensed in the period acquired. No significant external R&D was incurred in the years ended 2021, 2020 and 2019.
Foreign Currency Translation
The Company’s functional currency is the Canadian dollar. Revenues and expenses denominated in foreign currencies are translated into Canadian dollars at the average exchange rate for the applicable period. Monetary assets and liabilities are translated into Canadian dollars at the exchange rate in effect at the end of the applicable period. Non-monetary assets and liabilities are recorded at the relevant exchange rates for the period in which the balances arose. Any related foreign exchange gains and losses resulting from these translations are included in the determination of net income (loss) for the period.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
Income Taxes
NXT follows the asset and liability method of accounting for income taxes. This method recognizes deferred income tax assets and liabilities based on temporary differences in reported amounts for financial statement and income tax purposes, at the income tax rates expected to apply in the future periods when the temporary differences are expected to be reversed or realized. The effect of a change in income tax rates on deferred income tax assets and deferred income tax liabilities is recognized in income in the period when the tax rate change is enacted. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.
Stock Based Compensation
NXT follows the fair value method of accounting for stock options, restricted stock units, deferred stock units, and the employee share purchase plan (the “Share Compensation Plans”) that are granted to acquire common shares under NXT’s Share Compensation Plans. For equity-settled stock-based compensation awards, fair values are determined at the grant date and the expense, net of estimated forfeitures, is recognized over the requisite service period with a corresponding increase recorded in contributed capital. An adjustment is made to compensation for any differences between the estimated forfeitures and the actual forfeitures. For cash-settled stock-based compensation awards, fair values, based on observable prices, are determined at each reporting date and periodic changes are recognized as compensation costs, with a corresponding change to liabilities.
Upon exercise or realization of the equity-settled Share Compensation Plans, the consideration received by NXT, and the related amount which previously recorded in contributed capital, is recognized as an increase in the recorded value of the common shares of the Company.
Net Income (Loss) Per Share
Basic income (loss) per share amounts are calculated by dividing net income (loss) by the weighted average number of common shares that are outstanding for the fiscal period. Shares issued during the period are weighted for the portion of the period that the shares were outstanding. Diluted income per share, in periods when NXT has net income, is computed using the treasury stock method, whereby the weighted average number of shares outstanding is increased to include any additional shares that would be issued from the assumed exercise of stock options and restricted stock units. The incremental number of shares added under the treasury stock method assumes that outstanding stock options and restricted stock units that are exercisable at exercise prices below the Company’s average market price (i.e. they were “in-the-money”) for the applicable fiscal period are exercised and then that number of incremental shares is reduced by the number of shares that could have been repurchased by the Company from the issuance proceeds, using the average market price of the Company’s shares for the applicable fiscal period.
No addition to the basic number of shares is made when calculating the diluted number of shares if the diluted per share amounts become anti-dilutive (such as occurs in the case where there is a net loss for the period).
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
Revenue
SFD® Surveys
The performance obligation for NXT in SFD® surveys is the acquisition, processing, interpretation and integration of Stress Field Detection (SFD®) data. Revenue from the sale of SFD® survey contracts (excluding any related foreign value added taxes) is recognized over time by measuring the progress toward satisfaction of its performance obligation to the customer. All funds received or invoiced in advance of recognition of revenue are reflected as contract obligations and classified as a current liability on our balance sheet.
The Company uses direct survey costs as the input measure to recognize revenue in any fiscal period. The percentage of direct survey costs incurred to date over the total expected survey costs to be incurred, provides an appropriate measure of the stage of the performance obligation being satisfied over time.
SFD® Data Sales
The performance obligation for NXT in SFD® data sales is the delivery of the promised specific services as itemized in the contract with the customer. Revenue from the sale of SFD® data sale (excluding any related foreign value added taxes) is recognized once the services are completed and the data is transferred to the customer.
Leases
The Company determines if an arrangement is an operating or finance lease, as defined under U.S. GAAP, at inception. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. These leases are included in right-of-use (“ROU”) assets and lease obligations in the Consolidated Balance Sheet.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the obligation to make lease payments arising from such leases. Lease obligations are recognized at the lease commencement date based on the present value of remaining lease payments over the lease term, taking into consideration conditions such as incentives and termination penalties, as appropriate. A corresponding ROU asset is recognized at the amount of the lease obligation, adjusted for payments made prior to lease commencement or initial direct costs, if any.
When calculating the present value, the Company uses the rate implicit in the lease, or uses its incremental borrowing rate for a similar term and risk profile based on the information available at the commencement date. The Company’s lease terms may have options to extend or terminate the lease which are included in the calculation of lease obligations when it is reasonably certain that it will exercise those options. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Office and equipment lease expenses are included within General and administrative expenses; the aircraft lease cost is included within SFD® related costs.
Lease agreements can contain both lease and non-lease components, which are accounted for separately.
During 2021 the Company determined that the amounts previously recorded for the Aircraft lease were calculated incorrectly and the United States Dollar denominated lease liability had not been re-measured to Canadian Dollars each reporting period as required. The result of these corrections are to reduce the value of both the Right of use assets and Lease obligations, with changes to related income statement. The Company has determined that the effect of these adjustments are not material. The Company has recorded the adjustments in the related accounts in the comparative periods in these financial statements. On the balance sheet and income statement, the specific accounts affected are Deposits, Right of use assets, Current portion of lease obligations, Long-term lease obligations, Deficit, SFD® related costs, Interest income (expense), and Foreign exchange loss (gain). The loss per share in each of the comparative periods did not change as a result of these immaterial corrections. The tables below highlight the changes to each account in each of the comparative periods.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
Balance Sheet | | December 31, 2020 | |
| | As previously reported | | | Adjustments | | | Adjusted | |
Deposits | | $ | 526,560 | | | $ | (100,730 | ) | | $ | 425,830 | |
Right of use assets | | | 2,415,430 | | | | (423,658 | ) | | | 1,991,772 | |
Current portion of lease obligations | | | (773,465 | ) | | | 85,474 | | | | (687,991 | ) |
Long-term portion of lease obligations | | | (1,896,277 | ) | | | 494,430 | | | | (1,401,847 | ) |
Deficit | | | 83,934,230 | | | | (55,516 | ) | | | 83,878,714 | |
Income Statement | | For the year ended December 31, 2020 | |
| | As previously reported | | | Adjustments | | | Adjusted | |
SFD® related costs | | $ | 1,091,587 | | | $ | 19,483 | | | $ | 1,111,070 | |
Interest (income) expense | | | (11,535 | ) | | | (2,527 | ) | | | (14,062 | ) |
Foreign exchange loss (gain) | | | (76,029 | ) | | | 11,597 | | | | (64,432 | ) |
Net loss | | | (5,999,675 | ) | | | (28,553 | ) | | | (6,028,228 | ) |
Income Statement | | For the year ended December 31, 2019 | |
| | As previously reported | | | Adjustments | | | Adjusted | |
SFD® related costs | | $ | 2,611,086 | | | $ | 41,969 | | | $ | 2,653,055 | |
Interest (income) expense | | | (20,684 | ) | | | (8,275 | ) | | | (28,959 | ) |
Foreign exchange loss (gain) | | | 233,231 | | | | (55,495 | ) | | | 177,736 | |
Net income | | | 3,772,908 | | | | 21,801 | | | | 3,794,709 | |
Deficit | | | 77,934,555 | | | | (84,069 | ) | | | 77,850,486 | |
Accounting for the above adjustments, the adoption of Topic 842 resulted in the initial recognition of right-of-use assets of approximately $3.2 million, current lease liabilities of approximately $0.7 million, and non-current lease liabilities of approximately $2.8 million as at January 1, 2019. Before the above retrospective adjustments, at January 1, 2019, the Company recorded the initial recognition of right-of-use assets of approximately $3.5 million, current lease liabilities of approximately $0.7 million, and non-current lease liabilities of approximately $3.4 million. The disclosures in notes 5, 6, 8, 13, 17, 19 and 23 have also been revised.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
Consolidated Statement of Cash Flows
In the preparation of the annual financial statements as at and for the year ended December 31, 2021, the Company has determined that certain amounts previously recorded in the 2019 and 2020 consolidated statements of cash flows were not correctly calculated to properly reflect payments on the financial liability, lease obligation payments and accretion, and application of exchange rates to calculate unrealized foreign exchange (gain) loss including the effect of foreign exchange on changes on cash and cash equivalents. The adjustments to correct the respective financial statement line items are not material and did not change the Cash, SFD® related revenues, or Net income (loss) accounts or basic and diluted loss per share. The Company has recorded the adjustments in the related line items in each of the comparative periods. Line items affected on the Consolidated Statement of Cash Flows by the adjustment are: Non-cash lease costs, Change in the carrying amount of right of use assets and lease liabilities, unrealized foreign exchange (gain) loss, Repayment of financial liability and finance lease obligations, Proceeds from (used in) short-term investments, and Effect of foreign exchange rate changes on cash and cash equivalents. The tables below highlight the changes to each line item in each of the comparative periods.
Consolidated Statements of cash flows | | For the year ended December 31, 2020 | |
| | As previously reported | | | Adjustments | | | Adjusted | |
Net loss (see Note 2 “Leases”) | | $ | (5,999,675 | ) | | $ | (28,553 | ) | | $ | (6,028,228 | ) |
Non-cash lease costs | | | (171,300 | ) | | | 159,564 | | | | (11,736 | ) |
Change in carrying amount of right of use assets & lease liabilities | | | 0 | | | | 21,470 | | | | 21,470 | |
Unrealized foreign exchange (gain) loss | | | 141,799 | | | | (106,656 | ) | | | 35,143 | |
Operating activities | | | (3,452,925 | ) | | | 45,824 | | | | (3,407,101 | ) |
Repayment of financial liability | | | (42,515 | ) | | | (138,693 | ) | | | (181,208 | ) |
Financing activities | | | (34,923 | ) | | | (138,693 | ) | | | (173,616 | ) |
Effect of foreign exchange rate changes on cash and cash equivalents | | | (116,941 | ) | | | 92,868 | | | | (24,073 | ) |
Net increase (decrease) in cash and cash equivalents | | | (168,099 | ) | | | 0 | | | | (168,099 | ) |
Consolidated statements of cash flows | | For the year ended December 31, 2019 | |
| | As previously reported | | | Adjustments | | | Adjusted | |
Net income (see Note 2 “Leases”) | | $ | 3,772,908 | | | $ | 21,801 | | | $ | 3,794,709 | |
Non-cash lease costs | | | (171,056 | ) | | | 159,320 | | | | (11,736 | ) |
Change in carrying amount of right of use assets & lease liabilities | | | 0 | | | | (2,095 | ) | | | (2,095 | ) |
Unrealized foreign exchange (gain) loss | | | 95,557 | | | | (31,331 | ) | | | 64,226 | |
Operating activities | | | 4,052,406 | | | | 147,695 | | | | 4,200,101 | |
Repayment of financial liability and finance lease obligations | | | (42,603 | ) | | | (117,303 | ) | | | (159,906 | ) |
Financing activities | | | (1,385,787 | ) | | | (117,303 | ) | | | (1,503,090 | ) |
Proceeds from (used in) short-term investments | | | 42,764 | | | | 33,175 | | | | 75,939 | |
Investing activities | | | (173,927 | ) | | | 33,175 | | | | (140,752 | ) |
Effect of foreign exchange rate changes on cash and cash equivalents | | | 26,021 | | | | (63,567 | ) | | | (37,546 | ) |
Net increase (decrease) in cash and cash equivalents | | | 2,518,713 | | | | 0 | | | | 2,518,713 | |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
Government grants
Government grants are recognized when there is reasonable assurance that the grant will be received, and all attached conditions will be complied with. When the grant relates to an expense item, it is recognized as an expense reduction in the period in which the costs are incurred. Where the grant relates to an asset, it is recognized as a reduction to the net book value of the related asset and then subsequently in net loss over the expected useful life of the related asset through lower charges to amortization and impairment.
3. Short-term investments
As at December 31, 2021 and 2020 all GIC’s had less than one year left before maturity. For December 31, 2021, interest rates ranged from 0.85% to 0.87%. (2020: 0.50% to 1.75%.)
Days to maturity | | December 31, 2021 | | | December 31, 2020 | |
Less than 90 days | | $ | 0 | | | $ | 191,261 | |
90 days to one year | | | 550,000 | | | | 150,000 | |
| | | 550,000 | | | | 341,261 | |
4. Accounts Receivable
Accounts receivable are all current as at December 31, 2021. US$200,000 (CDN$246,922) of outstanding trade receivables was received in February 2022.
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Trade receivables | | $ | 806,460 | | | $ | 804,059 | |
Other receivables | | | 35,107 | | | | 161,489 | |
| | | 841,567 | | | | 965,548 | |
Allowance for doubtful accounts | | | 0 | | | | 0 | |
Net accounts receivable | | | 841,567 | | | | 965,548 | |
The entire trade receivable was with one client as at December 31, 2021 and 2020.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
5. Prepaid expenses and deposits
Security deposits have been made to the lessors of the office building and the aircraft. The aircraft deposit is denominated in United States Dollars and the amount of US$150,000 (CDN$191,166) is expected to be returned to the Company in the second quarter of 2022. (See Note 15).
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
| | | | | (Adjusted – Note 2) | |
Prepaid expenses | | $ | 74,270 | | | $ | 77,532 | |
Aircraft deposit | | | 191,166 | | | | 0 | |
| | | 265,436 | | | | 77,532 | |
6. Deposits
Security deposits have been made to the lessors of the office building and the aircraft. The aircraft deposit is denominated in United States Dollars.
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
| | | | | (Adjusted – Note 2) | |
Building | | $ | 43,309 | | | $ | 43,309 | |
Aircraft | | | 191,166 | | | | 382,521 | |
| | | 234,475 | | | | 425,830 | |
7. Property and equipment
| | December 31, 2021 | |
| | Cost | | | Accumulated | | | Net book | |
| | Base | | | Amortization | | | value | |
Survey equipment | | $ | 892,637 | | | $ | 701,911 | | | $ | 190,726 | |
Computers and software | | | 1,265,045 | | | | 1,242,504 | | | | 22,541 | |
Furniture and other equipment | | | 528,419 | | | | 516,084 | | | | 12,335 | |
Leasehold improvements | | | 1,084,573 | | | | 685,412 | | | | 399,161 | |
| | | 3,770,674 | | | | 3,145,911 | | | | 624,763 | |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
| | December 31, 2020 | |
| | Cost | | | Accumulated | | | Net book | |
| | Base | | | Amortization | | | value | |
Survey equipment | | $ | 892,637 | | | $ | 676,442 | | | $ | 216,195 | |
Computers and software | | | 1,265,045 | | | | 1,232,844 | | | | 32,201 | |
Furniture and other equipment | | | 528,419 | | | | 513,001 | | | | 15,418 | |
Leasehold improvements | | | 1,084,573 | | | | 641,061 | | | | 443,512 | |
| | | 3,770,674 | | | | 3,063,348 | | | | 707,326 | |
8. Right of use assets
|
| | December 31, 2021 | |
| | Cost | | | Accumulated | | | Right of | |
| | Base | | | Amortization | | | Use | |
Aircraft | | $ | 1,870,808 | | | $ | 1,073,365 | | | $ | 797,443 | |
Office Building | | | 1,805,447 | | | | 664,372 | | | | 1,141,075 | |
Printer | | | 17,794 | | | | 13,060 | | | | 4,734 | |
| | | 3,694,049 | | | | 1,750,797 | | | | 1,943,252 | |
| | December 31, 2020 | |
| | Cost | | | Accumulated | | | Right of | |
| | Base | | | Amortization | | | Use | |
| | | | | | | | | | (Adjusted – Note 2) | |
Aircraft | | $ | 1,256,787 | | | $ | 658,562 | | | $ | 598,225 | |
Office Building | | | 1,799,626 | | | | 415,559 | | | | 1,384,067 | |
Printer | | | 17,794 | | | | 8,314 | | | | 9,480 | |
| | | 3,074,207 | | | | 1,082,435 | | | | 1,991,772 | |
In the fourth quarter of 2021, the Company determined it was reasonably certain it would extended 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 ROU 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.
9. Intellectual property
Acquisition of SFD® Geothermal Right
The Company acquired the SFD® technology rights for geothermal resources (“Geothermal Right”) from Mr. George Liszicasz, President and CEO of NXT (“CEO”) on April 18, 2021. The consideration deliverable by the Company in connection with the acquisition of the Geothermal Right is set forth below:
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
| 1. | US$40,000 (CAD$50,310) signature payment, which became due immediately and was paid on April 22, 2021; |
| | |
| 2. | 300,000 common shares, which were issued in December 2021; |
| | |
| 3. | CAD$15,000 signature milestone payment paid in August 2021; |
| | |
| 4. | US$200,000 milestone payment which will become due in the event that the Company’s cash balance exceeds CAD$5,000,000 due to receipt of specifically defined funds from operations; and |
| | |
| 5. | US$250,000 milestone payment which will become due in the event that the Company executes and completes and receives full payment for an SFD® contract valued at US$10,000,000 or greater, provided such contract is entered into and completed and payment of at least US$5,000,000 is received by April 18, 2023. |
As of December 31, 2021 the Company has recognized $275,610 for the acquisition Geothermal Right 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 of $207,300 and other costs of $3,000. Before the 300,000 common shares were issued by the Company, the value of the common shares was recorded as Contributed capital. Upon TSX approval, the amount recognized of $207,300 less issuance costs of $42,697 were reclassified to common shares. The cost of the remaining two milestones will be recognized when it is deemed probable that these two milestones will be achieved by a special committee of the Board of Directors, comprised entirely of independent directors. The Board of Directors delegated authority to the special committee to determine when the milestones have been achieved.
The current book value of 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 5 year aggregate total of approximately $68,902.
SFD® Hydrocarbon Right
During 2015, NXT acquired the rights to the SFD® technology for use in the exploration of hydrocarbons (“Hydrocarbon Right”) from the CEO, and recorded the acquisition as an intellectual property asset on the balance sheet. The asset was recorded at the fair value of the consideration transferred, including the related tax effect of approximately $25.3 million.
The Hydrocarbon Right is being amortized on a straight line basis over its estimated useful life of 15 years. The annual amortization expense expected to be recognized is approximately $1.7 million per year for a 5 year aggregate total of $8.5 million.
| | December 31, 2021 | |
| | Cost | | | Accumulated | | | Net book | |
| | Base | | | amortization | | | Value | |
SFD® Hydrocarbon Right acquired | | $ | 25,271,000 | | | $ | 10,670,400 | | | $ | 14,600,600 | |
SFD® Geothermal Right acquired | | | 275,610 | | | | 9,187 | | | | 266,423 | |
| | | 25,546,610 | | | | 10,679,587 | | | | 14,867,023 | |
| | December 31, 2020 | |
| | Cost | | | Accumulated | | | Net book | |
| | Base | | | amortization | | | Value | |
SFD® Hydrocarbon Right acquired | | $ | 25,271,000 | | | $ | 8,985,667 | | | $ | 16,285,333 | |
| | | 25,271,000 | | | | 8,985,667 | | | | 16,285,333 | |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
10. Accounts payable and accrued liabilities
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Accrued liabilities related to: | | | | | | |
Consultants and professional fees | | $ | 203,732 | | | $ | 183,920 | |
Payroll | | | 79,544 | | | | 120,318 | |
Expenses owed to an executive officer (Note 26) | | | 11,467 | | | | 0 | |
Vacation Accrued | | | 102,536 | | | | 71,699 | |
| | | 397,279 | | | | 375,937 | |
Trade payables and other | | | 103,346 | | | | 64,600 | |
| | | 500,625 | | | | 440,537 | |
11. Contract Obligations
In December, 2020, the Company received a deposit of US$100,000 to sell pre-existing SFD® data. The SFD® data was delivered to the customer in the second quarter of 2021.
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Contract obligations | | $ | 0 | | | $ | 127,507 | |
12. Long-term debt
On May 26, 2021, the Company received $1,000,000 from the Business Development Bank of Canada’s (“BDC”) Highly Affected Sectors Credit Availability Program (“HASCAP Loan”), funded by the Royal Bank of Canada. The HASCAP Loan is a $1,000,000 non-revolving ten year term credit facility with an interest rate of 4%. Repayment terms are 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.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
Maturity of long-term debt: | | | |
2022 | | | 104,167 | |
2023 | | | 146,481 | |
2024 | | | 142,037 | |
2025 | | | 137,593 | |
2026 | | | 133,148 | |
2027 to 2031 | | | 534,907 | |
Total principal and interest payments | | | 1,198,333 | |
Less interest | | | (198,333 | ) |
Total principal remaining | | | 1,000,000 | |
Current portion of long-term debt | | | 64,815 | |
Non-current portion of long-term debt | | | 935,185 | |
13. Lease obligation
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
| | | | | (Adjusted – Note 2) | |
Aircraft | | $ | 712,762 | | | $ | 640,550 | |
Office Building | | | 1,185,356 | | | | 1,440,056 | |
Printer | | | 4,486 | | | | 9,232 | |
| | | 1,902,604 | | | | 2,089,838 | |
Current portion of lease obligations | | | 532,936 | | | | 687,991 | |
Long-term lease obligations | | | 1,369,668 | | | | 1,401,847 | |
Maturity of lease liabilities: | | | | | Weighted Average Remaining Lease Term | |
2022 | | $ | 702,215 | | | 3.4 years | |
2023 | | | 711,284 | | | 2.3 years | |
2024 | | | 481,885 | | | 1.5 years | |
2025 | | | 275,389 | | | 0.8 years | |
Total lease payments | | | 2,170,773 | | | | |
Less imputed interest | | | (268,169 | ) | | | | |
Total discounted lease payments | | | 1,902,604 | | | | | |
Current portion of lease obligations | | | 532,936 | | | | | |
Non-current portion of lease obligations | | | 1,369,668 | | | | | |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
| | Lease Term | | Option to Extend | | Incremental Borrowing Rate |
Aircraft | | April 2024 | | Executed | | | 11.2 | % |
Office Building | | September 2025 | | No | | | 8.2 | % |
Printer | | November 2022 | | No | | | 8.9 | % |
The Company’s total lease expenditures for the year ended December 31, 2021 was $1,198,211 (2020 - $1,262,109).
14. Asset Retirement Obligations
Asset retirement obligations (“ARO”) relate to minor non-operated interests in oil and natural gas wells in which NXT has outstanding abandonment and reclamation obligations in accordance with government regulations. The estimated future abandonment liability is based on estimates of the future timing and costs to abandon, remediate and reclaim the well sites within the next five years. The net present value of the ARO is as noted below, and has been calculated using an inflation rate of 3.4% and discounted using a credit-adjusted risk-free interest rate of 10%.
| | 2021 | | | 2020 | | | 2019 | |
ARO balance, beginning of the year | | $ | 22,741 | | | $ | 21,481 | | | $ | 26,779 | |
Accretion expense | | | 2,069 | | | | 2,069 | | | | 2,068 | |
Change in ARO estimates | | | (2,473 | ) | | | 0 | | | | 0 | |
Costs incurred | | | 0 | | | | (809 | ) | | | (7,366 | ) |
ARO balance, end of the year | | | 22,337 | | | | 22,741 | | | | 21,481 | |
15. Commitments
The table below is the non-lease operating cost components associated with the costs of the building lease.
For the fiscal year ending December 31, | | Office Premises | |
2022 | | $ | 239,988 | |
2023 | | | 239,988 | |
2024 | | | 239,988 | |
2025 | | | 179,991 | |
| | | 899,955 | |
On March 15, 2022, the Company surrendered 828 square feet of its office building lease to the landlord. As a result its non-lease operating cost commitments for the building lease will reduced by approximately $13,881 for 2022, 17,537 for 2023 and 2024, and $13,150 for 2025. The Company incurred a surrender fee of $14,000 which will be expensed in the first quarter of 2022. The Company will derecognize the following amounts on its balance sheet at the surrender date:
Right of Use Assets | | $ | 77,043 | |
Lease obligations | | | 80,081 | |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
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 Cessna Citation aircraft that was purchased in 2015 for US$2.0 million, for the sum of US$2.3 million. NXT has leased the aircraft over an initial term of 60 months and retains all existing operating rights and obligations. Proceeds to NXT from the sale were approximately $3.14 million. The net book value of the asset of $2.37 million was derecognized and the resulting gain on disposition of $0.77 million was deferred. The aircraft is recognized on the balance sheet as a right of use asset with a corresponding lease obligation liability. The deferred gain on disposition is considered a financial liability that is being reduced as aircraft lease payments are made. The balance of the financial liability is included in the aircraft lease obligation in Note 13.
16. Common shares
The Company is authorized to issue an unlimited number of common shares, of which the following are issued and outstanding:
| | | | | | | | For the years ended | |
| | December 31, 2021 | | | December 31, 2020 | |
| | # of shares | | | $ amount | | | # of shares | | | $ amount | |
As at the beginning of the year | | | 64,437,790 | | | $ | 95,327,123 | | | | 64,406,891 | | | $ | 95,313,064 | |
Issuance for Employee Share Purchase Plan | | | 304,550 | | | | 173,023 | | | | 30,899 | | | | 14,059 | |
Issuance for Restricted Stock Units | | | 208,370 | | | | 114,604 | | | | - | | | | - | |
Issuance for SFD® Geothermal Right (Note 9) | | | 300,000 | | | | 164,602 | | | | - | | | | - | |
As at the end of the year | | | 65,250,710 | | | | 95,779,352 | | | | 64,437,790 | | | | 95,327,123 | |
| | For the Year Ended | |
| | December 31, 2019 | |
| | | # of shares | | | | $ amount | |
As at the beginning of the year | | | 68,573,558 | | | $ | 96,656,248 | |
Shares retired during the year | | | (4,166,667 | ) | | | (1,343,184 | ) |
As at the end of the year | | | 64,406,891 | | | | 95,313,064 | |
In December 2021, the TSX approved the issuance of 300,000 common shares for the SFD® Geothermal Right for a value of $207,300 less issuance costs of $42,697 (Note 9). Before the approval of the TSX, the Company recorded the value of the common share consideration in Contributed capital.
In 2019, the Company purchased 4,166,667 common shares in the capital of the Company at a price of $0.30 per common share for total gross costs of $1.25 million plus related costs of $93,184 through a targeted issuer bid. The 4,166,667 shares were cancelled immediately after they were purchased.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
17. Earnings (Loss) per share
| | For the years ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | | | | (Adjusted – Note 2) | | | (Adjusted – Note 2) | |
Net income (loss) for the year | | $ | (3,123,799 | ) | | $ | (6,028,228 | ) | | $ | 3,794,709 | |
Weighted average number of shares outstanding for the year: | | | | | | | | | | | | |
Basic | | | 64,658,380 | | | | 64,409,170 | | | | 68,156,059 | |
Diluted | | | 64,658,380 | | | | 64,409,170 | | | | 68,156,059 | |
Net Income (loss) per share – Basic | | $ | (0.05 | ) | | $ | (0.09 | ) | | $ | 0.06 | |
Net Income (loss) per share – Diluted | | $ | (0.05 | ) | | $ | (0.09 | ) | | $ | 0.06 | |
During 2019 all stock options were out of the money and are not included in the diluted weighted average number of shares.
18. Share based compensation
The Company has an equity compensation program in place for its executives, employees and directors. Executives and employees are given equity compensation grants that vest based on a recipient’s continued employment. The Company’s stock-based compensation awards outstanding as at December 31, 2021, include stock options, RSUs, deferred share units (“DSUs”) and the ESP Plan. The following tables provide information about stock option, RSU, DSU, and ESP Plan activity.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
| | For the years ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Stock Option Expense | | $ | 26,250 | | | $ | 34,223 | | | $ | 43,809 | |
Deferred Share Units | | | 0 | | | | 15,000 | | | | 0 | |
Restricted Stock Units | | | 154,715 | | | | 111,060 | | | | 0 | |
Employee Share Purchase Plan | | | 106,935 | | | | 8,133 | | | | 0 | |
Total stock based compensation expense | | | 287,900 | | | | 168,416 | | | | 43,809 | |
Stock Options:
The following is a summary of stock options which are outstanding as at December 31, 2021
Exercise price per share | | # of options outstanding | | # of options exercisable | | Average remaining life (in years) | |
$0.44 | | 21,360 | | 21,360 | | 4.5 | |
$0.49 | | 8,500 | | 8,500 | | 4.2 | |
$0.51 | | 16,000 | | 16,000 | | 3.7 | |
$0.52 | | 100,000 | | 100,000 | | 2.5 | |
$0.55 | | 30,000 | | 30,000 | | 3.1 | |
$0.59 | | 150,000 | | 150,000 | | 1.8 | |
$0.62 | | 18,050 | | 18,050 | | 5.0 | |
$0.68 | | 14,750 | | 14,750 | | 4.7 | |
| | 358,660 | | 358,660 | | 2.7 | |
A continuity of the number of stock options which are outstanding at the end of the current year and as at the prior fiscal year ended December 31, 2020 and 2019 is as follows:
| | For the year ended | | | For the year ended | |
| | December 31, 2021 | | | December 31, 2020 | |
| | | | | weighted | | | | | | Weighted | |
| | # of stock | | | average | | | # of stock | | | Average | |
| | options | | | exercise price | | | options | | | exercise price | |
Options outstanding, start of the year | | | 421,000 | | | $ | 0.83 | | | | 1,169,500 | | | $ | 1.48 | |
Granted | | | 62,660 | | | $ | 0.56 | | | | 46,000 | | | $ | 0.54 | |
Expired | | | (125,000 | ) | | $ | (1.48 | ) | | | (794,500 | ) | | $ | (1.77 | ) |
Forfeited | | | - | | | | - | | | | - | | | | - | |
Options outstanding, end of the year | | | 358,660 | | | $ | 0.56 | | | | 421,000 | | | $ | 0.83 | |
Options exercisable, end of the year | | | 358,660 | | | $ | 0.56 | | | | 421,000 | | | $ | 0.83 | |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
| | For the year ended | |
| | December 31, 2019 | |
| | | | | weighted | |
| | # of stock | | | average | |
| | options | | | exercise price | |
Options outstanding, start of the year | | | 1,297,000 | | | $ | 1.58 | |
Granted | | | 100,000 | | | $ | 0.52 | |
Expired | | | (47,500 | ) | | $ | (1.51 | ) |
Forfeited | | | (180,000 | ) | | $ | (1.70 | ) |
Options outstanding, end of the year | | | 1,169,500 | | | $ | 1.48 | |
Options exercisable, end of the year | | | 1,119,000 | | | $ | 1.52 | |
Stock options granted generally expire, if unexercised, five years from the date granted and entitlement to exercise them generally vests at a rate of one-third at the end of each of the first three years following the date of grant.
Stock based compensation expense (“SBCE”) is calculated based on the fair value attributed to grants of stock options using the Black-Scholes valuation model and utilizing the following weighted average assumptions:
For the year ended | | 2021 | | | 2020 | | | 2019 | |
Expected dividends paid per common share | | Nil | | | Nil | | | Nil | |
Expected life in years | | | 5.0 | | | | 5.0 | | | | 5.0 | |
Weighted average expected volatility in the price of common shares | | | 108 | % | | | 138 | % | | | 65 | % |
Weighted average risk free interest rate | | | 0.38 | % | | | 1.12 | % | | | 1.68 | % |
Weighted average fair market value per share at grant date | | $ | 0.56 | | | $ | 0.54 | | | $ | 0.52 | |
Intrinsic (or “in-the-money”) value per share of options exercised | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Deferred Stock Units (“DSUs”):
A continuity of the number of DSUs which are outstanding at the end of the current year and as at the prior fiscal year ended December 31, 2020 are as follows:
| | For the years ended | |
Opening balance | | 2021 | | | 2020 | |
DSUs outstanding, start of the year | | | 37,354 | | | | - | |
Granted | | | - | | | | 37,354 | |
Closing balance | | | 37,354 | | | | 37,354 | |
The DSUs plan is a long-term incentive plan that permits the grant of DSUs to qualified directors. DSUs granted under the DSUs plan are to be settled at the retirement, resignation or death of the Board member holding the DSUs
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
Restricted Stock Units (“RSUs”):
The Company’s first grant of RSUs began in 2020. RSUs entitle the holder to receive, at the option of the Company, either the underlying number of shares of the Company’s Common Stock upon vesting of such units or a cash payment equal to the value of the underlying shares. The RSUs vest at a rate of one-third at the end of each of the first three years following the date of grant. In Q3-21, the Company settled the Q3-21 RSU vesting with shares and cash, and intends to continue to settle the RSUs in shares and cash. In the year ended December 31, 2020, the Company granted 1,200,000 RSUs to employees and officers.
A continuity of the number of RSUs, including fair value (“FV”) which are outstanding at the end of the current period and as the end of the prior fiscal year ended December 31, 2020 is as follows:
| | | For the years ended, | |
| | December 31, 2021 | | | December 31, 2020 | |
| | # of RSUs | | | FV/Unit | | | # of RSUs | | | FV/Unit | |
RSUs outstanding, start of the year | | | 1,200,000 | | | $ | 0.79 | | | | - | | | | 0 | |
Granted | | | - | | | | 0 | | | | 1,200,000 | | | $ | 0.45 | |
Common shares issued | | | (208,370 | ) | | $ | (0.55 | ) | | | 0 | | | | 0 | |
Payroll withholdings settled in cash | | | (139,964 | ) | | $ | (0.55 | ) | | | - | | | | - | |
Forfeited | | | (155,000 | ) | | $ | (0.79 | ) | | | - | | | | - | |
RSUs outstanding, end of the year | | | 696,666 | | | $ | 0.61 | | | | 1,200,000 | | | $ | 0.79 | |
Employee Share Purchase Plan (“ESP Plan”):
The ESP Plan allows employees and other individuals determined by the Board to be eligible to contribute a minimum of 1% and a maximum of 10% of their earnings to the plan for the purchase of common shares in the capital of the Company, of which the Company will make an equal contribution. Common shares contributed by the Company may be issued from treasury or acquired through the facilities of the Toronto Stock Exchange (the “TSX”). During 2021 and 2020 the Company has elected to issue common shares from treasury.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
A continuity of the number of commons shares under the ESP Plan which are outstanding at the end of the current year and as at the prior fiscal year ended December 31, 2020 is as follows:
| | | | | For the years ended, | |
| | December 31, 2021 | | | December 31, 2020 | |
| | # of shares | | | $ amount | | | # of shares | | | $ amount | |
Purchased by employees | | | 127,790 | | | $ | 69,260 | | | | 16,686 | | | $ | 7,592 | |
Matched by the Company | | | 102,641 | | | | 55,733 | | | | 14,213 | | | | 6,467 | |
Bonus match by the Company | | | 74,119 | | | | 48,030 | | | | - | | | | 0 | |
Total Common Shares issued | | | 304,550 | | | | 173,023 | | | | 30,899 | | | | 14,059 | |
If the employee does not withdraw common shares from the ESP Plan in the first year of their participation, the Company will match an additional 100% of the employee contributions, up to $15,000 per employee (the “Bonus Match”). The Company matched employee contributions for a total of $52,867, less any payroll withholdings in the fourth quarter of 2021. As at December 31, 2021 the Company has accrued $NaN for the Bonus Match ($1,666 as at December 31, 2020).
19. Income Tax Expense
NXT periodically earns revenues while operating outside of Canada in foreign jurisdictions. Payments made to NXT for services rendered to clients and branch offices in certain countries may be subject to foreign income and withholding taxes. Such taxes incurred are only recoverable in certain limited circumstances, including potential utilization in Canada as a foreign tax credit, or against future taxable earnings from the foreign jurisdictions.
Income tax expense is different from the expected amount that would be computed by applying the statutory Canadian federal and provincial income tax rates to NXT’s income (loss) before income taxes as follows:
| | For the years ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | | | | (Adjusted – Note 2) | | | (Adjusted – Note 2) | |
Net loss before income taxes | | $ | (3,123,799 | ) | | $ | (6,028,228 | ) | | $ | 3,794,709 | |
Canadian statutory income tax rate | | | 23.0 | % | | | 24.0 | % | | | 26.5 | % |
Income tax (recovery) at statutory income tax rate | | | (718,474 | ) | | | (1,446,775 | ) | | | 1,005,598 | |
Effect of non- deductible expenses and other items: | | | | | | | | | | | | |
Stock-based compensation and other expenses | | | 67,948 | | | | 44,225 | | | | 11,609 | |
Change in statutory tax rates | | | (92,850 | ) | | | (131,242 | ) | | | 918,821 | |
Foreign exchange adjustments | | | 662 | | | | 29,910 | | | | 82,433 | |
Other (Expired losses) | | | 1,206,056 | | | | 258,091 | | | | 43,592 | |
Change in valuation allowance | | | 463,342 | | | | (1,245,791 | ) | | | 2,062,053 | |
Income tax expense (recovery) | | | (463,342 | ) | | | 1,245,791 | | | | (2,062,053 | ) |
Effective July 1, 2020, the Province of Alberta decreased its corporate tax rate from 10% to 8%.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
A valuation allowance has been provided for the Company’s deferred income tax assets due to uncertainty regarding the amount and timing of their potential future utilization, as follows:
| | For the years ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Net operating losses carried forward: | | | | | | | | | |
Canada (expiration dates 2027 to 2040) | | $ | 8,051,504 | | | $ | 7,809,363 | | | $ | 6,840,817 | |
USA (expiration dates 2022 to 2026) | | | 248,289 | | | | 1,223,212 | | | | 1,494,711 | |
Timing differences on property & equipment, Right | | | | | | | | | | | | |
of Use of Assets, Lease obligations and financing costs | | | 1,674,085 | | | | 1,945,086 | | | | 1,805,012 | |
SRED Expenditures | | | 575,747 | | | | 369,522 | | | | 348,341 | |
Foreign Tax Credit | | | 285,772 | | | | 285,772 | | | | 285,772 | |
| | | 10,835,397 | | | | 11,632,955 | | | | 10,774,653 | |
Intellectual property | | | (3,411,411 | ) | | | (3,745,627 | ) | | | (4,133,115 | ) |
Less valuation allowance | | | 7,423,986 | | | | 7,887,328 | | | | 6,641,538 | |
| | | (7,423,986 | ) | | | (7,887,328 | ) | | | (6,641,538 | ) |
20. Financial instruments
a) Non-derivative financial instruments:
The Company’s non-derivative financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, deposits, accounts payables and accrued liabilities, long-term debt and lease obligations. The carrying value of these financial instruments, excluding leases, approximates their fair values due to their short terms to maturity.
Credit Risk
Credit risk arises from the potential that the Company may incur a loss if counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms. The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The carrying value of cash and cash equivalents, short-term investments, and accounts receivable reflects management’s assessment of credit risk. At December 31, 2021, cash and cash equivalents and short-term investments included balances in bank accounts, term deposits and guaranteed investment certificates, placed with financial institutions with investment grade credit ratings. The majority of the Company’s accounts receivable relate to sales to one customer in the African region and is exposed to foreign country credit risks. The Company manages this credit risk by requiring advance payments before entering into certain contract milestones and when possible accounts receivable insurance.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk in relation to its holding of significant US$ balances in cash and cash equivalents, short-term investments, accounts receivable, deposits, accounts payables, accrued liabilities, and lease obligations, and entering into United States dollar revenue contracts. The Company does not currently enter into hedging contracts, but to mitigate exposure to fluctuations in foreign exchange the Company uses strategies to reduce the volatility of United States Dollar assets including converting excess United States dollars to Canadian dollars. As at December 31, 2021, the Company held net U.S. dollar assets totaling US$1,177,291. Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at December 31, 2021 would have had an approximately $150,039 effect on the unrealized foreign exchange gain or loss for the period.
b) Derivative financial instruments
As at December 31, 2021 and 2020, the Company held no derivative financial instruments.
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
21. Change in non-cash operating working capital
The changes in non-cash operating working capital balances are comprised of:
| | For the years ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Accounts receivable | | $ | 123,587 | | | $ | 406,114 | | | $ | (1,339,409 | ) |
Note receivable | | | 0 | | | | 324,700 | | | | (332,175 | ) |
Prepaid expenses and deposits | | | 3,262 | | | | 19,600 | | | | (31,972 | ) |
Accounts payable and accrued liabilities | | | 14,375 | | | | (120,767 | ) | | | 104,745 | |
Contractual obligations | | | (127,507 | ) | | | (3,879 | ) | | | 134,116 | |
| | | 13,717 | | | | 625,768 | | | | (1,464,695 | ) |
22. Geographic information
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® survey system sales and can vary significantly year-over-year.
Revenues for the years ended December 31, 2021 and 2019 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.
| | For the years ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
International | | $ | 3,134,250 | | | $ | 0 | | | $ | 11,976,149 | |
Other | | | 0 | | | | 136,566 | | | | 0 | |
| | | 3,134,250 | | | | 136,566 | | | | 11,976,149 | |
23. SFD® related costs
SFD® related costs include the following:
| | For the years ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Aircraft Operations | | | | | (Adjusted – Note 2) | | | (Adjusted – Note 2) | |
Charter Hire Reimbursements | | $ | (389,513 | ) | | $ | (662,383 | ) | | $ | (613,038 | ) |
Lease payments | | | 412,742 | | | | 453,101 | | | | 442,816 | |
Operating Expenses | | | 1,085,640 | | | | 1,320,352 | | | | 1,459,536 | |
| | | 1,108,869 | | | | 1,111,070 | | | | 1,289,314 | |
Survey Projects | | | 115,299 | | | | 0 | | | | 1,363,741 | |
| | | 1,224,168 | | | | 1,111,070 | | | | 2,653,055 | |
NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the years ended December 31, 2021, 2020 and 2019
(Expressed in Canadian dollars unless otherwise stated)
24. Government Grants
During the years ended December 31, 2021 and 2020, the Company received government grants through the Canada Emergency Wage Subsidy (“CEWS”), the Canada Emergency Rent Subsidy (“CERS”) and the National Research Council of Canada Industrial Research Assistance Program (“NRC IRAP”). The CEWS, CERS and the NRC IRAP were recognized as a reduction to general and administrative expenses.
| | For the years ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
CEWS | | $ | 226,607 | | | $ | 292,161 | | | $ | 0 | |
CERS | | | 188,983 | | | | 58,526 | | | | 0 | |
NRC IRAP | | | 50,000 | | | | 0 | | | | 0 | |
Government grants recognized | | | 465,590 | | | | 350,687 | | | | 0 | |
25. Other related party transactions
One of the members of NXT’s Board of Directors is a partner in a law firm which provides legal advice to NXT. Accounts payable and accrued liabilities includes a total of $16,000 ($1,570 as at December 31, 2020) payable to this law firm.
Accounts payable and accrued liabilities includes $11,467 ($NIL as at December 31, 2020) related to reimbursement of expenses owing to an executive officer.
A company owned by a family member of an executive officer was contracted to provide presentation design services to the Company.
The Geothermal Right was acquired from the Company’s CEO on April 18, 2021. As discussed in Note 9, the Company acquired the Geothermal Right from its Chairman, President and Chief Executive Officer, Mr. Liszicasz.
| | For the years ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Legal Fees | | $ | 85,815 | | | $ | 224,479 | | | $ | 276,261 | |
Design Services | | | 4,013 | | | | 0 | | | | 0 | |
