This management's discussion and analysis ("MD&A") was prepared by management of NXT Energy Solutions Inc. ("NXT", "we", "us", "our" or the "Company") based on information available as at August 10, 2023 and unless otherwise stated, has been approved by the Board of Directors of the Company (the "Board"), and should be reviewed in conjunction with the unaudited consolidated interim financial statements and related notes for the period ended June 30, 2023 (the "unaudited condensed consolidated interim financial statements"). This MD&A covers the unaudited three- and six-month periods ended June 30, 2023, with comparative amounts for the unaudited three- and six-month periods ended June 30, 2022.
Our functional and reporting currency is the Canadian dollar. All references to "dollars," "$" and "CDN$" in this MD&A are to Canadian dollars unless specific reference is made to United States dollars ("US$").
NXT® and SFD® are registered trademarks of NXT in Canada and the United States.
Advisories
Forward-looking Information
Certain statements contained in this MD&A constitute "forward-looking information" within the meaning of applicable securities laws. These statements typically contain words such as "anticipate," "believe," "would," "could," "should," "estimate," "expect," "intend," "may," "plan," "will," "continue" and similar words and phrases suggesting future outcomes or an outlook. Forward-looking statements in this document include, but are not limited to:
·
payment of the Consideration (as defined below), and the satisfaction of the conditions thereto (including with respect to cash balances, receipt of funds, and the execution and completion of contracts);
·
receipt of the final tranche of US$900,000 on the Convertible Debenture (as defined below.)
·
the development, commercialization, and protection of the SFD® technology for geothermal resource exploration;
·
the extent to which expanding the Company's scope of business to include exploring for both hydrocarbon and geothermal resources is anticipated to result in an expansion of its scope of revenue sources;
·
the Company's pursuit of opportunities to secure new revenue contracts;
·
estimates related to our future financial position and liquidity including certain contractual obligations; and
·
general business strategies and objectives.
Such forward-looking information is based on a number of assumptions which may prove to be incorrect. Assumptions have been made with respect to the following matters, in addition to any other assumptions identified in this document:
·
our ability to develop and market our SFD® technology and services to current and new customers;
·
our ability to source personnel and equipment in a timely manner and at an acceptable cost;
·
our ability to obtain all permits and approvals required;
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MD&A for the period ended June 30, 2023
·
our ability to obtain financing on acceptable terms;
·
our ability to obtain insurance to mitigate the risk of default on client billings;
·
foreign currency exchange and interest rates;
·
general business, economic, and market conditions (including global commodity prices); and
·
approval of the next phase of the NRC IRAP project.
Although NXT believes that the expectations reflected in such forward-looking information are reasonable, undue reliance should not be placed on them as NXT can give no assurance that such expectations will prove to be correct. Forward-looking information is based on expectations, estimates, and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated by NXT and are described in the forward-looking information. Material risks and uncertainties include, but are not limited to:
·
the ability of management to execute its business plan, including their ability to secure new revenue contracts;
·
health, safety, and the environment;
·
our ability to develop and commercialize the geothermal technology;
·
our ability to service existing debt;
·
our ability to protect and maintain our intellectual property ("IP") and rights to our SFD® technology;
·
our reliance on a limited number of key personnel;
·
our reliance on a limited number of aircraft;
·
our reliance on a limited number of clients;
·
counterparty credit risk;
·
foreign currency and interest rate fluctuations;
·
the likelihood that the Company's ICFR (as defined below) will prevent or detect material misstatements in our unaudited condensed consolidated interim financial statements;
·
changes in, or in the interpretation of, laws, regulations, or policies; and
·
general business, economic, and market conditions (including global commodity prices).
For more information relating to risks, see the section titled "Discussion of Operations – Risk and Uncertainties" in this MD&A and the section titled "Risk Factors" in NXT's most recently filed Annual Information Form. Except as required by applicable securities law, NXT undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise. Accordingly, the reader is cautioned not to place undue reliance on forward-looking statements.
Financial outlooks are provided for the purpose of understanding the Company's accounting practices and liquidity position, and the information may not be appropriate for other purposes.
Non-GAAP Measures
NXT's accompanying unaudited condensed consolidated interim financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The Company has consistently used US GAAP for the eight most recently completed quarters. This MD&A includes references to net working capital, which does not have a standardized meaning prescribed by US GAAP and may not be comparable to similar measures being presented by other entities. Net working capital is the net result of the difference between current assets and current liabilities, and can be used by investors and management to assess liquidity at a particular point in time. See "Liquidity and Capital Resources – Net Working Capital" for further information.
NXT Energy Solutions Inc.
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MD&A for the period ended June 30, 2023
Description of the Business
NXT Energy Solutions Inc. is a Calgary-based technology company whose proprietary and patented Stress Field Detection ("SFD®") survey system utilizes quantum-scale sensors to detect gravity field perturbations in an airborne survey method, which can be used both onshore and offshore to remotely identify traps and reservoirs with 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.
Financial and Operational Highlights
Key financial and operational highlights for Q2-23 are summarized below:
·
ten-year strategic partnership in Africa with Synergy E&P Technologies Limited (“Synergy”) as described below;
·
The first tranche of the Convertible Debenture contributed $1.63 million of cash as defined and described below;
·
in June, the appointment of Interim Chief Executive Officer (“CEO”), Mr. Bruce G. Wilcox;
·
cash at June 30, 2023 was $1.05 million;
·
net working capital was ($2.35) million at June 30, 2023;
·
the Company recorded SFD®-related revenues of $nil;
·
a net loss of $1.71 million was recorded for Q2-23, including stock-based compensation expense ("SBCE") and amortization expense of $0.51 million;
·
a net loss of $3.32 million was recorded for YTD 2023, including SBCE and amortization expense of $1.02 million;
·
net loss per common share for Q2-23 was $0.02 basic and $0.02 diluted;
·
net loss per common share for YTD 2023 was $0.04 basic and $0.04 diluted;
·
cash flow used in operating activities was $1.01 million during Q2-23 and $2.41 million YTD 2023; and
·
general and administrative ("G&A") expenses decreased by $0.10 million (10%) in Q2-23 as compared to Q2-22 and G&A expenses decreased by $0.16 million (8%) in YTD 2023 as compared to YTD 2022.
Key financial and operational highlights occurring subsequent to Q2-23 are summarized below:
·
an additional tranche of US$200,000 of convertible debentures were issued as of July 10, 2023.
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MD&A for the period ended June 30, 2023
Discussion of Operations
Strategic Investment
On May 24, 2023 the Company entered into a ten-year strategic alliance and associated financing with Synergy which grants Synergy an exclusive license to use, distribute, sub-license, market and sell NXT’s SFD® solutions in Africa.
PE Energy Limited, an affiliate of Synergy, has performed several commercial projects with NXT in Africa in the past.
Synergy, with this new arrangement, will be advancing the SFD® technology to address energy security in and transition in the African continent for both oil and gas and geothermal sources. Synergy and NXT will work closely together to train local technical teams and regulatory authorities on the patented SFD® technology application and related knowledge transfer.
Building upon a record of successful collaborations underpinned by the continued market demand in Africa, Ataraxia Capital (“Ataraxia”), an affiliate of Synergy, has agreed to participate in a US$2.3 million convertible debenture financing (“Convertible Debenture”). Please see the section "Liquidity and Capital Resources – Convertible Debenture" for further information on the Convertible Debenture.
Chief Executive Officer Appointment and Management Committee
The Company appointed Mr. Bruce G. Wilcox as Interim CEO, effective June 21, 2023. Mr. Wilcox has been a member of the Company’s board of directors since 2015, and brings extensive capital markets and energy investment experience to NXT’S executive team.
With the appointment of Mr. Wilcox as the Interim CEO, the committee of the board of directors that assumed the CEO’s duties in January ceased to have a governing role.
Acquisition of the Geothermal Right
The Company acquired the SFD® technology rights for geothermal resources ("Geothermal Right") from Mr. George Liszicasz, the former President and CEO of NXT on April 18, 2021. The consideration deliverable by the Company in connection with the acquisition of the Geothermal Right is set forth below (the "Consideration"):
1.
US$40,000 (CDN$50,310) signature payment, which became due immediately and was paid on April 22, 2021;
2.
CDN$15,000 signature milestone payment paid in August 2021;
3.
300,000 common shares, which were issued in December 2021;
4.
US$200,000 milestone payment, which will become due in the event that the Company's cash balance exceeds CDN$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 a 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. This milestone expired as of April 18, 2023.
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MD&A for the period ended June 30, 2023
As of June 30, 2023, the Company has recognized $275,610 for the acquisition of the Geothermal Right, which is the combination of the US$40,000 (CDN$50,310) signature payment, the CDN$15,000 signature milestone payment, the value of the 300,000 common shares of $207,300 and other costs of $3,000. The cost of the remaining milestone will be recognized when it is deemed probable that the milestone 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. As of June 30, 2023 the remaining milestone is still deemed not probable of being achieved.
Geothermal Right Development Update
Progress continues with respect to the development of the SFD-GT geothermal sensor family. The objective of this first 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. As of the date of this MD&A the Company funding for the next phase of research has not been finalized.
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.
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MD&A for the period ended June 30, 2023
Summary of Operating Results
Q2-23
Q2-22
YTD 2023
YTD 2022
SFD®-related revenue
$
-
$
-
$
-
$
-
Expenses:
SFD®-related costs, net
318,396
306,492
620,030
743,774
General and administrative expenses
941,707
1,046,677
1,803,061
1,959,227
Amortization
439,868
442,097
879,736
884,534
1,699,971
1,795,266
3,302,827
3,587,535
Other Expenses (income):
Interest expense, net
23,653
7,670
33,407
15,858
Foreign exchange gain
(19,165
)
(31,355
)
(24,406
)
(11,090
)
Intellectual property and other
2,350
3,090
9,628
23,236
6,838
(20,595
)
18,629
28,004
Loss before income taxes
(1,706,809
)
(1,774,671
)
(3,321,456
)
(3,615,539
)
Income tax expense
-
-
-
-
Net loss and comprehensive loss
(1,706,809
)
(1,774,671
)
(3,321,456
)
(3,615,539
)
Net loss per share – basic
$
(0.02
)
$
(0.03
)
$
(0.04
)
$
(0.06
)
Net loss per share – diluted
$
(0.02
)
$
(0.03
)
$
(0.04
)
$
(0.06
)
Quarterly operating results. Net loss for Q2-23 compared to Q2-22 decreased by $67,862, or $0.01 per share-basic. There were no SFD®-related revenues in either quarter. SFD®-related costs, net, were $11,904 higher due to higher maintenance fees for engine parts, offset by lower lease costs. G&A expenses decreased by $104,970, compared to Q2-22, due primarily to one less headcount and lower SBCE due to the lower NXT share price in Q2-23. Interest expense, net, increased by $15,983 in Q2-23 versus Q2-22 due to the Convertible Debenture. The CDN$ to US$ exchange improved between March 31, 2023 and June 30, 2023 but decreased in the same period in 2022. Therefore, there was an exchange gain in Q2-23 as the Company had a net US$ liability and also an exchange gain in Q2-22 the Company had a net US$ asset at June 30, 2022. Intellectual Property (“IP”) and other expenses related mostly to costs associated with maintaining and renewing certain SFD® patents.
Year-to-date operating results. Net loss for YTD 2023 compared to YTD 2022 decreased by $294,083, or $0.02 per share-basic. There were no SFD®-related revenues in either period. SFD®-related costs, net, were $123,744 lower due to the Phase V maintenance done on the aircraft in Q1-22 to add 300 flight hours, and lower lease costs. G&A expenses decreased by $156,166, compared to YTD 2022, due primarily to one less headcount and lower SBCE due to the lower NXT share price in YTD 2023. Interest expense, net, increased by $17,549 in YTD 2023 versus YTD 2022 due to the Convertible Debenture. The CDN$ to US$ exchange improved between December 31, 2022 and June 30, 2023 but decreased in the same period in 2022. Therefore, there was also an exchange gain in YTD 2023 as the Company had a net US$ liability and also an exchange gain in YTD 2022 as the Company had a net US$ asset at June 30, 2022. IP and other expenses related mostly to costs associated with maintaining and renewing certain SFD® patents.
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MD&A for the period ended June 30, 2023
SFD®-Related Costs, Net
SFD®-Related Costs
Q2-23
Q2-22
Net change
Aircraft lease costs
$
91,335
$
107,123
$
(15,788
)
Aircraft operations
226,552
198,848
27,704
Survey projects
509
521
(12
)
Total SFD®-related costs, net
318,396
306,492
11,904
SFD®-Related Costs
YTD 2023
YTD 2022
Net change
Aircraft lease costs
$
182,375
$
228,594
$
(46,219
)
Aircraft operations
436,641
514,059
(77,418
)
Survey projects
1,014
1,121
(107
)
Total SFD®-related costs, net
620,030
743,774
(123,744
)
SFD®-related costs include aircraft charter costs (net of charter hire reimbursements), lease expenses, and aircraft operation and maintenance costs. In Q2-23, SFD®-related costs were higher compared to Q2-22 by $11,903 due to maintenance fees for engine parts, offset by the lower monthly lease rate in the lease extension agreement that was executed.
In YTD 2023, SFD®-related costs were lower compared to YTD 2022 by $123,744 due to the Phase V maintenance done on the aircraft in Q1-22 to add 300 flight hours, and lower monthly lease rates in the lease extension agreement.
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. There were no charter hire reimbursements during YTD 2023 or YTD 2022.
The Company extended the term of its aircraft leasing agreement effective in Q2-22 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.
General and Administrative Expenses
G&A Expenses
Q2-23
Q2-22
Net change
%
Salaries, benefits and consulting charges
$
381,015
$
434,609
$
(53,594
)
(12
)
Board and professional fees, public company costs
228,625
257,645
(29,020
)
(11
)
Premises and administrative overhead
209,507
211,752
(2,245
)
(1
)
Business development
56,692
34,486
22,206
64
Stock-based compensation
65,868
108,185
(42,317
)
(39
)
Total G&A Expenses
941,707
1,046,677
(104,970
)
(10
)
G&A Expenses
YTD 2023
YTD 2022
Net change
%
Salaries, benefits and consulting charges
$
764,050
$
892,711
$
(128,661
)
(14
)
Board and professional fees, public company costs
428,088
439,599
(11,511
)
(3
)
Premises and administrative overhead
413,185
424,781
(11,596
)
(3
)
Business development
59,628
37,435
22,193
59
Stock-based compensation
138,110
164,701
(26,591
)
(16
)
Total G&A Expenses
1,803,061
1,959,227
(156,166
)
(8
)
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MD&A for the period ended June 30, 2023
G&A expenses decreased $104,970, or 10%, in Q2-23 compared to Q2-22 for the following reasons:
·
salaries, benefits, and consulting charges decreased $53,594, or 12%, as the Company had one less headcount for most of Q2-23;
·
board and professional fees and public company costs decreased $29,020, or 11%, as more director fees were reimbursed in options in Q2-23 versus Q2-22 and lower estimated audit fees;
·
premises and administrative overhead costs decreased $2,245, or 1%, due to lower spending;
·
business development costs increased 22,206 or 64% due to travel to Asia to pursue opportunities; and
·
SBCE's were lower in Q2-23 vs Q2-22 by $42,317 or 39% as the RSU expense was lower as the Company's share price was lower at June 30, 2023 versus June 30, 2022. Please see the next section "Discussion of Operations – General and Administrative Expenses – Stock-based Compensation Expenses" for further information on the SBCE.
G&A expenses decreased $156,166, or 8%, in YTD 2023 compared to YTD 2022 for the following reasons:
·
salaries, benefits, and consulting charges decreased $128,661, or 14%, as the Company had one less headcount for most of YTD 2023;
·
board and professional fees and public company costs decreased $11,511, or 3%, due to increased professional fees due to the financings, offset as more director fees were reimbursed in options in YTD 2023 versus YTD 2022 and lower estimated audit fees;
·
premises and administrative overhead costs decreased $11,596, or 3%, as the Company surrendered office space at the end of Q1-22 thereby lowering rent costs;
·
business development costs increased 22,193 or 59% due to travel to Asia to pursue opportunities; and
·
SBCE's were lower in YTD 2023 vs YTD 2022 by $26,591 or 16% as the RSU expense was lower as the Company's share price was lower at June 30, 2023 versus June 30, 2022. Please see the next section "Discussion of Operations – General and Administrative Expenses – Stock-based Compensation Expenses" for further information on the SBCE.
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MD&A for the period ended June 30, 2023
Stock-based Compensation Expenses
Stock-based Compensation Expenses
Q2-23
Q2-22
Net change
% change
Stock Option Expense
$
22,500
$
7,552
$
14,948
198
Deferred Share Units
-
-
-
0
Restricted Stock Units
37,264
90,368
(53,104
)
(59
)
ESP Plan
6,104
10,265
(4,161
)
(41
)
Total SBCE
65,868
108,185
(42,317
)
(39
)
Stock-based Compensation Expenses
YTD 2023
YTD 2022
Net change
% change
Stock Option Expense
$
68,750
$
15,052
$
53,698
357
Deferred Share Units
-
-
-
-
Restricted Stock Units
55,652
126,653
(71,001
)
(56
)
ESP Plan
13,708
22,996
(9,288
)
(40
)
Total SBCE
138,110
164,701
(26,591
)
(16
)
SBCE varies in any given quarter or year as it is a function of several factors, including the number of units of each type of stock-based compensation plan issued in the period and the amortization term based on the number of years for full vesting of the units.
SBCE is also a function of periodic changes in the inputs used in the Black-Scholes option valuation model, such as volatility in NXT's trailing common share price. 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 as determined by the Board of Directors. On January 6, 2023 the Company granted 2,050,000 incentive stock options at a price of $0.216 to employees, officers and directors. These incentive stock options will vest upon receipt of cash for SFD® services performed: 1/3 upon collection of US$6.5 million, 1/3 upon the collection of the next US$7.0 million and the final 1/3 upon collection of an additional US$7.5 million.
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.
Restricted Share Units ("RSUs") entitle the holder to receive, at the option of the Company, either the underlying number of shares of the Company's common shares upon vesting of such RSUs or a cash payment equal to the value of the underlying shares. The RSUs vest at a rate of one-third at the end of each of the first three years following the date of grant. The Company last settled the RSU vesting with common shares and cash, and intends to continue to settle the RSUs in common 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 Toronto Stock Exchange. During 2022 and 2023 the Company has elected to issue common shares from treasury.
SBCE in Q2-23 was lower compared to Q2-22 by $42,317 or 39%. The RSU expense was lower as the Company's share price was lower at June 30, 2023 versus June 30, 2022 resulting in a lower accrual rate. In addition, there was lower ESP plan participation during Q2-23 due to one less headcount and salary deferrals. This was offset as the Stock Option expense was higher, as options were granted in lieu of cash payments to certain directors.
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MD&A for the period ended June 30, 2023
SBCE in YTD 2023 was lower compared to YTD 2022 by $26,591 or 16%. The RSU expense was lower as the Company's share price was lower at June 30, 2023 versus June 30, 2022 resulting in a lower accrual rate. In addition, there was lower ESP plan participation during YTD 2023 due to one less headcount and salary deferrals. This was offset as the Stock Option expense was higher, as options were granted in lieu of cash payments to certain directors.
Amortization
Amortization
Q2-23
Q2-22
Net change
%
Property and equipment
$
15,239
$
17,468
$
(2,228
)
(13
)
Intellectual property
424,629
424,629
-
0
Total Amortization
439,868
442,097
(2,228
)
(1
)
Amortization
YTD 2023
YTD 2022
Net change
%
Property and equipment
$
30,479
$
35,277
$
(4,798
)
(14
)
Intellectual property
849,257
849,257
-
0
Total Amortization Expenses
879,736
884,534
(4,798
)
(1
)
Property and equipment and related depreciation expense. Property and equipment depreciation was lower in Q2-23 compared to Q2-22 and YTD 2023 compared to YTD 2022 as the Company did not acquire new assets in the periods. Depreciation also decreases each year as the Company uses the declining balance method of depreciation, thereby having the effect of lowering depreciation each year on existing assets.
Intellectual property and related amortization expense. NXT acquired specific rights to utilize the proprietary SFD® technology in global hydrocarbon exploration applications from the inventor of the SFD® technology, NXT's former Chairman, President and CEO, on August 31, 2015. The value attributed to the acquired IP assets was $25.3 million. The IP assets are being 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 ongoing assessment of potential indicators of impairment of the recorded net book value. No impairments were recognized in 2023 or 2022.
As discussed in the section "Discussion of Operations –Acquisition of the Geothermal Right," the Company acquired the SFD® technology for the Geothermal Right from NXT's former Chairman, President and CEO 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.
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MD&A for the period ended June 30, 2023
Other Expenses (Income)
Other Expenses
Q2-23
Q2-22
Net change
%
Interest expense, net
$
23,653
$
7,670
$
15,983
208
Foreign exchange gain
(19,165
)
(31,355
)
12,190
39
Intellectual property and other
2,350
3,090
(740
)
(24
)
Loss on disposal of assets & lease modifications
-
-
-
-
Total Other Expenses, net
6,838
(20,595
)
27,433
133
Other Expenses
YTD 2023
YTD 2022
Net change
%
Interest expense, net
$
33,407
$
15,858
$
17,549
111
Foreign exchange loss gain
(24,406
)
(11,090
)
(13,316
)
(120
)
Intellectual property and other
9,628
11,314
(1,686
)
(15
)
Loss on disposal of assets & lease modifications
-
11,922
(11,922
)
(100
)
Total Other Expenses, net
18,629
28,004
(9,375
)
(33
)
Interest 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), long-term debt and the Convertible Debenture. Interest expense increased in Q2-23 versus Q2-22 and YTD 2023 versus YTD 2022 due to no short-term investments during 2023 and due to the Company entering into the Convertible Debenture with Ataraxia in May 2023.
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$. The Company held a net US$ liability at June 30, 2023 and net assets in US$ at June 30, 2022, which included accounts receivable, cash and cash equivalents, short-term investments, convertible debentures, US$ lease obligations, and the security deposit for the aircraft, all of which have an effect on the unrealized foreign exchange gain and loss. For Q2-23 the exchange gain was the result of the 2.0% stronger CDN$ to US$ between March 31, 2023 and June 30, 2023 and the Company having a net liability in US$. In Q2-22 the CDN$ was higher by 3.2% between March 31, 2022 and June 30, 2022, but the Company had a net US$ asset resulting in the foreign exchange gain for Q2-22.
For YTD 2023 the exchange gain was the result of the 2.2% stronger CDN$ to US$ rate between December 31, 2022 and June 30, 2023 and the Company having a net liability in US$. In YTD 2022 the CDN$ to US$ was higher by 1.1% between December 31, 2021 and June 30, 2022, but the Company had a net US$ asset resulting in the foreign exchange gain for Q2-22.
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.
IP and other. This category of other expenses primarily includes costs related to IP filings and research & development activity related to the SFD® technology.
In YTD 2023 and YTD 2022, the Company's IP and other expenses were associated with periodic patent maintenance and renewal fees required during these time periods.
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.
NXT Energy Solutions Inc.
page | 12
MD&A for the period ended June 30, 2023
Income Tax Expense
There was no income tax expense in YTD 2023 or YTD 2022.
Competition
Our SFD® airborne survey service is based upon a proprietary technology, which is capable of remotely identifying, from a survey aircraft, subsurface anomalies associated with potential hydrocarbon traps with a resolution that we believe is technically superior to other airborne survey systems. To our knowledge, there is no other company employing technology comparable to our SFD® survey system for oil and natural gas and geothermal exploration.
Seismic is the standard technology used by the oil and 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 a 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. A 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 energy industry uses other technologies for wide area oil and natural gas reconnaissance exploration, such as aeromagnetic and gravity surveys. These systems can provide regional geological information, such as basement depth, sedimentary thickness and major faulting, and structural development.
Risk and Uncertainties
Hydrocarbon and geothermal exploration operations involve a number of risks and uncertainties that have affected our unaudited condensed consolidated interim financial statements and are reasonably likely to affect them in the future. These risks and uncertainties are discussed further below.
Development, Commercialization, and Protection of the Geothermal Right
With the acquisition of the Geothermal Right, the Company will continue to refine and develop the SFD® survey system to commercialize the Geothermal Right. This development requires substantial time and resources, and continued government assistance is not guaranteed. Furthermore, even if resources are available, there can be no assurance that the Company will be commercially or technically successful in enhancing the technology. If we are unable to develop and commercialize the geothermal applications of SFD® technologies, or adapt to evolving industry standards and demands, these could have a material adverse effect on our business, financial condition, and results of operations.
NXT Energy Solutions Inc.
page | 13
MD&A for the period ended June 30, 2023
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, a lender can foreclose on or sell the assets of NXT.
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 and accounts receivable. The carrying value of cash and cash equivalents and accounts receivable reflects management’s assessment of maximum exposure to credit risk.
At June 30, 2023, cash and cash equivalents included balances in bank accounts placed with financial institutions with investment grade credit ratings. The Company manages Accounts Receivable 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, deposits, accounts payables, accrued liabilities, convertible debentures, 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 June 30, 2023, the Company held net U.S. dollar liabilities totaling US$628,104. Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at June 30, 2023 would have had an approximately $83,224 effect on the unrealized foreign exchange gain or loss for the period. As at June 30, 2022, the Company held net U.S. dollar assets totaling US$273,150. Accordingly, a hypothetical 10% change in the value of one United States dollar expressed in Canadian dollars as at June 30, 2022 would have had an approximately $35,191 effect on the unrealized foreign exchange gain or loss for the period.
Interest Rates
We periodically invest available cash in short-term investments that generate interest income that will be affected by any change in interest rates.
Tax Rates
Changes in tax rates in the jurisdictions that we operate in would impact the amount of current taxes that we pay. In addition, changes to substantively enacted tax rates would impact the carrying balance of deferred tax assets and liabilities, potentially resulting in a deferred tax recovery or incremental deferred tax expense.
In addition to the above, we are exposed to risk factors that may impact the Company and our business. For further information on these risk factors, please refer to our Annual Information Form, available on NXT's website at www.nxtenergy.com and on SEDAR at www.sedarplus.ca.
NXT Energy Solutions Inc.
page | 14
MD&A for the period ended June 30, 2023
Summary of Quarterly Results
A summary of operating results for each of the trailing eight quarters (including a comparison of certain key categories to each respective prior quarter) follows:
Q2-23
Q1-23
Q4-22
Q3-22
SFD®-related revenue
$
-
$
-
$
-
$
-
Net loss
(1,706,809
)
(1,614,647
)
(1,469,549
)
(1,647,988
)
Loss per share – basic
$
(0.02
)
$
(0.02
)
$
(0.02
)
$
(0.03
)
Loss per share – diluted
$
(0.02
)
$
(0.02
)
$
(0.02
)
$
(0.03
)
Q2-22
Q1-22
Q4-21
Q3-21
SFD®-related revenue
$
-
$
-
$
(10,123
)
$
-
Net income (loss)
(1,774,671
)
(1,840,868
)
(1,573,587
)
(1,434,442
)
Income (loss) per share – basic
$
(0.03
)
$
(0.03
)
$
(0.02
)
$
(0.02
)
Income (loss) per share – diluted
$
(0.03
)
$
(0.03
)
$
(0.02
)
$
(0.02
)
In Q2-23 the Company incurred G&A costs as due to increased business development activity and professional fees related to the Convertible Debenture. In Q1-23 the Company incurred lower SDF®-related costs as there was no unplanned maintenance on the aircraft and had one less headcount. 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$. In Q1-22, the Company incurred maintenance fees on its aircraft to have it available for up to 300 flight hours. In Q4-21, the CEWS and the CERS programs were ended therefore increasing G&A expenses. In Q3-21, the Company recorded favourable exchange gains due to the strengthening of the US$. In each quarter, the Company incurred net losses primarily due to incurred SFD®-related costs related to aircraft lease and aircraft maintenance costs, G&A expenses, and non-cash items like SBCE, which can be a significant expense in any given quarter. More specific details are provided below:
·
in Q2-23, costs increased primarily due to higher professional fees and business development activity;
·
in Q1-23, costs were reduced primarily due to lower headcount and maintenance costs;
·
in Q4-22, costs were reduced primarily due to lower vacation and SBCE;
·
in Q3-22, costs were reduced primarily due to lower SFD®-related costs offset partially by higher business development costs;
·
in Q2-22, the Company recorded unrealized foreign exchange gains as the CDN$ weakened versus the US$;
·
in Q1-22, the Company incurred maintenance fees on the leased aircraft to have it available for up to 300 flight hours;
·
in Q4-21, the Company received grants from the CEWS and CERS for only one month due to the termination of these programs; and
·
in Q3-21, the US$ strengthened vs the CDN$, which resulted in a $102,632 exchange gain.
NXT Energy Solutions Inc.
page | 15
MD&A for the period ended June 30, 2023
Liquidity and Capital Resources
Going Concern
The unaudited condensed consolidated interim financial statements for Q2-23 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 unaudited condensed consolidated interim 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 unaudited condensed consolidated interim financial statements have been issued.
The Company has deferred payment of operating costs, including payroll and other general and administrative costs. Subsequent to June 30, 2023, the Company completed the second tranche the Convertible Debenture which resulted in raising an additional net proceeds of US$200,000 (CAD$265,560) with a further US$900,000 (CAD$1,192,500) committed by the financier in the third quarter of 2023. 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 unaudited condensed consolidated interim 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 unaudited condensed consolidated interim 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 June 30, 2023 totaled $1.05 million. Net working capital totaled $(2.36) 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.
NXT Energy Solutions Inc.
page | 16
MD&A for the period ended June 30, 2023
Net Working Capital (Non-GAAP Measure)
Net Working Capital
June 30,
2023
December 31,
2022
Net Change
%
Current assets (current liabilities)
Cash and cash equivalents
$
1,050,424
$
263,437
$
786,987
299
Accounts receivable
56,165
57,065
(900
)
(2
)
Prepaid expenses and deposits
62,828
36,157
26,671
74
Accounts payable and accrued liabilities
(1,312,090
)
(1,276,236
)
(35,854
)
(3
)
Convertible debenture
(1,590,000
)
-
(1,590,000
)
(100
)
Current portion of long-term debt
(111,111
)
(111,111
)
-
-
Current portion of lease obligation
(505,410
)
(650,315
)
144,905
22
Total Net Working Capital
(2,349,194
)
(1,681,003
)
(668,191
)
(40
)
NXT had net working capital of $(2,349,194) as at June 30, 2023.
Net working capital at June 30, 2023 compared to December 31, 2022 decreased by $668,191, or 40%, due to the issuance of the Convertible Debenture and a lower lease obligation as the aircraft lease will expire in less than one year.
NXT Energy Solutions Inc.
page | 17
MD&A for the period ended June 30, 2023
Accounts Payable and Accrued Liabilities
June 30,
2023
December 31,
2022
Net Change
%
Trade accounts payable
$
(166,728
)
$
(270,956
)
$
104,228
38
Deferred advisory board payable
(24,844
)
(25,410
)
566
2
Accrued liabilities
(268,568
)
(356,950
)
88,382
25
Accrued interest
(13,886
)
(507
)
(13,379
)
>
(100
)
Accrued directors’ fees payable
(174,449
)
(162,500
)
(11,949
)
7
Salaries payable
(511,200
)
(363,594
)
(147,606
)
(41
)
Vacation pay accrued
(78,964
)
(62,413
)
(16,551
)
(27
)
RSU and ESP Plan liability
(73,451
)
(33,906
)
(39,545
)
(117
)
Total accounts payable
(1,312,090
)
(1,276,236
)
(35,854
)
(3
)
Accounts payable and accrued liabilities increased by $35,854 or 3%, as at June 30, 2023 compared to December 31, 2022 for the following reasons:
·
trade accounts payable decreased by $104,228, or 38%, due to the Company paying previously deferred payables and timing of payables at the stated dates;
·
accrued liabilities decreased by $88,382, or 25%, due to the Company paying deferred professional fees during YTD 2023;
·
accrued directors’ fees payable decreased by $11,949, or 7%, as cash payment of directors' fees were deferred, but offset partially by some directors taking their fees in the form of options;
·
salaries payable increased by $147,606, or 41%, as the Company continued its salary deferral program until May 2023;
·
vacation pay accrued increased by $16,551, or 27%, timing of vacations that are usually taken in the summer months; and
·
RSU and ESP Plan liability increased 39,545 or 117% due to the increase in the Company’s share price and six months of additional accrual for the RSU vesting period since December 31, 2022.
NXT Energy Solutions Inc.
page | 18
MD&A for the period ended June 30, 2023
Cash Flow
Cash Flow - from / (used in)
Q2-23
Q2-22
YTD 2023
YTD 2022
Operating activities
(1,010,292
)
$
(782,888
)
$
(2,410,311
)
$
(1,696,029
)
Financing activities
1,612,644
12,965
3,216,777
1,121
Investing activity
-
200,272
-
50,000
Effect of foreign exchange changes on cash
(19,467
)
17,772
(19,479
)
3,895
Net source (use) of cash
582,885
(551,879
)
786,987
(1,641,013
)
Cash and cash equivalents, start of period
467,539
1,168,721
263,437
2,257,855
Cash and cash equivalents, end of period
1,050,424
616,842
1,050,424
616,842
Cash and cash equivalents, end of period
1,050,424
616,842
1,050,424
616,842
Short-term investments, end of period
-
500,000
-
500,000
Total cash and short-term investments, end of the period
1,050,424
1,116,842
1,050,424
1,116,842
The overall net changes in cash balances in each of the periods noted above is a function of several factors including any inflows (outflows) due to changes in net working capital balances and net of any cash transferred into/out of short-term investments. Further information on the net changes in cash, by each of the operating, financing, and investing activities, is as follows:
Operating Activities
Q2-23
Q2-22
YTD 2023
YTD 2022
Net loss for the period
$
(1,706,809
)
$
(1,774,671
)
$
(3,321,456
)
$
(3,615,539
)
Total non-cash expense, lease and other items
463,030
549,302
940,560
1,063,762
Operating activities before change in non-cash working capital balances
(1,243,779
)
(1,225,369
)
(2,380,895
)
(2,551,777
)
Change in non-cash working capital balances
233,488
442,481
(29,415
)
855,748
Total cash used in operating activities
(1,010,291
)
(782,888
)
(2,410,310
)
(1,696,029
)
Operating cash flow decreased by $227,403 in Q2-23 as compared to Q2-22 due to the company paying deferred costs during Q2-23, versus deferring costs in Q2-22.
Operating cash flow decreased by $714,281 in YTD 2023 as compared to YTD 2022 due to the receipt of payments for outstanding accounts receivable in Q1-22 of US$200,000 (CDN$252,415) and payments of several deferred costs in YTD 2023.
NXT Energy Solutions Inc.
page | 19
MD&A for the period ended June 30, 2023
Financing Activities
Q2-23
Q2-22
YTD 2023
YTD 2022
Repayment of long-term debt
$
(27,777
)
$
-
$
(55,555
)
$
-
Proceeds from the employee share purchase plan
8,467
12,965
18,321
29,071
Net proceeds from Private Placement
-
-
1,622,057
-
Proceeds from Convertible Debenture
1,631,954
-
1,631,954
-
Repayment of finance liability
-
-
-
(27,950
)
Total cash from (used in) financing activities
1,612,644
12,965
3,216,777
1,121
The Company began to repay its HASCAP Loan (as defined below) (long-term debt) 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. Proceeds from the Convertible Debenture were $1,631,954 (US$1,200,000). Please see the section “Convertible Debenture” for a discussion on the Offering.
In YTD 2023 net proceeds from the Offering was $1,622,057. Please see the section “Private Placement” for a discussion on the Offering.
Investing Activity
Q2-23
Q2-22
YTD 2023
YTD 2022
Proceeds from short-term investments
$
-
$
200,272
$
-
$
50,000
Total Cash used in Investing Activity
-
200,272
-
50,000
Changes in short-term investments were for investments in guaranteed investment certificates to fund operations and investing of excess short-term cash.
Contractual Obligations
Leases
The estimated minimum annual commitments for the Company's lease components as at June 30, 2023 are listed in the following table:
Lease payment obligations:
Total
2023
2024
2025
2026
Office
$
768,312
$
170,736
$
341,472
$
256,104
$
-
Office operating costs
506,824
112,628
225,255
168,941
-
Aircraft lease1
215,975
178,875
37,100
-
-
Office equipment
11,699
1,712
3,424
3,424
3,139
Total
1,502,810
463,951
607,251
428,469
3,139
1. US$ payments have been converted to CDN$ at a rate of 1.325.
NXT Energy Solutions Inc.
page | 20
MD&A for the period ended June 30, 2023
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.
Repayment of long-term debt principal and interest:
2023
72,685
2024
142,037
2025
137,593
2026
133,148
2027
128,704
2028 to 2031
406,204
Total principal and interest payments
1,020,371
Less interest
(140,741
)
Total principal remaining
879,630
Current portion of long-term debt
111,111
Non-current portion of long-term debt
768,519
Convertible Debenture
On May 24, 2023 the Company announced a multi-tranche a two-year term US$2.3 million convertible debenture financing with Ataraxia. The terms of the Convertible Debenture include an annual interest rate of 10%, paid quarterly, a fixed conversion price of US$0.143 per common share, and the right to appoint a board member. On May 31, 2023 the Company received US$1,200,000 (CAD$1,631,954) of the Convertible Debenture from Ataraxia. The Company received an additional US$200,000 (CAD$265,560) tranche of the Convertible Debenture on July 10, 2023. Therefore, the total amount received to the date of this MD&A is US$1,400,000 million. Ataraxia intends to advance the remaining US$900,000 in the near future with the conversion price adjusted to reflect the current market price of NXT’s shares.
The debenture may also be converted into voting preferred shares with an annual dividend rate of 10% paid per quarter. The preferred shares are not transferable, but may be converted on a one-to-one basis into common shares. The Convertible Debenture is payable on demand and is secured by a general security agreement, subordinate to the long-term debt.
The proceeds from the Convertible Debenture will fund general and administrative costs including business development and marketing activities to convert NXT’s existing opportunity pipeline into firm contracts.
NXT Energy Solutions Inc.
page | 21
MD&A for the period ended June 30, 2023
Repayment of principal and interest (US$) as of June 30, 2023:
2023
$
60,493
2024
120,329
2025
1,259,836
Total principal and interest payments
1,440,658
Less interest
(240,658
)
Total principal remaining
1,200,000
Private Placement
On December 22, 2022 the Company announced a multi-tranche private placement (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 share, for additional aggregate gross proceeds of approximately $1,659,450, less issuance costs of $37,393.
The proceeds from Private Placement were used for G&A expenses.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as of the date of this MD&A other than office premise non-lease operating costs with the Landlord. If the Company were to default on its office lease, the current month rent including operation costs plus the next three months become immediately due. Operating cost amounts are disclosed in the section "Liquidity and Capital Resources – Contractual 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 consistent with discussions with the Landlord.
Transactions with Related Parties
Related party fees incurred were as follows:
Q2-23
Q2-22
YTD 2023
YTD 2022
Legal fees
$
65,981
$
19,491
$
98,659
$
30,456
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 $76,117 ($76,843 as at December 31, 2022) payable to this law firm.
Another member of NXT’s Board of Directors is a board member of Ataraxia which holds the Convertible Debenture. Accounts payable and accrued liabilities includes a total of $10,192 ($nil as at December 31, 2022) for both interest payable and interest expense to Ataraxia.
Accounts payable and accrued liabilities includes $174,449 ($162,500 as at December 31, 2022) for Board of Director’s fees.
NXT Energy Solutions Inc.
page | 22
MD&A for the period ended June 30, 2023
Critical Accounting Estimates
In preparing the unaudited condensed consolidated interim 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 unaudited condensed consolidated interim 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 unaudited condensed consolidated interim 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 2023 and 2022, 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.
Changes in Accounting Policies
The unaudited condensed consolidated interim financial statements of NXT for Q2-23 have been prepared by management in accordance with US GAAP. The Company has consistently used US GAAP for the eight most recently completed quarters. The accounting policies applied are consistent with those outlined in NXT's annual audited consolidated financial statements for the year ended December 31, 2022, available on NXT's website at www.nxtenergy.com and on SEDAR at www.sedarplus.ca other than the addition of convertible debentures.
Convertible debentures are recorded as a current liability as the Company has an obligation to deliver cash to the holder on demand on or before the maturity date. If the convertible debentures are converted to either voting preferred or common shares, the preferred or common shares will be classified as equity. Interest on the convertible debenture is accrued. Dividends on preferred shares will only be accrued on dividends declared by the Board of Directors of the Company.
NXT Energy Solutions Inc.
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MD&A for the period ended June 30, 2023
Financial Instruments and Other Instruments
The Company's non-derivative financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, convertible debentures, and lease obligations. The carrying value of these financial instruments approximates their fair values due to their short terms to maturity. NXT is not exposed to significant interest arising from these financial instruments, but is exposed to significant credit risk with accounts receivable. For accounts receivable, where possible, NXT requests advance payments and utilizes risk mitigation products offered by entities such as Export Development Canada including, for example, insurance coverage of contract accounts receivable, guarantee support for contract performance bonds, and wrongful call insurance for such bonds.
NXT is exposed to foreign exchange risk as a result of holding foreign denominated financial instruments. Any unrealized foreign exchange gains and losses arising on such holdings are reflected in earnings at the end of each period.
As at June 30, 2023 and June 30, 2022, the Company held no derivative financial instruments. For more information relating to risks, see the section titled "Liquidity and Capital Resources – Net Working Capital".
Outstanding Share Capital
August 10,
2023
June 30,
2023
December 31,
2022
Common Shares
77,731,029
77,678,277
68,949,109
Convertible Debentures converted at US$0.143
9,790,209
8,391,608
-
Options
2,862,570
2,862,570
461,320
Deferred Share Units
37,354
37,354
37,354
Restricted Share Units
296,668
296,668
348,334
Total share capital and dilutive securities
90,717,830
89,266,477
69,796,117
NXT Energy Solutions Inc.
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MD&A for the period ended June 30, 2023
Current Director & Officer Share Capital
August 10,
2023
June 30,
2023
December 31,
2022
Charles Selby 1
408,161
408,161
408,161
Gerry Sheehan 1
77,000
77,000
77,000
John Tilson 1
6,887,490
6,887,490
6,887,490
Bruce G. Wilcox 1,2
500,005
500,005
500,005
Eugene Woychyshyn 2
631,669
596,497
514,937
Total Director and Officer Share Capital
8,504,325
8,469,153
8,387,593
1 Director of NXT
2 Officer of NXT
Disclosure Controls and Procedures ("DCPs") and
Internal Controls over Financial Reporting ("ICFR")
NXT's CEO and Chief Financial Officer ("CFO") (together the "Responsible Officers") are responsible for establishing and maintaining DCPs, or causing them to be designed under their supervision, for NXT to provide reasonable assurance that material information relating to the Company is made known to the Responsible Officers by others within the organization, particularly during the period in which the Company's year-end consolidated financial statements and MD&A are being prepared.
DCPs and other procedures are designed to ensure that information required to be disclosed in reports that are filed is recorded, summarized, and reported within the time periods specified by the relevant securities regulatory authorities in either Canada or the United States of America. DCPs include controls and procedures designed to ensure that information required to be disclosed in our reports is communicated to management, including our Responsible Officers, to allow timely decisions regarding required disclosure.
The Company has established and maintains ICFR using the criteria that were set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). The control framework was designed or caused to be designed under the supervision of the Responsible Officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP.
In evaluating the effectiveness of the Company's DCPs, as defined under the rules adopted by the Canadian securities regulatory authorities and by the United States Securities and Exchange Commission, the Company's Responsible Officers concluded that there are material weaknesses in the Company's ICFR that have a direct impact on the Company's DCPs:
·
due to the limited number of staff, it is not feasible to achieve adequate segregation of incompatible duties. NXT partially mitigates this deficiency by adding management and Audit Committee review procedures over the areas where inadequate segregation of duties are of the greatest concern; and
·
NXT does not have a sufficient level of staff with specialized expertise to adequately conduct separate preparation and a subsequent independent review of certain complex or highly judgmental accounting issues. NXT partially mitigates this deficiency by preparing financial statements with their best judgments and estimates of the complex accounting matters, and relies on reviews by management, external consultants, and the Audit Committee.
NXT Energy Solutions Inc.
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MD&A for the period ended June 30, 2023
From time to time, to reduce these risks and to supplement a small corporate finance function, the Company engages various outside experts and advisors to assist with various accounting, controls, and tax issues in the normal course.
Given the small size of the Company's finance team, management has established a practice of increased engagement of external consultants, legal counsel, the Company's Disclosure Committee and Audit Committee in reviewing the public disclosure.
The Responsible Officers concluded that, as at June 30, 2023, its ICFRis not effective and as a result, its DCPs are not effective. NXT reached this conclusion based upon its assessment that there is a more than remote likelihood that its ICFR will not prevent or detect material misstatements if they should exist in the Company's unaudited condensed consolidated interim financial statements. The Responsible Officers continue to take certain actions to mitigate these material weaknesses including:
·
the implementation of controls with regards to the review procedures surrounding its disclosure; and
·
engagement of third-party experts used above.
In addition, the CFO engages subject matter consultants as the need arises.
There were no changes to the Company's ICFR in Q2-23.
It should be noted that a control system, including the Company's DCPs and ICFR, no matter how well conceived, can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met, and it should not be expected that the DCPs and ICFR will prevent all errors or fraud.
Additional Information
Additional information related to the Company, including the Company's Annual Information Form and the Notice of Change of Auditor pursuant to National Instrument 51-202 (Part 4.11), is available on NXT's website at www.nxtenergy.com and on SEDAR at www.sedarplus.ca.
NXT Energy Solutions Inc.
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MD&A for the period ended June 30, 2023
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