Our financial position will be affected by exchange rate fluctuations. We may earn revenue and incur expenses denominated in foreign currencies, yet report our financial results in Canadian dollars. Furthermore we intend to enter into contracts to provide services in foreign countries and may conduct business in other currencies such as the Euro. Changes in currency exchange rates could have an adverse effect on the company's business, financial condition and results of operations.
Our net income or loss is impacted by interest rate fluctuations.
We periodically invest available cash in short term investments that generate interest income that will be affected by any change in interest rates. See Item 11 of this Form 20-F.
We rely upon the availability of charter aircraft to conduct our survey operations.
NXT currently does not currently own any aircraft, and relies upon the availability of aircraft which is operated under charter hire arrangements. Charter operators provide the aircraft used in SFD® survey operations on an as required basis in exchange for an hourly charter fee (plus fuel and other direct operating costs). NXT is not required to make a capital investment in chartered aircraft, but in order to guarantee aircraft availability and rate certainty, it currently commits to a one year contract, with a minimum number of charter hours. NXT is thus exposed to potential financial penalty in the event that it fails to fulfill the minimum annual charter hours commitment.
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On May 8, 2009 we entered into a charter agreement with Air Partners Corp., a Calgary, Alberta based international aircraft charter operator, to supply aircraft services for our survey requirements for a minimum period of one year. This agreement has been renewed and now covers a period which ends on January 11, 2012. This agreement has been included in this Form 20-F as Exhibit No. 4.43.
Although various charter operators have provided aircraft charter services since the disposal of our aircraft in 2003 there is a risk that suitable aircraft may not be available from charter operators when needed.
If a chartered aircraft is not available then NXT may have no option but to purchase a company owned aircraft and then engage a third party to operate the aircraft. A future requirement to acquire an aircraft would place significant strain on the financial and operational resources of the company. There is a risk that the company would not have the financial resources or operational capacity to acquire an aircraft within an acceptable time frame to meet operational requirements.
Should we be unable to receive aircraft services from a suitable charter operator in the future and we are unable to acquire an alternative suitable aircraft in a timely fashion we would be unable to conduct SFD® surveys for clients and this inability would have a material adverse effect on the company's business, financial condition and results of operations.
We are a small business with limited personnel and our inability to segregate duties between administrative staff is an internal control weakness.
Certain duties that are most appropriately segregated between different employees are, due to our limited staff, assigned to one individual.
Standard internal control methodology involves the separation of incompatible functions by assigning these functions to separate individuals, and in larger organizations, to separate departments. We often cannot allocate these functions to separate individuals because our administrative staff is too small.
Although the company has adopted alternative control methods designed to compensate for the reduced ability to separate incompatible functions these alternative controls are not effective and there is more than a remote likelihood that our internal control over financial reporting will not prevent or detect material misstatements if they should exist in our financial statements. This lack of separation of duties exposes the company to misappropriation of funds, embezzlement and other forms of fraud and could have a material adverse effect on the company's business, financial condition and results of operations. See Item 15 included in this Form 20-F.
Our rights to SFD® technology may be challenged and we may need to defend our rights to the technology in the courts.
Our rights to ownership and use of SFD® technology depends on our CEO and director, Mr. Liszicasz, having the lawful right to sell to NXT the exclusive rights to exploit the SFD® technology for the exploration of hydrocarbons as agreed to in the Technical Transfer Agreement (“TTA”). (For a full history of the TTA see Item 4.A Information on the Company - History and development of the company
included within this Form 20-F.)
On December 31, 2006 we executed the TTA with Mr. Liszicasz whereby Mr. Liszicasz transferred to NXT all his rights to the SFD® technology for the purpose of hydrocarbon exploration.
A risk does exist that an unknown party may claim some legal entitlement to Mr. Liszicasz’ intellectual property, NXT’s rights to commercialize this intellectual property or NXT’s right to create SFD® devices and processes. However, we believe that such a claim would be without merit.
The SFD® technology is an essential component of our business plan. If a third party challenged our lawful entitlement to this technology, the legal defense of our right to the technology may be expensive and could cause a loss of our right to the SFD® technology, or a protracted legal process to assert our right to the technology would have a material adverse effect on the company's business, financial condition and results of operations.
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We rely on specialized equipment, including a limited number of SFD® sensors, and this limitation may affect our ability to conduct business.
We rely on specialized data acquisition equipment, including a limited number of SFD® sensor devices, to conduct our aerial SFD® survey operations. The company would be at risk if these survey sensors were to become damaged, destroyed, worn out, stolen or in any way became unavailable for use in operations prior to us creating and testing additional sensors. Should the sensors become unavailable for any reason, our ability to conduct surveys could be delayed for several months as we built new sensors. During this period we may become unable to satisfy contractual obligations, which may jeopardize future revenue opportunities and may potentially result in a client drawing on a performance bond posted or otherwise making claims against the company for breach of contract. In addition, an inability to satisfy contractual obligations may have an adverse effect on our developing reputation within the oil and gas community.
Unless we pursue ongoing technological improvement and development we may be unable to respond to changes in customer requirements or new competitive technologies.
We must continue to refine and develop our SFD® survey system to make it scalable for growth and to respond to potential future competitive pressures. These improvements require substantial time and resources. Furthermore, even if resources are available, there can be no assurance that the company will be commercially or technically successful in enhancing the technology. The company’s inability to keep pace with new technologies and evolving industry standards and demands could have a material adverse effect on the company's business, financial condition and results of operations.
We are dependent on key personnel and the loss of any of these key persons will impact our ability to conduct business.
The company's future success depends to a significant extent on the continued service of its key technical and management personnel and on its ability to continue to attract and retain qualified employees. The loss of the services of the company's employees or the company's failure to attract, retain and motivate qualified personnel could have a material adverse effect on the company's business, financial condition and results of operations. We do not have “key man” insurance on any of our personnel.
The company has employment agreements with all of its executive officers, including George Liszicasz, its president and chief executive officer.
We have a dependence on Mr. Liszicasz to interpret the SFD® data and to enhance our technology. The company is working to minimize this dependency on one individual. Mr. Liszicasz has trained and continues to train a team of signal interpreters to minimize the company’s reliance on him to perform these functions.
Currently four persons,
two of which are highly qualified, are trained to interpret SFD® signals.
Although the company has engaged employees with suitable credentials to work with Mr. Liszicasz to enhance our interpretation process and further develop the SFD® technology, if the company is unable to reduce dependence on Mr. Liszicasz and he becomes incapable of performing or unwilling to perform these functions, then there may be an adverse affect on our ability to interpret the data from SFD® surveys or to enhance our technology.
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We rely on a limited number of employees and contractors who collectively possess the knowledge and skills to conducted SFD® surveys, interpret SFD® data and provide other services required to meet contract obligations. Additional or replacement personnel cannot be found and trained quickly. The loss of any of these key persons or increased demand for our services from clients could impair our ability to meet contract obligations, thereby adversely impacting our reputation and our ability to earn future revenue from clients.
Within the province of Alberta the skilled personnel that we require are in short supply and in addition there is specialized training required that can take several months in order for a new employee to become effective. If we cannot hire these key personnel, we have inadequate time to train them or should we lose current personnel, then our ability to accept contracts or meet contract commitments may be adversely affected thereby restricting our ability to earn revenue.
A single major shareholder who is also a board member and an officer of the company retains the ability to influence or control the company and this influence or control may result in a conflict of interest.
Mr. George Liszicasz, our principal executive officer and largest shareholder, as of May 11, 2012, owns, approximately 14% of the common shares outstanding and therefore has a substantial influence in all shareholder matters. Additionally, he owns 10,000,000 convertible preferred shares, of which 2,000,000 are convertible immediately on a one-to-one basis into common shares at the discretion of Mr. Liszicasz, and the balance are convertible into common shares subject largely to certain revenue performance conditions being met. If all 10,000,000 the preferred shares were to be converted and there was no other change in our share structure he would own 31% of the then outstanding common shares. See Notes to the Consolidated Financial Statements or Item 4.B Information on the Company – Technical Transfer Agreement, for additional information relating to the preferred shares.
Controls do exist to mitigate any potential risks associated with this conflict of interest. Mr. Liszicasz adheres to a code of conduct which includes a fiduciary responsibility to the company and its shareholders and this conduct is governed by the independent board of directors who collectively represent a majority of the board. Furthermore all material related party transactions are disclosed publicly.
However, should these conflict of interest controls not be effective, decisions could be made by the company that may advantage Mr. Liszicasz and negatively impact other shareholders.
There is no certainty that an investor can trade our common shares on public markets at a stable market price.
There is a limited public market for our common shares on the TSX Venture Exchange (the “TSX-V”), and the Over the Counter Bulletin Board (the “OTCBB”) and the Frankfurt and Berlin Exchanges and there is a risk that a broader or more active public trading market for our common shares will not develop or be sustained, or that current trading levels will not be sustained.
The market price for the common shares on the exchanges where our stock is listed has been, and we anticipate will continue to be, extremely volatile and subject to significant price and volume fluctuations in response to a variety of external and internal factors. This is especially true with respect to emerging companies such as ours. Examples of external factors, which can generally be described as factors that are unrelated to the operating performance or financial condition of any particular company, include changes in interest rates and worldwide economic and market conditions, as well as changes in industry conditions, such as changes in oil and natural gas prices, oil and natural gas inventory levels, regulatory and environment rules, and announcements of technology innovations or new products by other companies. Examples of internal factors, which can generally be described as factors that are directly related to our consolidated financial condition or results of operations, would include release of reports by securities analysts and announcements we may make from time to time relative to our operating performance, clients exploration results, financing, advances in technology or other business developments.
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Because we have a limited operating history and only one profitable year to date, the market price for the common shares is more volatile than that of a seasoned issuer. Changes in the market price of the common shares, for example, may have no connection with our operating results or the quality of services provided to clients. No predictions or projections can be made as to what the prevailing market price for the common shares will be at any time, or as to what effect, if any, that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price. Given the low trading volume, small trades of the company’s common shares can adversely and potentially dramatically affect the market prices for those shares.
Accordingly investors in the company’s common stock should anticipate both volatile stock price and poor liquidity unless these conditions change.
You will be subject to the penny stock rules to the extent our stock price on the OTCBB is less than $5.00.
Since the common shares are not listed on a national stock exchange within the United States, trading in the common shares on the OTCBB is subject, to the extent the market price for the common shares is less than $5.00 per share, to a number of regulations known as the "penny stock rules". The penny stock rules, subject to certain exemptions, require a broker-dealer to deliver a standardized risk disclosure document prepared by the Securities and Exchange Commission (the “SEC”), to provide the customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable investment for the purchaser and to receive the purchaser's written agreement to the transaction. To the extent these requirements may be applicable they will reduce the level of trading activity in the secondary market for the common shares and may severely and adversely affect the ability of broker-dealers to sell the common shares.