NXT Energy Solutions Inc. (NSFDF) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. My name is Michael, and I am your conference operator today. At this time, I would like to welcome everyone to the NXT Energy Solutions, Inc. Investor Update Conference Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Eugene Woychyshyn, Vice President of Finance and Chief Financial Officer of NXT Energy Solutions. Please go ahead, Mr. Woychyshyn.

Thank you, Michael. Welcome, and thank you, everyone, for joining us today for the NXT Energy Solutions Investor Conference Call. My name is Eugene Woychyshyn, NXT's Vice President of Finance and Chief Financial Officer. Joining me on today's conference call from our management team are Dr. Xiang Gui, Director of R&D; and Enrique Hung, Director of Geosciences for the Americas; Rashid Tippu, Director of Geosciences for Africa, Asia and the Middle East; and Mohammed Saqib, Head of Interpretation and Project Engineer. In addition, with us, we have Charles Selby, Bruce Wilcox, and Gerry Sheehan, who are members of the management subcommittee of the Board of Directors. During today's call, we'll provide a 10-minute update on management changes, business development and technology status. We will then open up the line for questions. Please note, all statements made by the company and management during this call are subject to reader's advisory regarding forward-looking information for non-GAAP measures set forth in our Q3 2022 MD&A issued on November 9, 2022. All dollar amounts discussed in today's conference call are in Canadian dollars unless otherwise stated. It was with great sadness that we announced at our Chief Executive Officer, George Liszicasz passed away last week. In 1986, George established an R&D company where his research in the field of physics and electronics led to an airborne gravity-based transducer SFD, which is capable of detecting small-scale gravity anomalies applicable to hydrocarbon exploration by [indiscernible] boundaries, trap and seal of fluid bearing formations. The technology is extensively developed, tested and improved in Western Canadian sedimentary basins before commercialization. In 1996, George founded NXT Energy Solutions, which he led until his passing. George was charismatic, passionate and committed to the commercial application of SFD, the technology to increase the effectiveness of oil, gas and geothermal exploration worldwide. The NXT family is profoundly saddened by George's passing and extends its heartfelt condolences to George's loved ones. As previously announced, Board of Directors was formally -- has formally empowered the management subcommittee of the Board to assume the CEO's duties until further notice. The committee which meets 3 times weekly with NXT management consists of Lead Director, Charles Selby, and Directors, Gerry Sheehan; and Bruce G. Wilcox, who collectively possess operating and management experience in energy and capital market industries. All committee members are present on today's call and are able to answer any questions you have for them. The priority of the committee is to formalize new contracts, including repeat business for NXT's proven SFD technology. Committee will undertake its executive role until further notice in close cooperation with NXT's qualified management team that will continue to manufacture SFD systems, perform SFD surveys, provide vital interpretation work once SFD surveys are conducted. Management members including the seamless process are on this call today also. On December 2, 2022, we reported the closing of the rights offering announced on October 31. The company issued 2.15 million common shares at a price of $0.18 per common share for proceeds of approximately $387,000. Last week, on January 25, we closed a private placement that was announced on December 22, 2022, for total proceeds of approximately $1.882 million in connection with the issuance of 9.658 million common shares for $0.195 per common share. Insiders contributed a total of $1.7 million or 95% of the private placement. Altogether, a total of $2.269 million was raised through the offerings and all 5 directors and the Chief Financial Officer participated in either the private placement, rights offering, or have elected to take a portion of all their recent director fees in the form of options. Proceeds from rights offering and private placement are being used to support general administrative costs, which include business development and marketing activities to transform the existing pipeline of opportunities into firm contracts, which we will explain in more detail. We currently have a very robust project pipeline and experience an increased level of business development and engagement with our customers. This is attributable to a number of factors such as strong commodity prices, increased exploration activity around the world and heightened empowerment of our senior operating staff. We have increased our focus on technical and commercial meetings and target markets directly and through qualified informed agents to secure new SFD surveys. Since the passing of George, we have had several meetings with our sales agents around the world. While universally saddened and shocked by his passing, they remain very committed to securing future SFD surveys. Operationally, the aircraft stands ready, having completed all the scheduled maintenance requirements and is fully prepared for up to 300 flight hours. Additional logistics planning continues, and we are in active discussions to arrange ground operations in targeted survey locations. Recently completed rights offering and private placement give the company sufficient working capital to execute on near-term business opportunities. The opportunities are engaged network and our committed team give us confidence that we can achieve near-term success. Hydrocarbons segment, there are multiple opportunities that have our attention at various levels of probabilities. We'd like to highlight 3 SFD survey opportunities that we are currently focused on through daily communications. This level of focus is necessary when dealing with levels of bureaucracy in government-controlled companies. First, progress continues to be made with our African SFD opportunity. This customer is very familiar with NXT and appreciates the value that our previous surveys have brought them. We believe that we are in the final stages before contract execution. Secondly, as mentioned last quarter, NXT carried out two consecutive business trips to the Middle East. After several technical meetings through the fall of 2022, the discussions have advanced the commercial stage with meetings during December 2022 and continuing through January, which are moving us closer to an SFD survey in the Middle East [indiscernible] with our clients alongside their technical and financial partners in the U.K. and Canada. We are undertaking operational and readiness activities for one of these potential customers, including the approval of SFD prospecting technology as a work commitment for licensed blocks to conduct geophysical activities for oil and gas exploration. Thirdly, in Asia, we have navigated several necessary government approvals for our technology to be adopted for both hydrocarbon and geothermal applications. As of today, we have conducted the necessary technical meetings and submitted relevant documents to have SFD included at the strategy level of the natural -- national hydrocarbon and geothermal companies. We are in the final steps to secure Phase 2 of the IRAP funding to move NXT to the next stage of the SFD geothermal sensor development. Continue to improve the SFD hydrocarbon sensors and to constantly review our procedures to ensure the processes are properly and securely documented. Our highly trained and experienced SFD interpretation team will continue to improve or continue to provide quality and need recommendations for areas of exploration, interest to our repeat and new customers. In summary, NXT has a strong team that is continuing to move the business forward and highly incented agents. Our SFD opportunity pipeline is strong with 2-plus SFD business opportunities and commercial discussions. We remain confident in our ability to execute on our SFD survey opportunities. On behalf of our Board of Directors and the entire team at NXT, I want to thank all of our shareholders for their continued support. I'll now ask our operator, Michael, to open up the line for us to take a few of your questions. Thank you.

[Operator Instructions] And the first question is from Michael Mork of Mork Capital Management.

This is Michael Mork, and I've obviously known George for 25-plus years. I had a great relationship with this brilliant man. Moving on, looking at the big picture, it's becoming more and more obvious that hydrocarbons will be around for decades. Even a year or so ago, they thought that this is going to be a fantasy and green was going to take over, but that's not going to happen. And so we want to make sure that this revolutionary technology, we do end up playing small ball. We like the contracts and whatnot. And again, this is very important. We want to stabilize the company, get $10 million, $15 million in the bank. But then can you give us some idea when you might be able to shift to the gross override in royalties? And also, to me, it seems like the highest advantage that this technology brings is if you have a company with a very large block, and they maybe have thousands and thousands or millions of acres, and they might have 100 potential prospects. You fly the SFD over instead of 100 prospects, you can narrow it down to 5, that has to be invaluable to these companies. And are you moving in that direction? And who -- if this is so, is a Gerry who is going to be in charge of making this transition.

Okay. I'll ask [ Moh ] to start to answer that question.

Mike, so the first part of your question concerning the GOR question, right? We have, in fact, already started some work on that while we are waiting for some of these contracts to materialize in the near term. We have already started some work that we had somewhat implemented previously, and we are driving it, trying to drive it faster to completion in multiple countries on the GOR side of things. Now with respect to the large blocks, yes, as the technology gets more and more contracts with the state level companies, which, as we all know, control most of the large blocks in pretty much any country, then the critical momentum does build up for them to start using it at a bigger level. An example of this is in one of the opportunities that Eugene mentioned in the in Southeast Asia, where we are now discussing the use of SFD at the strategic level within the government, which is pre-block areas, which is areas that have not even formally been blocked for operator use, but they are thinking about using SFD to plan their to plan the future blocks and future exploration areas and develop the blocks before they go out to the operator group.

[Operator Instructions] The next question is from Thomas Wood at [indiscernible].

First off, I'm just so sorry about George. I was lucky enough to have a lot of hour-plus long conversations about physics with him and was just what an amazing guy. To go with Mike, moving forward, I guess, I would be curious if maybe the Board members of the subcommittee could whoever want to represent or all three of them, maybe just talk about their plan moving forward in terms of like change of tenure in terms of change of leadership, like how do they want to move things forward and maybe strategies that haven't been implemented before. Obviously, with any new change of leadership, even an unfortunate change like this in terms of its necessity, there still is some sort of change. So what's their vision? What is their plan? What things do they want to change? Just so we can have a picture of things moving forward.

Eugene, perhaps I could leap in on that question. It's Charles Selby speaking. I think that Michael Mork actually set the stage with his commenting question. We see that, firstly, getting in contracts that are well down the road towards execution and stabilizing the company and putting some cash in. So that is the first priority. And frankly, we have the resources in place to do that with our executive committee and the people within the company have all of the skills to do that. We've -- although George has been ill for a while, and we formally empowered this committee only recently, but it has, in fact, been operating behind the scenes for a while. And so we do have that confidence. The second point, again, Mr. Mork raised this, and we would agree that there is considerable potential for conventional gas and oil and given declines and given the flight of capital out of the sector, it's going to be more and more required that national oil companies find efficient programs to identify resources and get after some of the exploration and development activities that are needed to bring it to bear. And we think that NXT is well positioned to do that. We're very fortunate to have resources on the Board, such as Mr. Sheehan, who's a well-known explorationist with deep experience in Africa, which is an area, which we're looking a lot. So that again sets the stage. And then moving on, if we -- how are we going to pursue these things, we're looking at different strategies, of course, the conventional model of services for our fees for services is the one that's been driving us, but we are working in parallel and other strategies and where we can partner with companies and with governments and indeed take compensation in other forms, that is very much part of our current discussion. But in order for that to occur, you need to be starting from a solid base. So that's what we've got. Now as far as leadership, of course, the company just recently suffered this loss. So I think our focus is on stabilization and then determining the appropriate resources to take us forward. And we haven't made any decision in respect to that yet, but we will obviously make the right move. But I think you're being, as shareholders, well served by the current management group. Hopefully, that's helpful.

This is Bruce Wilcox speaking. So the management committee's #1 job is to empower and support our key operating personnel, all of whom are on the call. And in my 7 years on the Board, I think the team is as focused, motivated and energetic as I've ever seen them. So this is our configuration until further notice. But I think that even rest assured that we're paying very close attention, as Eugene mentioned in his comments, we meet -- we have standing meetings three times a week. We have standardized reporting, which is something new as the progress on each of our prospects. So -- but the focus, as Charles said, is getting the near-term prospects over the line and making sure that our operating team feels fully supported.

[Operator Instructions] And the next question is from Norman Sarafian at RBC Wealth Management.

This is not Norman, this is his wife and I would like to ask a question concerning that I'm sure George knew that his health was declining over the few months or some time. I'm not aware of that. What was his message to the Board members? I'm sure he had his wish how to have this company be run. Did he communicated with all of you? Or did he just communicated with certain people? And what was his wish? What did he pass on to?

Well, just let me -- again, Charles Selby, just say one thing. His companion told that his very last words, and he was quite aware until he passed away, were, keep going. And so I think that he didn't give us a great deal of specifics during his declining health. But I think he was very supportive of the direction of the company. And indeed, it was quite interesting that he participated in a call on Friday before passing away early Sunday morning where he seemed to be somewhat robust and was very supportive of what the company was doing and had hoped to indeed get back into the office and work directly, but that sadly didn't happen. So Bruce or anybody else would you like to elaborate on that?

Yes. This is Bruce speaking. I would -- George was not terribly communicative about the exact state of his condition. However, it was apparent to all of us from going back three months that he was very ill. He did not give us a specific diagnosis. But that's when we formed this subcommittee of the Board. And the subcommittee has been functioning since October, and I think functioning very well. I would say that George's last ambition was for this technology to become globally accepted and much more commercially viable, and that's where our focus is on. So we realized that he was very ill, even though we didn't have the details, and we organized to deal with it. And I think that it's been extremely effective. So we're going to fulfill George's legacy.

Well, I guess, we hope so, because I know he was the brain. He was -- he knew everything about the technology. Do we have the -- well, not the board members, I'm sure people, you've hired to continue this work, hopefully, that we can vitalize it. For some reason, I really don't see vital essence in there to move forward, but maybe it will. We just...

This is Bruce again. I'd like to respond to that. George was a brilliant man, but he wasn't all the brains. The people, our staff members that are on this call, George himself have said that some of them were smarter than he was. So there was much more behind -- much more knowledge, ability execution, capability behind George. George was our charismatic base of the company. But I think organizationally, we are in as strong a shape as we've been for the 7 years that I've been on the board. And so we paid a great deal of attention to making sure our technology is documented and secure, able to be continually developed. So it wasn't just George, it is the whole team.

Yes. And I would like to -- this is Eugene. I just -- to emphasize the strength of the team that George helped develop, but Dr. Xiang Gui is effectively George's inventing partner, co-inventor. The rest of the guys around the table here and including other people in the office are -- the capabilities -- they're very dedicated and have gotten great mentorship from George. And yes, we're moving forward.

Okay. I really would like to see more contracts coming in to make it more exciting. We always have a wishful thinking that, yes, it will work and we're going to get contracts, but we haven't so far and it's a little bit of a depressing. I know you guys are all with brains, but we'd like to have that in place to bring in the revenues so we can enjoy as shareholders as well.

Okay. This is Xiang Gui. We are working on getting more contracts. In terms of the technology, personally, I joined the company over 23 years ago. Of course, George's passing is a big loss for us, but over the years, George has talked with me quite a lot. I can assure you that the SFD sensor system is in standby condition, the system can be deployed at any time. So in terms of the oil and gas exploration, the data acquisition and also the data interpretation, I don't see any issues right now.

The next question is from Bob McWhirter at Selective Asset Management.

Eugene has given a description that the company had a very robust project pipeline. I'm wondering if you can give a bit more color on that, please.

Okay. Well, what I explained a couple of the ones we are working on, and I think the important item here is we are in -- two of our opportunities are in commercial discussions, which is, in our opinion, the final step before we get contract execution. I don't know if the guys want to add a little more specific color.

So in addition to the three that Eugene mentioned, we have also recently reactivated some of our agents from the past, who have delivered significant commercial surveys before in South American region. And we are also in touch with a significant contact in South Asia, who helped deliver one of the previous surveys. So while we focus on these two almost commercial opportunities as being the near-term opportunities, we are trying to fill the mid- and the long-term pipeline at the same time so that we can have a continuous cycle of contracts going forward.

Okay. So as I'm involved in a bunch of companies. One is a guy who makes [ puffy concrete ] says, look, we're currently bidding on $350 million for the business or we even approach for $350 million worth of business. We actually have a backlog of $80 million or whatever the number is. And at the end, saying, okay, hopefully, over time, you can convert some of that sales pipeline into actual contracts. And that's the kind of color what I'm looking for.

Okay. So we are -- in the two contracts that we are -- that are very close to commercialization, we are looking at over 6,000 line kilometers in one of them and the other is approximately 800.

Is it translating leading that into Fisher Price terms of about $1,000 a kilometer? Or what kind of price does that translate into, yes, we've got $15 million of potential business?

We're -- well, we could talk about our list prices, so list prices of approximately $2,000 a line kilometer.

Okay. So I think what you're saying is, Bob, get your calculator out, take 6,800 multiply by $2,000 and you come up with $13.6 million. And that's, I assume, all in [indiscernible] money. Okay. So then the question is, okay, how much of it is kind of off list. It doesn't really matter. In other words, even if it was 20% kind of off list the Canadian [indiscernible] effectively offsets that potential as well. Okay. Sales then required to breakeven.

Can you -- sorry, can you repeat that?

What level of sales are required to end up covering from recollection of approximately $6 million per year cash burn for staff, plane standby and other fixed costs?

We need approximately $6 million to breakeven, $6 million a year to breakeven on a cash flow basis.

The next question is from Jerome Hass of Lightwater Partners.

I have a follow-on to Bob's questions. Just with regards to the pipeline. Obviously, George was involved in negotiations with some of these sales. So perhaps you could give us some color on your top 5 or 6 prospects which will be most affected by George's absence and which will be least affected by George's absence in the process?

Right. So George, obviously, was always involved in the process, but in each region and with each customer, there has been somebody who has been really the main contact. So in Africa, for example, Rashid has been the main contact with our agents there, and George would provide guidance, but most of the hard lifting is done by Rashid. I don't know if you can maybe add a little bit more color, for example.

Like for day-to-day and also -- Rashid is here. From day-to-day talk with agent and also our customer, the end user. So normally, myself is on the call with and talk about technical and also some part of the -- contractual part before bringing in to George and Eugene to further negotiate down. So that's like initial process like I'm on day-to-day conversation with most of our agents in Africa and Middle East and Southeast Asia and Western Asia. So there's like -- similarly, like on American side, Enrique Hung, he is the contact person for all the agents, so he runs all the day-to-day conversations.

Yes. Yes. We both, Rashid and -- this is Enrique. Either Rashid or me in the oil and gas business, we've been in the other side of the game here. So we've been either gatekeepers for technology selections for some of the companies like Schlumberger or Chevron and now we are on the other side. So we have a very fast widespread network on these companies and in this -- also this medium-sized and national companies that we've been contacting. So we know what the process is and then we have conversations with all the levels that need to be contacted to get the contract.

Okay. And Jerome, just to maybe answer your question very directly is George was the enthusiasm, but the real contract negotiation work was done by our teams here. And George provided, as everybody knows George, that special color and might have opened a few doors, but it's these guys that helped get them closed in terms of getting -- not closed doors, but getting the contracts secured and closed.

[Operator Instructions] And the next question is from Michael Mork at Mork Capital Management.

Yes. Again, it's me, Mike Mork. One of the criticisms of the company has been, you have this fantastic technology, you should be exploding with business, but you rely on agents here and there, and you've never had a marketing and sales department within the company. And why don't you? And is that something you're going to do going forward?

So as we -- and I'll let the Board chip in here also. But as hopefully, Bruce and Charles had stated, we need to take time here to reset where -- what we need in terms of resources to move this company forward. And yes, one of the issues has been, do we have the right marketing resources? The agents have been at various times, very effective, and they know those local markets that we're in. But yes, it's one of the things we have to seriously consider and put appropriate resources to it.

And Mike, I will add on that because if we look at even African continent, so we started with one country, which was -- which is a leader in the African continent. So we prove our technology through a success. And then we had another contract, which was like back in 2021 and based on that we are. So we -- the technology once proven in the region, then that will open up the doors for other countries in the same region. So that's what the strategy was in the past as well, like we started in Colombia. And then from Colombia, we move it from Colombia to Mexico, Mexico to Bolivia. So similarly, we are expecting like definitely in terms of acceptance of the technology because you have to know we are working actively in the Middle East and Southeast Asia. So we -- once we have a project, and we have a proven data sample, then definitely, that will open up new doors in terms of acceptance and also the project.

Let me intervene a little bit. This is Enrique on again. Mike, yes, it is a concern, the marketing department, and we -- and here, we have treated this problem in the past several times. And the problem here is the placing and the [indiscernible] combined because we are the only company in the world offering SFD technology. We have not expanded. We are the sole source of the technology and it's very exclusive and very, very highly protected. So -- but we are taking a look at that. And one of the efforts would be to expand our marketing efforts and probably improve the web page we have discussed.

Yes. I appreciate that. But in talking to different people, the company, I hear that Peru calls you, Bolivia calls you, Mexico calls you and whatnot, they shouldn't be calling you, you should be calling them. And how many past prospects could you be following up on because a lot of these companies are very bureaucratic. They're happy with their jobs. It seems somebody should be stirring the pot to get things going.

So Mike, this is Bruce Wilcox speaking. We did have dedicated marketing when I joined the Board. It proved to be -- it's Sajid Sayeed, but it proved to be ineffective. And part of the problem was the interaction between George and the marketing effort. So I just want to point out that with regards to Bolivia, which when I joined the Board in 2015, we were in the midst of our YPFB contract. The agent, Jose Candia, reset to us in the past month or so. And the effect of marketing is an important strategic focus for the management committee and the staff. But there is outreach from past customers to us. And I have to say that the staff has followed up very assiduously with them. So we think we're going to have enough in near-term contracts to get a little cushion under our belt, and that is a very important consideration that we need to address. But I just want to assure you that there are no stones being left unturned in terms of marketing opportunities.

Yes. And maybe, again, it's Charles Selby, I can just add a few words. Mike, in the past what we have noted is that is our greatest success comes where we identify a qualified agent in a jurisdiction that knows how to pull the levers with the NOCs, has the inside knowledge and can work in a focused way to do that. And almost without that, it's very difficult to achieve. You need that sort of dedication and you need to reward them appropriately. So that's one aspect of it. The second aspect of it is that we've increased the credibility of this technology over the years. Now that it's patented in many places, that should make it much more acceptable and should allow us to proceed. And then everybody is aware of the fact that oil and gas exploration has not been in vogue for a number of years. I think you alluded to it yourself with the green agendas, which I'm not trying to, in any way, criticize, but just to note that even the major companies were talking in terms of adopting those agendas not focusing on exploration and development activities. That pendulum is swinging back again. And so we see it as a period of opportunity. And we, in fact, think that we've put some very effective resources in certain jurisdictions that we can follow up on. Now can we do more and can we do it better? Absolutely. But we do have limited internal resources. So we have to begin by coalescing some of these arrangements. And then looking at how we can expand our resources. And frankly, we want to continue the dialogue with you and get your input and input of other shareholders that may have a different perspective on it. But I think our approach is well thought out one that's likely to lead to results.

There are no further questions, Mr. Woychyshyn. I would like to turn the conference back over to you, sir.

Okay. So just again, in summary, I just want to thank all of our shareholders for their continued support. I just want to reemphasize that we have a very strong team. The pipeline is robust, and we're moving forward with opportunities, which we hope to soon commercialize. So again, thank you very much and wish you a good evening. Thank you.

Thank you. Ladies and gentlemen, your conference has now ended. All callers are asked to disconnect their lines at this time, and thank you for joining today's call.