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

Good day, ladies and gentlemen. My name is Melanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the NXT Energy Solutions, Inc. Fourth Quarter 2023 Operating and Financial Results Conference Call. [Operator Instructions]. I would now like to turn the meeting over to Mr. Bruce Wilcox, Interim CEO of NXT Energy Solutions. Please go ahead, Mr. Wilcox.

Thank you, Melanie, and welcome, and thank you, everyone, for joining us today for NXT Energy Solutions 2023 Fourth Quarter Financial and Operating Results Conference Call. My name is Bruce Wilcox, NXT's Interim Chief Executive Officer. Joining me on today's conference call is Mr. Eugene Woychyshyn, VP of Finance and CFO; Mr. Enrique Hung, Director of Geosciences for the Americas; Mr. Rashid Tippu, Director of Geosciences for Africa, Asia and the Middle East; and Mr. Mohammad Saqib, operations and interpretation manager. So a little history on me, I joined the NXT Board in 2015. I've had a 40-year career as an investor, primarily as an analyst/portfolio manager and ultimately CEO of one of the oldest long-short equity investment firms in the U.S. Among other things, I was responsible for all of our investments in the energy sector both E&P and service companies. I was appointed interim CEO of NXT in June of last year. As I observed in my opening remarks for the 2023 shareholders dating, I want to be judged on the progression of our stock price and for reasons that I will outline later, I am optimistic. The purpose of today's call is to briefly discuss the highlights of the release of NXT's 2023 4th quarter financial and operating results and to give some color on our business pipeline prospects. Our CFO, Eugene Woychyshyn, will start with a financial review, and I will follow with perspective on our business outlook. Following our update, we will open up the line for questions. Please note, all statements made by the company and management during this call are subject to the reader's advisory regarding forward-looking information and non-GAAP measures set forth in our Q4 2023 press release and MD&A issued March 27, 2024. All dollar amounts discussed in today's conference call are in Canadian dollars unless otherwise stated. The complete financial and operating results and consolidated financial statements for the 2023 4th quarter were published on March 27 and are available on NXT's website, SEDAR's website and soon will be available on EDGAR's website. Now over to Eugene for the financial review.

Thank you, Bruce. First, I'll start with a review of our financial results. During the fourth quarter of 2023, the company commenced the Turkish SFD survey for the new [ cement] oil and gas exploration company in Turkey and recorded SFP-related revenues of approximately $2.15 million for work completed up til December 31, 2023. Cash was at $0.4 million at December 31, 2023. The net working capital was a negative $1.86 million, which was an improvement versus an approximate negative $3.47 million at September 30, 2023. Accounts receivable were $1.83 million at December 21, 2023, approximately $1.43 million of the payments on the cash receivable received up to March 27, 2024. The debentures announced in November 2023 were finalized in January 12, 2024 for a total of USD $1.87 million, USD $0.72 million of these debentures were received in the first quarter of 2024. Insiders, including all the directors participated in this debenture for a total of USD $1.522 million. Working capital needs or operating activities used approximately $1.47 million of cash during the fourth quarter and $4.83 million year-to-date. For the quarter, NXT recorded a net loss of approximately $0.43 million or $0.01 per share based on 78 million weighted average common shares outstanding. This compares to a net loss of $1.47 million in the fourth quarter of 2022 or $0.02 per share. Year-to-date, NXT recorded a net loss of approximately $5.45 million or $0.07 per share based on 77.5 million weighted average common shares outstanding. This compares to a net loss of $6.73 million in 2022 or $0.10 per share. G&A expenses decreased $37,000 or 5% from the fourth quarter of 2023 compared to 2022 for the following reasons. Salaries, benefits and consulting charges decreased $37,000 or 10% as a portion of some of the sales were allocated as direct labor expense to support the Turkish SFD survey. [indiscernible] professional fees and public company costs increased $15,000 or 9% as audit fees were significantly lower due to change of auditor. And business development costs decreased $35,000 or 75% in the fourth quarter of 2022, the company traveled to the Middle East of Asia to pursue opportunities while in Q4 '23, the company focused on Turkish SFD survey. G&A expenses decreased $316,000 or 8% in 2023 compared to 2022 for the following reasons. Salaries, benefits and consulting charges decreased $176,000 or 10%. This company had one less head count for the first half of 2023. In addition, the portions of the salaries are allocated to direct labor expense to support the SFD survey. Board and professional fees and public company costs decreased $65,000 or 8%. Audit fees were lower due to company changing it's auditor. This was offset by increased professional fees due to the debenture financing. And finally, business development cost decreased $105,000 or 53% due to less travel expense during 2023 versus 2022. Companies engaged in more travel to the Middle East and Asia to see opportunities in 2022. While in 2023, the company focused on the Turkish survey and attended more virtual meetings. The company continues its program to reduce costs. On March 22, 2024, the company extended its lease on its aircraft for an additional three years as a capital lease. Under the terms of release, the company will own the aircraft at the end of the 3-year term. In addition, we are working with our landlord to reduce our office space by an additional 30% beginning May 1, 2024, thereby reducing total space by approximately 40% compared to the original lease agreement. We will continue to negotiate and rightsize other service provider contracts as we come due. For 2023 financial statements and MD&A are filed on SEDAR+ it's website were filed on March 27, and we certainly [indiscernible]. To summarize the key financial points, we ended the quarter with $0.4 billion of cash and accounts receivable approximately $1.83 million. Our [indiscernible] forecast continues to be supporting the execution of NXT's commercial pipeline in a cost-efficient way. Now I'd like to turn the call back over to Bruce. Thank you.

Thank you, Eugene. Well, first, I want to convey my sincere thanks to everyone for their support over the last year. Our last conference call was over one year ago, and we are pleased to provide an update on our progress since then and our forward plans. We intend to make these investor calls more regular. In my opinion, that 2023 will be looked back upon as a watershed period for the company as we continue efforts to increase revenues and ultimately enhance shareholder value. In May 2023, NXT announced a strategic alliance partnership with Synergy E&P Technologies Ltd., which included an exclusive license to market and distribute NXT's SFD solutions in Africa. Synergy, by the way, is the successor of the company to [indiscernible] Energy that exited -- for whom we did our 2019 survey in Nigeria. In September 2023, NXT announced the first SFD survey contract in Turkey, and we have completed all the deliverables. We will be jointly publishing a paper on the survey with the operator once initial drilling of prospects is completed, anticipated to be within 6 months. In October 2023, the company was a finalist for Best exploration technology at the World Oil 2023 Gulf Energy Excellence Awards in Houston. World Oil is the publisher of [indiscernible] Energy Magazine and a number of industry data services. By the way, our competition for that category included Schlumberger, now known as SLB, Halliburton and a couple of companies I've never heard of some got the award, but we were pleased to be in that company. Most recently, in the sales agency agreement was announced with [indiscernible], known as [ CAMEA ], an Abu Dhabi-based startup focused on "deep deck disruptive technologies", which covers the United Arab Emirates. So through our collective efforts on these and other strategic initiatives, I have increased confidence that 2024 should bode well for the future of the company. To get a little more granular on our outlook, we've had a very active business pipeline -- we have a very active business pipeline. In total, we currently have outstanding two draft contracts, three formal written proposals and a number of detailed outlines with customers. Our firm has historically targeted large opportunities almost exclusively with national oil companies or NOCs due to their financial strength and ongoing exploration commitments. Smaller scale projects with independent oil companies or IOCs were being secondary primarily because that segment of the industry was suffering financially due to low commodity prices and the lack of consistent exploration activity. Although the company did achieve periodic significant success with the NOCs, this approach resulted in extended periods of inactivity for the company. during which no survey revenue was achieved. This, unfortunately, resulted among other things in balance sheet stress and a decline in share price. This is obviously an unsustainable trajectory. We frequently said "we are elephant hunting", I prefer to think of us as hunting smaller, more plentiful game with an elephant gun in the truck should the need arise. So my vision for the company can be summarized in a handful of key words: actively market, high grade, diversify, monetize, collaborate and grow. So to define those, with active market, we have retained the services of a deeply seasoned marketing consultant, who is recommended by a larger shareholder. We then have subscribed to the act customer relationship and management software. This is raising our visibility with a wide range of prospects. High-grade, we're ranking prospects with regards to size, timing and collateral benefits like being able to execute several contracts in a single geography. Diversify, we're diversifying by geography. We have concentrated opportunities, particularly in Africa, the Middle East and Southeast Asia, diversified by company size and type. We will continue to target NOCs, but they are bureaucratic and slow. We are increasingly engaging with IOCs such as our client in Turkey. Surveys may be smaller, but they develop more quickly. We are in fairly advanced stages with a number of IOCs worldwide diversified by agents. So we currently have four agency agreements covering Africa, the Middle East, Indonesia and most recently, the United Arab Emirates. Monetize, NXT possesses over 140,000 line kilometers of survey data, which we believe could be marketed to IOCs who are now enjoying much stronger financial positions and are undertaking more robust exploration programs. Collaborate We have initiated dialogues with other service providers such as seismic survey companies and library service providers to explore opportunities to work together to our mutual benefit. And finally, grow, grow revenues and earnings. In summary, 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 now ask our operator, Melanie to open the line for us to take your questions.

[Operator Instructions] The first question is from Jerome Hass from Lightwater Partners.

This is a question for either Bruce or for Eugene. It's with regards to the Turkish contract. So we note that in Q4, you booked $2.1 million in revenues and approximately $2.2 million over the course of the year in serving costs. We also note that you have trade receivables of $1.74 million. So firstly, we assume that those receivables are all related to the Turkish contract, but it would appear as though if we take those numbers without any more survey costs that your margins on a gross basis have fallen to about 42% on that contract versus in '21, you had about 61% gross margin. So was there something about the Turkish contract that was lower margin?

Jerome, this is Bruce. I'll take a quick overview stab at that, but I'll let Eugene give the details. So with -- we have remaining balance within the receivables of round numbers about $600,000, which should be paid very soon. But in terms of the margin, we booked the revenues basically on the percentage of costs that are incurred in comparison to the total cost. So Eugene, can you give Jerome some more color on margin?

Sure. So first of all, I'm not going to discuss specific numbers because we are in active negotiations with other potential customers and [indiscernible] specifically about margins. But on the Turkish survey, what we're experiencing is it's a lower volume, the [ total line cost ]. So you do lose a little bit of the volume [indiscernible] spreads of the cost. But overall, the margins were lower than we expected.

So when we look at -- for the year, you actually had negative gross margin I'm not sure how we're supposed to interpret that?

So our SFD related costs include the full all the costs in the first three quarters when we were still maintaining the aircraft. So the -- what you're seeing there is the need for us to be -- keep the aircraft in the air every quarter so we are covering our fuel cost. So the actual incremental cost in the survey are together with the fixed cost that we are occurring. So the message, [indiscernible] we're trying to achieve here is to get volume.

The next question is from [ Thomas Wood from Wood ].

So I think anyone who's been an investor with this company for a long time as I have belief in the technology and it's ability to disrupt what has been like a pretty slow to evolve process and industry. But something I spoke at length with George about before his passing was that it felt like the public face of the company, the marketing materials, the brand is also pretty old fat and I feel like it's probably still that way. So obviously, we need to be pretty cost conscious, but I wonder if you could just talk a little bit about some of this new strategy you have with the marketing firm that you guys have engaged and maybe a little bit more about like their work, their background and how that approach is going to be coming into this industry.

So thank you. This is Bruce speaking. So [indiscernible] is the name of our marketing consultant. He is a retired independent practitioner with a very long and very successful career marketing, primarily in the technology and related industry. But he's really intimidated our process. So it's [indiscernible] to by e-mail or phone or flyers, on conference attending [indiscernible] has been to, I believe now, three conferences. And it's just the face-to-face. And I think the -- I want to tell you a little bit about my personal approach. So we always talked a lot about the technology. My preference is really to talk to somebody typically in the C-suite CEO, CFO, Director of Exploration, to make it more on point. We can speed up the survey process, we have approaching 70% commercial success rate on the body of wells that have been drilled on a recommendation since 2009 30 wells. That's a huge number compares to, say, 19% onshore and about 9% offshore for [ wildcat ] exploration. So we can save time we can save money, we can derisk exploratory acreage and all of that adds up to much higher returns on the exploration invested capital. That's my pitch. And I have a very capable geophysicists on the team, and they can talk about the science. But I think we overemphasized quite frankly, we would sometimes end up in arguments with our potential customers about the details of the technology. We have -- so we have a big enough body to illustrate that this works. And so [indiscernible] job is to really to keep us moving and cover a really wide swath of ground and he's a real test master, I can tell you. Does that help?

Yes, I think so. I mean I think if I was to frame the picture differently, and part of this is like my generation and my connections with people in Silicon Valley. But look, this to me feels like it should be also something like Tech Crunch and obviously, it's completely different industries. But I think from a framing standpoint, like this is such a disruptive incredible technology, and I mean, I've been following the curve over a decade. And it's just incredible to me that it's not out there pitching next to the Twitters of the world. Obviously, it's a very different industry. But I just mean in terms of that sort of mutual disruption, world-changing potential and certainly George was passionate, and I agree that things could get a bit bogged down. But I think what I'm curious about is just in terms of the public space, the brand and the marketing [indiscernible] a little bit of my background, just -- if there is talk about strategy of having some of that kind of startup mentality or energy or if that seems valuable in terms of the pitch?

I think we've got that, notwithstanding the fact the company has been around for 20 years. But there's a lot of things that we need to upgrade. We need to upgrade our website, which looks archaic. The content, I spent a lot of time on moving over the content when I first came to Board. And I think the content is good, but the appearance is very, very old school, social media. But [indiscernible] is pursuing a lot of different avenues for us. So we're open to anything that works that brings business.

There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Wilcox.

Well, thank you very much all the attendees, and thank you for three questions. We will be releasing our first quarter under the regulatory time limit, which would be -- means before May 15. And it's our current intention to do -- to make these conference calls a regular part of the process. So thank you very much, everybody, and have a wonderful evening, and we'll talk to you soon.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.