EX-15.1 2 fins.htm CONSOLIDATED FINANCIAL STATEMENTS AND AUDIT REPORT OF KPMG LLP FOR THE YEAR ENDED DECEMBER 31, 2012 CA Filed by Filing Services Canada Inc. 403-717-3898
 
 
 
 
NXT ENERGY SOLUTIONS INC.
 
 
Consolidated Financial Statements
 
As at and for the year ended December 31, 2012
 
 
 
 

 
 
INDEPENDENT AUDITOR’S REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Shareholders of NXT Energy Solutions Inc.
 
We have audited the accompanying consolidated financial statements of NXT Energy Solutions Inc. (“the Company”), which comprise the consolidated balance sheets as at December 31, 2012 and 2011 and the consolidated statements of income (loss) and comprehensive income (loss), shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2012, and notes, comprising a summary of significant accounting policies and other explanatory information.
 
Management's Responsibility for the Consolidated Financial Statements
 
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with US generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
 
Auditors’ Responsibility
 
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
 
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
 
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
 
Opinion
 
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of NXT Energy Solutions Inc. as at December 31, 2012 and 2011, and its consolidated results of operations and its consolidated cash flows for each of the years in the three-year period ended December 31, 2012 in accordance with US generally accepted accounting principles.
 
Emphasis of Matter
 
Without qualifying our opinion, we draw attention to Note 1 in the consolidated financial statements, which indicates that NXT Energy Solutions Inc. has uncertainty about the timing and magnitude of future revenues. These conditions, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty that casts substantial doubt about the Company’s ability to continue as a going concern.
 
 
/s/ KPMG LLP
 
Chartered Accountants
April 16, 2013
Calgary, Canada
 
 
F-1

 
 
NXT ENERGY SOLUTIONS INC.
 
Consolidated Balance Sheets
(Expressed in Canadian dollars)
 
   
As at December 31
 
             
   
2012
   
2011
 
Assets
           
             
Current assets
           
Cash and cash equivalents
  $ 5,052,594     $ 1,508,946  
Short term investments
    55,000       10,000  
Restricted cash [note 3]
    433,369       -  
Accounts receivable
    472,308       122,231  
Work-in-progress
    976,463       1,112,210  
Prepaid expenses and other
    140,649       43,105  
      7,130,383       2,796,492  
                 
Long term assets
               
Restricted cash [note 3]
    -       74,135  
Property and equipment [note 4]
    327,839       404,301  
                 
    $ 7,458,222     $ 3,274,928  
                 
Liabilities and Shareholders' Equity
               
                 
Current liabilities
               
Accounts payable and accrued liabilities [note 5]
  $ 1,623,724     $ 1,347,925  
Deferred revenue
    317,103       1,776,496  
Capital lease obligation
    -       8,591  
Fair value of derivative instruments [note 12]
    241,000       -  
      2,181,827       3,133,012  
Long term liabilities
               
Asset retirement obligation [note 6]
    61,813       57,953  
      2,243,640       3,190,965  
                 
Future operations [note 1]
               
Commitments and contingencies [note 15]
               
Subsequent events [note 18]
               
                 
Shareholders' equity
               
Preferred shares [note 8]: - authorized unlimited
               
      Issued: 10,000,000 Preferred shares
    3,489,000       3,489,000  
Common shares [note 7]: - authorized unlimited
               
      Issued:  39,554,959 common shares (2011 - 34,757,396)
    56,623,686       53,756,687  
Contributed capital
    5,406,193       5,205,301  
Deficit
    (61,015,232 )     (63,077,960 )
Accumulated other comprehensive income
    710,935       710,935  
                 
      5,214,582       83,963  
                 
    $ 7,458,222     $ 3,274,928  
 
         
 
Signed "George Liszicasz"
 
Signed "John Agee"
 
 
Director
 
 Director
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-2

 
 
NXT ENERGY SOLUTIONS INC.
 
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Expressed in Canadian dollars)
 
   
For the year ended December 31
 
                   
   
2012
   
2011
   
2010
 
                   
Revenue
                 
                   
Survey revenue [note 16]
  $ 10,937,575     $ 144,650     $ 443,011  
                         
Expense
                       
                         
Survey costs
    3,633,645       46,713       466,428  
General and administrative
    4,508,506       3,218,143       3,678,806  
Stock based compensation expense [note 10]
    265,000       344,800       577,815  
Amortization of property and equipment
    125,015       160,478       164,065  
                         
      8,532,166       3,770,134       4,887,114  
                         
      2,405,409       (3,625,484 )     (4,444,103 )
                         
Other expense (income)
                       
                         
Interest expense (income), net
    2,744       (16,353 )     (9,923 )
Loss (gain) on foreign exchange
    14,686       (28,209 )     16,509  
Oil and natural gas operations
    15,273       3,679       665  
Other expense
    51,700       -       1,074  
Change in fair value of derivative instruments [note 12]
    (168,143 )     -       -  
                         
      (83,740 )     (40,883 )     8,325 )
                         
Income (loss) before income taxes
    2,489,149       (3,584,601 )     (4,452,428 )
Income tax expense [note 13]
    426,421       -       -  
                         
Income (loss) and comprehensive income (loss)
  $ 2,062,728     $ (3,584,601 )   $ (4,452,428 )
                         
Income (loss) per share [note 9]
                       
    $ 0.05     $ (0.10 )   $ (0.14 )
Diluted
  $ 0.04     $ (0.10 )   $ (0.14 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-3

 
 
NXT ENERGY SOLUTIONS INC.
 
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
 
   
For the year ended December 31
 
       
   
2012
   
2011
   
2010
 
Operating activities
                 
                   
Net income (loss) for the year
  $ 2,062,728     $ (3,584,601 )   $ (4,452,428 )
Items not affecting cash:
                       
Amortization and depreciation
    125,015       160,478       164,065  
Stock-based compensation expense
    265,000       344,800       577,815  
Accretion of asset retirement obligation
    3,860       3,509       4,092  
Change in fair value of derivative instruments  [note 12]
    (168,143 )     -       -  
Asset retirement obligations paid
    -       -       (902 )
Loss on sale of property
    -       -       1,074  
      225,732       508,787       746,144  
      2,288,460       (3,075,814 )     (3,706,284 )
Changes in non-cash working capital balances [note 14]
    (1,495,468 )     1,319,299       1,013,508  
                         
Net cash generated by (used in) operating activities
    792,992       (1,756,515 )     (2,692,776 )
                         
Financing activities
                       
                         
Repayment of capital lease obligation
    (8,591 )     (10,246 )     (8,681 )
Issue of common shares and warrants, net of issue costs
    2,886,024       1,487,827       -  
Exercise of stock options and warrants
    326,010       438,900       54,518  
                         
Net cash generated by financing activities
    3,203,443       1,916,481       45,837  
                         
Investing activities
                       
                         
Purchase of property and equipment
    (48,553 )     (38,975 )     (55,516 )
Decrease (increase) in restricted cash
    (359,234 )     27,721       (101,856 )
Decrease (increase) in short term investments
    (45,000 )     895,651       (905,651 )
Proceeds from sale of property and equipment
    -       -       400  
                         
Net cash generated by (used in) investing activities
    (452,787 )     884,397       (1,062,623 )
                         
Net cash inflow (outflow)
    3,543,648       1,044,363       (3,709,562 )
Cash and cash equivalents, beginning of the year
    1,508,946       464,583       4,174,145  
                         
Cash and cash equivalents, end of the year
  $ 5,052,594     $ 1,508,946     $ 464,583  
                         
Supplemental information
                       
                         
Cash interest paid (received), net
    2,744       (16,353 )     (9,923 )
Cash taxes paid
  $ 426,421     $ -     $ -  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-4

 
 
NXT ENERGY SOLUTIONS INC.
 
Consolidated Statements of Shareholders' Equity
(Expressed in Canadian dollars)
 
   
For the year ended December 31
 
                   
   
2012
   
2011
   
2010
 
                   
Common Shares
                 
                   
Balance at beginning of the year
  $ 53,756,687     $ 52,031,435     $ 51,934,360  
Issued upon exercise of warrants
    278,760       420,000       -  
Issued upon exercise of stock options
    47,250       18,900       54,518  
Issued through private placement, net of issue costs [note 7]
    2,886,024       1,487,827       -  
Value attributed to derivative instruments related to warrants
                 
 issued in private placement financings [note 8 and 12]
    (409,143 )     -       -  
Value attributed to warrants issued in
                       
 private placement financing [note 7]
    -       (329,386 )     -  
Transfer from contributed capital upon exercise
                       
 of stock options and warrants
    64,108       127,911       42,557  
                         
Balance at end of the year
    56,623,686       53,756,687       52,031,435  
                         
Preferred Shares
                       
                         
Balance at beginning and end of the year
    3,489,000       3,489,000       3,489,000  
                         
Contributed Capital
                       
                         
Balance at beginning of the year
    5,205,301       4,659,026       3,939,953  
Recognition of stock based compensation expense
    265,000       344,800       761,630  
Contributed capital transferred to common shares pursuant
                       
to exercise of options and warrants
    (64,108 )     (127,911 )     (42,557 )
Value attributed to warrants issued in private placement financing
    -       329,386       -  
                         
Balance at end of the year
    5,406,193       5,205,301       4,659,026  
                         
Deficit
                       
                         
Balance at beginning of the year
    (63,077,960 )     (59,493,359 )     (55,040,931 )
Net income (loss) and comprehensive income (loss) for the year
    2,062,728       (3,584,601 )     (4,452,428 )
                         
Balance at end of the year
    (61,015,232 )     (63,077,960 )     (59,493,359 )
                         
Accumulated Other Comprehensive Income
                       
                         
Balance at beginning and end of the year
    710,935       710,935       710,935  
                         
Total Shareholders' Equity at end of the year
  $ 5,214,582     $ 83,963     $ 1,397,037  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-5

 
 
NXT ENERGY SOLUTIONS INC.
 
Notes to the Consolidated Financial Statements
As at and for the year ended December 31, 2012
(Expressed in Canadian dollars unless otherwise stated)
 
1. History and Future Operations
 
NXT Energy Solutions Inc. (the "Company" or "NXT") is a publicly traded company based in Calgary, Canada.
 
NXT owns a proprietary technology called Stress Field Detection ("SFD®"), an airborne survey system that is used in the oil and natural gas industry to help aid in identifying areas with hydrocarbon reservoir potential.  This technology was acquired from NXT's current Chief Executive Officer and President (the "CEO") under a technology transfer agreement (the "TTA") which has a term to December 31, 2015.  The TTA also involved the issuance by NXT of convertible Preferred Shares (see note 8).
 
Prior to 2006 the Company had engaged in extensive activities to develop, validate and obtain industry acceptance of SFD®, including conducting SFD® surveys for oil and gas industry partners on a cost recovery basis and participating as a joint venture partner in SFD® identified exploration wells.  By December 31, 2005 the Company had accumulated a deficit of approximately $47.6 million in conducting these activities.
 
This early period was effective in developing the SFD® technology to the point that the Company could commence the "commercialization" phase in 2006.  SFD® survey services began to be offered to potential clients engaged in oil and gas exploration activities with an initial focus on companies operating in the western Canadian sedimentary basin.  Subsequently, in 2008, NXT commenced to focus its sales activities towards international and frontier exploration markets.
 
NXT is still in the early stages of commercializing its SFD® technology, and the continued generation of positive cash flow from operations will depend largely on its ability to demonstrate the value of the SFD® survey system to a much wider client base.  NXT recognizes that this early commercialization phase can last for several years and that its' financial position is currently dependent upon a limited number of client projects, on obtaining additional financing when needed, and attracting future clients.
 
These consolidated financial statements have been prepared on a "going concern" basis in accordance with generally accepted accounting principles of the United States of America ("US GAAP").  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.  There is substantial doubt about the appropriateness of the use of the going concern assumption, primarily due to current uncertainty about the timing and magnitude of future SFD® survey revenues.  NXT recognizes that it has limited ability to support operations significantly beyond 2013 without generating sufficient new revenue sources or securing additional financing if required.
 
NXT realized significant growth and improvement in its financial position in 2012, and is working to expand operations in order to generate ongoing positive net income and cash flow from operations in future years with its existing business model.  However, the occurrence and timing of this outcome cannot be predicted with certainty.  NXT's ability to continue as a going concern will also depend on its ability to further develop, and ultimately retain the SFD® technology that was acquired under the TTA.
 
These consolidated financial statements do not include any adjustments to amounts and classifications of assets and liabilities or reported expenses that would be necessary should NXT be unable to raise additional capital or generate sufficient net income and cash flow from operations as required in future years in order to continue as a going concern.
 
2. Significant Accounting Policies
 
Basis of presentation
These consolidated financial statements as at and for the year ended December 31, 2012 have been prepared by management in accordance with US GAAP and by applying the same accounting policies and methods as used in preparing the consolidated financial statements for the years ended December 31, 2011 and 2010.
 
Consolidation
These consolidated financial statements reflect the accounts of the Company and its wholly owned subsidiaries.  All significant inter-company balances and transactions among NXT and its subsidiaries have been eliminated and are therefore not reflected in these consolidated financial statements.
 
Estimates and Assumptions
The preparation of these consolidated financial statements requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, including the disclosure of contingent assets and liabilities, at the date of these consolidated financial statements as well as revenues and expenses recorded during the reporting periods.
 
Estimates made relate to allowances for doubtful accounts, estimated useful lives of assets, provisions for contingent liabilities, measurement of stock-based compensation expense, valuation of deferred tax assets, estimates for asset retirement obligations, the valuation of derivative and equity instruments and the preferred shares (which may include estimates of the likelihood that the conversion feature of the preferred shares will be achieved in future). The estimates and assumptions used are based upon management's best estimate. 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.
 
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and short term securities with an original maturity less than 90 days from the date of acquisition.
 
 
F-6

 
 
Short Term Investments
Short term investments are recorded at fair value, and include short term securities, held by a major Canadian chartered bank, with original maturity dates greater than 90 days but less than one year.
 
Revenue Recognition
Revenue from SFD® survey contracts (net of any related foreign sales tax) is recognized on a completed contract basis.  Amounts received or invoiced in advance of completion of the contract is reflected as deferred revenue and classified as a current liability.  All related survey expenditures and obligations related to uncompleted contracts are  reflected as work-in-progress and classified as current assets.  Upon completion of the related contract, unearned revenue and the related work-in-progress are reflected in the statement of income (loss) as either revenue or survey cost.  Sales commissions incurred on the contracts are included in survey costs.  Survey cost does not include any amortization or depreciation of property and equipment.
 
Derivative Instruments
Derivative instruments are recognized on the balance sheet at fair value with realized and unrealized gains (losses) recognized in the Consolidated Statement of income (loss).  Any outstanding derivatives are required to be included into one of three categories based on a fair value hierarchy (which in 2012 was Level III  - based on valuation techniques that refer to both observable and unobservable market data).  NXT does not apply hedge accounting to any of its derivatives.
 
Property and Equipment
Property and equipment is recorded at cost, less accumulated depreciation and amortization, which is recorded over the estimated service lives of the assets using the following annual rates and methods:
 
Computer hardware
30% declining balance
Computer software
100% declining balance
Furniture and other equipment
20% declining balance
Leasehold improvements
over the remaining term of the lease
 
Management periodically reviews the carrying values of  property and equipment to ensure that any impairment in value is recognized and reflected in results of operations.
 
Research and Development Expenditures
Research and development ("R&D") expenditures incurred to develop, improve and test the SFD® survey system and related components are expensed as incurred.  Any intellectual property that is acquired for the purpose of enhancing research and development projects, if there is no alternative use for the intellectual property, is expensed in the period acquired.  No significant R&D was incurred in the years ended 2010, 2011 and 2012.
 
Foreign Currency Translation
The Company's functional currency is the Canadian dollar. Revenues and expenses denominated in foreign currencies are translated into Canadian dollars at the average exchange rate for the applicable period. Shareholders' equity accounts are translated into Canadian dollars using the exchange rates in effect at the time of the transaction. Monetary assets and liabilities are translated into Canadian dollars at the exchange rate in affect at the end of the applicable period. Non monetary assets and liabilities (including work-in-progress and deferred revenue balances) are recorded at the relevant exchange rates for the period in which the balances arose. Any related foreign exchange gains and losses resulting from these translations are included in the determination of net income (loss) for the year.
 
Prior to 2010, NXT had active subsidiaries which had the US dollar as their functional currency.  Foreign currency translation adjustments related to the consolidation of these subsidiaries is the only component of accumulated other comprehensive income, which is included in shareholders' equity.
 
Income Taxes
NXT follows the asset and liability method of accounting for income taxes. This method recognizes deferred income tax assets and liabilities based on temporary differences in reported amounts for financial statement and income tax purposes, at the income tax rates expected to apply in the future periods when the temporary differences are expected to be reversed or realized.  The effect of a change in income tax rates on deferred income tax assets and deferred income tax liabilities is recognized in income in the period when the tax rate change is enacted.  Valuation allowances are provided when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.
 
Stock based compensation expense
NXT follows the fair value method of accounting for stock options that are granted to acquire common shares under NXT's stock option plan.  Under this method, an estimate of the fair value of the cost of stock options that are granted to employees, directors and consultants is calculated using the Black-Scholes option pricing model and charged to income over the future vesting period of the options, with a corresponding increase recorded in contributed capital.  Upon exercise of the stock options, the consideration received by NXT, and the related amount which was previously recorded in contributed capital, is recognized as an increase in the recorded value of common shares of the Company.
 
Stock-based compensation related to options granted to non-employees is periodically re-measured until the earlier of the completion of their service period or when the vesting period is completed.  Changes to the re-measured compensation are recognized in the period of change and amortized over the remaining life of the vesting period in the same manner as the original option.
 
Income (loss) per share
Basic income (loss) per share amounts are calculated by dividing net income (loss) by the weighted average number of common shares that are outstanding for the fiscal period.  Shares issued during the period are weighted for the portion of the period that the shares were outstanding.  Diluted income (loss) per share is computed using the treasury stock method, whereby the weighted average number of shares outstanding is increased to include any additional shares that would be issued from the assumed exercise of stock options and common share purchase warrants.  The incremental number of shares added under the treasury stock method assumes that outstanding stock options and warrants that are exercisable at exercise prices below the Company's average market price (or “in-the-money”) for the applicable fiscal period are exercised and then that number of incremental shares is reduced by the number of shares that could have been repurchased by the Company from the issuance proceeds, using the average market price of the Company’s shares for the applicable fiscal period.
 
No addition to the basic number of shares is made when calculating the diluted number of shares if the diluted per share amounts become anti-dilutive (such as occurs in the case of a net loss for the period).
 
 
F-7

 
 
3. Restricted cash
 
Restricted cash consists of US dollar money market securities (plus accrued interest) which have been deposited by NXT with financial institutions as security in order for these institutions to issue bank letters of credit for the benefit of third party clients.   These letters of credit include contractual performance bonds related to conducting certain SFD® surveys.
 
   
2012
   
2011
 
             
Total restricted cash
  $ 433,369     $ 74,135  
Less current portion, amounts scheduled to be released to NXT within 12 months
    (433,369 )     -  
                 
    $ -     $ 74,135  
 
4. Property and equipment
 
   
2012
   
2011
 
             
Survey equipment
  $ 623,081     $ 610,230  
Furniture and other equipment
    528,420       526,105  
Computers and software
    1,080,302       1,046,915  
Leasehold improvements
    382,157       382,157  
      2,613,960       2,565,407  
Less accumulated depreciation, amortization and impairment
    (2,286,121 )     (2,161,106 )
                 
    $ 327,839     $ 404,301  
 
Included in furniture and other equipment are assets held under capital lease agreements which have a net book value as follows:
 
   
2012
   
2011
 
             
Cost
  $ -     $ 35,000  
Accumulated amortization
    -       (22,028 )
    $ -     $ 12,972  
 
5. Accounts payable and accrued liabilities
 
   
2012
   
2011
 
Accrued liabilities related to:
           
Consultants and professional fees
  $ 114,640     $ 167,500  
Commissions payable on survey contracts
    -       122,400  
Survey expenses
    29,686       18,508  
Board of Directors' fees
    60,000       98,612  
Wages and bonuses payable
    351,780       183,198  
Vacation pay
    51,078       81,042  
      607,184       671,260  
Trade payables, payroll withholdings and other
    1,016,540       676,665  
    $ 1,623,724     $ 1,347,925  
 
6. Asset retirement obligation
 
Asset retirement obligations ("ARO") relate to oil and natural gas wells in which NXT has outstanding abandonment and reclamation obligations in accordance with government regulations. The Company's obligation relates to its interests in 8 gross (1.1 net) wells that were drilled in the years 2000 through 2004. ARO have an estimated future liability of approximately $62,000 and is based on estimates of the future timing and costs to remediate, reclaim and abandon the wells within the next three years.  The net present value of the ARO is as noted below, and has been calculated using an inflation rate of 3.4% and discounted using a credit-adjusted risk-free interest rate of 10%.
 
   
2012
   
2011
   
2010
 
                   
Asset retirement obligation, beginning of the year
  $ 57,953     $ 54,444     $ 51,254  
Accretion expense
    3,860       3,509       4,092  
Costs incurred
    -       -       (902 )
Asset retirement obligation, end of the year
  $ 61,813     $ 57,953     $ 54,444  
 
 
F-8

 
 
7. Common shares
 
The Company is authorized to issue an unlimited number of common shares, of which the following are issued and outstanding:
 
   
# of Shares
   
$ Amount
 
             
As at December 31, 2009
    30,726,796     $ 51,934,360  
Transactions during the year ended December 31, 2010
               
Issued on exercise of stock options
    100,000       54,518  
Transfer from contributed surplus upon exercise of stock options
    -       42,557  
As at December 31, 2010
    30,826,796       52,031,435  
Transactions during the year ended December 31, 2011
               
Issued through private placement, net of issue costs (i)
    3,200,600       1,487,827  
Value attributed to warrants issued in the private placement financing (i)
    -       (329,826 )
Issued on exercise of stock options
    30,000       18,900  
Issued on exercise of warrants
    700,000       420,000  
Transfer from contributed surplus upon exercise of stock options and warrants
    -       127,911  
As at December 31, 2011
    34,757,396       53,756,247  
Transactions during the year ended December 31, 2012
               
Issued through private placement financings, net of issue costs (ii)
    4,258,005       2,886,024  
Value attributed to warrants issued in the private placement financings (ii)
    -       (409,143 )
Issued on exercise of stock options
    75,000       47,250  
Issued on exercise of warrants
    464,558       278,760  
Transfer from contributed surplus upon exercise of stock options and warrants
    -       64,108  
                 
As at December 31, 2012
    39,554,959     $ 56,623,246  
                 
 
(i) On February 16, 2011 NXT closed a non-brokered private placement (the "2011 Placement") for aggregate proceeds of $1,600,300 ($1,487,827 net of costs incurred of $112,473) including $40,000 subscribed for by two Officers of the Company.  NXT issued a total of 3,200,600 units at a price of $0.50 per unit, with each unit consisting of one NXT common share and one warrant, with each warrant entitling the holder to acquire an additional common share at a price of $0.60 per share on or before the expiry date of February 16, 2012 (see also note 11).  In connection with closing of the 2011 Placement, NXT paid finder's fees which included $72,600 cash and 145,320 warrants, which had the same terms as the other warrants that were issued.
 
The common shares were recorded at a value equal to the net proceeds received of $1,488,267 and reduced by $329,386 which was the estimated fair value attributed to the 3,345,920 warrants that were issued in the 2011 Placement.
 
(ii) In March and May 2012, NXT conducted private placement financings (the "2012 Financings") which consisted of units issued at a price of US $0.75 (the "Units"). Each Unit consisted of one NXT common share and one warrant (the "Warrants") to purchase an additional NXT common share at a price of US $1.20. The Warrants have a term of two years from the date of issue, and the expiry can be accelerated at the option of NXT in the event that it issues a press release advising that its common shares have traded on the US OTCBB Exchange at a price exceeding US $1.50 for 20 consecutive trading days. Any Warrants subject to acceleration shall expire 30 days after such notice.
 
In connection with the 2012 Financings, NXT paid finder's fees totalling US $183,612 and issued a total of 244,816 finder's warrants (which have the same terms as the Warrants noted above).  The 2012 Financings had three separate closings in March, 2012 and one on May 4, 2012, which are summarized as follows:
 
   
March,
   
May 4,
       
   
2012
   
2012
   
total
 
                   
Proceeds (in US dollars)
  $ 2,216,005     $ 977,500     $ 3,193,505  
                         
Number of common shares issued
    2,954,672       1,303,333       4,258,005  
                         
Number of Warrants issued
    2,954,672       1,303,333       4,258,005  
Number of finder's warrants issued
    162,416       82,400       244,816  
      3,117,088       1,385,733       4,502,821  
 
Two Officers of the Company subscribed for a total of US $40,000 of the 2012 Financings.
 
The common shares that were issued under the 2012 Financings were recorded at a value equal to the proceeds received of $3,183,132 ($2,886,024, net of related issue costs totalling $297,108), and reduced by $409,143 which was the estimated fair value attributed to the 4,502,821 Warrants that were issued (see also note 11).
 
 
F-9

 
 
8. Preferred shares
 
The Company is authorized to issue an unlimited number of preferred shares, issuable in series.
 
In 2005, the Company issued 10,000,000 series 1 preferred shares (the "Preferred Shares") to its CEO pursuant to the execution of the Technical Transfer Agreement (see note 1) in exchange for the rights to utilize the SFD® technology for hydrocarbon exploration.
 
These Preferred Shares are non-voting, and are conditionally convertible into NXT common shares under the following terms:
 
2,000,000 of the Preferred Shares became convertible into common shares upon issue. In April 2013, the holder gave notice to NXT to formally convert (effective April 30, 2013) these 2,000,000 Preferred Shares into 2,000,000 common shares.
The remaining 8,000,000 Preferred Shares are subject to conditions related to potential future conversion. They may become convertible into common shares in four separate increments of 2,000,000 Preferred Shares each, should NXT achieve specified cumulative revenue thresholds of US $50 million, US $100 million, US $250 million and US $500 million prior to December 31, 2015.
An additional bonus of 1,000,000 Preferred Shares are issuable in the event that cumulative revenues exceed US $500 million.
Cumulative revenue is defined as the sum of total revenue earned plus proceeds from the sale of assets accumulated since January 1, 2007, all denominated in United States dollars, and calculated in accordance with generally accepted accounting principles.
In the event that the final cumulative revenue threshold of US $500 million is not achieved by December 31, 2015, NXT has the option to either redeem any remaining unconverted Preferred Shares for a price of $0.001 per share and forfeit its rights to the SFD® technology, or elect to retain the ownership of the SFD® technology by converting all of the remaining Preferred Shares into common shares.
 
The Preferred Shares do not participate in any dividends, and are not transferable except with the consent of the Board of Directors of NXT.
 
As at December 31, 2012, the Company had generated cumulative revenue of approximately US $23.1 million (December 31, 2011 - US $12.2 million) that is eligible to be applied to the above noted conversion thresholds.
 
The Preferred Shares were originally recorded at their estimated fair value as at December 31, 2005, with the total substantially assigned to the portion which was immediately convertible.  The remaining Preferred Shares were assigned a nominal value, reflecting the uncertainty that the required revenue objectives would be achieved to allow conversion into common shares, as follows:
 
   
# of Preferred
   
recorded
 
   
Shares
   
value
 
convertible upon issue effective December 31, 2005
    2,000,000     $ 3,256,400  
conditionally convertible on or before December 31, 2015
    8,000,000       232,600  
      10,000,000       3,489,000  
 
9. Income (loss) per share
   
 
   
2012
   
2011
   
2010
 
                   
Net income (loss) for the year
  $ 2,062,728     $ (3,584,601 )   $ (4,452,428 )
                         
Weighted average number of common shares outstanding
                       
 Basic
    40,453,392       35,696,620       32,774,974  
 Additional shares related to assumed exercise of
                       
    stock options under treasury stock method
    337,070       -          
 Contingently issuable preferred shares
    8,000,000       -          
 Diluted
    48,790,462       35,696,620       32,774,974  
                         
Income (loss) per share - Basic
  $ 0.05     $ (0.10 )   $ (0.14 )
Income (loss) per share - Diluted
  $ 0.04     $ (0.10 )   $ (0.14 )
 
A total of 2,000,000 of the Preferred Shares (see note 8) are included in the above noted basic income (loss) per share calculations, as the criteria for them to convert to common shares have been met for each period.  The remaining 8,000,000 Preferred Shares are contingently issuable, and are included in the diluted number of shares outstanding .
 
In periods in which a loss results, all outstanding stock options, common share purchase warrants and certain of the Preferred Shares are excluded from the diluted loss per share calculations as they are anti-dilutive.
 
 
F-10

 
 
10. Stock options
 
The following is a summary of stock options which are outstanding as at December 31, 2012:
 
 
exercise
   
# of
stock options
   
# of
stock options
     
average
remaining
contractual
 
 
price
   
outstanding
   
exercisable
     
life (years)
 
                         
  $    0.45       105,600       105,600       2.8  
  $    0.53       150,000       100,000       1.0  
  $    0.63       450,000       450,000       1.6  
  $    0.75       395,000       -       4.5  
  $    0.76       90,000       -       5.0  
  $    0.86       815,000       -       4.6  
  $    0.89       150,000       -       4.1  
  $    1.16       435,000       255,000       3.6  
  $    1.20       300,000       60,000       4.6  
            2,890,600       970,600       3.7  
 
A continuity of the number of stock options outstanding at the end of each of the last three years ended December 31 is as follows:
 
   
2012
   
2011
 
   
# of
   
weighted
   
# of
   
weighted
 
   
stock
   
average
   
stock
   
average
 
   
options
   
exercise price
   
options
   
exercise price
 
                         
Outstanding at beginning of the year
    2,473,100     $ 1.02       2,134,804     $ 0.62  
Granted
    1,900,000     $ 0.89       1,054,800     $ 1.58  
Forfeited
    (390,268 )   $ 1.72       (398,300 )   $ 0.65  
Expired unexercised
    (877,232 )   $ 1.05       (288,204 )   $ 0.63  
Cancelled
    (140,000 )   $ 0.63       -       -  
Exercised
    (75,000 )   $ 0.63       (30,000 )   $ 0.63  
Options outstanding as at end of the year
    2,890,600     $ 0.86       2,473,100     $ 1.02  
Options exercisable as at end of the year
    970,600     $ 0.86       1,538,100     $ 0.68  
 
   
   
2010
 
   
# of
   
weighted
 
   
stock
   
average
 
   
options
   
exercise price
 
             
Outstanding at beginning of the year
    2,757,204     $ 1.76  
Granted
    248,900     $ 0.62  
Forfeited
    (431,300 )   $ 1.48  
Expired unexercised
    (340,000 )   $ 0.66  
Cancelled
    (2,113,204 )   $ 1.94  
Granted on re-pricing in 2010
    2,113,204     $ 0.63  
Exercised
    (100,000 )   $ 0.55  
Options outstanding as at end of the year
    2,134,804     $ 0.62  
Options exercisable as at end of the year
    1,737,637     $ 0.61  
 
Stock options granted generally expire, if unexercised, five years from the date granted and entitlement to exercise vests at a rate of one-third at the end of each of the first three years following the date of grant, except as otherwise noted below.
 
A total of 300,000 stock options were granted in August, 2012, with an average exercise price of $1.20, expiring August 2017, and with 20% of the options vesting after each 3 month period.
   
In July 2012 a total of 830,000 stock options with an exercise price of $0.86 were granted to Directors and Officers of NXT. In addition, two Directors of NXT surrendered for cancellation a total of 140,000 vested stock options, which had an exercise price of $0.63 per share, and an expiry date of December 12, 2012.
   
A total of 400,000 stock options were granted in December, 2011, at an average exercise price of $2.50, expiring June 1, 2013, and with 25% of the options vesting after each 3 month period. In 2012, a total of 200,000 of these options were forfeited and the remaining 200,000 expired.
   
A total of 214,800 of the 504,800 stock options which were granted in July, 2011 at an exercise price of $1.16 per share had immediate vesting.
   
In January, 2011 an Officer of the Company was granted 150,000 options at an excise price of $0.53 per share, and with one third of the options vesting at the date of grant and one-third vesting at the end of each of the following two years. These options will expire three years from the date of grant.
 
On December 8, 2010, following approval by the Company's shareholders,  a total of  2,113,204 stock options (which had an average original exercise price of U.S. $2.04) were re-priced to an exercise price of Cdn. $0.63 per share.  All of these re-priced options retained the rest of their original terms, and were treated for accounting purposes as a modification of the previously issued options. The re-pricing included a total of 1,615,000 options held by Directors and Officers of the Company which had an average exercise price of U.S. $2.35 per share.
 
 
F-11

 
 
Stock based compensation expense is calculated based on the fair value attributed to grants of stock options using the Black-Scholes valuation model and utilizing the following weighted average assumptions:
 
   
2012
   
2011
   
2010
 
                   
Stock based compensation expense for the period
  $ 265,000     $ 344,800     $ 577,815  
Expected dividends paid per common share
 
Nil
   
Nil
   
Nil
 
Expected life in years
    4.0       2.8       1.8  
Expected volatility in the price of common shares
    79 %     111 %     92 %
Risk free interest rate
    1.0 %     1.5 %     1.5 %
Weighted average fair market value per share at grant date
  $ 0.52     $ 0.57     $ 0.27  
Intrinsic (or "in-the-money") value per share of options exercised
  $ 0.13     $ 0.22     $ 0.53  
 
As of December 31, 2012 there was $967,000 (December 31, 2011 - $338,000) of unamortized stock based compensation expense related to non-vested stock options.  This amount will be recognized in future expense over the remaining vesting periods of the underlying stock options.
 
11. Warrants to purchase common shares
 
The following is a summary of outstanding warrants to purchase common shares:
 
                   
Exercise
 
       
Exercise
   
# of
   
proceeds
 
       
price
   
warrants
   
received
 
                       
Outstanding as at January 1, 2009 and 2010
              -     $ -  
Issued on February, 2011 private placement (i)
      $ 0.60       3,345,920       -  
Exercised in 2011
                (700,000 )     420,000  
Outstanding as at December 31, 2011
                2,645,920       420,000  
Exercised in 2012
                (464,558 )     278,760  
Expired on February 16, 2012
                (2,181,362 )     -  
                  -       698,760  
Issued on March and May, 2012 private placement financings (ii)
  $ US 1.20       4,502,821          
Outstanding as at December 31, 2012
                4,502,821          
                             
These warrants expire in 2014 as follows:
 
 March 7, 2014
            2,096,175          
   
 March 19, 2014
            415,000          
   
 March 30, 2014
            605,913          
   
 May 4, 2014
            1,385,733          
                  4,502,821          
 
(i)  In February, 2011 NXT closed a private placement financing of Units (see note 7(i)) which included a total of 3,345,920 warrants which had an exercise price of $0.60 and an expiry date of February 16, 2012.  The estimated fair value attributed to the warrants that were issued in 2011 was $329,386 (see note 12(2)).
 
(ii) The estimated fair value attributed to the 4,502,821 total US$ Warrants that were issued in the 2012 Financing (see note 7(ii)) was $409,143, determined using the weighted average assumptions listed in note 12(2).
 
12.  Financial instruments
 
1) Non-derivative financial instruments
The Company's non-derivative financial instruments consist of cash and cash equivalents, short term investments, restricted cash, accounts receivable, and accounts payables and accrued liabilities. 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 or credit risks arising from these financial instruments. NXT is exposed to foreign exchange risk as a result of holding U.S. and Colombian denominated financial instruments.
 
2) Derivative financial instruments
As the exercise price of the Warrants issued in 2012 (see note 7) is in US dollars, which is a currency other than the functional currency of NXT, the fair value of this derivative financial instrument, is required to be reflected as a derivative on the balance sheet. The amount recorded for this instrument, which is included with current liabilities, will be adjusted to fair value at each period end over the life of the Warrants, with the changes in fair value reflected in earnings.
 
Under US GAAP fair value measurement standards, financial instruments that are recorded at fair value on a recurring basis are required to be classified into one of three categories based upon a fair value hierarchy. The Company's only financial instruments recorded at fair value on a recurring basis are the US dollar denominated warrants. NXT has classified these derivative financial instruments as level III where the fair value is determined by using valuation techniques that refer to both observable and unobservable market data. The valuation model was based on the Black-Scholes inputs noted below, as well as a discount to reflect the potential dilution impact upon exercise of the warrants and NXT's low stock market liquidity.
 
A continuity of the fair value of derivative instruments balance is as follows:
 
   
2012
   
2011
 
             
Balance, start of the year
  $ -     $ -  
Value attributed to US$ common share purchase warrants issued
               
   in 2012 Financings (see note 7(ii))
    409,143       -  
Change in fair value during the year
    (168,143 )     -  
                 
    $ 241,000     $ -  
 
 
F-12

 
 
The value attributed to warrants that have been issued by NXT was calculated at issuance using the Black-Scholes valuation model utilizing the following weighted average assumptions:
 
   
2012
   
2011
 
             
Expected dividends paid per common share
 
Nil
   
Nil
 
Expected life in years
    1       0.8  
Expected volatility in the price of common shares
    66 %     94 %
Risk free interest rate
    1.0 %     1.5 %
Weighted average fair market value per warrant issued
  $ US 0.05     $ 0.14  
 
13. Income tax expense
 
NXT periodically earns revenues while operating outside of Canada as a non-resident within certain foreign jurisdictions.  Payments made to NXT for services rendered to clients in such countries may be subject to withholding taxes, which are only recoverable in certain circumstances.  During 2012, NXT incurred foreign withholding taxes on a portion of its revenues that were generated in Latin and South America.  Although such foreign taxes paid can potentially be utilized in Canada as a foreign tax credit against future taxable earnings from the foreign jurisdictions, a full valuation allowance has been provided against this benefit.
 
Income tax expense is different from the expected amount that would be computed by applying the statutory Canadian federal and provincial income tax rates to NXT's income (loss) before income taxes as follows:
 
   
2012
   
2011
   
2010
 
                   
Net income (loss) before income taxes
  $ 2,489,149     $ (3,584,601 )   $ (4,452,428 )
Canadian statutory income tax rate
    25.0 %     26.5 %     28.0 %
Income tax (recovery) at statutory income tax rate
    622,287       (949,919 )     (1,246,680 )
Effect of non- deductible expenses and other items:
                       
Stock-based compensation and other expenses
    12,149       100,736       161,788  
Non-capital losses expiring in the year
    -       373,240       205,156  
Foreign exchange adjustment
    42,389       (42,965 )     103,007  
Tax rate reduction
    -       48,066       842,818  
Other
    (2,148 )     (2,715 )     12,226  
      674,677       (473,557 )     78,315  
Change in valuation allowance
    (674,677 )     473,557       (78,315 )
Income taxes paid in foreign jurisdictions
    426,421       -       -  
Current income tax expense
  $ 426,421     $ -     $ -  
 
The Company has significant unrecorded deferred income tax assets for which a full valuation allowance has been provided due to uncertainty regarding their potential utilization, as follows:
 
   
2012
   
2011
   
2010
 
Net operating losses carried forward:
                 
USA (expiration dates 2020 to 2026)
  $ 1,908,285     $ 2,014,577     $ 1,970,205  
Canada (expiration dates 2014 to 2031)
    3,269,542       3,805,274       3,410,240  
Timing differences on property and equipment and financing costs
    2,132,545       2,177,153       2,051,012  
      7,310,372       7,997,004       7,431,457  
Less valuation allowance
    (7,310,372 )     (7,997,004 )     (7,431,457 )
      -       -       -  
 
Certain income taxation years remain subject to review and assessment by the relevant tax authorities in Canada and the United States.  NXT has no unrecorded tax benefits and no amounts are included in these consolidated financial statements for amounts related to interest and penalties on income tax balances.
 
14. Changes in non-cash working capital
 
The change in non-cash working capital is comprised of:
 
   
2012
   
2011
   
2010
 
                   
Accounts receivable
    (350,077 )     (119,160 )     1,139,309  
Work-in-progress
    135,747       (1,112,210 )     -  
Prepaid expenses
    (97,544 )     2,836       7,347  
Accounts payable and accrued liabilities
    275,799       771,337       (133,148 )
Deferred revenue
    (1,459,393 )     1,776,496       -  
      (1,495,468 )     1,319,299       1,013,508  
Portion attributable to:
                       
 Operating activities
    (1,495,468 )     1,319,299       1,013,508  
 Financing activities
    -       -       -  
 Investing activities
    -       -       -  
      (1,495,468 )     1,319,299       1,013,508  
 
 
F-13

 
 
15. Commitments and contingencies
 
NXT has an operating lease commitment on its Calgary office space for a term through April 30, 2015 at a minimum monthly lease payment of $26,138 (including estimated operating costs).  As at December 31, 2012, the estimated remaining minimum annual lease commitment is as follows:
 
 
for the
   
total minimum
 
 
year ending
   
lease
 
 
December 31
   
payments
 
           
 
2013
    $ 304,382  
 
2014
      304,382  
 
2015
      101,461  
          710,225  
             
 
Payments for this premises lease were $353,379 for the year ended December 31, 2012 (2011 - $347,130, 2010 - $358,642).
 
NXT currently does not own any of the aircraft which are used in its' survey operations, but has an annual agreement (which expires in January, 2014) to utilize a minimum annual volume of aircraft charter hours.  The contract has a minimum commitment of $317,000 for 2013.
 
In 2003 NXT was named as one of several defendants in a statement of claim related to an aircraft crash.  The plaintiffs alleged that all defendants were in breach of an aircraft ferry flight contract and were seeking damages of $450,000, but did not pursue their claim against NXT for over six years.  NXT was not a party to the contract and its position was that the claim was without merit.  The claim against NXT was discontinued in October 2012.
 
16. Geographic information
 
NXT conducts all of its survey operations from its head office in Canada, and has a one person administrative office in Colombia.  NXT has no long term assets outside of Canada.  Revenues were derived by geographic area as follows:
 
   
2012
   
2011
   
2010
 
                   
Colombia
  $ 2,858,221     $ -     $ 443,011  
Argentina
    1,675,820       -       -  
Mexico
    5,727,392       -       -  
Guatemala
    676,142       -       -  
United States of America
    -       144,650       -  
      10,937,575       144,650       443,011  
 
The Company's 2012 revenues were derived from a total of four clients, of which the two largest represented 78% of 2012 revenues (100% from one client in each of 2011 and 2010).
 
17. Other related party transactions
 
NXT retains as legal counsel a law firm of which one of its Directors is a partner.  In 2012, NXT incurred legal fees and share issuance costs totalling $80,550 (2011 - $52,234, 2010 - $15,219) with this firm, for which a total of $11,112 is included in accounts payable as at December 31, 2012 (December 31, 2011 - $8,719).
 
Accounts payable and accrued liabilities includes a total of $63,820 (2011 - $4,681) related to re-imbursement of expenses owing to persons who are Directors and Officers of NXT.
 
In 2011, NXT conducted a US $150,000 SFD® survey contract with a client which has a board member who is a Director of NXT.
 
18. Subsequent events
 
Subsequent to December 31, 2012, NXT issued the following stock options (with a term of 5 years and 3 year vesting) to certain of its Directors & Officers:
 
   
date
 
exercise
   
# of stock
 
   
issued
 
price
   
options
 
                 
NXT Director
 
January 25, 2013
  $ 0.76       150,000  
NXT Officer
 
April 1, 2013
  $ 0.66       150,000  
                  300,000  
 
 
 
F-14