EX-99.1 2 q1fins.htm INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE THREE MONTHS ENDED MARCH 31, 2013 CA Filed by Filing Services Canada Inc. 403-717-3898

 

 

 

 

 

 

NXT ENERGY SOLUTIONS INC.

 

 

 

 

 

 

 

 

Consolidated Financial Statements

 

 

 

 

As at and for the three month period ended

 

March 31, 2013 

 

 

   
  

 

 

 

NXT ENERGY SOLUTIONS INC.
Consolidated Balance Sheets
(Unaudited - Expressed in Canadian dollars)
 
             
          As at the period ended
           
          March 31, December 31,
          2013 2012
       
Assets      
             
Current assets      
  Cash and cash equivalents   $ 2,384,678 $ 5,052,594
  Short-term investments   1,955,000 55,000
  Restricted cash [note 3]       322,247 433,369
  Accounts receivable   1,250,410 472,308
  Work-in-progress       - 976,463
  Prepaid expenses and other   180,514 140,649
      6,092,849 7,130,383
         
Long term assets      
  Property and equipment [note 4]   322,800 327,839
         
      $ 6,415,649 $ 7,458,222
             
             
Liabilities and Shareholders' Equity      
             
Current liabilities      
  Accounts payable and accrued liabilities [note 5]   $ 1,006,066 $ 1,623,724
  Deferred revenue   - 317,103
  Fair value of derivative instruments [note 12]   69,000 241,000
      1,075,066 2,181,827
Long term liabilities      
  Asset retirement obligation [note 6]   61,580 61,813
    1,136,646 2,243,640
       
Future operations [note 1]      
Commitments and contingencies [note 15]      
Subsequent event [notes 7 and 8]      
       
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   56,623,686 56,623,686
  Contributed capital   5,506,193 5,406,193
  Deficit   (61,050,811) (61,015,232)
  Accumulated other comprehensive income   710,935 710,935
             
      5,279,003 5,214,582
             
      $ 6,415,649 $ 7,458,222

 

  Signed "George Liszicasz"   Signed "John Agee"
  Director   Director

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 2 
   

 

 

NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Unaudited - Expressed in Canadian dollars)
             
             
          For the three months
          ended March 31,
             
          2013 2012
             
Revenue          
             
  Survey revenue [note 16]       $ 2,684,095 $ 2,815,320
             
Expense          
             
  Survey costs       1,542,248 1,174,393
  General and administrative       931,650 1,139,527
  Stock based compensation expense [note 10]       100,000 67,000
  Amortization of property and equipment       20,677 26,540
             
          2,594,575 2,407,460
             
          89,520 407,860
             
Other expense (income)          
             
  Interest expense (income), net       (470) 2,864
  Loss (gain) on foreign exchange       (112,667) 65,869
  Oil and natural gas operations       706 1,199
  Other expense       9,984 -
  Change in fair value of derivative instruments [note 12]     (172,000) -
             
          (274,447) 69,932
             
Income before income taxes       363,967 337,928
Income tax expense [note 13]       399,546 -
             
Income (loss) and comprehensive income (loss)       $ (35,579) $ 337,928
             
             
Income (loss) per share [note 9]          
  Basic       $ - $ 0.01
  Diluted       $ - $ 0.01

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 3 
   

 

NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Unaudited - Expressed in Canadian dollars)
             
             
          For the three months
          ended March 31,
             
          2013 2012
             
Cash provided by (used in):          
             
Operating activities          
             
Net income (loss) for the period       $ (35,579) $ 337,928
Items not affecting cash:          
  Amortization and depreciation       20,677 26,540
  Stock-based compensation expense       100,000 67,000
  Accretion of asset retirement obligation       980 878
  Change in fair value of derivative instruments [note 12]     (172,000) -
  Asset retirement obligations paid       (1,213) -
             
          (51,556) 94,418
          (87,135) 432,346
Changes in non-cash working capital balances [note 14]       (776,265) (1,559,311)
             
Net cash generated by (used in) operating activities       (863,400) (1,126,965)
             
             
Financing activities          
             
Repayment of capital lease obligation       - (1,665)
Issue of common shares and warrants, net of issue costs       - 2,022,846
Exercise of stock options and warrants       - 326,010
             
Net cash generated by financing activities       - 2,347,191
             
             
Investing activities          
             
Purchase of property and equipment       (15,638) (4,048)
Decrease in restricted cash       111,122 31,765
Increase in short-term investments       (1,900,000) (10,000)
Proceeds from sale of property and equipment       - -
             
Net cash generated by (used in) investing activities       (1,804,516) 17,717
             
Net cash inflow (outflow)       (2,667,916) 1,237,943
Cash and cash equivalents, beginning of the period       5,052,594 1,508,946
             
Cash and cash equivalents, end of the period       $ 2,384,678 $ 2,746,889
             
             
Supplemental information          
             
  Cash interest paid (received), net       (470) 2,864
  Cash taxes paid       $ 257,342 $ -

 

The accompanying notes are an integral part of these consolidated financial statements.

 4 
   

 

 

 

NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Shareholders' Equity
(Unaudited - Expressed in Canadian dollars)
             
           
          For the three months
          ended March 31,
             
          2013 2012
             
Common Shares          
             
Balance at beginning of the period       $ 56,623,686 $ 53,756,687
Issued upon exercise of warrants     - 278,760
Issued upon exercise of stock options     - 47,250
Issued through private placement, net of issue costs [note 7]     - 2,022,846
Value attributed to derivative instruments related to warrants        
  issued in private placement financings [note 7 and 12]     - (249,143)
Transfer from contributed capital upon exercise          
  of stock options and warrants       - 45,733
             
Balance at end of the period       56,623,686 55,902,133
             
             
Preferred Shares          
             
Balance at beginning and end of the period       3,489,000 3,489,000
             
             
Contributed Capital          
             
Balance at beginning of the period     5,406,193 5,205,301
Recognition of stock based compensation expense     100,000 67,000
Contributed capital transferred to common shares pursuant        
  to exercise of options and warrants     - (45,733)
             
Balance at end of the period       5,506,193 5,226,568
             
             
Deficit          
             
Balance at beginning of the period       (61,015,232) (63,077,960)
Net income (loss) and comprehensive income (loss) for the period   (35,579) 337,928
             
Balance at end of the period       (61,050,811) (62,740,032)
             
             
Accumulated Other Comprehensive Income          
             
Balance at beginning and end of the period       710,935 710,935
             
             
Total Shareholders' Equity at end of the period       $ 5,279,003 $ 2,588,604

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 5 
   

 

 

NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
As at and for the three month period ended March 31, 2013
(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's proprietary Stress Field Detection ("SFD®") technology is an airborne survey system that is used in the oil and natural gas industry to help aid in identifying areas with hydrocarbon reservoir potential. Specific rights to this technology were 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 requires the completion of various conditions, including conversion by NXT of a total of 10,000,000 convertible preferred shares (see note 8) which were issued.
             
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 interim unaudited consolidated financial 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 fiscal year ended December 31, 2012.
 
These interim financial statements should be read in conjunction with the 2012 annual audited consolidated financial statements as they contain disclosure which is supplemental to NXT's annual consolidated financial statements and accordingly certain disclosure normally required for annual financial statements has been condensed or omitted herein.

 

 6 
   

 

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 are related to contractual performance requirements on certain SFD® surveys.
             
             
4. Property and equipment          
          March 31, December 31,
          2013 2012
             
Survey equipment       $ 626,286 $ 623,081
Furniture and other equipment       528,420 528,420
Computers and software       1,092,735 1,080,302
Leasehold improvements       382,157 382,157
          2,629,598 2,613,960
Less accumulated depreciation, amortization and impairment       (2,306,798) (2,286,121)
             
          $ 322,800 $ 327,839
             
             
             
5. Accounts payable and accrued liabilities      
          March 31, December 31,
          2013 2012
Accrued liabilities related to:          
  Consultants and professional fees       $ 131,240 $ 114,640
  Commissions payable on survey contracts       46,100 -
  Survey expenses       - 29,686
  Foreign income taxes due on survey contracts       142,204 -
  Board of Directors' fees       22,500 60,000
  Wages and bonuses payable       172,065 351,780
  Vacation pay       64,079 51,078
          578,188 607,184
Trade payables, payroll withholdings and other       427,878 1,016,540
          $ 1,006,066 $ 1,623,724
             
             
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%.
          March 31, December 31,
          2013 2012
             
  Asset retirement obligation, beginning of the period       $ 61,813 $ 57,953
  Accretion expense       980 3,860
  Costs incurred       (1,213) -
  Asset retirement obligation, end of the period       $ 61,580 $ 61,813

 

 7 
   

 

 

7. Common shares
             
The Company is authorized to issue an unlimited number of common shares, of which the following are issued and outstanding:
             
    For the three months ended   For the three months ended
    March 31, 2013   March 31, 2012
             
    # of Shares $ Amount   # of Shares $ Amount
             
As at beginning of the period 39,554,959 $ 56,623,686   34,757,396 $ 53,756,687
Transactions during the period:          
  Issued through private placement financings, net of issue costs (ii) - -   2,954,672 2,022,846
  Value attributed to warrants issued in the private          
  placement financings (ii) - -   - (249,143)
  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 - -   - 45,733
As at end of the period 39,554,959 56,623,686   38,251,626 $ 55,902,133
  Conversion of preferred shares on May 22, 2013 (i) 2,000,000 3,256,400      
             
As at May 22, 2013 41,554,959 $ 59,880,086      
             
(i) NXT has also issued a total of 10,000,000 preferred shares (see note 8) which are convertible on a 1 for 1 basis into an additional maximum of 10,000,000 common shares by December 31, 2015. An initial total of 2,000,000 of these preferred shares was converted into 2,000,000 common shares of the Company effective May 22, 2013.
             
(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
             
Proceeds (in Cdn $)   2,210,690   972,442 3,183,132
Share issue costs incurred   (187,844)   (109,264) (297,108)
Proceeds, net of issue costs   2,022,846   863,178 2,886,024
             
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
             
Fair value attributed to Warrants issued   $ 249,143   $ 160,000 $ 409,143
             
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).

 

 

 8 
   

 

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 up to 10,000,000 NXT common shares (on a 1 for 1 basis) 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 these 2,000,000 Preferred Shares into 2,000,000 common shares. This transaction occurred effective May 22, 2013 (see note 7(i)).
● 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 common 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 March 31, 2013, the Company had generated cumulative revenue of approximately US $25.8 million (December 31, 2012 - US $23.1 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      
          For the three months
          ended March 31,
          2013 2012
             
Net income (loss) for the period       $ (35,579) $ 337,928
             
Weighted average number of common shares outstanding:          
  Common shares issued       39,554,959 35,611,443
  Convertible preferred shares       2,000,000 2,000,000
  Basic       41,554,959 37,611,443
  Additional shares related to assumed exercise of stock options          
  and warrants under the treasury stock method       - 835,000
  Contingently issuable preferred shares       - 8,000,000
  Diluted       41,554,959 46,446,443
             
Income (loss) per share - Basic       $ - $ 0.01
Income (loss) per share - Diluted       $ - $ 0.01
             
             
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.

 

 

 

 9 
   

 

10. Stock options
 
The following is a summary of stock options which are outstanding as at March 31, 2013:
   

 exercise

price

 # ofstock options

outstanding

 

 # of

stock options

exercisable

average

remaining

contractual

life (years)

   

 
   

 
   

 
     

 

    

 

   

$ 0.45

105,600

  

105,600

2.5

   

$ 0.53

150,000

  

150,000

0.8

   

$ 0.63

450,000

  

450,000

1.4

   

$ 0.75

395,000

  

-

4.3

   

$ 0.76

330,000

  

-

4.8

   

$ 0.86

775,000

  

-

4.3

   

$ 0.89

150,000

  

50,000

3.8

   

$ 1.16

435,000

  

255,000

3.3

   

$ 1.20

300,000

  

120,000

4.4

   

3,090,600

  

1,130,600

3.5

             
A continuity of the number of stock options which are outstanding at the end of the current period (see also note 17) and as at the prior fiscal year ended December 31, 2012 is as follows:
   

For the three months

ended March 31, 2013

 

For the year

ended December 31, 2012

   

 
     
   

# of

stock

options

weighted

average

exercise price

 

# of

stock

options

weighted

average

exercise price

   

 
   

 
   

 

 

  

 

  
Outstanding at beginning of the period

2,890,600

$ 0.86

  

2,473,100

$ 1.02

Granted

240,000

$ 0.76

  

1,900,000

$ 0.89

Forfeited

(40,000)

$ 0.86

  

(390,268)

$ 1.72

Expired unexercised

-

-

  

(877,232)

$ 1.05

Cancelled

-

-

  

(140,000)

$ 0.63

Exercised

-

-

  

(75,000)

$ 0.63

Options outstanding as at end of the period

3,090,600

$ 0.85

  

2,890,600

$ 0.86

Options exercisable as at end of the period

1,130,600

$ 0.79

  

970,600

$ 0.78

 
             
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.
   
             
             
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:
         

For the three months

         

ended March 31,

         

2013

2012

             
  Stock based compensation expense for the period      

$ 100,000

$ 265,000

  Expected dividends paid per common share      

Nil

Nil

  Expected life in years      

5.0

4.0

  Expected volatility in the price of common shares      

75%

79%

  Risk free interest rate      

1.0%

1.0%

  Weighted average fair market value per share at grant date      

$ 0.46

$ 0.52

  Intrinsic (or "in-the-money") value per share of options exercised      

n/a

$ 0.13

 
As of March 31, 2013 there was $903,000 (December 31, 2012 - $967,000) 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.

 

 

 

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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, 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 which included a total of 3,345,920 warrants which had an exercise price of $0.60 and an expiry date of February 16, 2012.
(ii) The estimated fair value attributed to the 4,502,821 total US$ Warrants that were issued in the 2012 Financings (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(ii)) 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:
          For the three months
          ended March 31,
          2013 2012
             
  Balance, start of the period       $ 241,000

$ -

  Value attributed to US$ common share purchase warrants      
  issued in 2012 Financings (see note 7(ii))      

-

 249,143
  Change in fair value during the period   (172,000)

-

         
      $ 69,000 $ 249,143
             
The value attributed to warrants that were issued in the 2012 Financings was calculated at issuance in 2012, and re-valued at each period end thereafter, using the Black-Scholes valuation model utilizing the following weighted average assumptions:
          For the three months
          ended March 31,
          2013 2012
             
  Expected dividends paid per common share     Nil Nil
  Expected life in years     0.83 1
  Expected volatility in the price of common shares     59% 80%
  Risk free interest rate     1.0% 1.2%
  Weighted average fair market value per warrant issued     n/a US $ 0.08

 

 

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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. For the three month period ended March 31, 2013, NXT recorded foreign withholding taxes of $399,546 (2012 - $nil) on a portion of its revenues that were generated on international projects.  Although such foreign taxes incurred 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.
             
             
14. Changes in non-cash working capital
             
The change in non-cash working capital is comprised of:     For the three months
          ended March 31,
          2013 2012
             
  Accounts receivable       (778,102) (750,491)
  Work-in-progress       976,463 222,358
  Prepaid expenses       (39,865) (50,259)
  Accounts payable and accrued liabilities       (617,658) (425,833)
  Deferred revenue       (317,103) (555,086)
          (776,265) (1,559,311)
Portion attributable to:          
  Operating activities       (776,265) (1,559,311)
  Financing activities       - -
  Investing activities       - -
          (776,265) (1,559,311)
 
             
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 March 31, 2013, the estimated remaining minimum annual lease commitment is as follows:
             
      for the   total minimum  
      year ending   lease  
      December 31   payments  
             
      2013   $ 228,287  
      2014   304,382  
      2015   101,461  
          634,130  
             
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.
             
             
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:
 
          For the three months
          ended March 31,
          2013 2012
             
Pakistan       $ 2,659,292 $ -
Colombia       - 2,815,320
Central America (Belize, Guatemala)       24,803 -
          2,684,095 2,815,320
 
The Company's revenues were derived almost entirely from a single client in each of the above noted periods.

 

 

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17. Other related party transactions
             
NXT retains as legal counsel a law firm of which one of its Directors is a partner. For the 3 months ended March 31, 2013, NXT incurred legal fees and share issuance costs totalling $774 (March 31, 2012 - $28,285) with this firm, for which a total of $466 is included in accounts payable as at March 31, 2013 (December 31, 2012 - $11,112).
             
Accounts payable and accrued liabilities includes a total of $24,180 (December 31, 2012 - $63,820) related to re-imbursement of expenses owing to persons who are Directors and Officers of NXT.
             
To date in 2013 (including items subsequent to March 31, 2013), NXT issued the following stock options (with a term of 5 years and 3 year vesting) to certain of its Directors and 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  

 

 

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